Car prices are expected to rise further this year
What was supposed to be a very good year for the U.S. auto industry didn’t turn out that way in 2021, as automakers battled semiconductor shortages and other issues that repeatedly shut down factories and left showrooms empty. For consumers, this meant record prices and less choice.
Those who hope that the situation will improve in 2022 can think again. At best, industry analysts are predicting a modest recovery in sales, and possibly another sharp decline, while car buyers can expect even more price hikes and more dealership shortages.
“Based on what we know today, it will be difficult to match last year’s sales,” said Dave Gardner, executive vice president of national operations for American Honda.
As the economy began to rebound in late 2020 as car sales increased, the industry was hit by a shortage of crucial semiconductor chips, leading to intermittent production cuts across the year 2021.
This year, Cox Automotive sees a modest rebound in the industry, to about 16 million vehicles from 14.9 million last year. IHS Markit is a little more cautious, around 15.5 million. But these numbers are still well below what we saw before Covid. In 2019, Americans bought 17.1 million new cars, trucks and crossovers.
Meanwhile, a new study from Bank of America’s automotive research team warns of strong “demand destruction.”
At the start of this year, Honda dealerships had 20,000 vehicles on their lots. A year ago, that number was around 320,000.
“In our view, the greatest risk to our volume forecast is that the broader economic environment and consumer health/confidence remain highly unclear,” BoA analysts wrote in a research note.
Overall, the token shortage appears to be under control. But there are still widespread concerns about other supply chain disruptions affecting rubber, plastics and foams and even steel. Wall Street highlighted concerns about rising interest rates and inflation.
Ironically, unless buyers are spooked by inflation and rising interest rates, “demand will significantly outstrip supply,” said Stephanie Brinley, senior automotive analyst at IHS Markit, noting that the current sales slump is completely different from what was seen during the Great Recession and earlier market declines.
This slowdown is a matter of supply, Brinley said. On the contrary, the pent-up demand totals up to 3 million vehicles, which means that millions of motorists would return to the market if they could find the vehicles they want.
Honda’s situation highlights the problem. At the start of this year, the company’s US dealerships barely had 20,000 vehicles on their lots. A year ago, that number was around 320,000. According to research firm Motor Intelligence, car dealerships ended 2021 with 1.04 million vehicles in stock, up from 3.4 million two years earlier.
If the industry can avoid further shortages, manufacturers will step up, working as much overtime as possible, but Gardner said Honda does not expect to catch up and will continue to face low stocks. Brinley said the same is true for other automakers.
The situation radically changes the normal business model. Americans have traditionally come to showrooms expecting to trade in and come home with a new vehicle. Now most buyers can expect to wait, sometimes up to two months, to take delivery.
There is an advantage. For consumers, this means a shift to buying online – and the ability to personalize a vehicle, rather than just what’s on the lot. For automakers and dealers, lower inventory means lower carrying costs and they can more closely adjust production to demand.
Automakers also cut the incentives they traditionally offer in half — to around $1,900 for the typical vehicle in December, according to industry data. But, for consumers, it has contributed to a rapid increase in prices. New car prices hit a record average of $47,077 in December, according to a Kelley Blue Book report released last week, more than $10,000 more than the typical motorist was paying before Covid.
New car prices hit a record average of $47,077 last month, $10,000 higher than before Covid hit.
“Think back to two years ago,” Gardner said. “When have you ever heard of cars being sold at MSRP [the manufacturer’s suggested retail price]? Now this is the start of the conversation. “Consumers have helped drive up prices by switching from sedans and coupes to more expensive SUVs and CUVs, and then stocking up on options,” Brinley noted.
But what really worries industry analysts and planners are the so-called ADMs, or “extra dealer margins” that many dealers prey on, especially for popular products. Ford, in particular, is concerned about retailers marking up the F-150 Lightning, which is expected to go into production in June. Some holders of early reservations reportedly backed down after facing additional charges exceeding $10,000.
Franchise laws limit automakers’ ability to influence dealer prices, though automakers could potentially penalize dealers who get greedy by limiting what should be early and limited electric truck allowances.
As dealer inventories begin their slow rebound, last year’s price spike may not happen “as quickly as it has in recent months”, according to the BoA study. However, car buyers should expect the upward trend to continue through 2022.