Last Updated on November 23, 2023 by inaz Ameera
Key Points
- There are signs of potential issues in the used car market. Margins and GPUs for used cars are starting to miss expectations, which could indicate a weakening in this part of the market.
- People falling behind on car payments have a significant rise
- Profit margins from parts and services like repairs and maintenance are holding up well. This a positive sign for dealers.
- US auto dealers are currently making more profit than expected
Concerns in the Used Car Market
- Recent reports have highlighted potential issues in the used car market.
- A notable decline in margins and Gross Profits per Unit (GPUs) is apparent, signalling a potential weakening.
- This downturn is particularly concerning as used cars have traditionally been a reliable sector for dealerships.
- Analysts are beginning to see cracks form beneath the surface, starting with misses in used margins and GPUs.
Rising demand in service and parts margin
“Large incumbent carmakers sell their cars at low to zero true margin. Most of their profit is selling replacement parts to their fleet, of which 70% to 80% are past warranty. Like razors & blades.”
Elon Musk, Tesla CEO
- In contrast to the used car sector, the parts and service segments of auto dealerships are demonstrating remarkable resilience.
- Despite broader market challenges, these areas maintain strong profit margins, indicating a stable demand for repairs and maintenance services. This provides a cushion for dealers against the volatility in other areas of their business.
- Cost-conscious consumers are less inclined to replace older cars with new models. This behavior, influenced by better car quality, strong second-hand markets, and anticipation of lower electric vehicle prices, is fueling the automotive aftermarket enormously.
Rising Auto Loan Delinquencies
- Auto loan delinquencies are at an all-time high. This increasing trend is worrying, suggesting many consumers are struggling with car payments, which could have far-reaching implications for the auto market, particularly in the used car and subprime sectors.
- Lenders, who were lenient during the pandemic, are now becoming more stringent and aggresive regarding defaults and restructuring. Those with significant borrowings are vulnerable to cash flow strains due to increasing debt cost.
- Price of vehicles have grown astronomically. So you’ve got higher cost goods, higher interest rates, but yet you’re also seeing a pretty healthy market right now. Consumers have shown us that they’re not saving for the future.
New Car Market vs. Housing Market
- There is a split in trends between the new car market and the housing market. The new car market is showing strength with high sales values, while the housing market is slowing down.
- The value of housing has largely declined since its peak in April 2022. Initially lower housing starts was offset by median prices that climbed through Oct ’22, but since the pricing peak, median home prices have fallen 13% through August, driving the value of housing down 24% from its peak. This housing trend deviates from what we’re seeing in autos where the ‘value of SAAR’ stands at a pinnacle.
- This concludes that demand for new vehicles remains strong. Consumers are spending near-record amounts on new vehicles.
Over-Earning in US Auto Dealers
- Interestingly, U.S auto dealers are currently over-earning, posting profits higher than anticipated. However, this trend is accompanied by emerging challenges.
- Slow adoption of electric vehicles (EVs) and the issues in the used car market represent significant obstacles that could impact long-term profitability.
- Demand for new vehicles remains robust. Consumers are spending near-record amounts on new vehicles, underlining the continued interest and willingness of consumers to invest in new automotive technology and models.
Conclusion
The U.S. auto market is at a crossroads, with strong demand in some areas but facing significant challenges in others. The issues in the used car market, rising auto loan delinquencies, and concerns in the subprime consumer space need careful monitoring. At the same time, the resilience in parts and service margins and the strong demand for new vehicles offer some stability.
“New vehicle supply is finally improving but the industry is swapping a supply problem with a demand problem and that doesn’t bode well for revenues and profits in the year ahead,”
Jonathan Smoke, Cox Automotive Chief Economist
Understanding these dynamics is crucial for stakeholders to navigate this complex and evolving landscape effectively. The key to success lies in understanding and meeting the changing needs of consumers, investing in innovative technologies, and staying ahead of the competition.
