- Factories have been closed for weeks
- Popular models are in short supply
- Deals could dry up on popular trucks and SUVs
- Inventory and incentives may remain strong for small cars and SUVs
- Don’t count on great deals being around for much longer
Despite a sharp fall-off in March sales and ongoing stay-at-home orders in many states, the car market showed signs of life in April. Even though sales were still off by half, purchases exceeded expectations. It appears buyers have adapted to their environment, thanks to new tools like Autotrader Dealer Home Services.
As the buyers return to the market, however, a different picture may emerge for car buying in general. During previous disruptions, like the 2008-2010 recession, manufacturing did not shut down as completely as it has during the current pandemic. Automakers are only now restarting factories, and it will take some weeks not only to ramp up assembly but also to get those vehicles into distribution pipelines.
In other words, as buyers get back into the market, demand may exceed the current supply. There could be shortages of popular models, which in turn may result in lower incentives and not as many good deals as you’d expect from companies that should be hungry for sales.
A Question of Availability
The key to car buying and selling will be inventory. Charlie Chesbrough, senior economist at Cox Automotive, parent company of Autotrader, explains: “How much inventory is too much or too little depends on the trajectory of vehicle sales. There may be sufficient inventory if sales stay weak through the summer. However, if buyers return more quickly in May and June, inventory levels will fall further. And that means buyers can’t be choosey. There may be plenty of vehicles on the lots, but maybe not the color or trim the buyer wants.”
Cox Automotive data puts the total number of new vehicles in inventory at the beginning of May at roughly 3.3 million vehicles. That’s a lot of cars and trucks, but still, inventories haven’t been this low in more than a year. Last May, new vehicle inventory stood at 4 million units. If demand outstrips current supply, dealers may find themselves short of vehicles to sell.
How Do Low Inventories Affect Deals?
With a short supply of vehicles, two things will happen. First, manufacturers will dial back incentives like rebates, lease deals, or low-interest rates. Second, dealers will be less willing to negotiate if they know a particular model is in short supply. This may have huge implications during the traditional Memorial Day Holiday Sales Events. The long and short of it is that great deals may not last as long as you expect.
As a result of market uncertainty over vehicle supply and demand, sellers will likely take a more conservative approach to holiday shopping. Vehicles that weren’t selling well before the downturn will likely still have more generous incentives and room for negotiation. Vehicles in short supply will not.
The first incentives to be scaled back will be across-the-board programs, like payment forgiveness and deferrals, as well as zero-percent finance deals. While some makes like Volkswagen have extended these programs through June, makers may choose to be more selective about how they apply these spiffs.
If you’re looking to buy a vehicle in the coming months, you’ll need to adjust your expectations around what type of deal you’re going to get and how much leverage you’ll have in negotiating, especially when it comes to vehicles that are in short supply.
Going into the lockdowns, pickups and SUVs were the hottest segments in the industry. That momentum has continued despite the steep drop in sales. Pickup trucks were the best-selling category in April. It was the first time that pickup trucks outsold traditional cars.
Restarting pickup production is a top priority for Detroit-based makes. If the sales momentum remains strong for these vehicles, look for tight inventories and fewer incentives in this category, at least through the summer months.
Among Asian brands, Kia and Subaru are more vulnerable to shortages, since both had the lowest inventory numbers in the industry. While Kia did resume production at its Georgia assembly plant, which makes the hot-selling Telluride 3-row SUV, the factory is operating only on one shift. Subaru is likewise hampered by not having many vehicles on the ground, especially popular models like the Ascent or the Outback.
Brands struggling with slow sales and large inventories before the shutdown include Fiat and Mini. Small vehicle sales are down for several reasons, including the big drop in gas prices. Others in premium and luxury segments, like Buick, Acura, Cadillac, Jaguar, and Land Rover, are carrying more vehicles than the competition. As a result, they may have more in the way of incentives and a desire to negotiate.
If the vehicle you’re looking for is in short supply, the other alternative is to turn to the used vehicle market. A late-model, low mileage Certified Pre-Owned (CPO) vehicle could be just the ticket. Currently, wholesale values have dropped because of a lack of used vehicle sales, so these cars are relatively abundant. Also, there’s a huge number of off-lease vehicles that will be returned. The beauty of buying a used vehicle is that it’s already built.