From the assembly line to the dealership lot, companies are searching for the new Goldilocks level of car production.
One common theme from auto companies’ fourth-quarter earnings calls and analyst discussions over the past six weeks: The industry still isn’t making a volume of cars that’s “just right.” Despite optimism that dealers will soon be able to reduce the backlog of customers waiting to buy new vehicles, the uneven recovery as supply-chains unsnarl and factories start up again is still causing the price of those vehicles to swing wildly.
On the plus side, many executives, including those at Canadian auto-parts companies, think the worst of shipping delays and chip shortages that halted new-car production have passed. On their companies’ earnings calls, Linamar CEO Linda Hasenfratz said ocean freight costs are nearing pre-COVID levels, while Martinrea CFO Fred Di Tosto predicted overall production volumes will rise this year as supply-chain disruptions and inflation ease.
“Chip availability is improving … [which will] satisfy the deep backlog needed to refill the pipeline of inventory on dealer lots,” said Hasenfratz.
“That doesn’t mean everyone has the chips they want,” she said, but rather that they’ve gotten better at planning for lower production volumes, leading to less volatile stops and starts in the manufacturing schedules for parts makers.
That isn’t to say that dealership lots—or car prices—will look the same as they did pre-COVID, as automakers prioritize which models to manufacture first as they get more access to limited resources.
“It’s not all [manufacturers] that are at three-month supply,” said Casey Charleson, VP of finance at the dealership group AutoCanada.
“You might have one [manufacturer] prioritizing high-end SUVs while you have another one prioritizing a pickup truck,” said AutoCanada chair Paul Antony.
Some automakers said they have no intention of totally refilling dealership lots this year. General Motors executives told analysts that 2022 ended with dealers having 50 days’ worth of total inventory, a third of mid-2019 levels. By the end of 2023, it’s targeting 50 to 60 days of total dealer inventory, down 20 to 30 days from mid-2019.
But other automakers, like Ford, still say their volume is too low, after the F-150 maker fell well short of Wall Street’s earnings expectations.
“The key driver for the miss in the fourth quarter was the volumes,” said Ford chief financial officer John Lawler. “As far as the rate inflow on the commodities, the chips, it continues to be hand-to-hand combat, but we’re putting corrective actions in place.”
As manufacturers try to find the right number of cars to ship to dealerships, whatever they land on could have a huge impact for salespeople on the lots.
Amid a shortage of new cars over the past couple of years, “for the first time in the history that I can remember of used cars, they actually started going up in price,” said Antony. Lately, however, “used vehicles in the market started depreciating again, because the type of new cars started coming.”
That’s left dealers who were holding out for good used-vehicle prices over the past couple years suddenly holding the bag again on a “radioactive” depreciating asset that must be sold before the price hits zero.
Antony pointed to the depreciation as one of the issues faced by other companies like Carvana. This week, Canada Drives said it was restructuring, in part due to the higher costs of holding inventory.
Antony also noted that as more automakers try to sell direct-to-consumer online, they have less latitude to tweak prices at dealerships to reflect supply and demand. Consumers are now seeing companies like Tesla marking down their new vehicles as supply and demand shifts, he said. “Everybody was throwing the kitchen sink at the price of new cars and used cars.”
Whether or not it has its feet under it, the industry is entering the spring selling season, as well as the second quarter, the busiest manufacturing season before the pandemic, according to Martinrea CEO Pat D’Eramo.
“The second quarter will probably be the best test,” he said.
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