U.S. automakers are struggling with the lowest inventory in nearly twelve years but that may not be bad news as a combination of strong demand and a dearth of enough vehicles at dealerships is pushing new car prices and profits to record highs, say industry experts.
What Happened: The U.S. new vehicle inventory at dealerships was just about 1.5 million units in June, a month when dealers typically stock 3.5 million to 4 million vehicles to support the summer selling season, as per automotive research firm J.D. Power.
While customers are left with fewer vehicles to choose from, they have to pay more — and record transaction prices are in turn further bringing in more profit for automakers and dealers.
“Transactions are expected to close over $40,000 in June, which would mark two straight months of all-time transaction price records,” said Tyson Jominy, vice president of data and analytics at J.D. Power.
Tighter Inventory, Higher Prices: With current inventory levels, dealers are seeing 76% of all vehicles to have a negotiated price near or above MSRP, as per J.D. Power. Besides, dealers are also cutting down on incentives, spending averages are down $2,355 per unit in June compared to $3,966 in June 2019 when the industry was stable.
“Our modeling says inventory won’t return to levels that require typical consumers incentives until Q3 2022,” Tyson said, adding that demand is robust but production is stressed.
U.S. automakers are scheduled to report second-quarter sales volume numbers later this week. Automotive research firm Edmunds expects 4,468,791 new cars and trucks will be sold in the second quarter this year, a jump of 51.6% on a year-on-year basis and a 14.8% increase when compared to the first quarter of this year.
It's worth noting that major automakers had posted lower sales last year due to the COVID-19 pandemic.
Lingering Semiconductor Shortage: While a faster-than-anticipated vaccine rollout in the U.S. has boosted sales in April, the global semiconductor shortage continues to dampen plans to scale up production, forcing automakers to build their most profitable models such as the pickup trucks first.
"Unfortunately the chipset and inventory shortages really came to a head and outstripped supply in June,” said Jessica Caldwell, Edmunds' executive director of insights.
“This isn't a problem that's going away anytime soon, but the silver lining for automakers and dealers in the meantime is that consumer demand continues to run high and shoppers are clearly willing to pay inflated prices for the vehicles that they want."
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What To Expect: As per Edmunds’ forecast, General Motor Co GM, the No.1 U.S. automaker by volume, could see second-quarter sales jump 40.5% to 692,169 vehicles year-on-year and 7.7% on a quarter-on-quarter basis.
Toyota Motor Corp TM is expected to report a 72.5% year-on-year jump to 686,539 vehicles, and a rise of 13.8% on a sequential basis.
Ford Motor Co F is the only top automaker that is expected to report an 8% fall in quarterly sales on a sequential basis to 479,538 vehicles — which on a year-on-year basis is a 10.5% growth, the lowest among peers.
Ford CEO Jim Farley had earlier this month said the automaker is relying on tight inventory and plans to “run our inventories historically lower”.
As per J.D. Power, light-duty pickups started June with 44 days supply, typically the segment has 100 days or more supply in most months and pickups are a place where such low numbers may not be desirable.
“There are consumers sitting on the sideline waiting for specific trucks. It would take a very strong commitment to attempt to move consumers to a new way of buying vehicles. Will Ford and other truck makers be able to stay the course after supply loosens? It remains to be seen,” Tyson said.
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