Mixed Messages on Vehicle Values with Added Hope for EVs

To sum up the automotive industry so far in 2024: It’s getting better but still has a few years to go if returning toward a normal balance.

The path since the pits of 2020 continues upward with some blips and dips that are yielding mixed results on pricing, values, supply, and profits for vehicle remarketers and sellers.

That is the big picture from a detailed industry overview brought by JD Power on March 28 during the Conference of Automotive Remarketing. The session, led by David Sargent, vice president and the head of the connected vehicle practice at JD Power, delved into new and used vehicle markets, vehicle quality, and all-matters electric vehicles.

JD Power employs 2,500 people across the globe who gather data from consumers, the automotive and remarketing industries, dealers, and OEMs. Data from 42% of all new and used vehicle retail transactions come through the JD Power system, including 20 million wholesale vehicle transactions.

New Vehicle Production Up, Profits Down

Retail new vehicle sales are up about 3.1 million as of Q1, which is a 10% increase from this time last year, and above 2019 levels, Sargent told the audience of consignors, auto auction leaders, dealers, and remarketers. Transaction prices are down compared to last year, but still much higher than five years ago.

“If you look at sales, and you look at what people are paying per vehicle, consumer expenditure is going to be up in the first quarter by about $5 billion,” Sargent said. “The bad news for new car retailers is they're not making much money, or at least not as much money on these vehicles as they were last year or the year before that.”

Retail profit per unit is down dramatically from last year, about 25% to 30%, but Sargent advised the audience not to feel sorry for auto retailers because they are on track to make $7 billion in profit in the Q1, likely the third best year in history. Retailer profits for the year will decline from about $40 billion in 2023 to $26 billion projected for this year.

The annualized rate for total sales will be about 16.5 million as of March, with actual sales more likely to reach 16.1 million vehicles, Sargent said. “When we look at the annualized rate that's going up quickly, retail is up, and fleet is up significantly from where it was just a few years ago. In terms of sales and pace, the market looks pretty good.”

On the production front, most of the pandemic-era disruptions are past, spurring a rapid raise in vehicle production about 10% above 2023 levels.

“Production is rising faster than sales with the inevitable consequence that if you have more supply and less demand, then transaction prices almost inevitably will come down,” Sargent said, adding that trend has accelerated in the first few months of this year. Average retailer profits as a percentage of the new vehicle price have fallen sharply since 2022 to 2.6%, which is still strong by historical benchmarks.

Other variables: Incentive spending will be up substantially from last year, along with sales, and consumers are going to spend about $1,000 less per vehicle compared to 2023.

Overall, the automotive sales market is trending back toward the “normalcy” of 2018 and 2019, but still has a long way to go, Sargent said. “The trend is generally back to what we might consider to be a more normal situation where OEMs are producing more vehicles that people are demanding, and at the prices that they want to charge for them. We will see incentives continue to rise in the new market with an obvious impact on the on the used market.”

Used Vehicle Supply to Tighten This Year

In the used market, retail sales through franchised dealers were down 7% last year to 11.3 million vehicles sold, and average used prices were down to $31,000. Gross margins and profits on used retail vehicles are down significantly, but used vehicles are moving at the same speed at an average of 41 days. After a price spike during the pandemic, used vehicle prices are now at the lowest since August 2021, but still far above pre-2020 levels, Sargent said.

Sargent also pointed to a “decoupling” of retail and wholesale prices because retailers are getting more used vehicles from other sources than wholesale channels, such as online and trade-ins. “Retailers are actually seeing this big disconnect between what they are charging and, on average, what they're paying.”

Wholesale vehicle sales reached 6.2 million last year, down 28% from 2019 levels, Sargent said. Used vehicle profits are also declining from their peak, with fewer sales and less money made on each one. Used gross profit, including F&I income per unit last year, was an average of $2,800, down from $3,400 in 2021.

From a consumer standpoint, affordability has declined, with 41% of all used vehicles sold in 2019 priced below $20,000, compared to 24% now.

Used payments are up but below all-time highs. Now the average payment is $545 per month, which is 75% of the average new car payment, down from the 80% peak in 2022. The average customer of a used vehicle is paying what they would have paid for a new vehicle in 2019 — a tough market for consumers, Sargent said.

Used vehicle values are set to decline this year, with higher incentives, more supply, and higher interest rates all working together to depress used vehicle prices. Incentives have moved back up to 5.6%.

New vehicle retail inventory is going up. The low was 900,000 in inventory in March 2022, which has since doubled about 1.8 million, but still down from the pre-pandemic norm of 3 million vehicles in available inventory. More vehicles on dealer lots will keep lower pressure on used vehicle prices, Sargent said.

