The Side Effects are Less Profit and Less Value

January 13, 2025 – Sales of U.S. light-duty vehicles in 2023 rebounded nicely (13%) from the prior year’s supply chain constraints, but by the end of the year, the pent–up demand had been satisfied, and the outlook for 2024 was as low as 15.6 million vehicles, flat with 2023 results, to a high of 16.1 million vehicles, a modest increase of 3.2%. After sales for the first quarter increased by 5.6% from the first quarter of 2023, the industry exhibited a collective confidence that it may have been too conservative at the outset. Then sales for the second and third quarters fell by 0.7% and 1.8%, respectively, and the confidence quickly vaporized. Everyone was pleasantly surprised when the seasonally adjusted annualized rate (SAAR) of sales exceeded 16.0 million vehicles in October 2024 and then improved to 16.5 million in November and 16.8 million in December. 2024 sales of U.S. light-duty vehicles ended the year at 16.0 million units, only slightly below the high end of the initial industry forecasts.
After waiting on the sidelines for two quarters, consumers were enticed to buy in the fourth quarter with richer sales incentives (discounts), improving credit conditions, and flush dealer inventory. At the end of the fourth quarter, the average sales incentive was nearly $3,500 per vehicle, average interest rates fell back below 7.0%, and new car inventory exceeded 3 million vehicles. Nonetheless, average retail transaction prices for a new vehicle remain above $45,000, about $10,000 more than what many consumers want to spend, and the average monthly payment above $750. Faced with the tailwind borne from increasing inventory and a headwind manifest from inflated sticker prices manufactures tend to resort to ever–increasing sales discounts while consumers will trade down to less expensive vehicles. The side effects are fewer profits for manufacturers and their surrogates (dealers), while consumers receive less value for their money. Total retailer profit has shrunk to $2,100 per unit, down 20% from December 2023, while consumers, trying to stay within their monthly budget for car payments, are increasingly choosing smaller crossovers at the expense of much larger and more expensive SUVs and pickup trucks.
While the market ended the year on a high note, the general outlook for 2025 is a modest increase of only 200,000 to 300,000 vehicles. Anyone waiting for a return of annual sales of over 17 million vehicles is likely disappointed. However, rather than chase volume as they had in the past, the industry needs to quit squandering money on maintaining excess capacity, thereby reducing its “break-even” point so it can generate sufficient cash to fund the technology of the future. Sales of electric vehicles, battery electric, and hybrids already account for more than 20% of every new vehicle sold and are expected to account for as much as 25% in 2025. By comparison, it is nearly double that in both Europe and China.
This publication has been prepared solely for the use of clients and professional associates of The Hilco Organization. No warranty is given as to the accuracy, completeness of the information or opinions provided in this publication. The publication should not be used as specific advice and is intended for general information purposes only.