New vehicle sales out-plunged production. Used vehicle supply already above normal amid weak sales.
By Wolf Richter for WOLF STREET.
The number of new vehicles in inventory on dealer lots rose to 1.098 million vehicles in December, the fourth month in a row of increases, and the highest inventory level since July, according to data from Cox Automotive. But inventory is still desperately short, after having collapsed by 76% from an average of 3.66 million vehicles in 2019 to just 886,000 vehicles in September, which was the low point of the year.
But inventories inched up for the wrong reason: New vehicle retail sales plunged 24% year-over-year in December, to just 1.40 million vehicles, and thereby out-plunged production that to this day is struggling with the semiconductor shortage.
There’s a circularity here. Sales were so weak because there was so little on the lot, and what customers could buy came with ridiculous prices, which depressed sales, which then allowed inventories to build a little.
The semiconductor issues are still going on. For example, Toyota announced yesterday that production at up to 12 of its plants in Japan will be halted and could cut production in January by as many as 47,000 vehicles. Other automakers are also still struggling with the shortages. And production will take far longer to return to normal than anyone expected a year ago.
For the whole year 2021, new vehicle sales plunged by 12% from 2019 and were back to 1978 levels (my charts on annual auto sales in the US total, and by major automaker going back years).
Supply of new vehicles ticked up to 35 days in December 2021, the highest since April 2021, according to Cox Automotive, which among numerous other brands owns Manheim, the largest auto auction house in the US, and vAuto, a provider of dealership inventory management software.
New vehicle supply had collapsed to just 25 days in September 2021 at the low point. About 60 days is considered healthy. In 2019, supply had averaged 90 days. The spike in supply in March and April 2020 was caused by the collapse of sales volume during the lockdowns.
Used vehicle inventory also rose for the wrong reason.
The number of used vehicles on lots of franchised and independent dealers in December rose to 2.38 million vehicles, the highest since February 2021, according to data from Cox Automotive. This was down by 17% from the average inventory in 2019 (2.88 million vehicles).
From mid-2020 through 2021, used vehicle inventories declined but never collapsed to the extent that new vehicle inventories collapsed, which makes those ridiculous price spikes for used vehicles – that people were actually paying new-vehicle prices for two-year-old vehicles with 25,000 miles on them – that much more astounding.
Supply of used vehicles has been rising since the low point in March and in December hit 51 days, the highest since December 2020. In 2019, supply had averaged 48 days. So in December, supply was above average.
But for the wrong reasons too: The high supply in December 2021 was in part a function of the 5.6% drop in unit sales from December 2020:
The normal state of the auto industry is a glut.
Normally, there’s plenty of inventory perfectly lined up and gleaming on huge dealer lots. Vehicles are being advertised in every media outlet with big discounts as dealers compete with each other to get another vehicle off the lot. Sales are a day-to-day battle, and they’re all trying to move the iron.
Those are the signs of a glut, and it’s the normal condition of the auto industry. They might run out of a hot model every now and then. But these huge dealer lots are normally full of cars, and there is a lot of choice for customers, and they can shop one dealer against the next.
The industry knows how to handle a glut. And prices still rise just fine year-over-year, and dealers are making money because a glut is the normal state.
But mid-2020 through 2021 was a historic exception.
New-vehicle inventories collapsed due to the semiconductor shortage that forced automakers to cut production. The shortage of new vehicles then ricocheted into used vehicles as rental car companies, that together normally buy 2-3 million new vehicles a year, couldn’t get enough new vehicles in 2021, and so they kept their current vehicles in the fleet longer, instead of selling them, which reduced the supply to the used vehicle market.
This situation in 2021 triggered ridiculous price spikes. Dealers advertised new vehicles that were still in transit because they had nothing on the lot. In their ads, they didn’t tout discounts, but the opposite, addendum stickers of $2,000 or $10,000 or even more over MSRP. They sold two-year old used vehicles for the price of a new vehicle. Prices at wholesale auctions exploded, as dealers were aggressively bidding up prices to get inventory. The whole situation was just mind-boggling.
But new vehicle production and inventories now appear to have bottomed out, and while a long way from a full recovery, are inching up. And there is plenty of supply of used vehicles at the current rate of sales. As the production and inventory situation improves, at some point, those ridiculous price spikes that we saw in 2021 are going to be an impediment to sales as customers prove to be unwilling or unable to pay them. And then, it might be back to the times when dealers were actually making deals to move the iron.
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