Carmakers have faced a ‘significant storm’ as buyers reject high prices at a time of huge capital outlays

DETROIT (AP) — Investors are punishing automaker stocks this week after second-quarter earnings reports exposed industry-wide problems of slowing sales and high prices, just as companies are having to spend huge sums to manufacture new electric and gas vehicles.

Each auto company has unique problems, but common to many is rising vehicle inventories on dealership lots, requiring deeper discounts to sell them to buyers with overstretched family budgets.

Ford Motor Co., who reported a drop in second-quarter profits due to electric vehicle losses and persistently high warranty costs led the declines. Its shares are down 20% this week. But others like General Motors, Tesla, Stellantis It is Nissanall saw their shares fall by around 8% or even more.

Carlos Tavares, CEO of Jeep and Ram maker Stellantis, said a significant storm has arrived in the auto industry that he has been warning about for several years. “We’re in it,” he told reporters after releasing disappointing results on Thursday. “To me, it’s obvious that this industry will be in crisis.”

Shortly after the coronavirus pandemic spread across the world in 2020, car manufacturers had to slow down their factories due to a global shortage of computer chips. At the time, high-income buyers who couldn’t afford to spend money on travel or restaurants began paying prices above list price for a limited supply of expensive, loaded vehicles. Automakers used their limited production to build only expensive products, and prices soared nearly 27% from pre-pandemic levels.

The trend continued until the end of last year, with companies and dealerships making large profits from lower-than-normal sales.

But as chip supplies have returned, automakers have ramped up production and inventory on U.S. dealer lots has grown to about 1.8 million a year ago. Now there are just under 3 million, a high number, but still a million short of pre-pandemic numbers.

The problem for the industry is that it continued to build expensive, option-laden vehicles – while most high-income buyers had already purchased new vehicles. The remaining buyers now cannot afford much of what dealers have in stock due to high prices and interest rates. Now, the big profits from the expensive trucks and SUVs that paid to develop and build electric vehicles are starting to dwindle.

“It’s kind of ridiculous that anyone was surprised this party ended,” said Sam Abuelsamid, principal mobility analyst at Guidehouse Insights. “There are a limited number of people who can afford such expensive vehicles, especially when interest rates have remained so high for so long.”

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The average price of a new vehicle in the U.S. peaked in December at $48,408, according to data from Edmunds.com. It fell slightly to $47,616 last month. Discounts, which were minimal or nonexistent in recent years, rose to an average of $1,819 per vehicle in June.

As the Federal Reserve raised interest rates, the average rate on new auto loans jumped from a low of 4.1% in December 2021 to 7.3% last month. That brought the average monthly payment to $739 per month, with an average loan term of nearly six years, according to Edmunds.

The average price of used vehicles has soared more than 50% since before the pandemic, to a peak of $31,095 in April 2022. It dropped to $27,277 in June as new vehicle prices began to fall, Edmunds said. .

Stellantis’ earnings were hurt by weak performance in North America. Tavares said the company’s prices are too high, causing potential buyers to leave showrooms without hearing about low-interest financing and other discounts.

“Our customers are telling us they need more affordability,” he said.

These demands have put Stellantis in a difficult situation between offering lower prices and inflationary pressures on the business, Tavares said. Stellantis, he said, must reduce costs to preserve profit margins at lower prices — something all automakers face now.

“We need attractive, high-quality products at a competitive cost that protect the affordability that makes customers buy our products,” said Tavares.

Tavares predicted that the storm in the sector could last several years and could lead to the bankruptcy of some automakers.

Automakers, especially GM, Ford and Stellantis, abandoned low-cost small and even midsize cars five or six years ago, leaving them little to sell to those who want affordable vehicles, Abuelsamid said. Some, like GM, even offer smaller, affordable SUVs. But those who don’t have accessible vehicles now will likely face more hardship than their competitors, he said.

Industry analysts expect more rebates from automakers and possible interest rate cuts from the U.S. Federal Reserve later this year and next year. So for those who can, it might be wise to wait before buying a new or used vehicle, said Eric Lyman, vice president of products at Black Book, which tracks car prices.

“Experienced buyers would be wise to pause their pursuit of purchasing a vehicle until we see some more drops in used and new vehicle prices, as well as the interest rate drops everyone is hoping for, to address the affordability crisis we are in. facing. come in,” Lyman said.