NADA 2023: What I Heard… And What I Think Auto Lenders Should Know
If working in the auto financing industry for almost 30 years has taught me anything, it’s that change is inevitable. When I started my career, “smart” phones still flipped open, the Internet was called the Information Superhighway, and buying a car on your computer wasn’t even a thought. If you had told me then that our customers would be using their phones to order self-driving vehicles that run off batteries from a manufacturer’s website… I probably wouldn’t have believed you.
Going into the NADA 2023 conference, I knew that change would be one of the themes that I heard my colleagues in the industry talking about most. While 2022 was a strong year for many credit unions, 2023 looks like it might be more of a challenge. At least we saw used car values stabilize in January and trend upward going into February. As part of CUDL, the largest credit union and auto lending network in the United States, I was keenly interested to learn what my peers were doing to prepare for 2023.
Here is what I heard…
2023 Will Be a New Kind of “Normal”
A few months ago, I wrote that 2022 had been both the best and worst of times for auto financing. While sales of new cars dropped to record lows, mostly due to inventory and supply chain constraints, used car sales boomed while prices surged. Inflation, pent-up demand, and inventory limitations forced us all to adopt a different approach to sales. Incentives virtually disappeared, customers were ordering cars that weren’t even in stock, and many of us saw a record increase in gross profits and F&I even as volumes fell.
From what I heard at the NADA show, the coming year will look more like a “typical” business environment for our industry… with a twist. Used car prices are trending down. On the new car front, inventory management is still going to be an issue due to the ongoing supply chain challenges – whether a recession comes or not. OEMs are beginning to change their inventory strategies, and dealers everywhere are learning how to function in a low inventory environment. I know that dealers have proven to be resilient no matter what challenges come their way, so I am confident that we will all make the necessary staffing, marketing, and retailing strategy adjustments that will be necessary to succeed going forward.
Rising Rates Are Driving New Lending Programs
As I walked the floor to talk with dealership owners, heads of sales, and retail professionals, I was struck by how often I heard folks discussing interest rates… and how we now need to create lender program guidelines that help our customers and members find the financing that they need.
The economy is on everyone’s mind, as incessant hikes have already taken a big bite out of customer demand. This is challenging many of us to find ways to create better affordability for consumers. Here’s the silver lining: For CUDL dealers and credit unions, rising rates can create more opportunities as consumers seek out the local credit unions that quickly adapt their lending programs to the community. Credit unions have historically held steady during recessions – as they did in 2008 and during other downturns. In fact, our partner Experian found that credit unions consistently gained market share last year, surpassing banks and captive lenders in market share for the first time ever in Q3 of 2022.
Most of the folks I spoke to at NADA expect the second half of 2023 to be much better than the start of the year as interest rate hikes begin to slow or drop. Still, it’s clear that the immediate future will require us to be flexible enough to meet the needs of our members and communities, as most projections have auto sales flat or slightly down for the first half of the year.
OEMs Are Changing Up…
Before 2021, the auto financing industry had been relatively stable for about a decade. While some years were up and some were down, the basic paradigm of auto lending stayed about the same. Now, the landscape is starting to change – and those changes are only going to accelerate.
During the pandemic, the surge in demand (and pricing) reached double digits, creating opportunities that attracted a whole new set of lenders. From fintechs to captive lenders, there’s lots of new competition in auto finance, including OEMs themselves that are becoming increasingly invested in direct sales as inventory shortages ease and consumer interest in electric vehicles (EVs) grows.
Relationships between dealers and manufacturers have always waxed and waned, but 2023 seems like it might be looked back on as the beginning of a new era. Automotive retail platforms like Tekion are rapidly gaining traction with the biggest OEMs, like GM and Acura. New and used EV sales, in particular, seem set to forever change the car buying journey for most consumers (and their lenders).
One thing I noted at NADA was how many dealers appreciated the consistent relationship they have with their credit unions. While banks and fintechs change standards and practices rapidly, credit unions tend to hold steady, helping auto shoppers connect with local lenders they know and trust.
… And EVs Are Charged Up!
Did you notice how many of those Superbowl commercials were for EVs? Four campaigns ran; three were for EVs (Jeep, Dodge, and GM). While Tesla is the dominant player in EVs, the rest of the industry is catching up fast – as is consumer demand.
While EVs still make up a small part of the market (about 6% by most estimates), demand is growing by double digits and will undoubtedly increase as more fast-charging networks are deployed. The federal government is subsidizing the adoption of EVs, with tax breaks available for many EVs and billions in Energy Department loans granted to EV manufacturers.
The problem for dealers is… where do we fit? EVs attract consumers that expect a digital, frictionless shopping experience. Many EV buyers want to begin their journey virtually; however, they also need the physical experience only a dealer can provide. Cars still need to be test-driven, questions still need to be asked, and no one has yet figured out how to download a handshake and a friendly smile.
While the negotiations between OEMs and their dealerships regarding EV sales will last for years, my advice to dealerships is to focus on what they have always done best: servicing the needs of the customer while building long-term relationships. Especially when it comes to aftercare servicing these next-generation vehicles, the role of local dealerships will never be replaced. These new vehicles are complicated, service patterns are changing – and dealers who provide a great purchase experience should be able to look forward to a long relationship with their customers.
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