The years were difficult for the American automobile industry. There was the production shutdown caused by the COVID-19 pandemic, and then the shortage of semiconductors forced manufacturers to repeatedly cut production, leaving dealers with a shortage of inventory. Today, with the rapidly rising cost of even the most basic commodities like steel, the price of new vehicles has started to skyrocket.
So far, Toyota has done about as well as any automaker, but the walls are closing in, said Bob Carter, longtime executive vice president of sales for Toyota Motor North America. Just last week, Toyota cut production twice, and he warned that more cuts are likely. With few vehicles on the show grounds, dealerships have little to sell and many customers are shut out of the market anyway, Carter said during an interview this week at TMNA headquarters in suburban Dallas. in Plano, Texas.
“None of us have ever seen anything like it,” said Carter, who spent more than four decades with the Japanese giant. Here’s more of what he had to say about the current crisis that is shaking the foundations of the US auto market.
The Detroit Office: It’s hard to know where to start, as automakers and auto buyers face so many challenges. What is your most serious concern?
Bob Carter: I am not the procurement expert, but I have the responsibility to set the price for the product line. And (rising) raw material prices are a problem for the industry. The industry cannot absorb this type of runaway inflation. So we pass it on to consumers. Right now it’s going to be fine because the demand is so much higher than the available production. But, in 2023, as the supply chain begins to stabilize (and production increases), you’re going to have much higher vehicle prices and higher interest rates. This leads us to set prices beyond what the consumer may be able to afford.
TDB: You said this is a crisis unlike anything you’ve seen before. How?
Carter: We’ve had all kinds of different crises over the 40 years that I’ve been through and I can’t find all of the ones that have interrupted consumer demand. But manufacturing continues and eventually consumer demand comes back, so every time we’ve had a slump in the industry there’s been a glut of inventory. (Immediately after the COVID hit), demand dropped suddenly, but it actually came back before manufacturing could catch up and that put us in this situation.
TDB: For now, the most immediate issue is supply chain disruption and how has this reduced dealer inventory?
Carter: At the beginning of the month, we had about 5 days supply of vehicles in dealership inventory. (Ed: The industry norm is 60-65.) We ended (May) with 7,400 vehicles in dealership inventory. It’s a 1.3 day supply. We sold more vehicles than we produced.
Last October, we thought there would be enough demand to support sales of 17.2 million vehicles (in 2022). But we knew there were supply chain issues, so we (expected) 16.5 million because we knew the industry couldn’t meet the full demand. Right now the question is whether the industry will be able to build 15 million. And that drives up transaction prices. He drives everything.
Back to normal ?
TDB: How long will it take to stabilize the supply chain, restart production… and normalize dealer inventories?
Carter: It will probably be deep into this year, maybe in the fourth quarter, before we start to see a stabilization of the supply chain and then we start to stabilize production. But keep in mind that we are down to a 1.3 day supply. It won’t go back to normal until you can walk into a dealership and see 30 days of inventory. This is a healthy number, but still lower than where we operated before. I don’t expect to see that until the third quarter of next year.
TDB: You talk about a “new standard” of 30 days of inventory, but that’s still half of what has been the industry standard.
Carter: This industry is much more efficient than it was 20 or 30 years ago. What I’m saying is I don’t want to go back. There are many benefits for consumers, dealers and us if we operate with less inventory.
A new buying process
TDB: Some manufacturers seem to want to change the way consumers buy vehicles, especially electric vehicles. Ford CEO Jim Farley said this week he wants to sell all of the company’s electric vehicles through advance orders.
Carter: I’m not sure I understand the logic. I don’t know how the consumer is really going to view this, and how the dealership body is going to view it as well.
TDB: Europe already has a more order-based approach to retail. Could it work here?
Carter: I mean, that might be a small part of the market, but, you know, a lot of consumers today have no idea what they want, they don’t make a decision before they walk in and see the car. How does the command model work in this scenario? I don’t think anyone has answered these questions yet.
TDB: Let’s finish by talking about electricity. You have a new electric vehicle coming onto the market, the bZ4X. We are already seeing strong sales figures from Ford and Tesla. What do you see happening as we move forward?
Carter: Electrification is the future of industry. The transition to 100% BEVs will take place in North America. Emerging countries and Africa? Who knows? But what is debatable is the transition rate. Ask 10 people and you’ll get 10 different answers. That’s where I like our strategy to have internal combustion engines, hybrids and plug-in hybrids. We don’t chase regulations. We exaggerate. What we intend to chase is the consumer. I want to be the big Macy’s powertrain store.