Lower Q1 auto sales results belie a hot market

The U.S. industry is not short of buyers right now — just the inventory to satisfy them.

As factory problems on three continents continue to disappoint efforts to capture what analysts say is hot pent-up consumer demand, U.S. auto sales plunged 16 percent in the first quarter for the 11 automakers that reported last week.

"We have a huge incentive on our end to build and ship," David Christ, head of the Toyota Division at Toyota Motor North America, told Automotive News. "With the consumer demand where it is now, even if we started building cars at full capacity today, it's going to take us a little while to get through these back orders."

In announcing its sales results, Toyota thanked its customers "for their patience as we work around the clock to ensure their needs are satisfied."

Industry totals will not be available until all automakers report. Most companies released U.S. sales results for March and the first quarter on Friday, April 1. Ford Motor Co., Volvo, Daimler, Volkswagen, Audi and Jaguar Land Rover will report results this week or later in month.

Toyota Motor Corp. outsold General Motors in the first quarter by 5,484 vehicles, despite Toyota's overall sales decline of 15 percent. Toyota replaced GM as the top U.S. automaker last year.

But it is hardly a sluggish market. Many retailers have been selling vehicles on a one-in, one-out basis. Almost as soon as a vehicle reaches a dealer's lot, a customer shows up to take delivery.

In this market, "our production pace equals our sales pace," Tyson Jominy, vice president of data and analytics at J.D. Power, told Automotive News.
The pinched sales tally led forecasting firms to revise their sales projections for the full year. LMC Automotive and J.D. Power expect a U.S. light-vehicle sales total of 15.3 million for 2022, down from an earlier forecast of 15.9 million. Cox Automotive also cut its 2022 forecast to 15.3 million from 16 million.

"Frankly, even this outlook requires the chip shortage issue to be significantly improved by the start of the second half of the year," acknowledged Charlie Chesbrough, Cox Automotive senior economist. "Sales remain weak and will basically be stuck at the current level until more supply arrives."

Market experts suggest the current sales pace is a poor reflection of true market dynamics, since there is now a disconnect between sales and factories' ability to supply the market.

Jominy believes that by the second half of this year, factories should be building at an annualized rate of about 18 million vehicles to satisfy U.S. consumers. GM Chief Economist Elaine Buckberg contends that with high customer demand and the strong labor market, annual sales should be registering at the 17 million level for the year. But because of production constraints, GM calculates the current rate at 14.1 million.

March's vehicle supply was 1.5 million fewer than March 2021, and 2.3 million lower than March 2020, according to Cox Automotive data.

Restocking dealers' inventory will be slow throughout this year and into next year as automakers sort through supply chain disruptions and strive to meet upwards of 4.5 million units of pent-up demand, according to a J.D. Power estimate. And because of the ongoing supply chain issues, second-quarter sales tallies will likely resemble those of the first quarter.

"Even if we run [production] at a much higher rate, the majority of that rate will be quickly absorbed by the pent-up demand," Jominy noted.

The demand is keeping average transaction prices high and incentive levels low.

TrueCar reports the average transaction price climbed 16 percent in the first quarter to $43,841, while the average incentive per vehicle plunged 51 percent to $1,680.

The war in Ukraine is also factoring into the equation. The Russian invasion triggered a surge in U.S. gasoline prices. Ordinarily, that could reduce the number of consumers in the market.

But demand is so hot that higher prices appear unlikely to hurt overall sales volume.

Christ said his team at Toyota has heard of customers canceling full-size SUV and pickup orders, but those orders are quickly picked up by the next customers in line.

"There has been an impact in consumers' minds on gas prices, and that has caused some to change their plans," he said, "but from a big-picture standpoint, I don't think it's really changing the world."

According to Edmunds, in the first quarter, 41 percent of new vehicles were sold within a week of arriving at the dealership, compared with 20 percent a year earlier.

"The lack of inventory is what ultimately depressed new-vehicle sales in the first quarter," Jessica Caldwell, Edmunds' executive director of insights, said in a statement.

Industrywide, fleet sales made up only 13 percent of the market in the first quarter, down from its typical range of 25 to 33 percent, according to J.D. Power. Throughout the year, fleet sales are likely to rise as daily-rental-car companies strive to replenish their stock, even though that means they will have to buy vehicles at retail prices.

"They need vehicles, and the automakers will finally be producing them," Jominy said "It's our expectation that many of these daily-rental companies will have to pony up to get to the front of the line, but they will."

Fleet will become automakers' most profitable channel, he said.

GM increased its fleet deliveries 10 percent from a year earlier, accounting for 24 percent of its total sales during the first quarter.

The first three months of this year marked GM's best commercial sales quarter in nearly three years and inched closer to pre-pandemic norms.

Despite bleak first-quarter sales figures, automakers will remain in the unique position of selling nearly every vehicle they build with low or nonexistent incentives.

"It's making record profits for retailers," Jominy said. "It's making record [revenues] for automakers."

Going forward, the automakers that can build and ship vehicles the fastest will have the most to gain, he added.

"If you can get more volume to market with these record transaction prices, the potential win there is very large."

Larry P. Vellequette contributed to this report.