The Global Automotive Industry Market Size, as of March 2024, had been valued at $3,564.67 Billion in 2023 and the Worldwide Automotive Industry Market Size is expected to reach $6,861.45 Billion by 2033, at a Compound Annual Growth Rate (CAGR) of 6.77%, according to a research report published by Spherical Insights & Consulting.
The latest figures suggest that the industry is thriving. However, things were not so rosy in 2020, at the height of the COVID pandemic. There was a demand reduction, as the countries went into the lockdown and the global economy came into a standstill. China saw a sharp decline in car sales. Sales in Europe and the United States had collapsed. Between March and April 2020, passenger car sales in Europe decreased by more than 65% on a month-over-month basis.
Now, the crisis has become a thing of the past, as the Asia-Pacific region is dominating the automobile sector. China holds the largest market share in the region, followed by India and Japan. Asia-Pacific’s automobile market is likely to grow at the fastest rate, given the pace of the region’s economic growth, along with the faster adoption of electric vehicles (EVs).
The United States too, is expected to dominate the regional market, followed by Canada and Mexico. The US government’s policies supporting electric vehicles and extensive supporting infrastructure are having a positive impact on the country, which is home to major automakers.
What’s the present scenario?
With few vehicles in showrooms during the COVID period, automakers and dealers were able to scrap most sales incentives, leaving consumers to pay full price. As per the New York Times, some dealers even added thousands of dollars to the manufacturer’s suggested retail price, and people started buying and flipping in-demand cars for a profit.
However, as the economic activities resumed and lockdowns started easing, semiconductor supplies too came back to healthy levels, causing automobile production to rebound and dealer inventories to grow further. However, there is another problem in the form of higher interest rates, which has dampened demands again. Due to this, automakers are again scrambling to keep sales rolling.
Wes Lutz, owner of Extreme Dodge in Jackson, Michigan, told the NYT that he had several Dodge Challengers and Chargers that were eligible for $11,000 discounts from Stellantis, the manufacturer of Dodge, Chrysler, Jeep and Ram models. The automaker is also offering discounts of up to $3,600 on certain versions of the Dodge Durango sport utility vehicle.
As per Lutz, the sector is heading back towards the phase of incentives and overproduction. As per the reports, despite high borrowing costs, vehicle buyers are still looking to reap benefits from reintroduced financing offers and other incentives like discounts and dealer cash. Cash-back offers, subsidised loans and other incentives are emerging as potent tools for selling cars. Automakers and dealers are comfortable with monthly payments that are more affordable and ease the impact of high interest rates.
The recent inventory shortages and consumers’ preferences for large vehicles have pushed the average purchase price of new vehicles to just under $47,000, and the average monthly payment to $735, according to the market researcher Edmunds. The average interest rate on used car loans was 11.6% in April 2024 and as per the company, consumers are no longer in the situation to afford cars without substantial incentives.
Will the incentives help?
Yes, we are living in a high interest rate regime. Yes, we are undergoing a “cost-of-living crisis.” This means that to keep up with its profit and sales targets, companies will continue to indulge in aggressive price wars, apart from offering customer-friendly incentives. However, if the game is taken to the extreme, it will erode automakers’ profits and create a sales surge that will be followed by a sudden demand drop, since most of the first-time car buyers will be awaiting the “Discount Season.”
“Two decades ago, the industry went on an incentive binge. General Motors for a time sold cars at the heavily discounted prices it previously offered only to its employees. Extreme discounting helped weaken GM and Chrysler before they filed for bankruptcy in 2009 during the financial crisis,” reported NYT.
However, repetition of the same story looks unlikely now. At the end of May 2024, automakers had almost 2.9 million cars and light trucks in stock, about one million more than the corresponding month in 2023, according to Cox Automotive, a market researcher. By comparison, there were 4.1 million vehicles in stock in 2019, according to Automotive News.
So, while reaching the pre-COVID mark looks difficult for the automakers (in terms of inventory numbers), things are certainly looking better in 2024.
“Toyota, Honda, Subaru, and GM’s Chevrolet and Cadillac brands have kept tight reins on their inventories and in general have not yet elevated incentives significantly. But Ford, Lincoln, Dodge, Chrysler, Nissan, Volvo and several other brands have higher stocks, enough to last over 100 days at the current rate of sales. They’re offering some big incentives, but mostly targeted at specific models, and sometimes specific versions of certain models. Ford, for example, is offering $5,500 off its Escape SUV, but only on the 2023 models that remain in dealer stock. Stellantis is offering $4,000 cash back on the Ram pickup, but it is limited to the 1500 Classic version. Volkswagen is offering interest-free financing on the 2024 Taos small SUV, but not on its other models,” NYT noted.
“So far we’re not seeing the across-the-board incentives that we had in the past,” said Charles Chesbrough, a senior economist at Cox Automotive.
The growing number of incentives on new vehicles has helped in the price reductions of used cars and trucks. In April 2024, used car prices declined nearly 7%, according to the Bureau of Labour Statistics.
Among the most heavily discounted models currently are electric vehicles. Consumers’ enthusiasm for those models has ebbed worldwide, due to concerns about the higher prices and the challenges of keeping them charged, especially on road trips.
To counter this, Volkswagen is offering discounts of up to $18,750 on leases on its 2023 ID.4 line-up. The price tag includes the $7,500 US federal tax credit, which can be rolled into leasing deals under the Inflation Reduction Act.
When discussing other customer-friendly options, the Chevrolet Blazer EV, Cadillac Lyriq, Kia EV6, Volvo XC40 Recharge hybrid, and Ford F-150 Lightning electric pickup are all in the competitive race. Tesla, led by Elon Musk, initially raised vehicle prices multiple times during the COVID period but has since corrected course by reducing them over the past year and a half. Additionally, the company is offering 0.99% loans on its Model Y SUV.
“The incentives come on top of other trends that are helping reduce the price of electric vehicles, including falling manufacturing costs and rising competition. Increased discounting is helping tempt what are known in the industry as “want buyers,” consumers who don’t need a new car but are drawn by new technologies, design or features,” NYT added.
“You have your ‘need buyer,’ whose car had died or needs a lot of expensive repairs, and they have to get a new vehicle. But a lot of those ‘want buyers’ went away when interest rates went up, and now incentives are bringing some of them back” said Adam Silverleib, owner of a Honda and a Volkswagen dealerships outside Boston.
Regarding the “want buyers,” NYT reported about Brian Pawlowski, a Michigun-based digital marketing executive, who had been driving a 2017 Chevrolet Volt plug-in hybrid that had only 55,000 miles on the odometer, yet was itching to get a fully electric model.
He began looking for customer-friendly EV deals and found a two-year lease on a Hyundai Ioniq 5 SUV. The deal came with a $13,000 discount and other terms that left him with a monthly payment of $369 for a vehicle with a sticker price of $52,000. And the deal was too lucrative for him to let go. So he went after it and got the vehicle.