Analysis: How high car prices are affecting the industry

Image credit: Depositphotos.com

The auto market is experiencing a rise in consumer spending, but is this good for the industry?

DesRosiers Automotive Consultants recently reported that automotive parts, accessories and tire stores showed 10.2 per cent growth. The increase in aftermarket growth comes even after elevated sales a year ago when factors like inflation and supply issues raised prices.

New car dealers reported a 9.3 per cent increase, thanks to recovering inventory numbers. Meanwhile, used dealers saw a 2.5 per cent decline, likely due to consumers opting for new options as availability improved.

While sales are increasing, so are prices, leaving many consumers unable to afford a new vehicle. The Canadian average transaction price in 2022 was just under $50,000.

With these trends, there are pros and cons to the rising tide of car sales in the new and used markets.

The auto industry has had a tough few years. Challenges continue as manufacturers grapple with ongoing supply chain shortages.

Increased auto spending in 2023

The auto industry has had a tough few years. Challenges continue as manufacturers grapple with ongoing supply chain shortages. The impact of these shortfalls affects the whole market, including consumers. In 2021 and into 2022, supply issues meant fewer new cars were available. However, availability is beginning to recover in 2023.

As a result, the auto market is seeing increases in consumer spending. Canadian auto dealers sold 20,000 more new cars in Q1 2023 compared to Q1 2022. Consumers spent $3.9 million more on new vehicles in Q1 2023 than in the previous year, as well.

More vehicles are being sold this year at higher prices than before. Some consumers are getting priced out of the new vehicle market, but demand remains strong. In fact, used cars are also seeing increased prices and demand, likely reflecting some consumers shifting to more affordable options.

One factor that may be helping the rising new car prices is production choices from automakers. Supply shortages mean manufacturers must be more selective about which vehicles they invest in most. In this situation, lower-priced models are often cut from the lineup or made in smaller quantities. Higher-priced offerings are more profitable, driving companies to produce more cars.

“They’ve certainly been picking the vehicles to build based on the chips they have available, as well as the demand they’re seeing,” said Todd Campau, automotive aftermarket practice lead at S&P Global Mobility, at AAPEX 2022. “They’ve been preferentially building high-margin vehicles — more trucks and things like that where they make more money.

Even if supply chain issues persist, the auto market can still see increased sales because the average car price is higher today.

Image credit: Depositphotos.com

A lack of affordable cars

While increased consumer spending may benefit retailers, it has some drawbacks. Key among those is the need for affordable cars on the market. Higher prices for new vehicles are pushing more consumers to buy used, allowing dealers to sell them at higher prices.

An uptick in used car prices may mean people who need a car don’t have access to an affordable one. This means more consumers may need to apply for loans or financing to get a vehicle, which can be risky for shoppers and dealers. One of the most important principles of effective collections is avoiding high-risk transactions when possible, which includes customers with poor credit.

In the past, customers in this position may have been able to afford inexpensive used vehicles, allowing them to get something without a big financial risk for the dealer. That isn’t always the case today, though. Even used cars are priced higher than many low-income consumers can afford.

Used car dealers have commented on the situation, noting that cars in the $3,000-$5,000 price range are unavailable. Many also can’t afford the financial risk of offering financing to customers without a strong credit history. That means less revenue for these dealers, who are also struggling to get a large supply of used vehicles on their lots.

While auto spending is up from previous years, it is important to note that it is not necessarily a universal win for the market. People spending more money on new vehicles than they can afford translates to more debt for consumers and more risk for dealers.

These trends are concerning, but it’s worth remembering the supply chain issues facing auto manufacturers are also hitting aftermarket manufacturers.

Repairs and the automotive aftermarket

The cost of car repairs is on the rise, along with the wait times, thanks to the low availability of replacement parts, even for popular models. Plus, higher car prices may motivate consumers to hang on to older models, which typically have higher maintenance needs. This is particularly true for people who usually shop in the used car market.

These trends are concerning, but it’s worth remembering the supply chain issues facing auto manufacturers are also hitting aftermarket manufacturers. As the world’s leading auto brands recover from supply chain shortages, the aftermarket will also likely bounce back.

While suppliers are closer to their normal, distributors are still navigating their way through what their new one is.

“In our case as the distributor, what that means is we are compensating for all of the volatility that’s in our supply chain,” said Mauro Cifelli, president and CEO of Groupe Del Vasto, at AIA Canada’s National Conference. “Inventories are sky high, our carrying costs are up and we’re trying to manage labour, we’re investing in technology and innovation to try to keep up with it with some of the volatility in the supply chain.”

Something the aftermarket will need to keep an eye on is the pace of new vehicle sales. Business has been great, as DesRosiers has pointed out. Aftermarket parts usually allow consumers to save money on vehicle maintenance. Higher prices and unavailable components in the aftermarket may make it more difficult for many consumers to afford the upkeep of their vehicle.

Will business subside to pre-pandemic levels as new vehicle inventories recover and consumers opt to replace rather than repair? This will be a trend to watch.

Will business subside to pre-pandemic levels as new vehicle inventories recover and consumers opt to replace rather than repair? This will be a trend to watch.

The future of the auto industry

What do these trends mean for the future of the auto industry? New vehicle prices are expected to remain high, while the cost of used cars will continue climbing through 2023 and into 2024. Trucks and SUVs are the most popular models on the market —and the most expensive options, so price increases will likely affect them most.

One interesting factor that could shake up the auto market is EVs. In 2022, Canada experienced the highest number of new zero-emission vehicle registrations on record, accounting for 18 per cent of new registrations nationwide. Consumers now have a wider variety of vehicles to choose from, leading many to switch to electrics and hybrids.

An uptick in consumer interest in EVs could cause noticeable disruption for dealers selling exclusively traditional ICE vehicles. With more affordable EVs coming to market, used car dealers could even experience some of the shift in demand.

EV charging infrastructure in Canada is still a major concern in 2023, but numerous efforts may change that. For example, the U.S. and Canadian governments recently announced a collaborative international EV charging network that will span 1,400 km with a charging station every 80 km.

Devin Partida is the Editor-in-Chief of ReHack.com and a freelance writer. Devin covers business technology, Fintech and auto tech