Why 2023 could be another tough year for the auto industry

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

Stephen Lamb | Reuters

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

These issues are not expected to be resolved quickly. There are growing concerns on Wall Street that this year’s supply shortages could quickly become a “demand-wrecking” scenario as auto production finally restarts.

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

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

Car sales could still rise

Unlike traditional downturns or previous periods of weak demand, most analysts expect global and US auto sales to rise in 2023 as the Covid-19 pandemic approaches early 2020.

The pandemic disrupted production and supply chains around the world, forcing automakers to significantly scale back production. The resulting shortage of new cars, trucks, and SUVs meant that automakers and dealerships were charging—and getting—much higher prices for the vehicles they could supply.

“New vehicle supply is finally improving, but the industry is trading a supply problem for a demand problem, and that doesn’t bode well for revenue and profits in the coming year,” Cox Automotive chief economist Jonathan Smoke said in a recent video.

Cox Automotive is forecasting 14.1 million new vehicle sales in the U.S. in 2023, which Charlie Chesbrough, Cox’s senior economist and senior director of industry insights, called “moderately optimistic.”

Analysts expect this year’s US auto sales to come in at about 13.7 million. US sales were 15.1 million in 2021 and 14.6 million in 2020.

S&P Global Mobility expects global new vehicle sales to reach nearly 83.6 million units in 2023, up 5.6% year-on-year. In the USA, the data and consulting company expects sales to increase by 7% to around 14.8 million units in 2023.

Chesbrough noted that the expected increase is because many lower-income and subprime borrowers who would normally exit new car sales during a recession have already done so due to low inventories and record high prices.

But fat gains can be at risk

Those sales increases are likely to come at the expense of the unprecedented pricing power and profits automakers have enjoyed on new vehicles in recent years.

“Ongoing supply chain challenges and recession fears will lead to a cautious recovery in the market. US consumers are cowering, and the recovery to pre-pandemic levels in vehicle demand is feeling like a hard sell. Inventory and incentive activity will be the key barometers for assessing potential demand disruption,” said Chris Hopson, manager of North America light vehicle sales forecasting at S&P Global Mobility, in a statement.

Put another way, will higher interest rates, mounting recession fears and overstocking force automakers to lower prices — and forego profits — to lure potential buyers to showrooms?

That would be good news for consumers who have faced record new vehicle prices this year. But if so, it will be expensive for automakers and possibly their shareholders.

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