Why 2023 could be another difficult year for the auto industry

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

These issues are not expected to be resolved anytime soon. Concerns are growing on Wall Street that this year’s supply shortage could quickly turn into a “demand-destroying” scenario, but auto production is finally picking up.

In a note to investors earlier this month, Bernstein analyst Daniel Roska said, “Given inflation, interest rates and energy costs, the industry is experiencing aggressive demand destruction, but so far this has been the case. mainly affects the backlog.

Roeska wrote that as car production recovers, the market will try to understand where, when and how much pain automakers will feel early next year.

Car sales could still rise

Most analysts expect global and U.S. auto sales to pick up in 2023, unlike traditional recessions and past periods of weak demand. Covid-19 pandemic in early 2020.

The pandemic has disrupted manufacturing and supply chains around the world, forcing automakers to drastically cut production. The resulting shortage of new cars, trucks, and his SUV led automakers and dealers to demand and get much higher prices for the vehicles they could offer.

Cox Automotive chief economist Jonathan Smoke said in a recent video, “The supply of new cars is finally improving, but the industry is trading supply problems for demand problems, and that’s going to be the year ahead. Not a good sign for revenue and profit.

Cox Automotive forecasts 14.1 million U.S. new car sales in 2023, a number that Charlie Chesbrough, Cox’s senior economist and senior director of industry insights, called the number “lukely optimistic.” express.

Analysts expect US car sales to hit about 13.7 million this year. Sales in the US were 15.1 million in 2021 and 14.6 million in 2020.

S&P Global Mobility expects global new car sales to reach approximately 83.6 million units in 2023, up 5.6% year-on-year. In the US, data and consulting firm sales are expected to grow 7% to about 14.8 million units by 2023.

Chesbrough said the expected increase was already due to low-income and subprime borrowers leaving the new-car segment, citing low inventories and record prices, typically during recessions. pointed out that there is

But fat gains can be at risk

These sales increases could come at the expense of the unprecedented pricing power and profits automakers have enjoyed on new vehicles over the past few years.

“Ongoing supply chain challenges and recession concerns will lead the market to recover cautiously.U.S. consumers are leaning in and a return to pre-pandemic levels of auto demand feels like a tough sell.” “Inventory and incentive activity gauge potential demand disruption,” Chris Hopson, manager of North American light vehicle sales forecasts at S&P Global Mobility, said in a statement.

In other words, rising interest rates, growing recession fears and excess inventories will force automakers to cut prices and forgo profits in order to lure potential buyers into their showrooms. Is not it?

This is good news for consumers facing record high new car prices this year.But if so, it would be costly for automakers − and possibly its shareholders.