Used vehicle supply will prop up prices somewhat, as it will decline slightly next year to 12.5 million vehicles from 13.7 million vehicles this year.

“Vehicles that weren't sold new three or four years ago are not going to be available used,” Sargent said. “Lease returns specifically are expected to be 33%, lower in 2025, than they were pre COVID.”

As a result, the market will see a major drop-off in the availability of high quality, lower mileage used vehicles. And in a quirk of marketing timing, lease returns are going up Q2, but then start a longer decline in Q3 and Q4 and even steeper in 2025. The increase in newer vehicles being sold this year and in the next few years will spur a resurgence in lease maturities by 2026-27.

“For a few years now, there will be a tight supply of high-quality used vehicles which will serve to help prop up the prices but cannot compete with other dynamics,” Sargent said. “We were forecasting that used retail prices are going to decline by about 6% this year after about a 3.5% decline.”

Despite the declines, used vehicles will remain far more expensive than a few years ago with prices and profitability strong by historical standards. Off-lease vehicles, while declining in volume, will come back with positive equity and fast turnover.

Quality of the Used Vehicle Fleet Looks Solid

Citing recent JD Power studies that assess the quality of the used vehicle fleet in terms of dependability, tires, and repairs, Sargent said used vehicle quality is without question the best it's ever been. It has measured the quality of used vehicles after three years of ownership since 1990.

Toyota and Lexus collectively have far fewer problems than any other OEM, and therefore supply the best used vehicles, Sargent said based on stats and findings.

Vehicle quality problems are far more likely to arise from how technology performs, and how drivers use it instead of the traditional measures of how well physical parts and functions hold together and how often a vehicle breaks down, Sargent said.

For example, “the transmission is not going to break, the doors aren't going to fall off, and there may be a fewer squeaks and rattles, but the infotainment system doesn't work as well as it used to because it's far more complicated and has all of these new features that customers complain about,” he said.

JD Power draws its data from millions of repair transactions at franchised dealers across the U.S. Because OEMs can vary in the quality results from one model year to the next, buyers should look at the ratings for specific models and years, Sargent advised.

He also warned that premium vehicles are now less reliable than mass market vehicles because they have more expensive and complicated technology. “Historically, premium vehicles were better built than mass market vehicles and so they have fewer problems. Now, there are about 13% more problems. This is almost entirely due to the fact they just have more stuff on them. They’re not built worse; they have more things to go wrong.”

Nowhere is this more apparent than with electrified vehicles which consistently record more problems than internal combustion engine (ICE) vehicles. For gasoline, diesel and hybrid vehicles, the total number of problems per 100 vehicles stands at 188; plug-in hybrids are at 216 per 100; and Tesla and battery-electric vehicles score the highest number of problems at 256 per 100. Tesla alone has 252 problems versus 285 for all other BEVs.

“When we look at what's driving this difference in problems, it’s not the powertrain,” Sargent said. “It's not that they have lots of problems with being an EV. They have many problems with their climate systems, which is indirectly because they're an EV. Climate systems and EVs are generally terrible because you cannot have a high-powered climate system in an EV because it will suck all the juice out of the battery.” Driver assistance systems can also draw more power from an EV, he added.

EVs also are subject to charging problems due to an inconsistent charging network with spotty access and random failures, which are more common to non-Tesla BEVs and charging networks with 6.6 charging problems per 100 vehicles compared to 1.9 for Tesla.

Meanwhile, Tesla ranks higher than other BEVs in EV range reduction problems over time at 7.2 per 100 EVs, versus 5.1 for non-Tesla BEVs, Sargent said. “I think Tesla tends to overstate how far the range of their vehicles is. And over time customers figure that out.”

EVs also have twice as many tire wear-and-tear problems as ICE vehicles due to their heavy battery weight, but most of that figure is attributable to Tesla. “If you hear stories about how all EVs have terrible tires that’s not really the case,” said Sargent, citing similar tire complaints among ICE and non-Tesla BEVs.

Although warranty costs are projected to decline 2021-2023 for all vehicles based on a scale of 3-, 12-, 24-, and 36-months in service, BEV warranty costs are consistently 2.5 times more relative to gasoline vehicles, exclusive of Tesla which does not offer ready warranty repair information.

Electric Vehicles Are Shaping Up

Despite all the negative news about EVs, they are selling faster now than last year, and in the years before. Sargent emphasized that when the media refers to slowing EV sales, it’s referring to a slowdown in the rate of increase in EV sales.

