Despite a strong start to the bottom line of most dealerships in 2021, this year has been progressively challenging for the automotive industry.
While some brands have seen only minimal dips in their year-over-year production, as disruptions to chip production continue to shake the automotive supply chain, no OEM is fully immune from the effects. IHS Markit’s forecasting team pulled information from more than 300 plant-specific outages across 63 carmakers when compiling their Q3 reports.
With countless external factors challenging auto dealers’ abilities to sell new vehicles, market their dealerships and acquire pre-owned vehicles, dealers need to stay a step ahead of the trends to achieve sustainable success no matter what lies ahead.
In this blog post, we explore the state of automotive sales and inventory in Q3 and what it means for dealers in Q4 and beyond, including:
· The big picture of the chip shortage
· The impact on automotive sales
· What’s in store for 2022
By the beginning of October, IHS Markit estimated the automotive sector already lost a total of 7.4 million light vehicles – and that’s before Q4 was factored in. Production disruptions progressively snowballed throughout 2021, growing from 1.44 million units in Q1 to 2.60 million in Q2 and to an estimated 3.40 million in Q3 – meaning the losses in Q3 were more than double that of Q1.
While in the first half of the year, IHS Markit found the primary cause of production delays were frontend supply shortages, new challenges emerged in the second half of the year related to backend processes. These backend disruptions were the most influential to the remainder of 2021 and are anticipated to extend well into 2022.
While some large OEMs have seen a fairly stable cadence to these disruptions, the impact on automakers has grown to be industry-wide. As of October, IHS Markit data shows brands like Ford, GM and Subaru have seen the biggest hit to their year-over-year production, while premium automakers like BMW and Volvo have experienced only relatively small losses. But by mid-month, IHS Markit further reduced its North American production forecast slightly as chip shortages took a greater toll on production at Toyota and Honda than previously expected.
Providing important context to these figures, IHS Markit notes the positive offsets resulting in some OEMs’ deliberate production allocation decisions toward more profitable models isn’t represented in this analysis and may create some distortive effects headed into 2022.
By the end of Q3, new vehicle inventory in the U.S. was just under a million units or approximately 24 days of supply according to NADA, representing a 65% decrease from the start of 2021. As supply chain disruptions have translated into shortages on the lot, new vehicle sales have slowed in recent months.
In their Q3 analysis, NADA found the seasonally adjusted annual rate (SAAR) of sales declined to 13.3 million units, down significantly from the second quarter 2021 SAAR of 17.0 million units. On a positive note: While new vehicle sales in total are down, sales of battery electric vehicles (BEVs) totaled more than 300,000 by September, a 91.3% increase over the same period in 2020.
On the pre-owned side, the growing scarcity of new vehicles coupled with sky-high sticker prices has led to increased consumer demand for used vehicles. Certified pre-owned (CPO) vehicles are currently selling at a premium with sales reaching 1,218,255 units through July, reflecting an 11% year-to-date year-over-year increase.
According to NADA’s Q3 analysis and the Manheim Used Vehicle Index, pre-owned wholesale vehicle prices hit a new record high at the end of Q3, up 27% from the same time last year. Further, by the end of September, average used vehicle prices at dealerships were up 20.1% compared to September 2020.
In combination with average OEM incentive spending falling to record lows in September, high trade-in values and low interest rates are creating new, invaluable opportunities for dealers and buyers alike amid inventory shortages.
Despite the worsening outlook for 2021 production and sales amid near-term challenges, there are positive signals on the horizon.
“While COVID-19 is still in the driver’s seat, the U.S. economy continues to show signs of recovery,” said NADA Chief Economist Patrick Manzi concluding NADA’s Q3 sales analysis. “The biggest obstacle for the auto industry moving into the fourth quarter and for 2022 will be rectifying supply chain disruptions to restore new vehicle production and sales.”
While it is still unclear when dealers will see relief from inventory challenges, production disruptions appear to be slowing. In IHS Markit’s October global light vehicle production forecast, the 2022 production view remained virtually unchanged at 82.7 million vehicles. This represents a 0.1% change over the previous month’s forecast despite a worsening production outlook for the remainder of 2021 – meaning IHS Markit now expects double-digit production growth in 2022 over 2021 at 10.6%.
Further down the road, IHS Markit forecasts 31.9 million light vehicles to be produced globally in 2023, representing a 11.2% increase over 2022. Additionally, North American production is forecasted to grow from 15.2 million units in 2022 – a 17.2% year-over-year increase from 2021 – to 17.3 million units in 2023.
While the semiconductor supply chain is showing signs of stabilization, what exactly lies ahead for the automotive retail industry is still unclear, as near-term obstacles such as recent European outages challenge analysts’ abilities to accurately forecast.