Automotive inventory supply levels: A reason for concern?
INSIGHT ARTICLE |
February 2009 is still crystalized in the minds of the automotive industry as a time when a dramatically slowing automotive market reached its lowest production in modern history. Only 9 million vehicles were produced and dealer inventories skyrocketed; it was the fourth consecutive month with an excess of 100 days’ supply. Despite a fragile economy with slow growth, the U.S. automotive industry then witnessed positive growth through most of 2015, peaking at over 18 million units before hovering near 17.5 million units for most of 2016. Thus far in 2017, production has settled to just over 16.6 million units. As the industry has now moved beyond its peak, the duration of time over which the industry will continue to maintain its overall strength is now being called into question as dealer inventory levels are noticeably rising.
One measure of particular concern has been days’ supply. The industry has averaged 69 days of inventory supply on hand for the 12 months ending June 30, 2017―well in excess of the industry’s manageable inventory sweet spot of 65 days, which the industry maintained for the same period just one year ago. Detroit’s Big Three car inventory is 100 days; Detroit’s Big Three car and truck combined inventory is 86 days.
What is striking about the days’ supply data is that the 12-month average has largely approximated 65 days since 2010. While manufacturers and dealers have thus far been relatively successful at enticing consumers to purchase new vehicles via various forms of dealer incentives, financing arrangements, new products and technologies, these have not yet been sufficiently effective at returning inventory supply to historically manageable levels as OEMs continue to saturate the market with new vehicles.
Should there be apprehension regarding current inventory levels? In the near term, OEMs will continue to look for cost optimizations and efficiencies that will allow them to maintain profitability as demand continues to stabilize, but with record-level highs in consumer confidence and low unemployment, coupled with continued strong market investment returns, we anticipate that consumer demand will continue to sustain the industry well into 2018. In the meantime, current average vehicle incentives, which are currently approaching $4,000, are expected to continue to grow in order to move products from dealer lots, but at the same time reducing OEM profitability.
This issue has not gone unnoticed by OEMs and dealers alike, who recognize the effect that both excessive new vehicles and nearly new vehicles entering the secondary market are having. As the industry looks to the future, it will need to continue to challenge its decisions on vehicle supply rather than ongoing incentives and longer-term financing arrangements―many of which extend as long as 84 months―to fuel new sales. With over 50 new vehicles expected between 2018 and 2021, the success of these new product launches will be an integral component in keeping automotive industry demand invigorated.