2023 Automotive Industry Outlook: You Asked, Experts Answered

During our January 2023 Market Pulse Webinar, "Hidden Risks & Hidden Opportunities,” we explored how the automotive industry is using smart data and insights to reach the right new customers with confidence. Vehicle prices, the current economy’s impact on the automotive industry, and recession planning were top of mind during our January 19 question and answer session. Our webinar presenters and panel of experts answer your questions below. 

AUTOMOTIVE

Where is the demand for auto coming from? (i.e., is the demand in line with historical trends or has the demand increased due to demographic, COVID, or other secular reasons.) 

Jonathan Smoke: 2020 and 2021 saw abnormal demand for autos caused by stimulus, record low interest rates, and a preference shift to personal transportation away from public or shared transportation. People went from living in dense urban areas that are less car dependent to more rural areas, which boosted  demand. Now, demand is softer than pre-pandemic levels primarily in response to affordability and the absence of stimulus, slowing home sales, and diminishing COVID concerns.

With the domestic suppliers out of the compact/sedan market, what is the outlook for Japan and Korea to provide the supply needed for affordable vehicles for consumers with subprime credit?

Jonathan Smoke: The Asia brands are continuing to produce sedans and more affordable products, but even there we are seeing less production of lower priced products due to scarcity of parts and limited capacity. Even if they were to return to 100% capacity, the industry would not be able to provide the same volume that existed when North American and European brands produced high volume entry level sedans.

Why have auto delinquencies risen to pre-pandemic levels while others have not?

Tom O'Neill: One factor is that auto delinquency wasn't impacted as greatly as others (e.g. bank cards) by events like the CARES Act, a sudden drop in consumer spending, and stimulus checks.  Events like that contributed to an environment where consumers were able to pay down balances and get a footing with their bank cards and personal loans. which resulted in delinquency rates in those areas reaching historic lows. Even as delinquencies have been rising in those markets over the past 12-18 months, they still remain below pre-pandemic levels. Auto, however, was less impacted by those events and the pandemic-related drop in delinquency rate was much more subdued. So, even though the year-over-year rise in delinquency rates for auto may not be as much as what we've seen recently in other areas, it didn't take as much for it to catch back up to and pass where rates were in late 2019.

By how much more will electric vehicles further drive down combustion used car prices over the next 5 years?

Jonathan Smoke: It is not clear that electric vehicles (EV) will impact prices for internal combustion engine vehicles (ICE) in the new or used market. Battery electric vehicles (BEV) still cost more than comparable ICE vehicles because of the still more expensive battery technology. As a result, electrification generally contributes to higher new vehicle price inflation. Used BEVs are less than 1% of the used market, so there is limited evidence of BEV pricing influencing ICE pricing. Historically, discontinued vehicles hold value better than non-discontinued vehicles. The most pressure on ICE vehicles would come from any forced regulation or limits on sales/driving.

Do you expect a fast decline of used car prices to trigger higher than expected delinquencies and default?

Jonathan Smoke: It is possible that continued used price corrections could lead to more defaults. Especially if more vintages end up with more negative equity than usual, as there would be less room for lenders to work with borrowers to find workable payment plans. The reverse causation could be equally viable-- that more delinquencies and defaults from deteriorating economic conditions could lead to lower used car prices, which in turn then limits options for consumers with existing loans with substantial negative equity.

GENERAL ECONOMY

 

Will the impact of the infrastructure bill, reshoring, EV investment, Inflation Reduction Act, CHIPs Act, etc. in the next few years soften the potential downside risk to investment even with a potential recession?

Robert Wescott: Yes, there has been $1.2 trillion dollars of spending in the November 2021 Infrastructure and Investment Jobs Act of 2021 (spread over 5 years), and another $485 billion in the Inflation Reduction Act passed in early 2022, and another $52 billion in the Chips Act passed this past summer. These are extremely large sums of spending. They can be expected to soften the downside in activity if a recession were to hit the U.S. in the next year, especially in the construction sector and the manufacturing sector.

For more, download the webinar deck and watch our full recording.

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