Chris Kuehl
Managing Director • Armada
The automotive sector has traditionally been one of the most volatile and unpredictable and there are several factors that play into this pattern. The bottom line is that consumers behave in ways that are generally not considered logical or likely. If one looks at the data it would seem to suggest that sales would be cratering right about now. The average price of a vehicle is now $49,740 – close to an all-time high. Prices for vehicles above $80,000 have been especially aggressive. At the same time, the average age of a car has been over 12.5 years and that means that people can keep their vehicle longer. These factors alone should be keeping people out of the showroom but sales have been holding fairly steady (growing for the more expensive models). It comes down to the fact that people buy vehicles for all manner of impractical reasons. These are status symbols as much as transportation and buying decisions are emotional rather than rational.
Is the era of the EV over already? It would be premature to declare it at an end but the bloom is certainly off the rose. There were a number of assumptions made at the beginning of the EV surge and most of them have not come to pass. The most important was that oil prices would soar to the point that gasoline and diesel would be prohibitively costly and people would be seeking alternatives. Fuel prices have stayed low and even the emerging crisis in the Middle East has not created a spike (thus far). It was also assumed that prices for EVS would fall but cheaper foreign models have been blocked in the US. The third assumption was that charging stations would be more common but investors have shied away from this development until more EVs are on the road. The problem is that people will be unlikely to buy an EV unless there are more charging stations or a greater range.
Automotive inventories have started to see some signs of overall recovery but there is a stark difference according to the vehicle model. Dealers are reporting weak demand for lower-priced vehicles as these are aimed at the lower third of income earners (making $50,000 a year or less). They are barely making it from paycheck to paycheck and have no ability to buy any kind of vehicle. The upper third (making over $100,000) will buy as they have in the past and are still in the market for the high-end vehicle. Trucks, SUVs and CUVs are still the dominant sellers. There is one inventory issue that hangs over the entire sector and it has been nearly impossible to predict. The vehicle sector is truly a global business and that means parts from all over the planet as well as assembly processing in multiple nations. If all of these threatened tariffs are imposed there will be some major interruptions in the manufacturing process and inventory levels will falter. The sense is that automotive will be getting more than its share of exemptions but nothing is secure these days. The most important concession thus far has been made towards Canada and Mexico due to the USMCA. This is a formal trade agreement between the three nations and has more legal and functional stability.
Mexico and Canada have been at the forefront of discussion over auto manufacturing and tariffs. The two nations are intimately tied to the US process with a vehicle crossing the borders several times in the course of its assembly. Mexico plays a significant role in U.S. auto manufacturing, though its share remains less than a quarter of the total. The country’s manufacturing capacity has grown over time, contributing to 18% of its total manufacturing output, with more than 50 automobile manufacturers operating there. Canada has fewer operations but they are generally larger facilities. It is next to impossible to separate the assembly process and the majority of the export and import activity is intra-company.
Sales continue to be determined primarily by income group. As we have noted before, the consumer sector has divided into three parts. The upper third ($100,000 and above), the middle third (between $50,000 and $100,00) and the lower third (below $50,000). The impact of inflation has been very different for all three groups. The higher rates wrecked the lower third and they are barely staying afloat. No vehicle buying in this cohort. The upper end vehicles are selling briskly as this group has money. That leaves the middle group and they are spending as long as they think their jobs are secure. As unemployment remains at record lows the expectation is they will keep spending on vehicles as well as other higher value items.
Consumer motivations have altered somewhat but the core issues remain dominant. The three reasons to buy a new car include 1) the cost of repairing the existing vehicle, 2) a significant price change that makes buying appealing and 3) simple desire for something new and updated. There has been no decline in price so that motivation is missing and there has not been a major change in the design of cars sufficient to push people away from their vehicle. That leaves repair costs. The cost of major repairs has been escalating and that may be enough to push people to a new car. Beyond these motivators there are the issues of job stability and the costs of other necessities that may preclude taking on auto debt.
