The Big Idea

Motor vehicle makers pick up the pace

Stephen Stanley | February 4, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Pandemic has had a severe effect on motor vehicle makers. Lockdowns forced assembly plants to close for at least six weeks in the spring of 2020, and since reopening, the sector has struggled to restore production primarily due to a shortage of semiconductors. Shortages throughout 2021 limited production and sales. In 2022, while supply bottlenecks remain acute, there are signs the industry is finally raising production to meet robust demand.

Motor vehicle production

For the first 18 months of pandemic, automakers were relentlessly optimistic that the chip shortage would clear up within a few months. Assembly schedules would show a quick return to a more normal pace within a quarter or so—at least, that was the expectation. Then every few months, automakers would update their schedules and push back a recovery. Having endured this cycle close to a half dozen times over the past two years, automakers have grown more cautious, warning in late 2021 that chip shortages would likely continue throughout 2022 and likely into 2023.

US domestic production averaged roughly 11 million units in 2019 before the pandemic. Output sank by about 20% to 8.8 million units in 2020, and then barely inched up to 9.1 million units last year (Exhibit 1). The only reason that 2021 outpaced 2020 is that the entire industry halted production for nearly two months in the spring of 2020. Nevertheless, unit assemblies in the fourth quarter of last year strengthened to 9.4 million annualized, well above the pace seen in the spring and summer. Moreover, industry projections for the current quarter show a further pickup to 9.6 million.

Exhibit 1: Motor vehicle production, with industry estimates Jan-Mar 2022

Source: BEA, Ward’s.

In fact, on a seasonally adjusted basis, unit production is estimated to have increased to 10.0 million in January, the best month in a year.

Motor vehicle inventories

Retail customers have been snapping up practically every new car and truck that is available. Auto dealers’ lots by late 2021 were close to empty. Motor vehicle inventories fell to just over 100,000 units, down from around 600,000 just before the pandemic and as high as 1.2 million just a few years ago (Exhibit 2).

Exhibit 2: Motor vehicle inventories plunge

Source: BEA.

Motor vehicle sales

Demand for new vehicles snapped back in the months after the lockdowns, even with fleet sales down substantially. By the end of 2020, auto sales were running roughly on par with the pre-pandemic pace. In fact, sales jumped to above an 18 million clip in April 2021, one of the highest monthly totals on record. However, once inventories were predominantly depleted, consumers could no longer easily buy a new vehicle, and sales sagged to the 12 million to 13 million range in the second half of the year, a pace that equates with 10 million units of domestic production plus net imports.

With production inching higher late last year, the January unit sales data brought the first glimmer of improvement in the supply-demand imbalance. On a seasonally adjusted basis, unit light vehicle sales jumped by 20% from December to a 15.0-million-unit annualized pace (Exhibit 3). To be sure, January is typically a low volume month for auto sales, so I would want to see better sales sustained for a few more months before concluding that the industry has turned a corner. Still, the January 2022 sales total is the first positive sign for the motor vehicle sector in quite some time.

Exhibit 3: Light motor vehicle sales

Source: BEA.

Dealers attributed the January gain to a slight improvement in the inventory situation. It would appear that the uptick in production in the fourth quarter and January is beginning to make a modest difference. However, pent-up demand for new vehicles has been building for at least a year, which means it could take at least several quarters of strengthening production to change the dynamic in the industry.

In the wake of GM’s quarterly earnings report last week, CEO Mary Barra noted that the semiconductor outlook is improving. Even so, she cited pent-up demand of several million vehicles in the U.S. This suggests that a normalization in inventories may not even begin in earnest this year. As a result, Barra expects retail prices for new vehicles to remain elevated throughout 2022.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

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