Declining customer affordability due to rising interest rates and inflation leading to a downgrade trend from higher to lower segment cars in the world’s second-larger car market, while chip shortage continues to remain a concern amidst the ongoing UAW strike, states market research firm Ipsos.
03 Oct 2023 | 5419 Views | By Mayank Dhingra
The uncertainty in the global economic environment is casting its impact on the automotive industry globally, particularly in markets like the US and Europe, which have already started showing downgrade purchase trends with the declining capacity of consumers to afford new cars.
The United States, which is the second-largest ...
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The uncertainty in the global economic environment is casting its impact on the automotive industry globally, particularly in markets like the US and Europe, which have already started showing downgrade purchase trends with the declining capacity of consumers to afford new cars.
The United States, which is the second-largest car market in the world after China, has begun is witnessing customers switching to smaller, more efficient cars, while also seeing longer ownership cycles, stemming from the squeezed purchasing power, and financial prudence of customers kicking in amidst the tough economic atmosphere.
According to Julia Moura Hedrick, Head, Global Automotive & Mobility, Ipsos, “Rising inflation and interest rates are casting a gigantic impact on the global automotive industry. While the rising fuel prices led to a consumer shift towards smaller cars in the US, the rising inflation and interest rates are driving people to retain their cars for longer durations, leading to delay in new purchases.”
“With the customer’s purchase power getting significantly impacted, an existing D-segment car owner is going down to a C-segment vehicle. So, we are witnessing a shift in the segmentation because of the reduced affordability,” she told Autocar Professional.
This downgrade trend is also giving birth to several repercussions, particularly in the form of declining brand loyalty and advocacy, as customer expectations remain unmet. “Customer expectations play a big role in their satisfaction, and the move to a lower segment model, is keeping them unsatisfied,” Hedrick mentioned.
Driving correlation of this trend to the Indian passenger vehicle market, Shashank Srivastava, Senior Executive Officer, Maruti Suzuki India, said, “With oil prices continuing to remain high, the inflation is rising, and this could lead to a further increase in interest rates. Since automobile retail (around 80%) is largely enabled by lending, the high interest rates will eventually impact vehicle sales. It remains a major headwind going forward,”
On the flip side, this trend is also fuelling the used-car market, which is attracting customers to make a lateral upgrade within a constrained budget, and fulfil their expectations. “The used-car segment is doing extremely well in this scenario,” she added.
According to Hedrick, the worry for the new car market in these developed economies does not end here as the chip shortage continues to be another hurdle. “The chip shortage is still a reality, and there are vehicles which continue to be produced without all components in place. Cars continue to be rolled out from the assembly lines without chips for features like heated seats or advanced infotainment functions,” Hedrick explained.
She added that when these missing parts get installed a month or two later at the dealership level, often they run into problems, therefore, hitting the customer satisfaction level once again. “The customer satisfaction gets impacted and this phenomenon disrupts a customer’s brand loyalty and advocacy towards an OEM,” Hedrick said.
While the US car market is also fighting the ongoing battle of the worker strike, which has been called upon by the United Auto Workers (UAW) union that has already caused an estimated US$ 1.6 billion loss to the Big 3 OEMs – General Motors, Ford, and Stellantis – based out of Detroit.
“The present strike is completely different from the last one which happened around six years ago. While it started with 3 key plants, it has scaled to nearly 36 facilities, including at Tier-1 suppliers and parts warehouses. As a result, customers could even expect to face delays in vehicle servicing as the parts inventory, particularly at GM and Stellantis, starts drying up at their dealership level,” Hedrick updated.
“While this is going to impact the entire supply chain as well as the US economy, the situation is only getting aggravated by the chip shortage, which is much improved over peak-Covid levels, continues to remain a concern even at this point in time,” Hedrick concluded.