The U.S. auto industry is changing its business model to produce fewer vehicles at higher prices, embracing the supply chain problems that triggered inflation across the global economy at the beginning of the COVID-19 pandemic. The result is that consumers are being priced out of the market for new cars as automakers seek higher profit margins from constrained supplies.
According to CNN Money, more car buyers than ever are making monthly payments of at least $1,000 due to rising auto loan interest rates and high prices. In the fourth quarter of 2022, 15.7% of Americans who financed a new vehicle purchase committed to monthly payments of $1,000 or more. A year ago, that percentage was 10.5%, and 6.7% two years ago. According to Edmunds, the average monthly payment on a new vehicle in Q4 2022 was $717 USD, up from $659 USD in Q4 2021.
The latest update from Kelley Blue Book has revealed that buyers paid an average transaction (ATP) of $48,681 for new vehicles in November, which is a $2,250 increase over the previous year. A new record that has seemingly been broken with each passing month. There are several factors leading to this, but the primary reason that everybody seems to agree on is the lower vehicle supply stemming from COVID-related supply chain shortages that have rippled everywhere from sourcing microchips to carbon fiber.
In short, that forced automakers to allocate resources to their most essential (profitable) vehicles, and de-prioritizing more utilitarian offerings that would been at the other side of that record ATP figure. This move rippled into the used vehicle market, with second-hand vehicles jumping in value at an average of 88 percent between April 2020 to January 2022, putting cars, trucks and SUVs that are normally within the budgets of more consumers right out of reach.
The silver lining is that used vehicle prices have begun to fall, but not enough to offset the spike that’s been observed. That’s not-so-good-news for used vehicle retail companies like Carvana, which owes roughly $4 billion USD to creditors. Its shares are down 97 percent at the time of this writing from its all-time high of $376.83 USD a share in August 2021.
US Auto Industry Does More With Less In 2022
According to The Hill, from 2017 to the pandemic, the United States auto industry produced about 11 million vehicles per year. However, since the pandemic, automakers have averaged fewer than 10 million vehicles a year for a production cut of more than a million cars and trucks.
Production was on course to average 10.6 million vehicles in the third quarter of 2022, but that has since been revised back down to 10.2 million vehicles for the year as a whole. Automakers say this is due to a shortage of the chips in the computers that help modern vehicles run, but Wall Street analysts have seen improvements since at least the middle of last year, while production has continued to lag.
The pandemic has given automakers the ability to shift their strategy to a low-volume, high-margin model, which translates to a higher profit over the typical strategy of a higher-volume, lower-price vehicles. In other words, doing more with less. Credit to this change has GM reporting a decade-high profit of more than $10 billion in 2021 and projected a similar number in 2022, as Ford Motor Company posted its best operating income in that year since 2016.
Both GM and Ford Motor Company made the most of the past couple of years, as they specialize in high-margin trucks and SUVs that are also built at a very high volume. The F-Series trucks are far and away the best selling vehicles that Ford makes, while GM enjoys even higher volume with the combined sales of the Chevrolet Silverado and GMC Sierra pickups. Stellantis enjoys similar spoils with Ram Trucks.
Americans See Sinking Savings
Interest rates for Auto loans aren’t helping factor into this issue, as Edmunds reports that the average auto loan interest rate for newly financed vehicles was 6.5% in the fourth quarter of 2022, up from 4.1% one year prior. Meanwhile, used cars have seen an average auto-loan interest rate increase from 7.4% in the fourth quarter of 2021 to 10% in the fourth quarter of 2022.
Rising interest rates, inflation, and economic recession has taken its toll on the American saver. According to Yahoo!, data from the Federal Reserve Bank of St. Louis states that the total personal savings of all Americans sits at $520 billion USD as of November 2022, a substantial drop from $4.85 trillion in 2020. Moreover, savings are now below even pre-pandemic levels, and the national stockpile has shrunk by $100 billion since October 2022.
Repos Up, “Demand Destruction” Predicted
With vehicle ATPs setting records while Americans are stretching themselves thin just to afford basic things like eggs and gasoline, it doesn’t take an economist to understand why analysts are predicting “demand destruction” for vehicles in 2023. Credit rating agency Fitch has also reported that vehicle repossessions have now risen back to pre-pandemic levels after lenders gave a dose of leniency during a disruptive time. And with cash-strapped consumers paying an average of $717 for a car that’s probably down a microchip or two, the coming year looks to be a whole new challenge for the American auto industry, and the people that it supports.