Despite higher interest rates and lingering concerns about the overall economy, the auto industry continues to bounce back from the effects of COVID-19 and the semiconductor shortage thanks to strong pent-up demand (retail and fleet), larger dealer inventories and a return to consumer sales incentives.
Sales of passenger cars and trucks in the United States were on pace to top 1.38 million units in June, which would be a 22.6% increase over like-2022, according to J.D. Power and Global Data. June capped a stronger-than-expected first half with sales up about 17% over last year. In fact, June marked the third straight month and fourth straight quarter that sales improved, with General Motors, Honda, Hyundai-Kia, Nissan, Stellantis and Toyota all reporting big gains.
And the trend looks to continue through the rest of the year.
“In the coming months, the industry may face challenges such as higher interest rates and changing economic conditions. Despite the potential effect of these economic risks, the industry will continue to benefit from pent-up demand for new vehicles,” Thomas King, president of the data and analytics division at J.D. Power, said in June. “As new-vehicle availability gradually improves, there will be an easing of the current record levels of pricing and profitability as manufacturer incentives gradually increase and retailer profit margins gradually fall. Nevertheless, this will be offset to some extent by an increase in overall sales volumes.”
Rising pricing, however, could stall the recovery.
“The largest demand problem for automotive is affordability,” warned Jonathan Smoke, chief economist for Cox Automotive, during a recent webinar.
However, Cox’s outlook remains bullish for the rest of 2023, albeit with expectations of a slight slowdown in the second half of the year. The Atlanta-based automotive service and tech giant increased its full-year new-vehicle sales forecast to 15 million units, which would be up 8% from 2022.
“The resilience of vehicle buyers in the face of historic increases in interest rates has been surprising,” notes Cox Automotive Senior Economist Charlie Chesbrough. “However, maybe less surprising, but more than we expected, has been the industry’s return to old habits to move the metal. We expect that headwinds will grow in the second half of this year as credit availability and unfulfilled demand become scarcer.”
EVs on the Rise
Sales of pure battery electric vehicles (EVs) were expected to reach nearly 500,000 units in the first half, up from 355,000 a year earlier, and are forecasted to top 1 million units for all of 2023 with a record 7% of the market, according to Cox. EV inventories soared to 92,000 units industrywide, climbing to an average of 92 days in the second quarter—up from 36 days a year earlier—to surpass the average days’ supply of gasoline vehicles at dealerships.
Tesla continues to lead the charge. The company, which celebrates its 20th anniversary this summer, said it delivered more than 466,000 EVs worldwide in the second quarter. The tally beat analyst forecasts by nearly 4%, but it was fueled by price cuts and other incentives, such as offering buyers free fast-charging services for three months.
About 96% of Tesla’s sales are derived from two vehicles, its Model Y small car and entry-level Model 3. Volumes for the pricey Model X crossover vehicle and the sporty Model S remain relatively low, while the long-awaited Cybertruck has been delayed several times.
Tesla’s speedy Supercharger protocol, meanwhile, is on its way to becoming the industry standard. SAE International is developing manufacturing, performance and reliability standards for the company’s North American Charging Standard (NACS) connector. And rival carmakers and charging stations already have begun adopting Tesla’s technology, which is said to be more reliable than current CCS connections.
At the same time, competition is heating up as traditional automakers accelerate their EV plans, and new players such as Rivian ramp up efforts. As a result, Tesla’s share of the EV market could plunge from 62% last year to 18% by 2026, according to the annual “Car Wars” study released in June by Bank of America Global Research.
To keep pace with the surging demand for EVs, a slew of battery companies are planning to open new manufacturing facilities in North America. The list includes projects in at least eight states by a mix of suppliers and carmakers.
Overall, the U.S. would need 28 million charging ports to support the 33 million EVs that are forecasted to be on the road by 2030, according to a study by the National Renewable Energy Laboratory.
Others caution that the transition to EVs won’t be as rapid as projected, due in part to tight supplies of raw materials used in batteries. “We’re going to see shortages in lithium... (and) massive price increases,” said Casey Selecman, director of powertrain forecasting for AutoForecast Solutions (AFS), at a recent event in Michigan. AFS predicts EVs will account for 55% of the vehicle market by 2040, which is healthy but far from the 92% penetration rate that the auto industry’s cumulative plans suggest.
Chinese Carmakers, Chips and Other Concerns
Chinese automakers, which continue to gain market share in China, also are making inroads in other regions—and may soon enter the U.S. In China, domestic automakers are expected to outsell foreign nameplates this year (a first in recent history, thanks in large part to government incentives) and control 65% of the market by 2030, according to AlixPartners.
In the first half of 2023, Chinese automakers surpassed their Japanese counterparts to become the industry’s largest global exporters. The surge is driven by low prices, demand for EVs and ongoing quality improvements of Chinese vehicles. While expansion to the U.S. isn’t expected to happen for another three to five years, analysts believe it’s inevitable.
While the global semiconductor chip shortage has subsided somewhat, it isn’t entirely over. Shortages have cost the global auto market more than 1.4 million units of lost car production this year and the total could top 2.5 million units by year end, AFS reports. The good news: More chips are becoming available as capacity is added.
But perhaps the biggest wild card this year is labor related. The current contract between U.S. Big 3 automakers and the UAW union is due to expire in September, after which all bets are off.
