U.S. vehicle sales shifted into high gear at the start of 2022, despite supply chain constraints and the ongoing semiconductor shortage. Anthony Okolie speaks with Thomas Feltmate, Senior Economist, TD Bank, about whether production could potentially get back to pre-pandemic levels towards year-end.
Yeah, so US vehicle sales in January were up 20% month on month, rising to a level of 15 million units, just over that, which is actually going to be a seven month high. And the funny thing here is the narrative really hasn't changed relative to what we've been seeing over the several prior months, in that sales are very heavily tied to production just given how undersupplied the market currently is. And what we saw towards year end last year was production started to incrementally move up a bit as some of those supply constraints started to ease. So that led to a bit more inventory coming to the market and hence slightly higher sales.
OK, so you mentioned that supply chain conditions are improving, but there's still some manufacturers that have been forced to curb production this year. We've heard from companies like Honda, for example. What are the automakers doing to try to circumvent, or perhaps work within, the constraints of the semiconductor shortage?
Yeah, we've definitely seen automakers take a more agile approach to their production over the last year or so. So probably the one that's been grabbing headlines the most is what Tesla has been doing. So they've pulled some of the steering components that are going into some select models. Now this has more to do with just the fully self-driving capabilities, which is not necessarily technology that Tesla has rolled out yet. They were just kind of building that into the model so that when that technology is deployed, those vehicles will have that functionality. So we're seeing some of that get pulled right now. And it's not only specific to Tesla, either. We're seeing other automakers pull things like dual system climate control, in-seat heating, start-stop functionality of engines, which is all just kind of different things to try to minimize the amount of semiconductors that are going into any one vehicle so that they can really kind of maximize output and get more vehicles on the lots.
I'm glad you mentioned Tesla, because I want to talk a little bit about the electric vehicle market. How has the current environment impacted this rapidly growing sector?
Yeah, it's hard to say. We don't necessarily have a counterfactual of what things would look like absent the supply chain issues. But it definitely has had some impact on some of the EV models that were projected to come out this year. But what's interesting is if we look at sales in the US, EV sales, they were up 83% last year. So in absolute terms, still quite small. There are 430,000 units and we look at it as a relative share of total vehicle sales, it's still in around 3, 3.5%. But what's interesting is popularity is growing and we're seeing that in the sales numbers having risen so much last year, even in the face of all these supply chain issues. And we look over the next couple of years, I think there's a lot of room for optimism here. We saw just last month actually the Department of Energy and Transportation announced that they're going to be releasing the first tranche of the $5 billion money that they've been allocated as part of the infrastructure bill to really enhance the charging infrastructure across the U.S. Now a lot of this development is going to be concentrated along the major interstate highways. You and I have talked about this in previous segments that range anxiety is really still kind of one of those big barriers to entry for a lot of consumers. So developing the charging infrastructure along these major highway routes is certainly going to go a long way in giving consumers a bit more flexibility in how they're able to use those EVs. And I think it's going to go a long way in broadening of consumer base over the next couple of years, for sure.
Also in the news, recently was a blockade of goods, including automotive parts at the Ambassador Bridge. What impact did the blockade have on auto production?
Yeah. So on both sides of the border, automakers are citing over the last week, there's certainly been a lot of disruption just because they haven't been able to move goods as freely as they normally do. So we've seen production runtimes really decrease. Some plants actually ran idle over the last week. Now, by all accounts, with those blockades having ended on Sunday, production has resumed across most facilities. It's only Toyota at this point that is still citing some lingering issues that are likely to persist through this week. Now, the hope is that there was some temporary setback, but they can kind of make up for any lost ground that they would have experienced over the last week over the remainder of the quarter. So hopefully it kind of comes out in the wash. So we'll have to wait and see how that still plays out.
Yeah, lots of moving parts. What's your outlook for the auto sector over the next 12 months?
Yeah. So I think over the next couple of months for sure, we're going to see things both on the sales and the production side likely go sideways. Obviously, we're still kind of feeling the impacts of Omicron, and we haven't even really saw how that is going to manifest on the production side yet. We're still waiting to get that January production data. So it's going to be interesting to see how that plays out. Like I said, things are probably likely to move sideways from here, at least over the next couple of months. Consensus in the market right now is that we're going to start to see these supply constraints eased through the second half of the year, particularly on the semiconductor side of things. So that should lead to more production. So the hope right now is, if that's the case, we can hopefully get to a level of production that is going to be more normalized to pre-pandemic levels towards year end. Obviously, like I've said, sales are really closely tied to production right now. So more production should lead to a higher level of sales. For the year as a whole, sales are likely to still be below what we would consider trend. So probably coming in around 16 million units or so. Trend is higher is a bit higher at about 17 million. So hopefully production normalizes towards year end. That sets us up nicely as we head into 2023 and then we can get back to kind of more normalized levels of both production and sales.
Thomas, thank you very much for joining us.
You bet. Thanks for having me.