The Korean Deloitte Group has published a report titled ‘In the Era of Carflation: Signs of Decreased Intent to Purchase Vehicles’, which analyzes the impact of significant and minor supply issues faced by the global automotive industry on consumer vehicle demand, as well as the current state of the domestic automotive industry.
According to the report, the intention of Korean consumers to purchase cars reached its lowest level in the past year by the end of August. This was derived from applying Deloitte’s ‘Car Purchase Intention Index’ to the Korean market. The index tracks the percentage of consumers willing to buy a car within the next six months, with 100 serving as the baseline to assess strength or weakness.
By the end of August, the Car Purchase Intention Index for the Korean market recorded 85.7, marking the lowest level since September 2021. Despite showing a generally upward trend with unstable fluctuations, the index plummeted in August, indicating a sharp decline in purchasing motivation.
The previous low during the survey period from September 2021 to August 2022 was 90.5 in early February 2022, while the lowest points in March and May were each at 95.2. The peak was noted at 104.8 in November 2021 and rose to 114.3 by the end of February 2022, escalating to 119 in July. However, this all changed drastically in August with a significant drop.
The Car Purchase Intention Index in the U.S., the largest automotive market globally, has remained below 100 for all but three months over the past year, showing a continuous slight decline.
The automotive industry is facing numerous challenges, such as a shortage of supply due to the COVID-19 pandemic and rising vehicle prices. In the early stages of the pandemic, car production was halted due to lockdowns, and after production resumed, semiconductor shortages and severe labor shortages exacerbated the already strained global supply chain.
In the U.S. alone, semiconductor shortages resulted in a production loss of 1.5 million vehicles in 2021, and it is estimated that around 233,000 additional units were lost in the first half of 2022. S&P Global Mobility recently adjusted its global light vehicle production forecast downwards by 2.6 million for both 2022 and 2023, taking into account Russia’s invasion of Ukraine.
Not only supply issues but also forecasting consumer demand has become more difficult than ever. Over the past two years, lockdowns due to COVID-19, increased health concerns, and the shift to remote work have changed consumer transportation habits. Furthermore, vehicle and fuel prices have reached all-time highs, increasing uncertainty, while consumer preference for electric vehicles has been rising rapidly.
U.S. electric vehicle sales doubled from 308,000 in 2020 to 608,000 in 2021, attributed to lower operating costs compared to gasoline, which is about one-third of the cost. Particularly after the spike in gasoline prices following the invasion of Ukraine, consumer interest in electric vehicles has surged and is expected to continue growing.
Demand for vehicles is anticipated to decline further. The geopolitical instability stemming from Russia’s invasion of Ukraine, the U.S.-China tensions, and the highest inflation rates in history contribute to increased vehicle prices. Living costs are also skyrocketing. With the likelihood of a recession growing, consumers are likely to either curb spending or postpone purchases altogether. The Car Purchase Intention Index also indicates weakened demand.
Deloitte’s analysis shows that U.S. consumers’ Car Purchase Intention Index has experienced fluctuations but has shown a gradual decline, while Korea’s index saw a trend of strengthening amid unstable fluctuations until it sharply dropped at the end of August 2022. This aligns with the recent trend of overall consumer sentiment declining due to heightened inflation concerns.
Consumer sentiment regarding financial conditions is already sending warning signals. In a survey of Americans, 84% expressed concern over surging prices of essentials. Worries about savings and credit debt are also increasing. The percentage of Americans postponing large purchases rose from 42% in September last year to 53% recently.
Korean consumers are no exception. According to the latest survey from the ‘Deloitte Global Consumer Tracker’, 59% of domestic consumers expressed significant concern about inflation. This was a sharp increase from 45% in September of last year, a rise of 14 percentage points within a year. Concerns about rising product prices were also prevalent, and consumers predicted that inflation would significantly affect their financial status. This expectation is the reason behind the predicted decline in demand, and vehicles are no exception.
Deloitte has proposed measures for automotive stakeholders, including suppressing price hikes, transitioning portfolios toward electric vehicles, and improving supply chains.
If prices rise to unaffordable levels, consumers will not tolerate any further price increases, so excessive price hikes must be restrained. Additionally, considering the growing consumer demand for electric vehicles due to soaring fossil fuel prices, a swift shift to electric vehicle production is essential.
As for supply chains, manufacturers and parts suppliers should transition from just-in-time production to maintaining an inventory of critical components to prepare for unforeseen circumstances, while adopting a near-shoring strategy to procure products from adjacent countries. They are encouraged to rebuild supply chains according to their specific circumstances.
Kim Tae-hwan, automotive industry leader at Deloitte Korea, stated, “The production issues that seemed temporary have persisted far longer than expected and have significantly impacted the global automotive industry and consumers’ car-buying sentiment. It is crucial for automotive industry stakeholders to understand and respond accurately to what consumers do not want and what they want more in the face of uncertainty.”
Lee Sang-jin daedusj@autodiary.kr