After a Boom, an Auto Profit Bust Looms


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By guest author Stephen Wilmot from the Wall Street Journal

April 6, 2023

It is getting easier to buy a new car, but also more tempting to wait for discounts.

Visitors to the New York Auto Show last April, when U.S. new-vehicle inventories were at rock bottom, got to see lots of exciting new products they might struggle to actually buy, particularly below the sticker price. When this year’s show opens to the public on Friday, potential car buyers can browse knowing that availability on dealer lots is improving. They might even get a deal.

The first quarter of 2023 was the strongest for U.S. light-vehicle sales since the spring of 2021, before the industry was crippled by chip shortages and other supply-chain hiccups. The seasonally-adjusted annual rate of sales, a popular measure of the market’s health, was 15.3 million, down from the 17 million to 18 million levels that were normal before the pandemic but well ahead of the 14.1 million clocked in the same period last year. Better vehicle availability and higher fleet sales drove the improvement.

The rebound is unambiguously good news for consumers but a mixed blessing for manufacturers, dealers and their investors. The industry made record profits during the shortages of 2021 and 2022 as it cleared out lots at high prices. With weekly supply running almost 740,000 vehicles or 70% higher in March than a year before, according to data provider Cox Automotive, the balance of power is shifting back to buyers.

Tesla TSLA -0.25%decrease; red down pointing triangle

has become a leading indicator because, unlike the rest of the industry, it adjusts prices publicly on its website. While its recent price cuts got all the attention, the same process is under way elsewhere through dealer discounts on list prices. In March these were 3.3 %, up almost a percentage point compared with the same month last year, according to an estimate by J.D. Power.

How far and fast this trend will run is the big question facing investors. The industry has a reputation dating back decades for maximizing sales volumes rather than profits. This year, high interest rates add to the pressure to discount: The average rate on a new-car loan in March was 6.7 %, according to J.D. Power’s provisional estimate, up more than 2 percentage points from a year earlier.

Tesla aside, stock-market valuations assume a return to the old ways, with General Motors GM -1.42%decrease; red down pointing triangle trading for about six times earnings, in line with pre-Covid norms.

Executives tirelessly make the case that they will keep inventories in check. Paul Jacobson, Chief Financial Officer at General Motors, told journalists in New York this week that the need for high cash flows to fund investments in electric vehicles would keep the industry disciplined. He is nonetheless preparing for potential problems: GM accelerated its cost-cutting efforts last month by launching an employee buyout programme.

If the industry really can hold on to higher prices, the flip side would be a permanently smaller U.S. new-vehicle market. Manufacturers would need to shrink production, leading to difficult conversations with unions.

The opposite seems much more likely. Detroit is already plowing its unprecedented pandemic cash flows into brand new EV factories. When they are up and running, the price wars could look fierce even by the car industry’s historic standards.

Oil folks are used to boom-and-bust supply cycles where high prices prompt investments that lead to overproduction and lower prices. In the longer term, the car industry could now be in line for something similar, on top of the cyclical shifts in consumer demand it has grappled with for years. This bust scenario will take years to play out, but signs are accumulating that it has already begun.

Appeared in the April 7, 2023, print edition as ‘After Auto Boom, Bust Has Begun’.