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Auto analyst: ‘We just can’t seem to get the production going’ on cars

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Cox Automotive Executive Analyst Michelle Krebs joins Yahoo Finance Live to talk about the slump in car sales reported for May ahead of the summer, the demand for inventory from American car-buyers, and the rise in gas prices and EV sales.

Video Transcript

[MUSIC PLAYING]

- Auto sales in May are traditionally very strong, driven in part by the long Memorial Day weekend but that was not the case this year. Sales down about 30% from a year ago. So for more on this, we want to bring in Michelle Krebs, Cox Automotive Executive Analyst. And Michelle, it's great to see you. So in May we saw sales hitting a low point of the year. Does this have anything to do with consumer weakness or is it simply just the fact that buyers can't get their hands on cars?

MICHELLE KREBS: I think it's more about buyers can't find the cars they're looking for. I think it's less about demand. We just can't seem to get the production going and fill up that pipeline to get enough inventory out there for consumers who are selling about everything that's on the ground.

- Michelle, where does that stand? Because I think people who are looking to buy a car are trying to figure out are they going to be waiting three months for this market to correct, six months, are we looking at even longer time horizons? What's your read on that?

MICHELLE KREBS: Well, it looks like the chip supply is getting better, but it's still taking time. We're starting to see reports from some automakers that they're actually getting enough chips for full production, but then there's some automakers who are not. We had anticipated it would be better in the second half. We still think it will be better in the second half, just it's taking a lot longer to get there and it may not be as strong in the second half as we had anticipated.

- So there's news over the last week or so, their lockdowns in Beijing are starting. They're starting to ease a bit, the same is the case in Shanghai. Does this have a material impact on cars on chip production that would potentially be available here in the US?

MICHELLE KREBS: Certainly not the cars, that aren't that many brought in from China. But certainly affects the bottom line of automakers there. Volkswagen is a big automaker in China, GM is, all of them are. So it'll have an impact on that. Tesla, of course, has a plant in Shanghai. They've been wanting to get that back up to full speed, they're not quite there yet. So in that sense, it definitely has an impact.

- Michelle, automakers are offering very few incentives for people who are out there looking to buy a new car. I mean, a lot of times you have to wait. My sister just recently bought a car. She had a wait I think three or four months. No incentives were offered. Is this a trend that you see continuing?

MICHELLE KREBS: Maybe not to the degree that it is, but we don't anticipate any big incentives going forward because the supply is just not there yet. Yeah, we have never seen incentives this low and people are paying list price or above and we anticipate high prices for quite some time.

- How high? I guess, how much higher could they potentially go or what are you expecting to see at Cox?

MICHELLE KREBS: Well, we're seeing the growth of the increase slow. And in fact, on the used car side we're starting to see them come back down. So I think it's peaked or is with new about it's peak, but still people should expect to pay pretty good prices and not expect a lot of incentives.

- So Michelle, I think the headline that got a lot of people's attention over the last week has been the fact that the level of cars that we saw sold, that's typically what we see during recessions, they call recessionary levels. If we do, in fact, slip into a recession, are we going to see a significant drop off in the number of cars sold or do you think that market's actually going to stay pretty consistent given the fact that we haven't seen nearly enough production over the last two years?

MICHELLE KREBS: Yeah, I would anticipate that we're going to still see strong sales, there's a pent up demand that's there. The other thing that we're seeing is that it's a different kind of new car buyer. Really you have to be fairly affluent to buy a new vehicle. And so that is a much more stable market, not as affected by the fluctuations in the economy and higher interest rates. So I expect we'll still see a strong new car market as long as the vehicles come in.

- Michelle, what automaker do you think is best positioned for this time?

MICHELLE KREBS: Oh, it's hard to say. You know Toyota's got the lowest inventory, but they've done a remarkable job at getting that inventory through the distribution system. Their sales were off 27%. The industry was off 20%. So they just done a really good job of distribution of not very many vehicles.

- Michelle, data that you guys sent over, record high gas prices sending people to buy electric cars at the end of the first quarter, during the first quarter, 12.5% of the vehicles sold in the U.S. were electric. What do you think that number is going to look like during the current quarter?

MICHELLE KREBS: Well, we started to see electric vehicle sales increase the fourth quarter of 2020. And we have been anticipating it will continue to increase, forget about gas prices, we thought it would increase just because there's a whole lot more models out there coming into the market some, 100 between now and 2025. So the gas prices just increase that. Our shopping shows that shopping for EVs went up 77% since January before the gas prices increased. And we're seeing a big increases in shopping for hybrids and also fuel efficient gas cars.

- Michelle, when we talk about this transition to EVs, obviously the infrastructure isn't there. That's a huge headwind when we talk about EV adoption. When do you realistically think we are going to see leadership amongst these EV vehicles?

MICHELLE KREBS: We already see leadership in terms of Tesla. You know, it's the leader in the EVs. But it's hard to know when that inflection point is coming, because the other thing that's happening, yes, we're seeing a lot of EVs come on the market. We're seeing the infrastructure improve. We're seeing the range of the vehicles out there improve and then gas prices are spurring that along. But they're still very expensive and price is the key. So it's got to get to a point where it's more on par with gasoline vehicles.

- And Michelle, consistent with what we've seen in a number of other industries, buyers of cars are looking online, they're no longer going to the dealership. Part of that is because the dealership simply don't have the vehicles on their lot. But how much has this changed the industry? And I guess, some of those changes that we have seen, how many of those do you expect to stick?

MICHELLE KREBS: Oh, well, the online shopping we're going to see that stay. Even before COVID we saw people saying, we want to do more of the sales process online. We do a study every year about the car buyer journey. And then COVID hit and that was about the only way you could get a car and have it delivered and your trade in picked up. And then that's just accelerated and that's the way people want to shop. So it doesn't mean dealerships are going away, there are still parts of the process that people want to go in and do the test drive, they want to focus on the product, but they want to do the deal online.

- All right, Michelle Krebs. Great to see you. Thanks so much for taking the time to join us.