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The automotive industry has been suffering a catastrophic scarcity of vehicles since the beginning of COVID-19, as the global shortage of computer chips took hold and slowed auto production. Now, as the economy appears to tip into recession, automakers may have a new problem, all the inventory they’ve been waiting for may arrive just at the wrong time. Stephen Wilmot reports in The Wall Street Journal:
Don’t worry too much about a recession hitting Detroit. The real concern should be normalizing supply.
The U.S. new-car market is stuck in a low but lucrative gear as manufacturers struggle with production. General Motors warned Friday that its second-quarter profit would be lower than previously expected due to parts shortages curtailing deliveries to dealers. First-half sales across the market came in at about 6.8 million, according to Wards Intelligence, down 17% from the same period last year.
Market share is being driven by vehicle availability more than desirability. Toyota outsold GM in the U.S. for the first time last year, and again in the first quarter, because the Japanese company initially handled procurement challenges better. But it too has succumbed lately; GM regained its old spot atop the sales charts in the most three months.
Yet supply constraints have created surprisingly profitable conditions for dealers and manufacturers. With few new vehicles on lots, the average price of a new one hit a fresh record of $45,800 in June, according to an early reading by J.D. Power. The losers have been consumers and parts suppliers, which are typically locked into long-term contracts.
Without many signs that the environment is changing, the question is why Detroit auto-maker stocks, which were very strong in 2021, had such a terrible first half. GM and Ford both fell 46%—much worse than the broad market.
The obvious answer is rising recession risks as interest rates rise. The average new-car loan cost 5.08% in May, up from 4.45% a year earlier. In the 2008 downturn, manufacturers had excess inventory and discounted aggressively to keep cash flowing to support their high fixed costs.
But a recession might not make so much difference in the current new-vehicle market which, in addition to being supply-driven, is now the preserve of the affluent. Buyers with incomes of less than $50,000 now account for less than a quarter of sales, down from roughly 40% at the start of 2016, according to Cox data.
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