I’ve been involved in the automotive retail trade for more years than I’m prepared to admit. However, one truism has always held: retail sales follow a pendulum effect – when used car sales are strong, the new car market is weak, and vice versa. Strong new car sales typically indicate a weaker used market.
Following this logic, will 2025 be the year the balance shifts, leading to a strong new car market that pressures the currently robust used market? The signs are all there:
1. Manufacturers are becoming more realistic on pricing
One of the biggest challenges for new car sales has been the rising cost of vehicles. Combined with increasing interest rates, this has caused the all-important monthly payment to climb dramatically from the days of “free money.”
At last, manufacturers are responding with much more realistic finance offers, including significant deposit contributions. With the right package, they can lower costs without appearing to reduce the headline price. This price adjustment is driven by the need to move excess production. Manufacturers operate with high operational gearing and require steady cash flow to maintain full capacity.
2. EVs have distorted the market
Due to the Zero Emission Vehicle (ZEV) mandate, the final quarter of last year saw a highly distorted market for internal combustion engine (ICE) vehicles, as manufacturers held back ICE sales. Although the required ZEV percentage is increasing this year, manufacturers now have the opportunity to open the taps for ICE sales over the next six months, boosting cash flow by selling the vehicles consumers want – while still meeting their critical financial needs (see #1 above!)
3. Resupply of used cars is getting more expensive
The key challenge I’m hearing in the trade is how difficult it is to source used stock at a realistic price. This is being driven by the lack of cars produced in the Covid era, but also by large dealer groups being much more effective at keeping the trade-ins for resale within the trade. This has caused a significant price increases combined with the normal strong demand we see in January.
The upshot of the three points above is that consumer demand remains strong, and manufacturers have become more realistic with their finance pricing. As a result, monthly payments for new cars are now comparable to those for many three-year-old vehicles on high-interest financing. Naturally, consumers are opting for new cars, especially with the ancillary offers around servicing and other incentives.
If we are in the middle of a pendulum change, for franchise dealers the challenge will be to manage the pre-registrations that manufacturers enforce onto the market which will put strains on their balance sheets.