New sales of PHEVs and EVs now make up 10%+ of all vehicle sales, with February 2024 at 10.3%. All-electric vehicles stood at 8.4% share of overall sales. Tesla, considered a premium vehicle, makes up most of the 37% share of new premium vehicles sold that are all-electric.

New EV prices have eased slightly due to price reductions and lower-priced entries.

Future Hope for EVs

In assessing the prospects of future EV purchases, JD Power’s EV Index looks at interest, availability, adoption, affordability, infrastructure, and experience.

Interest in EVs has plateaued with 24% of surveyed consumers in February 2024 indicating they are in the upper funnel of consideration, compared to 26.3% in February 2023, Sargent said, with March likely coming in at 22.5%. The availability of EVs also has plateaued in the premium and mass markets, but EV availability will likely grow in the next two years as cheaper EVs come into the market.

“For five months in a row, the proportion of people who say they're very likely to consider an EV for the next vehicle is down,” Sargent said. “When we look at online shopping behavior, and the percentage of clicks, which are driving someone to look at an EV, it picked up a little bit over the last month, but still for the most part, it's been flat. We’re not seeing this big increase in consumer interest in EVs that we started to see a while back.”

Some of that can be attributed to the total number of EVs in circulation, known as EV Parc, which is growing at 2.2 times the rate of the charging infrastructure. A year ago, 2.6 million EVs were on the street, compared to 3.7 million so far this year, an increase of 42%.

Among the top five reasons that consumers reject EVs:

1. Lack of charging station availability
2. Purchase price
3. Limited driving distance per charge
4. Time required to charge
5. Inability to charge at home or work

Among the positives in favor of EVs:

• Availability will grow, especially among affordable EV models
• EVs are at parity on cost, or better
• Owners are mostly satisfied and likely to stay with EVs

Among the negatives:

• Interest remains limited and regional
• Infrastructure is lagging
• Concern about durability and depreciation

The Challenges of Remarketing EVs

“It’s critical to know how an EV has been treated during its life,” Sargent said. “Consumers frankly are terrified of used EVs.” Among key points:

• For recently sold EVs (MY19-23), batteries are generally holding up over the measurable mileage (first 75,000-100,000 miles)
• Motorq and J.D. Power see an average of 7% capacity degradation for the first 100,000 miles, even better than most OEM expectations.
• Among outliers, 5-10% of EVs have reduced realized range in that timeframe.
• This situation will become more complex, given the range of new EVs coming out, with varying battery suppliers, chemistries, architecture, etc.

“For the most part, EVs are holding up really very well in terms of their battery life,” said Sargent, referring to the extensive EV data gathered by JD Power and its data partner, Motorq. “When customers report a lot of problems with the EVs, very few of those problems have anything to do with the battery itself.”

When the data is modeled out, the first 100,000 miles on an EV show that the average battery capacity degradation is 7%. As Sargent explained, if you buy an EV with a 300 mile range, after 100,000 miles, the battery will be left with a max range of 279 miles.

“Frankly, there's probably a greater degradation in mpg on an ICE vehicle than there is in range on an EV,” Sargent said. “There are outliers because not all EVs are the same. It matters where an EV has been, how it’s been treated, how it’s been driven, and particularly how it’s been charged.”

When buying a used EV, purchasers should do their research and find out which make and model EVs are the outliers with shorter ranges than the average degradation. Likewise, some EVs will end up as “superstars” with less percentage degradation of the battery than with the average EV, he said.

“Your ‘problem children’ are the ones at the bottom. You don't want to buy one of these EVs. The question is, you got to find out which it is because you can't tell by just looking at it.” One rule for powering EVs is to not always use full DC Level 3 charging to 100% which over time can hasten battery degradation. “DC fast charging in small amounts is not too much of a problem.”

The use of battery health scores based on consistent evaluation and data methods can build confidence and peace of mind in the used EV market, he said.

“Consumers are really worried about used EVs. Most consumers have no experience buying an EV. Almost no one has bought a used EV. Their understanding is based often on hearsay, or their experience with other rechargeable electric devices in their life, like a phone or laptop. And they know that those degrade rapidly over time.”

An EV battery differs vastly from a personal electronic device, which many prospective buyers don’t fully understand yet, Sargent said. “As an industry, we owe it to consumers to have a healthy used EV market, so we can have a healthy new EV market. The two go together. We must give them peace of mind as to the health of the vehicle that they're planning on buying.”

Consumers are more likely to pay more for a used EV that has been accurately evaluated and verified as having a healthy battery, Sargent said, and more companies are pursuing such measures. 

 

Originally posted on Automotive Fleet