Limited Supply can be a good thing for Dealers, OEM's and Funders

New vehicle supply has yet to rebound to levels seen before the pandemic halted production for months, forcing automakers, dealers and lenders to adapt to a landscape marked by fewer cars on dealership forecourts and a shift in how consumers purchase vehicles.

Pandemic-related manufacturing plant closures and the ongoing chip shortage have continued to plague vehicle production. In the US alone, the supply of new unsold vehicles totalled 1.34 million cars at the end of June 2021 or a record-low 29 days’ supply. This is down from 1.74 million vehicles, or 34 days’ supply, at the end of May, and 2.17 million vehicles at the end of April, representing 41 days’ supply. Days’ supply is calculated by measuring inventory against the pace of vehicle sales.

Tight inventory contributed to floorplan balance declines at major captives nearly every quarter in 2020, including at?Ford Credit?and?GM Financial.

New normal: Tighter supply

As a result of more than a year of dwindling vehicle supply, OEMs have redefined what it means to be well-positioned with new vehicle inventory, a shift that could benefit dealers in the long run.

General Motors, for one, is aiming for about 60 days’ supply as opposed to the pre-pandemic norm of 90 days and their CFO recently stated that they see continued tight inventories going into 2022.

Limited inventory will result in fewer OEM incentives and lower floorplan costs for dealers, which, in turn, will push down the captive’s floorplan outstandings.

GM Financial provides floorplan financing for 1,558 dealers in the U.S., with dealer penetration reaching 35.9% as of June 30, up from 30.3% a year ago. Their US-based floorplan book has been shrinking since the start of 2020, with floorplan outstandings falling to $8.9 billion in the fourth quarter of 2020 from $11.7 billion in the first quarter, according to the captive’s earnings reports. In 2021, outstandings have declined to $7 billion in Q1 and?$5.7 billion in Q2, a decrease of 27.9% year over year.

Ford Credit, too, has seen a consistent decline in commercial outstandings since the start of the pandemic. Outstandings dropped to $19.5 billion by Q4 2020 from $30.6 billion in Q1 2020, and fell again to $16.8 billion in Q1 2021, according to the company’s earnings reports. By Q2 2021, outstandings clocked in at $11.4 billion, a?43.8% YoY decrease.

Ford Motor now aims to have a 50 to 60 days’ supply on hand versus the regular 75 days,

Maximizing profitability

Lower new-vehicle inventory and competitive pricing is driving strong profitability, with GM Financial and Ford Credit both logging record earnings before taxes of $1.6 billion at the end of Q2.

Tight supply is also likely to contribute to competitive pricing for prestige models as continued demand for higher spec products. With limited supply, it’s allowed sustained strong pricing. Even as we start to see supply and demand normalize, we’ll see some of this pricing come off a little bit but given the strength of pent up demand, it is expected to be a seller's market with relatively strong pricing power for the foreseeable future.

Dealership executives, expect gross profit per unit to remain above pre-pandemic levels in 2022 even as government supports, pent-up demand and low-interest rates begin to wane, One example is US-based Asbury Automotive Group their finance and insurance revenue in Q2 increased 60.6% YoY to $107 million, accounting for 21.5% of the retailer’s gross profits.

Management at one of the US's largest groups?AutoNation?expects gross profit per unit to remain elevated for the rest of the year as consumer demand continues to outpace supply.

Similarly, large dealer groups are benefiting from lower floorplan costs. AutoNation’s floorplan interest expenses, for one, decreased 59.9% YoY to $6.6 million in Q2 even as new-vehicle sales increased 42% YoY to 77,164 units, according to the company’s earnings report. The retailer’s finance and insurance revenue also clocked in at $369 million, an increase of 49.8% YoY and 7.9% from last quarter.

“U.S. automakers won’t go back to bloated output and bulging dealer lots, even after the global semiconductor shortage ends,” AutoNation Chief Executive,?Mike Jackson.

Adapting to change

Meanwhile, industry experts believe supply chain issues are likely to continue into early next year, prompting OEMs to turn to new ways to capitalize on strong consumer demand.

Ford Motor, for one, has shifted priorities to build-to-order vehicle sales. “We have learned that, yes, operating with fewer vehicles on lots is not only possible, but it’s better for customers, dealers and Ford,” Ford CEO Jim Farley. Instead of working toward getting back to pre-pandemic inventory levels, OEMs have started to rethink their market strategy when it comes to stocking dealer lots.

“Navigating these chip constraints has led us to make important permanent changes in our business model at Ford,” Farley said. “We’re placing a greater emphasis on build-to-order sales banks, not just low stocks.”

The change has led to fewer incentives, a simplified order system and the ability for customers to get the cars they want more quickly, Farley added, noting Ford Motor’s US retail order bank sits at about 70,000 units.

Whether pre-orders will dominate remains to be seen, but manufacturers, dealers and automotive lenders in the short term will likely refrain from stocking dealer compounds to the brim in favour of streamlined inventory strategies that yield lower costs and meet changing consumer preferences. But as history has shown us time and again, despite their best of intentions, when one major OEM captures increased market share, their competitors respond by pushing the market, invariably resulting in dealership inventories riseing and margins suffering.

This article features heavily on extracts from auto finance news.

Adrian Walsh is the founder of Checkventory Innovation as specialist solution provider focussed on inventory risk and management for Floorplan Finance providers and Automotive/Capital Asset retail groups.