Last Updated: January 14, 2022
2022 Auto Industry Outlook Overview
This blog presents and addresses 3 key topics every automotive industry executive should have at the top of mind in 2022, as well as best practices for developing forecasting and planning strategies for the next year.
The market conditions in 2021 were challenging for the auto industry as a whole, with sales declining annually in 2020 and 2021 due to low inventory. At the beginning of 2022, this low inventory crisis will keep demand high as consumers were unable to fulfill their needs last year despite having above normal savings and preparation for buying a car.
While demand may remain high in the new year, supply chain issues will continue to disrupt the industry as the chip shortage limits the production of new cars and prices rise for the transportation of parts and finished vehicles around the world. Given these factors, prices are expected to remain high for both new and used cars throughout most of 2022.
#1: The Chip Shortage
For the past two years, automakers have been stuck competing with other industries over a limited supply of chips. As a result, the production of cars has been severely limited and most automakers had to significantly cut their projections for production in the second half of 2021. This is unlikely to be made up for in 2022, especially if COVID continues to disrupt both production and global transportation.
The complexity of producing chips makes it difficult for new suppliers to enter the market and relieve the constraints. Diversifying the supply chain is difficult unless automakers directly invest in chipmakers themselves to incentivize and aid them to produce at higher levels.
Reshoring and making investments in new suppliers will be key to navigating the chip crisis. Some automakers are choosing to work with smaller companies and help them scale up production in exchange for a dedicated supply of chips. This will be beneficial to those automakers engaging in the commerce but could tighten the market for others if they get the chip manufacturer to sign exclusive contracts in exchange for more investment.
#2: The Vehicle Shortage
Due to the chip shortage and challenges in the supply chain, there is simply not enough stock to meet the demand for either new or used vehicles. For manufacturers and sellers, not having adequate supply to meet demand leaves money on the table as they could have sold more products, increased their bottom lines, and improved business performance on the year if they’d had the supply.
Prolonged shortages in supply could also impact buyer behavior and encourage consumers to wait longer before buying vehicles, which could potentially impact demand in the long run. However, that does not mean that automakers should default to promotions or cut prices. Instead, auto companies should identify consumer segments that can afford to buy new cars at full price, primarily Americans with higher incomes that have held onto their disposable income as savings throughout the pandemic. The key is to identify the profit margin for that segment and sell directly to them while limiting incentives. As of now, there is enough demand for this strategy to be successful as Edmunds report of car sales in November 2021 had cars selling 3.8% over MSRP.
The other strategy is prioritizing the production of cars that are most popular with this segment of consumers and increasing the production of those models. Again, it’s critical to focus on the profit margin, not just the overall sales.
#3: The Talent Shortage
The labor shortage will increase costs to employers both in terms of attracting new talent and retaining current talent. While some of these costs can be passed onto consumers, companies should be wary of passing increased labor costs onto consumers too quickly, especially as commodity and supply chain driven inflation continue to push prices up.
While rising labor costs are inevitable to some degree, auto companies need to limit the increase as much as possible. Employers need to consider strategic ways to bring in new employees as well as retain their current employees. Onboarding and training new talent can be expensive and time-consuming and high levels of turnover can negatively impact quality, productivity, and team morale. Moving forward, organizations need to carefully monitor turnover rates and get creative with employee incentives.
Best Practices for Forecasting and Planning in 2022
Strategic planning for auto companies in 2022 starts with increasing the efficiency and diversity within a company’s supply chain. Executives should work on creating more secure supply chain networks, and potentially invest in their company’s suppliers to ensure future needs will be adequately met. Companies should also be careful not to over-commit on production in the new year.
When it comes to the labor issue, executives should carefully consider workforce needs and find innovative ways to improve long-term productivity. Additionally, the expanded use of technology could offset some of the increased costs in attracting and retaining employees.
Finally, auto companies should prepare for limited vehicle availability and continued shortages. Executives should identify areas of potential high-profit margins to account for lower sales and target consumers that are willing to pay for higher costing vehicles.
Bonus Insight: Electric Cars
Given recent legislation in Europe, every auto industry executive planning for the new year should be thinking about a shift to electric cars. For many automakers, this inevitable shift will bring significant challenges. For example, auto companies will need to invest in more effective batteries while keeping them inexpensive enough to make electric vehicles broadly available.
Increased costs associated with labor, rare earth metals, and other commodities necessary for electric vehicle production will also factor into the pricing challenges auto companies will likely face in the coming years. This shift will create a major disruption for the industry and will require significant retooling of production capabilities, new approaches to automotive R&D, and a significant change for after-market dealers as they maintain more different types of products to meet demands in both conventional and electric vehicles.
As many manufacturers have yet to develop successful electric vehicles that generate enough interest to penetrate auto markets, 2022 is the year that executives need to identify their strategy for making these changes. Following the recent laws in Europe, potential government regulations in the U.S. are something to keep an eye on in the coming year. In particular, this may be led at the state level by California rather than the federal level.
Reevaluating the supply chain should be a priority in 2022 and executives should have the inevitable transition to electric vehicles in mind when considering any major changes.
Watch the 2022 Auto Industry Outlook to learn more about planning for the new year.