As U.S. new vehicle inventories stabilize near a target average supply of 60 to 80 days, automakers must ensure their product mix meets consumer demand, experts told Automotive Dive.
That could prove difficult amid uncertainty over federal support for electric vehicles as Republicans take power in Washington and consumers grapple with affordability issues.
“The devil’s job right now is to be a product planner,” said Erin Keating, executive analyst and senior director of economic and industry insights at Cox Automotive. “Figuring out the right powertrain distribution mix will be their main battle.”
While new vehicle inventories are healthy with an 85-day supply, electric vehicle inventories remain significantly higher than internal combustion engine vehicles, despite increased incentives on these models, according to Cox Automotive. In September, EV inventories had a 91-day supply, while ICE vehicles had a 79-day supply, according to Cox Automotive.
Furthermore, even if the new vehicle affordability is improvingautomakers still need to lower prices because a lack of used inventory makes it difficult for many potential buyers to get into a vehicle.
“Many consumers who would normally buy a three- or four-year-old vehicle are now buying six-, seven- or eight-year-old vehicles,” said Tyson Jominy, vice president of data and analytics at J.D. Power.
Cutting production is usually better than cutting prices
The auto industry often relies on incentives to help clear inventories by making vehicles more affordable for consumers, spurring further sales.
According to Cox Automotive, incentives for new vehicles during the third quarter reached 7.7% of the average transaction price, increasing more than 60% year over year. However, incentives remain significantly below pre-pandemic levels, which often topped 10% before Covid hit, according to Kelley Blue Book.
OEMs are slowly increasing incentives to safeguard their profit margins, while dealers are discounting deeper and making lower profits, Jominy said. This is a change from 2022, when dealers achieved record profits selling vehicles above the MSRP because they could raise prices faster than producers.
Reducing production is often a better alternative to consumer incentives because it reduces dealers’ planning costs and allows automakers to maintain or even raise prices, experts said.
“When an automaker’s stock rises, the answer isn’t just to put money on the hood,” said Stephanie Brinley, principal automotive analyst at S&P Global Mobility. “Tighter inventory is financially better for everyone.”
Automakers adjust vehicle production by model to ensure their inventory mix matches consumer demand. Idling plants, reducing shifts and slowing assembly lines are common approaches to reducing production.
In recent months, car manufacturers such as Nissan, Stellantis AND Volkswagen Groupthey laid off auto workers and idled or closed manufacturing plants to align production with market demand for their products.
However, OEM with union workforceincluding Ford Motor Co., General Motors, Stellantis and others represented by the United Auto Workers union, often pay higher costs to reduce production, influencing when to reduce production and by how much.
“The latest UAW contract has higher costs for long layoffs, so that needs to be taken into account,” Brinley said.
The UAW also won the right to strike over plant closures during the most recent union negotiations with Detroit automakers, leading to a clash between Stellantis and the union over the automaker’s plan to delay reopening its Belvedere assembly plant in Illinois amid weak demand for electric vehicles.
Today’s vehicles can also share components and platforms, giving manufacturers more flexibility to adapt production based on market demand. Honda, for example, builds the Civic and CRV at the same assembly plant and can tailor production of each model to meet demand, Brinley said.
Additionally, while some automakers prefer to maintain lower inventories, some OEMs, such as Toyota Motor Corp., have not been able to produce enough vehicles. According to Cox Automotive, the Toyota and Lexus brands had a 35-day supply in October.
It may be related to Toyota’s just-in-time production system, which aims to limit excess inventory in normal markets, Jominy said.
“The more efficient you are, the harder it is to get back to those efficiencies [after the pandemic] because you don’t have any buffer,” Jominy said. “It’s going to take a lot longer to recover than some of the other automakers that have had more slack in the system.”
Understanding what to sell and where to sell it
Keating said automakers need to understand what types of vehicles they sell and where they sell them, especially when it comes to electric vehicles.
“It is more important than ever to understand the regionality of vehicle sales. If you send the wrong trim levels to the wrong places, you’re going to have to incentivize them,” Keating said.
OEMs also need to target inventories that make sense for their dealers and customers based on the model, Brinley said.
“That targeted 60- to 80-day supply is a very, very fluid target,” Brinley said.
Some vehicles, such as full-size pickup trucks, require dealers to maintain higher inventory levels because they come in different variations, leading some automakers, such as Ford Motor Co., to maintain higher overall inventories than those whose lines they have fewer construction combinations, like Hyundai. While full-size pickups have cabs and doors of varying lengths, other vehicles such as subcompact SUVs often do not.
“If you reduce the supply to 60 to 70 days of pickup trucks, you’re not going to have the truck that someone needs when they need it, and that becomes a problem,” Brinley said.
Market reach also matters, Brinley said. Only six full-size pickups are available in the United States, giving each manufacturer a larger market share and requiring higher inventories. The subcompact SUV market, meanwhile, numbers a few dozen, which means smaller market shares, lower inventories and fewer construction combinations.
It’s a “balancing act” for automakers, Brinley said. Automakers often have similar trim levels, such as LX or Platinum, across their vehicle lineups to ensure they meet customer needs. However, they could simplify build combinations within these trim levels to reduce costs.
Some automakers, such as Ford, Honda and Kia, are also introducing lower trim levels with less standard equipment to offer consumers more affordable options rather than lower prices or rely on incentives to improve affordability.
However, while removing features from a trim level can help automakers reduce costs, it can also backfire.
“If you take out the wrong stuff, consumers see it and don’t like it,” Brinley said.