The U.S. auto sector has gotten off to a strong start in 2021 with April vehicle sales reaching their highest level since July 2005. Anthony Okolie speaks with Andrew Hencic, Economist, TD Bank, about the risks the global microchip shortage poses for the industry.
- Well, what we're seeing is very strong, healthy demand. Car sales for the last month came in at about 18 and a half million units on a seasonally adjusted annualized basis. And this is coming off a month before with 18 million units, again, on the same basis. These are really strong, healthy demand numbers.
To put it in perspective, in April of 2019, a comparable number would have been about 16.6 million. So this is really healthy, strong demand heading into the spring.
- OK, so what's driving all of this growth in the US auto sector?
- Well, I think there's a combination of factors. The first thing is that during the pandemic, a lot of people kind of delayed their purchases. And so you have this tremendous amount of pent-up demand, for whatever reason, whether they weren't working, or car dealerships were closed. People took pause and then didn't go out and make those purchases.
So now as we see things opening back up again, people are going out and looking at new cars. Obviously, the broader economic recovery-- the fiscal transfers, the really successful vaccination effort-- all those things are combining to create this kind of healthy economic activity. And so you're getting a really strong demand push.
Now in terms of kind of specifics and nuances, one of the things that we're keeping track of is used vehicle prices have surged. They're up a little over 50% year-on-year as of April. And so for those people who might be on the edge of whether or not it's time to kind of make the upgrade, obviously the surge in used vehicle prices have really bumped up the trade in values. And so that decision becomes a little bit, maybe, easier if you're looking to maybe make that upgrade.
- OK, and we can't talk about the auto sector without talking about electric vehicles. So give us a sense of what's happening in the EV space today.
- Sure. Well, you know, the electric vehicle market is still a pretty small component of the overall pie in the US, coming in somewhere around 2% of the market. But from our perspective, there are three things that are really jumping out, and three things that we think are going to be addressed and potentially addressed in the future. That's the sticker price-- so EVs tend to be more expensive than their internal combustion engine counterparts.
There are a kind of a dearth of models. There's not as much selection available in the electric vehicle market. And lastly, there's the range anxiety. People are concerned. If they get an EV, are they going to be able to go as far as they want to, as far as they can with an internal combustion engine? On the model selection front, the automakers are taking note, and they're putting their money where their mouth is. They're growing out, and they're expanding model lineups.
GM alone is planning to launch about 30 electric vehicle models by 2025. Most of these are going to be available-- or many of these, I should say-- are going to be available in the United States. So we can see kind of the response from the automakers there. When it comes to range anxiety and the sticker price, one of the things we're monitoring right now is the Biden administration's kind of goal to quote, unquote, "win the EV market."
Proposals that have been discussed involve about $100 billion in consumer rebates to be made available to really bring down that upfront cost, and around $15 billion to build out about a half a million charging stations around the United States to kind of alleviate that range anxiety. So that combination of factors is really working towards kind of helping this market gain more traction.
- What do you see as the key risks for the US auto sector going forward?
- Well, I mean, the biggest one there is supply, supply, supply. We've all seen the news articles with the semiconductor shortages and other key components, that these are really hampering production. There are-- it's nothing on the scale of what we saw last spring with large scale shutdowns in response to the pandemic but there still are plant closures happening intermittently.
This is having the knock-on effect of bringing down inventories. In March, light vehicle inventories are down about 10%, and so that's something that we're kind of keeping an eye on, because it's having an impact on production. The April production numbers have been revised. Production projections have also been revised down, and so it's a little bit of a concern of whether people are going to be able to get the cars that they want.
- So given all this, what's your outlook for the auto sector in the short and medium-term?
- Well, as I mentioned, the supply issues are more of a risk than the base case. We still see a very healthy expansion continuing. The March and April sales numbers were quite strong. If anything, the kind of exuberance we were anticipating the latter half of the year has been pulled forward, and people are going out and making those purchases that have been delayed from 2020.
So our outlook is of a very healthy market in the short and medium-term, and we anticipate that the supply issues are going to slowly begin resolving themselves.
- Andrew, thank you very much for your time.
- Thank you very much for having me, Anthony.