The U.S. auto industry is entering a new year with mixed prospects, as it deals with the challenges of supply chain disruptions, high interest rates, and slow consumer spending, while also tapping into the opportunities of the electric vehicle market, rental and commercial demand, and price parity.
One of the major hurdles for the U.S. auto industry in 2024 is the ongoing impact of supply chain disruptions caused by geopolitical tensions, labor shortages, and natural disasters. These factors have resulted in a shortage of key components, such as semiconductors, steel, and rubber, that are essential for vehicle production. According to a report by the Economist Intelligence Unit, the global automotive output is expected to decline by 2.4% in 2024, after a modest recovery of 3.8% in 2023.
The supply chain disruptions have also affected the availability and variety of new vehicles in the U.S. market. Some brands, such as Ford, GM, and Toyota, have faced significant inventory constraints, while others, such as Hyundai, Kia, and Subaru, have maintained relatively high levels of inventory. The uneven distribution of inventory has created a gap between consumer preferences and dealer offerings, leading to lower customer satisfaction and loyalty.
High Interest Rates and Inflation Dampen Consumer Demand
Another challenge for the U.S. auto industry in 2024 is the dampening effect of high interest rates and inflation on consumer demand. The Federal Reserve has raised its benchmark interest rate four times in 2023, and is expected to raise it again in 2024, to combat the rising inflation that has eroded the purchasing power of consumers. The higher interest rates have increased the cost of financing for both new and used vehicles, making them less affordable for many buyers.
The consumer demand for new vehicles in the U.S. is also affected by the slow growth of personal income and spending, as well as the low consumer confidence and sentiment. According to a report by Cox Automotive, the U.S. new vehicle sales are expected to be around 15.5 million units in 2024, slightly higher than the 15.46 million units in 2023, but still below the pre-pandemic level of 17 million units in 2019. The report also notes that the consumer spending growth has slowed down, while the consumer sentiment has improved but remains below the historical average.
Electric Vehicle Market Offers Growth Potential and Competition
Despite the challenges, the U.S. auto industry also has some opportunities to capitalize on in 2024, especially in the electric vehicle (EV) market. The EV sales in the U.S. have soared by 46% in 2023, reaching 1.1 million units, and are expected to grow by another 21% in 2024, as more consumers and governments seek to reduce the greenhouse gas emissions and mitigate the effects of climate change. The EV market is also supported by the federal tax credits, state incentives, and infrastructure investments that aim to promote the adoption of EVs.
However, the EV market also poses some challenges for the U.S. auto industry, as it faces intense competition from both domestic and foreign players. The U.S. EV market is dominated by Tesla, which accounted for 56% of the EV sales in 2023, followed by Ford, GM, Toyota, and Hyundai. The market is also crowded by new entrants, such as Rivian, Lucid, and Fisker, as well as established brands, such as Volkswagen, BMW, and Mercedes-Benz, that are expanding their EV offerings. The competition has led to a surplus of EV inventory, higher incentives, and lower prices, which have reduced the profit margins for the automakers.
Rental and Commercial Demand Boosts Used Vehicle Market
Another opportunity for the U.S. auto industry in 2024 is the strong demand for used vehicles, especially from the rental and commercial sectors. The rental and commercial fleets have been replenishing their inventories, after selling off a large portion of their vehicles during the pandemic-induced downturn in 2020 and 2021. The pent-up demand for travel, tourism, and business activities has also increased the need for rental and commercial vehicles.
The used vehicle market in the U.S. has been booming in 2023, with sales reaching 42.5 million units, up 11% from 2022, and prices hitting record highs, up 28% from 2022. The market is expected to remain strong in 2024, as the supply of new vehicles remains tight, and the demand for used vehicles remains high. However, the market may also face some headwinds, such as the rising interest rates, the declining trade-in values, and the aging vehicle population.
Price Parity Between EVs and ICE Vehicles Nears
One of the most interesting trends to watch in the U.S. auto industry in 2024 is the price parity between EVs and internal combustion engine (ICE) vehicles. The price parity refers to the point at which the upfront cost of an EV is equal to or lower than that of an ICE vehicle, without considering the operating and maintenance costs. The price parity is considered a key factor for the mass adoption of EVs, as it eliminates one of the main barriers for consumers.
According to a report by BloombergNEF, the global average price parity between EVs and ICE vehicles is expected to be reached by 2025 for large vehicles, and by 2026 for small vehicles. However, the report also notes that the price parity may vary by region, depending on the local factors, such as taxes, incentives, fuel prices, and electricity prices. In the U.S., the price parity may be achieved sooner than the global average, as the EV inventory is well above the industry average, and the EV prices are near parity with ICE vehicles, thanks to the higher incentives and competition.
The price parity between EVs and ICE vehicles may have significant implications for the U.S. auto industry, as it may change the consumer behavior, preferences, and expectations, as well as the industry structure, dynamics, and profitability. The price parity may also create new opportunities and challenges for the automakers, dealers, suppliers, and service providers, as they adapt to the changing market conditions and customer demands.
