vehicle supply

The COVID-19 pandemic could be a watershed for carmakers who have typically kept hundreds of thousands of new vehicles at any given time. AutoNation CEO Mike Jackson surmises that this inventory-heavy practice could be coming to an end, giving way for a new method for vehicle supply to retailers.

In an interview with Bloomberg Television, Jackson said, “The industry has understood that overproduction and excessive inventories as the old model is not where they want to be. I really think there’s a new strategy going forward.”

He points to the practice manufacturers have of showing revenue. It’s when the carmaker ships built vehicles to their dealership’s lots that they book the transaction as revenue, rather than when the dealer pays for the vehicle or the unit is sold to a consumer. It promotes the tendency to overproduce vehicles and use dealer incentives to accept more inventory. Those same incentives can be damaging to both profits at the dealership and for carmakers and can taint the brand’s image.

A reset for the industry

As microprocessor chips are slow to recover from the Renesas fire earlier this year and a pandemic shift toward electronics mid-2020, it’s left dealer lots and manufacturers’ days of supply strained. Cox Automotive reports that the industry had an average of 31 days vehicle supply remaining as of July 19. That represents a drop of 68% from the same time in 2019 before COVID-19 was even aforethought, and the industry was firing on all cylinders.

“The new vehicle market is starting to show signs of stabilization around inventory levels,” said Cox Automotive Senior Economist Charlie Chesbrough. “The sales pace has been falling as vehicle supply is constrained and consumers wait for improvement. While the days’ supply is stabilizing – and, in fact, it rose slightly at the end of July – inventories remain tight and are far from normal.”

With two-thirds fewer vehicles in supply, the timing could afford carmakers an opportunity to reset how they supply cars to their dealerships and their customers. It’s a chance to moderate incentive programs that retain profits more in line with expectations, and it allows dealerships to demonstrate the brand’s value better without using discounts as an equalizer.

What order control looks like is hard to predict, but Jackson and others believe it won’t return to the old way, even as production is expected to be in full swing near the end of 2021 or in early 2022.

Sales to remain strong in coming months

Any realignment or model for vehicle supply isn’t likely to affect consumer demand. The average transaction price for a new vehicle in July has far surpassed $41,000 for the first time, and dealers nationwide are continuing to report best-ever results in both new and used car sales.

Why are car sales so strong? Of course, there’s an influence from government spending, but it largely has to do with a shift in what consumers are spending their money on. Mike Jackson says, “Demand has dramatically increased as a result of the reprioritization of the household budget toward more space, more electronics in the home, and personal transportation.”

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