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Tight US auto inventory likely to hit already depressed car sales, experts say

Consumers are facing a limited selection of new cars and trucks at U.S. dealerships and might delay plans to buy a new ride, experts say, because of tighter inventory levels from battered supply chains and auto production shutdowns caused by the coronavirus pandemic.

Car sales, which suffered heavily throughout the pandemic, have started to show some signs of improvement. Automakers like General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV have added shifts to their assembly plants and worked through traditional summer downtime, but growth in supply has yet to catch up to demand, according to experts. Auto industry tracker Wards Intelligence expects inventory levels will not start making significant gains until the end of the summer. The firm predicts inventories could still be about 30% lower than year-ago levels at the end of July.

The inventory issue could pose a risk to the U.S. auto industry as companies try to recover from the pandemic crisis. Second-quarter non-seasonally adjusted vehicle sales dropped 33.3% year over year, improving in May and June after plunging 46.6% in April, according to the Bureau of Economic Analysis. Second-quarter sales fell to 2.95 million vehicles from 4.42 million a year ago. Passenger car sales dropped 46.9% year over year, while sales of trucks, SUVs and minivans declined 27.7% year over year, according to S&P Global Market Intelligence.

Dealer inventory totaled 2.61 million new vehicles at the end of June, down 33.1% from 3.9 million units year over year, according to Wards Intelligence. Popular vehicles, including pickup trucks, were particularly low in supply because of strong sales from record incentives offered by automakers in April and May.

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Garrett Nelson, senior equity research analyst at CFRA Research, said it will be difficult for auto production to reach pre-pandemic levels since safety measures are preventing plants from achieving previous levels of capacity utilization.

"If consumers are unable to find the specific models they are seeking, the automaker risks losing the sale, as the consumer will likely postpone the purchase or buy a different vehicle," Nelson said.

CFRA Research expects U.S. new-vehicle sales to plummet 22% in 2020 year over year, with a 12.8% rebound in 2021 from 2020.

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Automakers used major incentives to attract customers in the first half of 2020, and sales began climbing back after bottoming out in April. Levels of incentives for the rest of 2020 are expected to be higher than 2019 but not as high as April, according to Wards Intelligence.

U.S. dealers had an average supply of full-size pickup trucks to last 69 days as of July 6, and a supply of midsize pickups to last 45 days as of the same date, according to Cox Automotive data. A healthy level of pickup supply for a dealership is 80 to 90 days, while it is 70 to 80 days for cars and SUVs.

GM, Ford and Fiat Chrysler are also facing production issues as workers call out due to the virus, whether they are sick themselves or potentially exposed.

Rebuilding limited inventory

The three Detroit automakers — GM, Fiat Chrysler and Ford — are working to ramp up production and rebuild inventory levels after hitting low points earlier in the year, according to company executives.

North American auto production plummeted 42.9% to 4.17 million vehicles year-to-date through May 31, according to CFRA Research's Nelson.

GM is working to rebuild its pickup truck inventory, which was 120,000 units as of July 25, compared with 270,000 vehicles in June 2019, CFO Dhivya Suryadevara said on the company's July 29 earnings call.

"We have returned to a normalized run rate in all of our full-size truck plants and are matching supply with demand in our remaining facilities, building inventory where we need it the most," Suryadevara said. "Our dealers are doing a great job of selling deep into their inventory, and there are many initiatives underway to optimize logistics so we can rebuild our inventory faster."

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GM expects to rebuild U.S. dealer inventory to about 600,000 vehicles by the end of 2020, assuming the pandemic does not cause further plant shutdowns or shift reductions, she said.

Fiat Chrysler plans to shorten or eliminate its usual summer production downtime at most of its North American plants to meet stronger-than-expected consumer demand, CEO Mike Manley said during Fiat Chrysler's July 31 earnings call.

"Levels of inventory at the moment are healthy," Manley said. "But we do have significant order bank now in the U.S., and there are certainly pockets of inventory that need to be refilled."

Ford's North American production was operating at about 95% of pre-pandemic levels by the end of the second quarter, CFO Tim Stone said on the company's July 30 earnings call. The automaker's narrower-than-expected second-quarter loss was from operational execution that included inventory management, he said.

Tesla hopes to deliver 500,000 vehicles in 2020, but CEO Elon Musk said that is becoming more difficult from a production standpoint because of global supply chain problems.

The company has been using airplanes to transport parts during the pandemic, Musk said on Tesla's July 22 earnings call, adding that he hoped that would not be the case going forward.

"Demand exceeds supply right now," Musk said.

Toyota improved its global vehicle production outlook to 7.2 million units from 7 million, the automaker said in its fiscal first-quarter 2021 earnings results on Aug. 6. Global sales recovery for the Toyota and Lexus brands is forecast to improve to 8.3 million vehicles for the year, with about 85% in the second quarter, nearly 95% in the third quarter and almost 105% in the fourth quarter, according to Toyota.

Delayed sales

Although vehicle demand is growing since bottoming out in April, consumers could put off purchases if dealers do not have certain models, experts say.

Charlie Chesbrough, senior economist with Cox Automotive, said consumers will either have to compromise on the vehicle they want, or the dealer might offer a better deal on a different vehicle.

"But given general tightness, my guess is that most consumers will wait to get what they want" and delay sales, he said.

The three best-selling vehicles in the second quarter of 2020 were pickup trucks, according to an S&P Global Market Intelligence analysis. Ford sold 180,825 units of its F-Series in the quarter, while the Chevrolet Silverado hit 122,432 sales and the Ram pickup was at 117,448.

The auto industry could see demand start to drop off quickly, however, as incentives and financial assistance related to the pandemic dry up, Chesbrough added. Then inventory levels might balance out if demand is low again.

Nelson expects a more favorable environment for used vehicles instead of new as consumers opt to keep their cars longer. This has boosted the average U.S. vehicle age as consumers hold off on purchases during the economic downturn or opt for longer-term financing options.

The average age of light vehicles in operation in the U.S. rose to 11.9 years in 2020, about one month older than in 2019, according to IHS Markit. New-vehicle sales growth has plateaued, according to the research company, and fewer new vehicles available have offset a potential drop in average age.