10 Auto Industry Predictions for 2023

DETROIT: Wall Street and industry analysts remain on high alert for signs of a “demand-killing” scenario for the U.S. auto industry this year as interest rates rise and consumers grapple with car affordability issues and fears of a recession.

Since the start of the coronavirus pandemic in early 2020, automakers have experienced unprecedented pricing power and profits per vehicle amid resilient demand and low inventory levels due to supply chain and parts disruptions affecting vehicle production.

Those factors have created a supply problem for the auto industry that Cox Automotive and others believe could turn into a demand problem, just as automakers slowly improve production.

“We’re trading a supply issue for a demand issue,” Cox Automotive Chief Economist Jonathan Smoak said Thursday.

Cox has 10 predictions for the US auto industry this year that point to such an outcome. Here are them and the reasons why investors should be aware of them.

Although the tax credits for electric vehicles under the Inflation Reduction Act have not been finalized, the incentives for commercial vehicle and fleet owners promise to be of great benefit.

Unlike consumer vehicles, which are eligible for a credit of up to $7,500, fleet and commercial vehicles do not need to meet strict US requirements for household parts and batteries.

“That’s actually where we think most of the growth will be in new car sales in ’23,” Smoke said.

Cox predicts new U.S. vehicle sales will reach 14.1 million in 2023, up slightly from last year’s nearly 13.9 million.

The coronavirus pandemic has forced franchise car dealers to embrace online retail more than automakers ever could, as consumers demand it and many brick-and-mortar dealerships close due to the global health crisis.

That trend is expected to continue in the coming years, as many automakers have pledged to better match production to consumer demand.

With a lack of affordable new cars and higher costs, consumers are keeping their cars longer. This is expected to increase after-sales business and dealers’ revenue compared to their sales. Dealers make significant profits from servicing cars. The increase is expected to help offset a potential decline in sales and financing options.

“We see this as one of the silver linings for dealers,” Smoke said. “The service department usually does well [and] somewhat countercyclical during economic downturns.’

High interest rates make vehicle purchases more difficult for mainstream buyers and less economical for more affluent consumers. Such conditions are expected to encourage those with cash to buy a car without financing to buy it.

Smoke said the average interest rate on a new car loan is more than 8%. For used cars, it’s around 13%.

Vehicle affordability was already a concern when interest rates were low. This issue has become more of a concern as the Federal Reserve has been raising interest rates to combat inflation. Cox reports that car availability is at a record low.

The increases resulted in an increase in average monthly payments of $785 for new cars and $661 for leases, Cox said. The average new car list price remains above $27,000, while the average new car transaction price last year ended at around $49,500.

“The long-term concern is that it causes production to lean more toward luxury and away from affordability, which means that even the U.S. vehicle market has a long-term affordability problem,” Smoke said.

Used car prices skyrocketed in the first two years of the coronavirus pandemic due to low availability of new cars and trucks. Wholesale pricing peaked in January 2022. It fell 14.9% last year and is expected to fall another 4.3% by the end of the year.

The declines are still not enough to offset the 88% increase in index pricing between April 2020 and January 2022.

Used car inventories are stabilizing at about 50 days, around 2019 levels, before the coronavirus pandemic depletes stocks.

Cox reports that sales of all-electric vehicles rose 66% to more than 808,000 units in the U.S. last year, so reaching 1 million isn’t much of a leap since dozens of new models are slated to hit the market. EVs represented about 5.8% of new vehicles sold in the US

Add in hybrids and plug-in hybrid electric vehicles that pair with a traditional engine, Smoke says, about 25% new cars sold this year will be “electrified” cars. In 2022, it will be between 15% and 16%.

Automakers are expected to rely more heavily on sales to commercial and fleet customers, such as car rentals and government agencies, than in recent years to boost overall sales.

Automakers have prioritized more profitable sales to consumers amid low inventories in recent years. But with consumer demand falling, companies are expected to turn to fleet sales to fill that demand gap.

Expectations for lower demand come as the auto industry slowly ramps up vehicle production, leading to higher inventory levels.

Inventory levels have been at record lows for the past two years due to supply chain and parts issues affecting production.

Cox reports that inventory levels vary significantly by brand, especially with Detroit automakers Stellantis — having a large stock of vehicles. Toyota: has the lowest vehicle supply days, according to Cox.

Combine all of the previous projections, on top of economic concerns, and that’s a lot of pressure on the U.S. auto industry in the year ahead.

It also comes as automakers invest billions in electric vehicles and new technologies such as advanced driver assistance systems and autonomous vehicles.

“We’re hoping for a soft economic landing, but we think the auto market will rebound in the coming year,” Smoke said.