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Why 2023 could be another difficult year for the car industry

A for sale sign is seen at Serramonte Subaru car dealership in Colma, California.

Stephen Lam | Reuters

High interest rates, supply chain problems and recession fears were among the major challenges for the global automotive industry in 2022.

These issues are not expected to be resolved quickly next year, or at all, and there are growing concerns that this year̵[ads1]7;s supply shortage could quickly turn into a “demand destruction” scenario, which Wall Street has been watching for signs of recently . year, just as production increases again.

“There is active demand destruction in the industry, given inflation, interest rates and energy costs – but so far this has most affected the backlog,” Bernstein analyst Daniel Roeska wrote in an investor note earlier this month.

As vehicle production ramps up, Roeska wrote that markets will look early next year to understand where, when and how much pain automakers will feel.

Car sales can still increase

Unlike traditional recessions or previous periods when demand was weak, most analysts expect global and US car sales to increase in 2023. This is mostly because car sales were already at or near recession levels in the US and other parts of the world since the start of covid -19 pandemic in early 2020.

The pandemic disrupted manufacturing and supply chains worldwide, forcing automakers to cut production way back. The resulting shortage of new cars, trucks, and SUVs meant that automakers and dealers demanded—and received—much higher prices for the vehicles they were able to supply.

“The supply of new vehicles is finally improving, but the industry is trading a supply problem for a demand problem, and that doesn’t bode well for revenues and profits in the year ahead,” Cox chief economist Jonathan Smoke said in a recent video.

Cox Automotive projects US new car sales of 14.1 million in 2023, which Charlie Chesbrough, Cox senior economist and senior director of industry insights, described as “lukewarmly optimistic.”

Analysts expect this year’s US car sales to total approx. 13.7 million. Sales in the US were 15.1 million in 2021 and 14.6 million in 2020.

S&P Global Mobility expects new vehicle sales globally to reach nearly 83.6 million units in 2023, an increase of 5.6% from the previous year. In the US, the computer and consulting firm expects sales to increase by 7%, to around 14.8 million units in 2023.

Chesbrough noted that the expected increase comes as many lower-income and subprime borrowers, who would typically leave the new vehicle segment during a recession, have already done so due to low inventory and record high prices.

But fat profits may be at risk

These sales increases are likely to come at the expense of the unprecedented pricing power and profits automakers have enjoyed on new vehicles over the past couple of years.

“Ongoing supply chain challenges and recession fears will result in a cautious build-up for the market. US consumers are hunkering down, and recovery towards pre-pandemic vehicle demand levels feels like a tough sell. Inventory and incentive activity will be key barometers to gauge potential demand destruction,” said Chris Hopson, head of North American light vehicle sales forecasting at S&P Global Mobility, in a statement.

Put another way, will higher interest rates, growing fears of a recession and excess inventory force automakers to cut prices—and give up profits—to draw potential buyers to showrooms?

That would be good news for consumers, who have faced record high prices this year for new vehicles. But in that case, it will cost car manufacturers and possibly their shareholders.

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