Auto industry could see 'cruel summer' amid economic uncertainties, analysts say

Breana Noble
The Detroit News

There could be a "cruel summer" ahead for the auto industry amid an uncertain economic environment, low inventory levels and COVID-19 cases increasing in some parts of the country, Cox Automotive analysts said Wednesday, 

Almost halfway through 2020, automakers are just now returning to production levels equivalent to before the two-month shutdown resulting from the pandemic. They have offered 0% financing and other incentives to keep up sales, but the industry that represents nearly 4% of the national economy could be in for a long recovery more like Nike's swoosh than a "V" or "U," said Jonathan Smoke, Cox's chief economist.

Economic uncertainty could lead to a long recovery for the automotive sector and a "topsy turvy" year in sales, analysts with Cox Automotive Inc. say.

"We know we're in for a rocky road on unemployment, consumer credit, consumer sentiment and oh, yeah, election politics," he said. The contentious circumstances of the election are sure to be a "wet blanket" because of the contributing uncertainty.

Cox now forecasts 12.9 million new-vehicle sales this year in the United States, a 24% decrease year-over-year. Contributing to that is major declines in fleet sales as rental and travel business subsides and is likely to do so for the remainder of the year, said Charlie Chesbrough, a Cox senior economist.

On the retail side, constantly fluctuating market conditions may challenge the automakers, he said. Inventory in mid-June was lower than a year ago with roughly 600,000 fewer units and 71 days of supply.

"This limited supply we have now may constrain the market recovery. It's extremely low, far below levels we were at last year," Chesbrough said. "As sales continue and supply continues to sputter as factories get back to 100% utilization or at least 100% of the levels they were at before, this number can go back even further."

The limited supply may allow companies to relax incentives, he said, but if popular configurations and trim levels are unavailable, consumers may delay their purchases.

Adding to the challenges of inventory is the geography of the virus outbreak. States such as Texas and Florida with fewer cases saw their contributions to national vehicle sales increase early during the pandemic, likely helping pickup sales at Detroit's three automakers, Chesbrough said. Truck sales in the first half of the year are down about 25% compared to the 40% drop seen in passenger cars. But COVID-19 cases now appear to be increasing in some parts of the Sunbelt.

"It's just going to to be a really topsy turvy market throughout the rest of the year," Chesbrough said. "We know sales are improving, but there were incredible offers out there and pent-up demand."

Taking advantage of ways to make it more convenient for consumers to look and buy a vehicle — particularly delivery and online buying — will be key now and in the future, said Michelle Krebs, an executive analyst for Cox. Two of three consumers surveyed indicated they want to close the deal online.

"Since consumers have been waiting for this service for years and consumers who bought this vehicles this spring have experienced this way of car-buying and they prefer it, it is really hard to imagine that they will return to the old way," Krebs said. "We have come to believe they will expect this way of doing business.

"We believe dealers who continue to elect offering these solutions post-COVID-19 will have a clear competitive advantage over others."

Twitter: @BreanaCNoble