As of this writing, coronavirus cases and deaths are increasing nationally, but the car business is doing fine. Many manufacturers and franchised auto dealers shut down or seriously curtailed operations in April and May, but since then the industry is struggling to keep up with demand. The demand shock (or cratering in consumer demand for products) that we saw during the government-mandated shutdowns has turned into a supply shock (or shortage of inventory to sell). Some observations about the state of the industry:
Planet Subaru sold 250 new and used vehicles in June, our highest volume month since we opened in 1998. Our Jeep store had its best month since opening in 2004. I never would have guessed we would be breaking records just a few weeks after reopening our showrooms.
We, and our fellow dealers, are running out of new cars. Manufacturers, and the many suppliers they depend upon for all their components, shut down for weeks or months, and it’s taking time to get the whole supply chain moving again. You appreciate the complexity involved in building a car when you stop and think about how many parts go into one. And a car can’t be sold until every last part goes on the car. Some parts, such as tires, could be easily substituted in a pinch, but more complicated parts, such as electronic control units programmed for that specific car, might be available only from a single supplier. And if that supplier is struggling to restart its operations because of labor shortages or component shortages of its own, it may not be able to supply the quantity the manufacturers require. These shortages won’t last forever, but they will continue for a few months.
We’re also running out of used cars. At the Planet dealerships, we generally stock up in the spring, so we were loaded with inventory when the crisis first struck. We were really concerned about having so much inventory as demand plummeted, and wholesale prices for comparable vehicles at the auction dropped too. Because used cars typically depreciate while they sit on our lots, we try to avoid owning inventory that no one wants to buy for several months—we would rather buy it later when it’s less expensive. But now we’re relieved that we had so many cars, because we have a lot to sell while demand is high. But that supply is dwindling quickly, and we can’t easily replace them. Typically, dealerships replace inventory as it sells in an orderly way. But with most dealers running out of cars, there is tremendous upward pressure on prices at the auction. The Manheim Used Vehicle Index, which tracks wholesale used car pricing, is setting another record this month after an all-time high in June. There is a ceiling on what we can pay for a used car—for example, no one wants to pay more for a one-year-old Subaru than a new one. We have witnessed overheated wholesale prices during other times and we’re familiar with the Catch 22. We can’t pay so much for a used car that consumers won’t pay, but we can’t afford to run out of inventory either.
I’m not an economist, I do have a view from the trenches about what’s causing the boom. Here are my theories:
There are still many people working from home or furloughed, and they’re bored. Buying another car is usually a time-consuming project, and people have a lot of time on their hands to do it.
Eager to get selling again, manufacturers put a lot of “cash on the hood” (rebates) and special financing offers (0% for extended terms), so there a lot of good deals in the market.
The federal government has flooded the economy with money. Customers are getting stimulus checks and finance rates are at historical lows. Even the unemployed have been getting an additional $600 per week on top of state benefits, an amount large enough that many people are seeing more income than when they were employed.
Even with all the general uncertainty and anxiety in the zeitgeist, most people are not terribly worried about signing up for another car payment because they assume their jobs are relatively safe as long we have the V-shaped recovery that many economists expect.
Some people who traditionally took public transportation, and/or relied on Uber and Lyft, have decided that the risks of being in close proximity to strangers are significant enough that they want their own vehicles.