It's tough to have a year-end clearance sale when there's hardly any inventory to clear out.
Auto makers' inability to restock dealerships after losing two months of production to the pandemic shows how quickly demand has rebounded, helping to spark hope among executives and analysts about the potential for a strong finish to a chaotic year.
The third-quarter performance "makes us cautiously optimistic for Q4, but there's still a lot of uncertainty and a lot of Americans are still suffering," said Mark LaNeve, vice president of U.S. marketing, sales and service at Ford Motor Co.
The inventory shortages, high unemployment and other troubling economic data make the fourth quarter somewhat precarious. Sales depend largely on auto makers keeping their inventory pipelines filled with popular vehicles and consumers being confident enough to make a large purchase, analysts say. Still, many auto makers and dealers anticipate that sales will continue to recover, whether or not a proposed second round of economic stimulus payments ultimately is approved.
"Many of us have been pleasantly surprised by the resilience that we've seen in the new vehicle market," said Charlie Chesbrough, Cox's senior economist. "But we are concerned that there are tremendous headwinds as we head into the fourth quarter."
The spring production shutdown to curb the spread of the coronavirus put auto makers 3 million vehicles behind, Chesbrough said. Most auto makers are back to previous production schedules but haven't yet fully replenished dealership lots. The Detroit 3 had a 49-day supply in recent days, down from 65 a year ago, according to a Morgan Stanley report.
"They're producing pretty good output for a couple of months, (but) they don't seem to be making much headway in terms of restocking the shelves," Chesbrough said. Unless demand decreases enough for auto makers to restock, "this is going to be a problem, certainly through the rest of this year," he told reporters last week. "Possibly it could last into the first quarter of next year."
Pickup inventories have been particularly tight since the spring. Even so, sales of the Ford F-Series, Ford Ranger, GMC Sierra and Jeep Gladiator were up year-over-year in the third quarter. Ford said it was the company's best third quarter of pickup sales since 2005.
Sales declined an average of 1.3 percent for full-size pickups and 2.5 percent for all pickups, compared with about a 10 percent drop for the industry overall.
"We are currently running our full-size pickup truck and SUV plants at maximum capacity," a General Motors spokeswoman said, "and vehicles are being sold almost as soon as they arrive on dealer lots."
Heading into the fourth quarter, inventory across all segments is likely about 800,000 to 900,000 lower than the year earlier, said Tyson Jominy, vice president of data and analytics at J.D. Power.
"We still do have excess capacity on our manufacturing side," Jominy said. "It's a liability during bad times, but during times like this where we need vehicles so desperately, it's actually an asset that's going to help us push through and get more vehicles out there to consumers quicker."
Charlie Gilchrist, president of Gilchrist Automotive in Texas, said the inventory crunch continues to concern dealers, especially for pickups and SUVs. His Ford store outside Dallas recently had just a 20-day supply of F-150s, a number he fears will continue to decrease as Ford prepares to launch the redesigned 2021 version in November.
"Low inventory levels are a concern for everybody. We just need to keep the plants running and open," he said. "We have to have them to sell them."
Some dealers say they would have sold more vehicles in previous quarters if more inventory was available. "We are doing more with less. The inventory shortage absolutely plays a huge part in that," said Oliver Young, sales director for Young Automotive Group in Utah and Idaho.
The right mix
Despite the recession, consumers have continued to move away from cars, favoring crossovers and SUVs that are larger, more expensive and thus more profitable for auto makers.
"You would think that in a crisis like we're in that people will be flocking to lower-priced products, but that's not the case," Chesbrough said.
Dealers need the right inventory mix to keep sales momentum building, said Inder Dosanjh, dealer principal at Dosanjh Family Auto Group in the San Francisco Bay area.
"If you have pickup trucks, you have SUVs and, in our case, electric cars, you're good," Dosanjh said. "Brands that don't have a full-size truck, that don't have a Colorado, those brands are suffering right now."
As of last week, 2021 models accounted for just 3 percent of dealership inventory, according to Cox Automotive. This time last year, a quarter of their stocks were new models.
Because so few of the vehicles on dealerships' lots are 2021 models, clearance deals have been slower to materialize this year. Jominy said incentives that traditionally would have been offered around Labor Day could instead arrive between Black Friday and Christmas.
Once more 2021 models are available, though, he expects a "lightning fast" transition. The 2021 Subaru Crosstrek, which began reaching dealerships in July, accounted for 94 percent of the nameplate's sales after just two months, he said. It took the 2020 Crosstrek five months to hit that mark last year.
Meanwhile, auto makers and dealers are watching to see whether Congress will approve more stimulus checks that consumers might use toward a down payment on a new vehicle. House Democrats last week introduced a bill calling for a second round of $1,200 payouts, mirroring an element of the federal assistance provided in the spring.
Increased unemployment benefits expired at the end of July, and jobless claims remain high—though significantly lower than at the height of the pandemic in April and May.
"For the unemployed, the fall is not going to be pretty. The spring and summer had support, but without it, they will be overwhelmed," said Jonathan Smoke, Cox's chief economist. "With the economy losing momentum as fiscal support wanes, we can't expect the sales pace to continue."
Randy Parker, vice president of national sales at Hyundai Motor America, told Automotive News that the brand doesn't see a sales slowdown on the horizon, with or without new federal government stimulus. Hyundai sales fell only 1.3 percent in the third quarter, and the brand has focused on maintaining high levels of inventory both from its U.S. plant and from South Korean imports.
"We're in a good place right now. I want to remain humble, but I want to remain very hungry at the same time," Parker said.
The U.S. unemployment rate was 8.4 percent in August. As long as that doesn't significantly increase, "we should be able to manage pretty easily," Dosanjh said.
If the government approves another stimulus package soon, auto sales are likely to recover even faster.
Said Smoke: "It's a pretty broad spectrum of potential outcomes that could happen over the next three months."
Laurence Iliff and Michael Martinez contributed to this report.