As dealerships were forced to shut down their showrooms, auction lanes closed, jobless claims peaked, and car sales fell off a cliff in April, the industry was laser-focused on consumer demand. Fortunately, May brought incentives, stimulus checks, and pent-up demand, which drove consumers back to dealership lots. However, because inventory has not been replenished, the industry’s problem has shifted from demand to supply.
Plant closures stunt new vehicle supply
Nearly every OEM halted production from mid-March through mid-May in an effort to curb the spread of COVID-19. Initially, the plant closures didn’t have a major impact on new vehicle supply because many consumers had delayed their purchases because of the pandemic. Once dealerships were deemed essential and vehicle sales increased, new inventory quickly started to dwindle.
To replenish new vehicle supply, OEMs restarted production at their plants—however, it wasn’t without problems. Ford reopened the Dearborn truck plant, but swiftly closed after a worker tested positive for COVID-19. Other OEMs faced parts issues from their suppliers, especially OEMs that use the just-in-time manufacturing model.
Given the delay in ramping up production, the industry will likely face an inventory problem for its most popular vehicles. This will result in brands that still have ample supply gaining share. For instance, at the end of May, the Toyota RAV4 had only a 32-days’ supply while the Nissan Rogue had a 108-days’ supply. Though the current Rogue is long in the tooth and the new Rogue just debuted, Nissan has a chance to gain ground in the market. By offering higher incentives on the hood, they may be able to conquest buyers who are finding it difficult to locate vehicles like the Toyota RAV4.
Standard used inventory sources impacted by COVID-19
Used vehicle supply faces its own supply and demand issues. Because dealers were more preoccupied with the state of their operations and declining demand, used inventory acquisition and the fact that auctions were closed fell by the wayside for many. However, as pent-up demand and stimulus checks brought consumers back to the market in May, the supply issue came to light.
In particular, used vehicle sourcing became a major issue when used and CPO sales were higher than expected in May. Though dealers were able to move inventory again, they were unable to find new supply. There were several reasons for this:
- Because vehicle sales were down in March, April, and May, dealers didn’t see the steady influx of trade-ins that they normally see.
- COVID-19 led to many consumers extending their leases, which shut down another source of used inventory acquisition that dealers typically rely on.
- The closure of auctions led to vehicles just sitting there with no way for dealers to access and source much-needed inventory. To make matters worse, the low used vehicle supply running in the auction lanes has been leading to more bids per vehicle, which is driving prices up as dealers desperately try to source used inventory. As long as the auction supply remains low, dealers will find it difficult to replace and replenish inventory levels.
Vehicle supply undergoing a crunch unlike during previous recessions
It’s important to remember that both used and new supply will return. As OEMs bring plants back online and either shorten or cancel the summer shutdown to restock, new inventory levels will increase. However, most plants are still not operating at full capacity and will probably stumble as plants near full capacity.
Used vehicle supply should return more quickly than new. When the auctions call their workers back from furlough and the lanes are running at full capacity, the used vehicle supply curve should rebound within a short amount of time. That’s because there will be supply from many sources, including vehicles parked at auctions that have yet to be reconditioned, vehicles returning from off lease, rental car companies offloading fleet, and the expected increase in vehicle repossessions once payment deferral programs end. The only things that could complicate the matter are the lack of new inventory and consumers turning to the used vehicle market to avoid paying higher prices during a recession.
While there is a lot of uncertainty in the market, one thing remains clear: until the supply at the auction lanes returns to normal levels, inventory acquisition will remain problematic given the current levels of demand for used vehicles. For dealers, it’s more important than ever to be strategic about the cars you’re buying. Analyze demand in your local market before sourcing inventory so you’re not wasting any money. And, if you can hold off on restocking, do it to avoid overpaying for vehicles. Supply levels will return to pre-COVID-19 levels—it’s just a matter of time.