Is worst of new-vehicle inventory shortage in rearview mirror?

New-vehicle inventories are starting to build again—and relatively quickly—thanks to a combination of low incentives and higher interest rates that have kept millions of potential buyers on the sidelines. While assembly plants still face supply chain challenges, there are signs of recovery. For instance, North American production rose 12 percent in 2022 to 14.7 million vehicles.

U.S. vehicle inventory rose sharply in December, topping 1.8 million for the first time since May 2021, according to data compiled by Cox Automotive and the Automotive News Research & Data Center, and it was up nearly two-thirds from where it stood a year earlier.

Not all brands or segments are building at the same rate, and overall consumer demand remains strong, auto executives say. Still, on a macro level, once-empty dealership lots are starting to fill again.

Cox put its latest industrywide inventory estimate at 1,803,717, representing a 58-day supply, based on the selling rate from the most recent 30-day period. The top-line inventory and days' supply figures represented year-over-year growth of about 65 percent and were approaching what the industry previously considered normal levels, said Cox Senior Economist Charlie Chesbrough.

"New-vehicle supply has risen by almost 500,000 units since the end of September, only three months ago, for a 37 percent increase. From a year ago, inventory is up 715,000 units or 66 percent, but the sales pace has improved only 2 percent," Chesbrough wrote in his monthly report. "If this trend continues—and it seems likely to do so—auto makers will be under increased pressure to move the metal with higher incentives."

U.S. inventory levels began a sharp, sustained decline in late March 2021, including vehicles still in transit from the factory, according to Cox Automotive. By that August, consumers had largely picked dealership lots clean, with inventory levels falling below 1 million. They hit their lowest point the following month, dropping to just under 830,000, Cox said.

By the end of 2021, inventory had climbed back above 1 million vehicles, but it remained very tight, bouncing between 1 million and 1.1 million until July. After topping 1.2 million in mid-August, inventories began recovering more quickly, according to Cox, and if the pace continues, they could top 2 million again early this year.

The period of super-low inventories has been extremely lucrative for most dealers and auto makers, with many continuing to report record profits. It's also allowed some dealers and brands to experiment to find the sweet spot in their operations.

"It turns out, we don't need 69 days' supply. Yeah, we really don't—the actual number is probably 20," Don Flow, CEO of Flow Automotive Cos., told Automotive News last week. His dealership group is headquartered in Winston-Salem, N.C., and has 44 new-car franchises.

Flow, who is starting his third year as chairman of the Audi National Dealer Council, said Audi dealerships and the brand have used this period to find the optimal balance for collective profitability. "In the premium segment, if you produce the right cars, we've learned that somewhere between 20 to 30 days' supply of cars is all we actually need to maintain market share," Flow said. "And when Audi had that day supply, it was at its maximum market share, and the dealer had their maximum profitability as well."

Gross inventory levels and days' supply are different measurements; days' supply relies on the pace at which consumers continue to purchase new vehicles. Among brands reporting monthly sales, Mazda was alone in posting an increased days' supply for December over the previous month, according to the Automotive News Research & Data Center. Meanwhile, the other six brands recorded days' supply decreases ranging from one to six days. Ford Motor Co. was the only reporting automaker to record more than a one-month supply.

Said Gates: "I don't think that any of us want to go back to the day where we had way too much inventory. If we could get back to 60 or 70 percent of what we used to have, that would be ideal."