November new-vehicle sales are forecast by our team to be modestly better than October, but down significantly from November 2020 and well off the 16-to-17 million sales pace the industry enjoyed prior to the global pandemic.
Supply chain disruptions and the well-documented microchip shortages have had an enormous impact on both consumers and dealers. On-the-ground inventories are in some cases 15-to-20% of pre-pandemic levels, transaction prices and grosses are at all-time highs, and incentive offers are at all-time lows.
In this environment, there are two big questions everyone is asking:
- Is this low-inventory, low-incentive market the new norm going forward?
- Will a build-to-order model arise from the current situation?
As microchips become more available and supply chain kinks are worked out, the automakers will be able to build more units and generate more revenue. However, we believe it will take 2-to-3 years to replenish dealer inventories to even 70% of pre-pandemic levels, due to the strong consumer demand for vehicle ownership, driven partly by increased reluctance towards ride-sharing and public transit, and due to the enormous demand from fleet and rental companies.
In this ongoing constrained-inventory environment, there’s little incentive for automakers to offer incentives. In October, industry incentive spending hit another all-time low of 4.3% of the transaction price. We anticipate that consumers will have a hard time finding a “smoking deal” for the foreseeable future. Sticker price will continue to be the norm for some time to come.
Dealers have increasingly begun selling units from their incoming pipeline to meet consumer demand and maximize their sales turn-and-earn efforts. In Q3, Ford Motor Company reported that 28% of their retail sales came from their order bank and that their overall customer orders increased more than 50% from the second quarter to more than 100,000 units.
Will the coming years of lean inventory last long enough to shift the U.S. market to a full, build-to-order paradigm, as so many automakers and dealers desire? Will vehicles be sold before they are built?
I don’t think so, not entirely. Americans generally lack patience. Roughly 50% of new-vehicle buyers need something new (lease is up, car accident, new baby, etc.) and the other 50% are largely driven by the emotion of wanting a new vehicle. Either way, American consumers prefer the immediate gratification of driving their new vehicle off the lot today versus 60 or 90 days from now.
What I do believe we’ll see is improved inventory management and a significant reduction in model complexity, to help reduce the number of hard-to-sell models. A recent J.D. Power report indicated in 2020 that 80% of the configurations available for sale represented less than 25% of the retail sales. This current inventory crisis has forced product planners and production managers to take a hard look in the mirror and ask, “Why do we have 153,000 configurations of a particular sedan?” These unicorn combinations slow down sales turn and lead to unnecessary incentive spending.
Automakers have taken note that simplified build combinations have also driven efficiency gains in their supply chain and production facilities. It’s been a hard lesson to learn, but an important one. And one we hope is not forgotten when “normal” production resumes.
Brian Finkelmeyer is senior director of new vehicle solutions at Cox Automotive.