2022 auto industry forecast: Chance of pain

If LMC Automotive analysts are right, next year will be another challenging one for U.S. auto dealers, though there will be some signs of recovery.

Consider just some of the top-line projections put forth last week by the forecasting firm in its latest global outlook for light vehicles.

On the upside:

• New-vehicle inventories will improve slightly. But they will remain under intense pressure as automakers struggle to secure microchip supplies.
• North American factories will produce nearly 2 million additional vehicles next year — still well below expected demand levels — but some of those will be from new electric vehicle players.
• U.S. sales are expected to rise from 15 million this year to 15.7 million in 2022, with short supplies still boosting pricing power.

And on the downside:

• Inflationary pressures are expected to stick around, pushing up costs and prices, though inflation as a whole is likely to stay in its historical bandwidth.
• The Federal Reserve is winding down its quantitative easing policy and signaling readiness to start boosting interest rates, with the first of at least three expected late next year.
• Ramped-up average transaction prices, driven by reduced incentives because of excess demand, are pushing some potential new-car buyers out of the market and into used models. Lower lease penetration and increased consumer purchases of vehicles coming off lease look to drive used-vehicle prices even higher.

What's all this mean for dealers?

"Dealer margins are going to stay strong on what they have to sell, but they're still not going to have much metal to move," Jeff Schuster, president of global vehicle forecasts for LMC Automotive, told Automotive News. Supply constraints, including with microchips, are "just a global issue, across different industries, and it's not going to get better anytime soon. I would say dealerships are probably going to have a hard time over the next 12 to 18 months."

Schuster said automakers have lost 6.8 million units of planned vehicle production so far this year around the world, and they could drop another 2.6 million before the end of 2021 as the microchip shortage continues to roil the industry. And he believes that empty dealership lots, lower incentives and higher prices are going to start to drive some customers out of the market.

"We're starting to see the risk that buyers are going to pull out, that they're not going to pay those prices for something that's not exactly what they want," Schuster said.

In North America, production is actually up 3.7 percent through September from last year's COVID-19 shutdown-constrained figures, according to the Automotive News Research & Data Center, breaking a four-year streak of production declines in the region. However, through the first three quarters, automakers cut 2.2 million vehicles from planned production, including 1.98 million because of the microchip shortage, and collectively lost over 3,000 production days in assembly plants because of supply shortages, said Bill Rinna, LMC's director of vehicle forecasts for the Americas.

Rinna said General Motors and Ford Motor Co. have been hardest hit so far in North America, with GM losing an estimated 675,000 vehicles from planned production and Ford cutting about 600,000. By comparison, Toyota and Stellantis have each lost roughly 300,000 vehicles, Rinna said.

The lost production and strong-though-cooling demand brought inventories down to under 1 million vehicles, or a 24-day supply, at the end of September, compared with what Rinna called a "normal" level of 65 days. However, LMC analysts said inventory levels were expected to begin to recover later in the year as microchip shortages ease and could recover to about 2.5 million vehicles by mid-2022, with more normalized levels returning in the later part of 2023.

Last week, Toyota said it will cut global production 15 percent in November, but the impact will not be as painful as its cutbacks in September and October. And the automaker finally sees signs of recovery.

"I think we are over the worst period," said global procurement manager Kazunari Kumakura.

Augusto Amorim, senior manager for Americas vehicle sales forecasts at LMC, said the company sees Toyota Motor North America retaining its current sales lead over GM through the fourth quarter and likely keeping it through 2022 as microchip shortages continue to play out.

"We expect 2022 to be a tie with GM in market leadership and expect GM to regain market leadership [in North America] in 2023," Amorim predicted.

He said light-truck sales will continue to grow relative to cars. "There's still a market for cars, especially for compact cars," he said, but overall, car sales will not come back.

Amorim detailed other retail trends that may be concerning for dealers over the longer term. He said lease penetration in the U.S. is moving down, and in September, more new vehicles were financed than leased.

He said borrowers are also looking more favorably at noncaptive lenders that are offering competitive terms. "As OEMs keep cutting incentives, transaction prices continue to grow and, with them, monthly payments," he wrote in an email to Automotive News . "All those 84-month loans with 0% APR that we saw when the pandemic first hit are mostly gone. There are still a few captive lenders offering 72-month loans (Ford still has a plan with 0% APR for 72 months for the F-150, for example), but they aren't too common anymore. However, noncaptive lenders still offer these longer terms. Even if their APR is higher, consumers are paying less monthly, and that's what most people look at."

Both trends could impact automaker and dealer abilities to recapture customers by either pulling leases ahead or luring buyers with attractive captive offers, which in turn could weaken availability of late-model off-lease vehicles.

Gregory Daco, chief U.S. economist for Oxford Economics, said he expected consumer spending to remain a key engine of economic growth in 2022 but that the global economy had moved past what he called "peak growth" acceleration and is now moving at a more sustainable long-term pace.

"We still expect the global economy will manage to grow above 5 percent this year and 4 percent next year," Daco said, adding that supply chain issues continue to be headwinds around the world. "It's not just a question of capital, it's also a question of labor and heightened shipping costs, which are putting additional pressure on business margins."

The economist said consumer demand is cooling in the face of higher prices and restrained supplies across many sectors, including automotive. "These lingering supply issues are not only constraining production but constraining demand," Daco said.

He predicted that, for the U.S. economy, "There can be no robust and sustainable economic recovery without a robust and sustainable health recovery" enabled by broader vaccination, including for children.

Daco predicted "sticky" inflation going into next year, with higher energy prices being a driver, with some gradual cooling of "inflation dynamics," though he noted that inflation in the U.S. economy "hasn't yet broken out of historical ranges."

He said the Federal Reserve was already signaling interest rate hikes, which he expected to begin in late 2022, with as many as three hikes in the offing through 2023 as the Fed begins to tighten years of loose monetary policy.

Hans Greimel and Naoto Okamura contributed to this report.