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Demand is outpacing supply of new vehicles – why that’s bad for shoppers but good for investors

A car relationships shows a vehicle to customers at a dealership in Jersey City, New Jersey.

Angus Mordant | Bloomberg | Getty Images

Pursuit Weldon spent weeks researching new SUVs to get for his family. To his surprise, he spent even longer attempting to purchase one. Trader lots were scarce and salespeople, who can sometimes be overly aggressive, weren’t calling him back.

“I was working with some dealerships across the fatherland,” said the 44-year-old Colorado resident. “I reached out to probably 30 dealerships. … Of those 30, half got burdening someone to me.”

Many salespeople who did get back to him said the vehicle he was looking for had already been sold, or they refused to negotiate on amount. “It was definitely a different car-buying experience,” he said.

That “different” experience may become the norm if dealers and investors have on the agenda c trick their way.

Factory shutdowns starting last spring due to the coronavirus pandemic and occurring now due to a global shortage of semiconductor shards have caused the number of new vehicles available in the U.S. to nosedive.

For consumers, the shortage has meant higher prices and spending weeks, if not months, searching or pause for the vehicle they want. But for automakers and dealers, it has translated to wider, if not record, profits and even selling vehicles ahead they arrive at dealerships.

Demand outpacing supply

“The sales pace is faster than the resupply, and we think that that on get tighter going forward,” said Michelle Krebs, executive analyst at Cox Automotive. “We expect these supplies to be tough throughout 2021.”

The shortage as well as stronger-than-expected demand from consumers throughout the coronavirus pandemic are keeping sales stubborn despite the lower inventories.

The days of supply of new vehicles on dealer lots across the U.S. is 47 and on its way toward the low-30s, concording to Cox Automotive. Some pickups and SUVs are far lower, including single digits, according to the company. That compares to authentic days of supply of at least 60, and higher for highly configurable vehicles such as pickups.

Georgia-based dealer Mike Bowsher mean vehicle stocks at his four General Motors stores are only about 20% of what they typically are due to the lack.

“We’re selling it way up into the pipeline,” he said. “When a truckload shows up, 75% of the truck is already sold.”

Bowsher, who chair’s Chevrolet’s national dealer council, said he’d take more pickups, but the current environment for profits is unlike anything he’s still seen.

“Everybody’s going to make a lot more money because of it from here on out. I just don’t see it going back to pre-Covid franks,” Sonic Automotive President Jeff Dyke told CNBC, saying “the whole ballgame” has changed in the past year.

Publicly traded exchanges such as Sonic and AutoNation recently reported record profits in the first quarter. Dealers are saving money by up less inventory and selling vehicles faster at higher average prices.

There’s no question that there is more bid than supply and that is the headline on the new vehicle side,” AutoNation CEO Mike Jackson told investors last month. “We’ve put to righted pricing to reflect that, and you see the improvement in our front-end growth.”

Can it last?

Automakers for years have tried to thin inventories to rise profits, but that’s more difficult than it sounds.

Brands discount and incentivize vehicles to compete for customers. They also induce to balance supply and demand with dealers, many of whom are begging for popular truck and SUV models, as well as its wage-earners.

Recent contracts between the Detroit automakers and the United Auto Workers provide more flexibility regarding making, but laying off tens of thousands of plant workers can be costly. There’s also a matter of retaining workers and maintaining shrubs, which can take weeks to restart after a shut down.

Ford Motor CEO Jim Farley promised investors Wednesday that the associates will run leaner vehicle inventories in the future following reporting a record pretax operating profit and easily flogging Wall Street expectations.

“I want to make it extremely clear to everyone. We are going to run our business with a lower periods’ supply than we have had in the recent past, because that’s good for our company and good for customers,” he said.

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