Why 2023 Could Be Another Difficult Year For The Auto Industry

High-interest rates, supply chain concerns and recessionary fears were among the primary challenges for the global automobile industry in 2022.

Those concerns aren’t anticipated to be remedied immediately. There’s considerable anxiety on Wall Street that this year’s supply shortfalls might swiftly develop into a “demand destruction” scenario just as vehicle production is finally ramping back up.

“There is active demand destruction in the industry, given inflation, interest rates, and energy costs − but so far, this has largely impacted the backlog,” Bernstein analyst Daniel Roeska said in an investor note earlier this month.

As vehicle manufacturing ramps back up, Roeska writes that markets early next year will be eager to grasp where, when and how much pain automakers will face.

Auto sales could still grow

Unlike conventional downturns or earlier eras when demand was slow, most analysts expect worldwide and U.S. vehicle sales to improve in 2023. That’s primarily because auto sales were already at or near recessionary levels in the U.S. and other parts of the world since the commencement of the Covid-19 pandemic in early 2020.

Why 2023 Could Be Another Difficult Year For The Auto Industry
Why 2023 Could Be Another Difficult Year For The Auto Industry

The pandemic affected manufacturing and supply systems worldwide, causing automakers to cut production significantly. The consequent lack of new cars, trucks and SUVs meant that automakers and dealers wanted – and got – substantially higher prices for the vehicles they were able to supply.

“New car supply is finally improving but the industry is substituting a supply problem with a demand one and that doesn’t speak good for revenues and profitability in the year ahead,” Cox Automotive’s chief economist, Jonathan Smoke said in a recent video.

Cox Automotive expects U.S. new vehicle sales of 14.1 million in 2023, which Charlie Chesbrough, Cox’s senior economist and director of industry analytics, described as “tepidly optimistic.”

Analysts predict this year’s U.S. auto sales to tally roughly 13.7 million. U.S. sales were 15.1 million in 2021 and 14.6 million in 2020.

S&P Global Mobility anticipates new vehicle sales globally to reach almost 83.6 million units in 2023, a 5.6% rise from the previous year. The statistics and consultancy organization forecasts that in the United States, sales will rise by 7% to over 14.8 million devices in 2023.

Chesbrough pointed out that many low-income and subprime borrowers, who would generally quit the new vehicle segment during a recession because of low inventories and record-high costs, have already done so.

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But fat profits may be at risk

Automakers’ exceptional pricing power and profits on new vehicles during the past couple of years are anticipated to decline as sales climb.

Market recovery will be slow and cautious due to ongoing supply chain difficulties and fears of a recession. Consumers in the United States are hunkering down, making it challenging to sell them on a return to demand levels seen before the 2009 pandemic. Chris Hopson, manager of S&P Global Mobility’s North American light vehicle sales estimate, said that inventory and incentive activities would be critical barometers to evaluate possible demand destruction.

To rephrase the question, will manufacturers be forced to slash prices and give up profits to entice potential consumers to showrooms if interest rates continue to rise, recession worries continue to mount, and there is an excess inventory?

Consumers would be relieved by such news, as new car costs have hit record highs this year. But if that happens, it could hurt automakers’ bottom lines and drive away investors.

Keep following our website NogMagazine.com for more updates.

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