Scott Cauvel, executive director, enterprise business at S&P Global Mobility, has worked with OEMs for 35 years as they work through their pricing strategy. He sat down with Chris Potgieter, director, growth marketing at S&P Global Mobility to discuss incentive and pricing strategy in the current market.
What follows is an abbreviated transcript of the conversation.
Question (Chris): Scott, so excited to have this conversation with you today. Can you tell us a little bit more about your role at S&P Global Mobility and what your team is responsible for?
Answer (Scott): Since the acquisition of Market Scan about a year ago, our team has put the company’s offerings in front of industry players that have never seen it before. I had 35 years of experience at an OEM, and I didn’t know anything about Market Scan while in some critically important roles. Key users for the data we offer include OEMs, sales and incentives teams, brand teams, marketing teams, people making pricing decisions and finance teams. We also know there are opportunities for lenders and in the digital retail marketplace.
Q: Before we get into automotive sales and the state of the industry, I understand you’ve been on the road a lot. What have you been up to?
A: We’ve been visiting and talking to OEMs in the East Coast, central U.S. and West Coast to demonstrate the benefits of our insights and intelligence offerings. Market Scan offers real-time payment calculation insights that take into account pricing, incentives and payments, down to the ZIP code level.
Q: Let’s go back to the state of U.S. auto sales. In the first quarter of 2024, automotive sales were up about 5% compared to the previous year. It seems like the industry is making progress, but what are your thoughts surrounding market sentiment? What are OEMs and incentive planning teams saying about the rest of 2024?
A: If you could knock out the highs and lows of the industry, it’s a cyclical business. For several years now, we’re seeing a 15.5 or 16 million SAAR, which is strong. But that said, there’s a lot of challenges. Incentive spending’s way up year over year, and OEMs are saying how hard it is to keep up with the changes, and are also trying to figure how to target those incentives to specific vehicles and customers. Retail inventory is also up 60-70%, which equates to 20-25 days’ supply of increased supply year over year. This proves a challenge for OEMs, who are trying to avoid costly plant downtime.
There’s also the pricing pressure in the marketplace – pricing is high and consumers face an affordability crisis. Our data shows about 15% of today’s consumers have a monthly vehicle payment of $1,000 or more. Finally, consumers opted for higher trim levels and series during the pandemic, and the OEMs swung their mix to cater to this strong demand and also book the added revenue. Now that consumers are facing affordability challenges, entry level vehicles are in demand, and OEMs are trying to figure out how to adjust. To top it all off, the transition from ICE vehicles to EVs is affecting inventory mix, spending and consumer adoption.
Q: You touched on increasing inventory – a stat from S&P Global Mobility said that dealer inventory is about 2.89 million units, a 65% increase from the previous year. A large portion of those units are late model year 2023. What’s the explanation for this? Have you seen how this is affecting incentive spend?
A: Many OEMs have a lot of 2023 models left in inventory and are trying to get rid of the old ones. OEMs fought hard to increase production and meet demand in 2021 and 2022, along with the ongoing chip shortage and other supply chain challenges. After they accelerated production schedules, the market got a lot more competitive and volume growth has flattened a bit. We’ve gone from about 150,000 prior model years in stock last year to about 280,000 models listed in retail inventory today – about an 80% increase. This drives incentive spending. Leasing is facing challenges at the same time – if I’m trying to lease old models with residual support and everything that goes into a lease, it’s really costly to try to get rid of those old vehicles. The 2024 models are starting to build, and the 2025 models are right around the corner, and many are still having to spend to move 2023 models.
Q: It sounds like dealers are facing some challenges, but I’ve always been impressed by the automotive retail industry’s ability to adapt and find opportunities. Looking at incentives – are they up consistently across the market, or are increases isolated to specific segments?
A: Overall, incentive spending is up about 90% year-over-year – we can even say 100% in some instances. The increases are pretty staggering and are about $1,400 per unit. Two segments where we’ve seen even steeper incentive acceleration are in EVs and full-size pickups. For EVs, incentives are up by $3,700 from the previous year, while pickups, particularly from the Detroit Three, are up by more than $2,700.
Q: Outside of increases in incentive spending, I’ve seen some manufacturers are decreasing MSRP. Which models have you seen taking the largest price adjustments? Are these changes affecting EV affordability?
A: Adjustments to MSRP are a bit of a new phenomenon in the business, driven by the Teslas and Rivians of the world. However, if you ignore those two brands, we are seeing MSRPs coming down. Ford is a good example of it; the Lightning pickup truck is down about $14,000 per unit, and Mach-E is down about $11,000. We’re seeing this in the luxury space as well, with BMW and Mercedes decreasing the MSRP of their top-line EVs by about $4,000. These decreases are happening in response to the affordability of monthly payments.
When you look at Ford’s decreases, monthly payments are down about 30%; MSRP decreases really help on the affordability side. Leasing is also becoming more popular, as it offers a lower monthly payment. Consumers view affordability through the lens of their monthly payments, so lowering those payments will help customers with their shift toward EVs.
Q: Do you think EV incentive spending is going to continue to increase this year and stay at a high level?
A: Absolutely. OEMS have shifted their business and moved their plant capacity and schedules around a mix that includes EVs. With a lower than expected EV demand, they’ll shift back to ICE and hybrid where they can, especially as hybrid demand has grown. However, we have to remember that OEMs need EV adoption to continue to come through due to regulations. What’s going to be interesting is whether OEMs take a traditional discounting through incentives, whether more OEMs to reevaluate and change MSRP or whether we’ll see a combination.
Q: What makes Market Scan’s solutions stand out, and how are OEMs benefitting by using our solutions?
A: OEMs need us more than ever. We live in a data-driven world, and automotive retail is shifting monumentally fast – too fast for anyone to gather and analyze data on their own. OEMs aren’t staffed to track competitors’ pricing changes throughout the month. Through my travels, I’ve heard OEMs ask for a one-stop data shop with holistic views of the marketplace, which is exactly what Market Scan offers. We provide all the data necessary to make pricing decisions in a digestible format that updates in real time.
Q: What three pieces of advice would you provide OEMs to help them navigate the rest of 2024?
A: First, OEMs need to be on their toes. Your competitors are moving quickly, and you have to do the same. Second, OEMs need to find their balance – particularly between production schedules and sales plans as prices and incentives change. It can be really tough to make a decision between plant downtime and spending a little more on discounting, but using tools to find the balance, efficiencies of spend and elasticities is really essential. Finally, find the best real-time data and insights possible in the marketplace. This is not the time to guess at what’s happening in the industry.
The full conversation between Chris and Scott can be watched below.