Consumers will pay high prices for new, used cars for next two years
Sky-high transaction prices and near nonexistent discounts for new and used cars — due to scarce vehicle stock — will be the new normal for the next couple of years.
That's even after the shortage of semiconductor chips abates, which is expected to start later this year and take all of next year as a recovery period, industry experts say.
"We may never see normal in the near future or we’ve redefined normal," said Jeff Schuster, LMC Automotive's president of Americas Operations and Global Vehicle Forecasts. "The industry and consumers need to be flexible. For the industry, it means moving around production and inventory as the market dictates."
The Japanese automakers have mastered operating with lean inventory and matching production to what consumers will buy. They've been rewarded with increased U.S. market share over the past few years.
The Detroit Three each have lost market share, despite reporting profits, prompting them to tweak their future go-to-market strategies and production plans.
The weird year of high prices, thin inventory, idled factories and seas of thousands of half-built new vehicles parked near and around plants awaiting parts is due, in part, to the aftermath of COVID19, as automakers shut down their factories in North America for eight weeks last year. Also to blame is a worldwide shortage of computer semiconductor chips.
Big prices, few incentives
Acres of barren concrete have surrounded showrooms in recent months as hungry car buyers salivate over a handful of new cars rolling off a carrier, snapping them up at full sticker price.
“It’s a scramble like I’ve never seen in the car business," Gordon Stewart, owner of Gordon Chevrolet in Garden City, Mich., told the Free Press in July. "Car loads come in and half the cars on the trucks are presold and the other half, people were on the ground and picking them off as they came off the trucks.”
But sales are slowing as some consumers either postpone a purchase, perhaps hoping for prices to drop, or can't get what they want because of tight inventory.
The industry’s annualized selling rate in April was 18.5 million cars, said Jessica Caldwell, executive director of insights at Edmunds. That means if every month were to be replicated by that month, the industry would sell 18.5 million cars this year.
But last month, that rate dropped to 14.7 million, Caldwell said, likely due to the low inventory. If inventory were normal, the selling rate would likely be 17 million or more based on consumer demand, she said.
The average transaction price for a new car was $42,832 last month, a 9.5% increase over the year-ago period, Caldwell said. In used cars, it's a similar trajectory because the limited new car stock means fewer trade-ins, creating a shortage of supply in used cars too. The average transaction price for a used car is $27,245, a 29% spike from the year-ago period, she said.
But last month, that rate dropped to 14.7 million, Caldwell said, likely due to the low inventory. If inventory were normal, the selling rate would likely be 17 million or more based on consumer demand, she said.
The average transaction price for a new car was $42,832 last month, a 9.5% increase over the year-ago period, Caldwell said. In used cars, it's a similar trajectory because the limited new car stock means fewer trade-ins, creating a shortage of supply in used cars too. The average transaction price for a used car is $27,245, a 29% spike from the year-ago period, she said.
"Vehicle prices will remain high," Caldwell said. "A few automakers, such as Ford, have said they will try to scale back on inventory because bigger margins have made (dealers) happy. We could see high prices for a longer period of time."
She said prices will eventually level out as inventory ramps up, "but we’ll see less incentives in the short term." Reinvention
All of it is an opportunity for the carmakers and their dealers.
"The good news is it allows the industry to reinvent itself," said Charlie Chesbrough, Cox Automotive senior economist. "The idea of having hundreds of vehicles on a lot to choose from is an American idea. They don’t do that in other parts of the world."
General Motors CEO Mary Barra has said the automaker has improved its production efficiency and supply-chain management to better match what it builds to what customers want. In the future, GM dealers will carry less stock, just enough for those car buyers who want to drive home in a new car the same day they buy it. But most customers will order online and wait for delivery.
Ford Motor Co. presented a similar go-to-market strategy for when the chips shortage ends. And, earlier this year, Stellantis CFO Richard Palmer said that inventories might not need to bounce back fully. A leaner inventory picture makes the business more nimble, he said.
"I don't think we will be pushing to necessarily go back to the same levels of stock we had in the past," Palmer said. "The organization is learning to function with lower levels of stock and seeing the benefits."
An off-road test track? Some car dealers see the benefits too. At Matick Chevrolet in Redford Township, Mich., there were 105 new vehicles in stock as of Wednesday. In years past, Matick would have had about 1,200 cars on its 13 acres, said Paul Zimmermann, vice president and owner.
“On July 1, we had 79 vehicles in stock, yet we sold 210, so we got a bunch in," Zimmermann said. "My concern now is there are only 100 or so in transit. But I know some dealers who have none.”