A pivotal moment for the car market

Hey, everyone. The day has finally come: Tesla will deliver its first Cybertrucks today from its Texas Gigafactory. After years of waiting, I’m eager to see how this plays out.

How do you think the Cybertruck will do (once Tesla hits volume production about 18 months from now, of course)? Hit reply and tell me what you think.

—CDG

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Today’s Biggest News

This Is a Pivotal Moment for the Car Market

Let’s take a few minutes to understand what’s really going on in the car market right now, because the picture is fuzzier than it usually is. It sort of feels like the economy does these days—there are plenty of positive headlines, but those positives are offset by some systemic concerns we just can’t shake.

The positives: There are three big ones—pent-up demand (US new vehicle sales are expected to jump 10.2% this month compared to November 2022), growing inventories (for November, we’re likely in for a 7.5% increase from last month and a 43.7% increase from last year), and lower prices for consumers (keep reading).

The systemic concerns: To name a few, the industry is still grappling with high interest rates (more on that in a second), tightened auto lending, and rising auto insurance costs.

• FYI: The average car payment for new vehicles hit a record high of $725 in the first quarter of 2023, up 11.5% from the same time in 2022.

• And car insurance premiums have rocketed up 17% on average across the US this year.

So what do these two realities—both the positive and negative—mean for the future of the auto industry as we head into 2024? I think answering that question requires us to consider some of the biggest forces impacting the sector right now.

Truth 1: Interest rates. As recently as this month, interest rates were the highest they’ve been in 22 years. This year, the Fed raised rates at their fastest pace since the 1980s in their continued effort to rein in inflation.

Truth 2: Consumer $$$. Consumer savings are shrinking, coming back down after US households accumulated a historically high volume of personal savings during the Covid-19 pandemic. Even as there’s disagreement about how much household savings have changed post-pandemic, the percentage of people's incomes left after they pay taxes and spend money has fallen from almost 5% this summer to 3.4% in September, according to the Bureau of Economic Analysis.

Truth 3: Prices. Vehicle prices are normalizing (with some exceptions). The average new vehicle retail transaction price this November is expected to clock in at $45,332, down almost 7% from this time last year. FYI, average incentive spending per unit is expected to reach $2,247 this month, up from $1,089 in November 2022.

Bottom line: All things considered, I think we’re in for a little bit of a bumpy ride (no pun intended) heading into 2024. Margin compression, the gradual decrease in the difference between cost and profit, could be the two words on everyone’s mind—because cars are still selling, but earnings could be declining. And readjusting to lower earnings is a messy process…

So how are dealers responding? In the face of headwinds we haven’t seen in several years, the best operators I know are focusing on the basics and fundamentals. Tightening the screws, trimming the fat, blocking and tackling, however you want to put it.

It’s nothing fancy. It’s just focus. That’s what will get the smartest operators through this period of uncertainty.

This Week’s Episode of the CDG Podcast

Our industry is full of questions…and many of them are legal. What’s really going on with dealership franchise laws? Will franchise laws ever go away? Is there such a thing as a consumer-friendly auto brand? And do current legal frameworks prevent the entry of lower cost competitors? You’ve wondered, just like I have…so I asked Leonard Bellavia, Founding Partner at Bellavia and Blatt Law. This week on my podcast, he’s sharing all the answers to those big questions.

Listen to the episode here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to CDK Global and Cars Commerce for making this episode possible.

Together With Cars Commerce

You know your store’s reputation is essential to the health of your business—but do you know how to diagnose it? ⭐️🩺

With so many reviews to read through, it's not easy to identify which specific aspects of your experience are resonating well (and not so well) with your customers.

Dealers: Check out your Cars Commerce Experience Report. 📊👀

This free report measures and tracks customer sentiment for each aspect of your experience—from lead follow-up to financing—and helps you benchmark those perceptions against your local market and OEM averages. 

Improve your experience. Build your reputation. Promote what makes you different. It all starts with using data to diagnose where you are today.

Get your Experience Report.

Today in Non-Car News That Matters for Car People

There are 340 days until the 2024 presidential election. And? There’s still a “strong and enduring correlation” between political ideology and US electric vehicle adoption, according to a new working paper from UC Berkeley's Energy Institute at Haas. Translation: Unfortunately, EVs are political.

So what do some of the top contenders think about the transition to EVs? Let’s roll the tape:

• President Joe Biden: His administration passed the Inflation Reduction Act, which created tax credits to boost domestic EV manufacturing. Roughly $128 billion in investments in domestic EV and battery manufacturing has been announced since the IRA was passed in 2022. 

• Former President Donald Trump, the Republican front-runner: He’s been a vocal critic of EVs, suggesting that the transition away from combustible engines would boost America’s reliance on Chinese tech and materials. Trump has also promised to kill the EPA's tailpipe CO2 emissions rules.

• The other Republican potentials: Florida Governor Ron DeSantis and entrepreneur Vivek Ramaswamy, two other Republican front-runners, echo much of what Trump has said re: EVs.

Worth noting: EV and battery manufacturing is taking off in traditionally Republican-leaning states, which could mean EVs become less of an electoral flash point by November 2024.

Bottom line: A lot could change in the year between now and the presidential election, but one thing is likely to stay the same—the transition to EVs is on the minds of politicians. How do you think our politicians will talk about electrification on the campaign trail?

Overheard at the Dealership

This just in via my DMs:

My context: Lending continues to tighten in various ways—and some of those ways are more subtle than others. Increasing down payment requirements is one such way. For lenders, doing that reduces the percentage of equity that lenders are putting on the street versus what a vehicle is worth. We’ve seen it in the US, and now we’re seeing it in Canada.

The Backlot

• The share of US households that can cover an unexpected $2,000 cost is at the lowest level in a decade.

• Lexus and Toyota will use the production method Tesla pioneered in future EV manufacturing. 

• The National Transportation Safety Board has recommended (for the second time in six years) that all new car models come equipped with tech that prevents vehicles from exceeding speed limits.

• Volkswagen is cutting jobs as part of an effort to trim down costs.

Thanks for reading. Anyone want to wager a bet on the Cybertruck launch? $5 says Elon Musk shoots a Cybertruck with something on stage.

—CarDealershipGuy

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