By the end of 2022, automotive manufacturer Stellantis reported a 13% drop in U.S. sales, with additional automakers like Honda and Nissan reporting a sales volume slump of more than 20%. A reduction in sales volume equals a drop in profits, right?
That doesn’t seem to be the case in the current automotive market.
In March 2023, customers spent an estimated 50 billion dollars on new cars, an increase of 5.5% from last year. Transaction costs on automotive sales are up 3.5%. By estimation, customers spent more than 132 billion dollars in the first quarter of 2023, a “record-high for any quarter and 4.4% more than Q1 of 2022.” The price for a new car is now, on average, approximately 50,000, a new record. Americans are paying 20% more for new vehicles than in 2019.
Automotive profits are booming post-COVID, but the question remains; Is this level of profitability sustainable? What will happen to dealers if the market hits a wall?
Factors That Drove Record Profits
To bring economic relief during the height of COVID-19, the federal reserve cut interest rates to close to 0%. This cut brought huge incentives for Americans to borrow money for loans or spend on credit cards. Although, at the time, there were many out-of-work, (by May 2020 the number hit 23 million) the low-interest rates incentivized consumers to buy. This was the first drastic cut to interest rates since the 2008 U.S. recession.
So, it’s no secret that COVID played a prominent role in the automotive market in the past three years. Semiconductor chip shortages, supply chain issues, labor shortages, and import restrictions put in place to slow the spread caused a sharp decrease in vehicle production. To make the most of available chips, manufacturers chose to produce SUVs, pickups, trucks, and other high-priced models. This decision caused a lack of smaller, and thus more affordable, new cars. Consumers, driven by the invention of an almost 0% interest rate and wanting a new vehicle, may have opted for more expensive trim packages in part because they could, and in part because that was what was available.
That being said, this brings us back to the question, is this growth sustainable?
In a recent survey from the University of Michigan, consumers report hesitance when buying a new vehicle, with price being the highest concern. The federal reserve has been raising interest rates to slow inflation. This rate hike affects large purchases like houses, businesses, and cars. With these high-interest rates, the threat of a recession looming, and record-high prices for new and used vehicles, an end to the meteoric profit in the auto industry might be near.
Long-Term Success Strategies
The lower inventory levels have been highly profitable for the auto industry, but like most good things, it may not last forever. At least, not at the rate we’ve seen over the past two years. Specifically, dealers that have been able to charge record-high prices on used vehicles should remain cautious. As the New York Times said in a recent article, “…dealers might be basing their prices on what they paid earlier in the year, when costs were higher, for the cars sitting on their lots.” Used car prices, after several years of skyrocketing, are beginning to even out.
Something dealers should focus on, if the profit boom comes to a head, is keeping an eye on their market share. Take E.V. maker Tesla, which has been making headlines for its recent price cuts. Four Tesla Models, including the least expensive Model 3 and the flagship models S and X (the most expensive models), were given significant reductions in the latter half of 2022 and the beginning of 2023. In the case of the Model X, the price has been cut by approximately $20,000. The actions of CEO Elon Musk may seem puzzling, as the price cuts to these models contributed to Tesla missing its 2023 Q1 targets by 24%. But Musk defended the price cuts at the time, stating he wanted to “sacrifice profits to maintain a global growth target...” By looking at the numbers, Tesla is succeeding. Registrations for the Model 3 rose 11%, and registrations for the Model X rose 34% in Q1.
Despite falling short of its goals, Tesla chose to keep its market share and appeal to price-conscious customers. This approach worked. Should other automakers be doing the same instead of focusing on maintaining high per-vehicle profits? Eventually, car prices might drop with this looming possibility of a recession and current high-interest rates. Dealers should look for ways to capitalize on customer loyalty and trust and determine what is essential to stay competitive.
To Sustain Success, Dealers Need a Targeted Approach
As consumers tighten their wallets and interest rates skyrocket, dealers need to find a targeted approach to continue profitability. Dealers should be ready to negotiate or find ways to appeal to consumers in the market. The economy will change and adapt, and dealers need to as well.
MarketAI is a revolutionary platform that analyzes real-time inventory supply and consumer demand data to achieve maximum marketing efficiency and turn rates. By using AI and machine learning, the MarketAI platform enables dealers to target the right customers at the right time. A data-driven tool like MarketAI is essential to dealers who have thrived in the post-pandemic market and wish to sustain their success.
Welcome to the ZeroSum Blog
Learn about the latest trends, insights, research on automotive marketing, and more!