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Auto Inventory Glut Sends Shockwaves Across the Industry

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·6 min read
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Inventory glut is making things worse for the auto industry. With car sales stalling amid the coronavirus pandemic, new vehicles are piling up. Notably, cargo ship Jupiter Spirit — operated by Nissan Motor’s NSANY freight arm — arrived at Los Angeles’ harbor on Apr 24, ready to unload 2,000 vehicles in a quick half-day operation. However, the ship had to wait for almost a week to offload its merchandise amid an unprecedented impasse in the nearby storage.

Nissan currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SUVs Getting Stuck at Sea Reveals Massive Auto Glut

Around 2,000 Nissan vehicles are floating offshore as there is no room left at dealerships on the lots. So, what does this huge inventory of unsold vehicles signal? The brand new cars left adrift at sea for days is indeed a testament to the extent of economic pain that the COVID-19 pandemic has inflicted.

As we know, coronavirus has wreaked havoc on the economy and rattled most industries. With the auto industry being highly cyclical in nature, it is bearing the brunt of low demand amid weak consumer sentiment. The economic shutdown is decimating vehicle demand and sales and the overflow of inventory does not come as a surprise. Low sales are creating a chain-reaction backlog, causing some ships to divert to other ports. While some are just forced to cancel voyages before they get underway, others are waiting for days to offload their cargos.

The Hueneme Port — a major import facility in California — had to find space in the surrounding area for 6,000 surplus cars, in addition to the 4,000 on its site. Some East Coast ports in Brunswick and Georgia are experiencing excess inventory but the main logjam is on the West Coast. As ports are struggling to cope with inventory glut, some automakers have started taking precautionary steps. For instance, Toyota TM is leasing additional storage space at a sports venue in California. South Korean carmaker Hyundai Motor has also found additional storage lots, after experiencing excess inventory in the West Coast.

Are Hefty Discounts Ahead?

The auto industry is in deep trouble. Dealers are not accepting cars and fleet sales are down. Factory closures, low footfall at dealerships and supply chain distortions have ripped apart the auto market. Auto sales and consumer spending are crashing amid the sluggish economy, all thanks to the coronavirus outbreak. U.S. auto sales dropped around 40% year over year in March. As the virus continues to crimp demand, April deliveries in the United States slid further. Toyota, Honda Motor HMC, Subaru, Hyundai and Kia sales declined 54%, 54%, 47%, 39% and 38%, respectively, on a year-over-year basis.

Per IHS Markit, demand for cars and trucks in the United States is anticipated to fall 27% to 12.5 million units in 2020, which would mark the lowest for the industry since 2010. As demand and sales sink, vehicles will get increasingly piled up. So, would this inventory glut result in amazing buying opportunities for new and used vehicles?

Well, automakers are likely to continue giving loans in a bid to maintain sales amid the COVID-19 pandemic. In fact, zero-percent auto financing deals hit a record last month. Auto biggies like General Motors GM, Ford F and Toyota, among others, are offering new financing programs to spur sales. While the automakers are offering easy financing terms, auto loans are emerging as one the of hardest-hit categories of credit amid the coronavirus pandemic. Auto loan delinquencies are already on the rise. A surge in subprime auto loans more than 90-days delinquent was seen even before coronavirus-led shutdowns happened.

Carmakers are launching programs to boost sales and support buyers who may have trouble making car payments. General Motors, Ford, Hyundai, and Honda have expanded their first responder lease and purchase discount programs.

Amid the gloom and doom, car dealers are likely to cut prices in a bid to revive the halted auto sales. Per J.D. Power, used-car prices are expected to drop around 8-16% through June. Customers can expect attractive deals on new vehicles as well, going forward. However, the big question is: Will the drop in car prices buoy sales in this uncertain economic environment?

Inventory Glut to Stay Amid Weak Consumer Confidence

Although automakers are doing their bit to ward off a catastrophic fall in car sales by providing landmark incentives, these are not enough for consumers to recover financially from this economic turmoil. Even if the automakers offer big discounts, it is unclear if people will be willing to make such discretionary purchases for quite some time.

The pandemic has sparked fears of an economic recession. With rising unemployment levels, the spending capacity of consumers will, undoubtedly, be compromised to a great extent. In fact, April’s U.S. consumer confidence saw a record decline, largely due to the coronavirus-led spike in unemployment and shutdown of economic activities. The Conference Board's measure of consumer confidence index stands at 86.9 (the lowest since June 2014), below the reading of 118.8 in March.Per International Monetary Fund, the global economy is projected to shrink 3% in 2020, which is worse than the 2008-2009 financial crisis.

The asymmetry between demand and supply of vehicles is not likely to disappear anytime soon. With more than 30 million Americans out of work and loan defaults on the rise, there are not likely to be many buyers of these big-ticket items.

Last Words

As inventory is beyond bloated and car dealers are bleeding cash, negotiating power is likely to be tilted in favor of the buyers. Hence, if your job is secure and you can really afford to buy a car, you should consider making the purchase. In fact, buyers may wait for a few more weeks or months as there are chances that sellers may be willing to negotiate readily and offer more attractive deals. Once the stay-at-home orders are lifted and activities resume normalcy, a clearer picture will likely be revealed. It seems like a meaningful recovery of the auto market will not happen until next year.

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Ford Motor Company (F) : Free Stock Analysis Report
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