Inside Automotive with Jim Fitzpatrick, powered by CBT News

Automotive Market Stability and Challenges with Kevin Tynan

• Jim Fitzpatrick • Season 1 • Episode 48

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On this episode of Inside Automotive, Kevin Tynan, director of research at The Presidio Group, provides a forward-looking analysis of the automotive industry as it transitions from 2025 into 2026. Tynan discusses how policy shifts, geopolitical factors, and temporary market catalysts have shaped the current landscape, and what dealers and manufacturers should anticipate in the coming year. He highlights the importance of inventory discipline, pricing strategies, and profitability management, emphasizing that volume alone does not guarantee sustainable margins. The conversation also explores the evolving electric vehicle market, affordability pressures, and the critical role of revenue diversification for dealerships.

Key discussion points include:

  • 2025 industry performance and pull-ahead effects on SAAR
  • Inventory levels and their impact on pricing integrity and margins
  • Affordability challenges and anticipated price increases per vehicle
  • EV market adjustments and implications for profitability
  • Importance of diversifying dealer revenue through used vehicles, fixed ops, and services
  • The role of technology and AI in improving efficiency and sustaining profits

Inside Automotive with Jim Fitzpatrick is powered by CBT News, your go-to source for the latest news, trends, and insights in retail automotive. Subscribe for more interviews with top industry leaders, dealership innovators, and experts shaping the future of automotive.

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Jim Fitzpatrick:

Welcome to Inside Automotive with Jim Fitzpatrick. Today we're joined by Kevin Tynan, Director of Research at the Presidio Group, to get his take on what the auto industry should expect in the year ahead. I can't believe I said that. This year has gone so incredibly fast. But from consumer demand to inventory to tariffs to trends, uh you name it, it's been a crazy year. So uh Kevin, thank you so much for joining us once again on the show.

SPEAKER_00:

Always my pleasure, Jim.

Jim Fitzpatrick:

So uh it has been a crazy year, and dealers are trying to shake off. There's been some good parts, there's been some tough parts, uh, but uh tariffs and the EV shutting down the you know the tax incentives and all else, everything else that goes into it. You know, we got rates that are coming down, we get some other things happening in the marketplace, and the economy is still a little bit uh on shaky ground. But uh, as we look ahead to the next year, what's your overall outlook for the auto market and the auto industry? Any anything um that you see as a major tailwind or headwind?

SPEAKER_00:

Yeah, I think I think the difference is gonna be, you know, if if 2025 finishes at about a 16 million unit rate, which is what it looks like it'll be, that's reasonable. Um I think profitability is sustainable at that level. I think what's gonna be missing from 2026, however, is two big catalysts that we have uh or we had in 25. In March and April, you had uh this tariff fear pull forward. So we had 17 million plus seasonally adjusted rate in those two months. And then in the third quarter, the expiration of the federal tax credit for EVs, I feel like pulled forward a little bit of demand there. And we saw that snapback in the October seasonally adjusted rate, which was down to like a 15.3 million and in 2024 that was a 16 million for the first time in the year. So I feel like we're going to be missing those demand catalysts in 2026, at least anything visible at this point. But again, and like I always talk about Jim, more volume isn't always better, right? It's and I think if I and if I think if the industry pushes much above that 16 million unit rate, we're gonna see pricing and margins break down. So I'm not concerned about volume catalysts not being there. I'd rather see a 15.5 to 16 with about three million units in inventory, and to me that would mean sustainable profitability for the manufacturers and the dealers.

Jim Fitzpatrick:

Yeah, yeah, and and yeah, you we've talked about a number of times, and you've made a very strong case for the fact that more isn't necessarily more on the bottom line, and dealers are I think uh agreeing with that. And then also there's a lot of uh manufacturers that agree with that concept as well, right?

SPEAKER_00:

Yeah, I mean we've seen inventory tick up to about 3.3 million, which is starting to get a little bit dangerous, much above three million, and I start to worry because I feel like 1.5 million not seasonally adjusted rate is about as good as we're gonna do. Three million units would be 60 days supply. Right. Right. So if you get if you get a big drop in the denominator being volume or an increase in the numerator being inventory, you start to throw that out of whack. And there goes your pricing integrity and your margin dynamics, and it and it kind of messes up the whole system. And I feel like there's pressure to the demand side of it, right? As we we had a reasonably strong 16, 16.1 in 2025, and if we're not going to be that high in 2026, you really got to watch your inventory levels. Yeah. Um, for the most part, manufacturers have been reasonably disciplined in 2025. Whether they can hold that line going forward, I think is the big question for 26.

Jim Fitzpatrick:

Yeah, yeah, for sure. And of course, the the underlying uh issue here is affordability, right? I mean, that that's still a major factor out there, right?

SPEAKER_00:

It's not coming back, though. Yeah. Um, if anything, and you if you look at the affordability question, I I think there was a lot of the tariff impact that the manufacturers ate in 2025.

Jim Fitzpatrick:

Yeah.

SPEAKER_00:

So that's not sustainable because that impacts your income statement. So I think as they start to pass along, and we've seen estimates that could be$2,500 per vehicle, as that gets passed along to the consumer, um, there's no way for pricing to come down or affordability to be recreated in that way. So I think, and and and to that point though, when you see higher prices, it means less volume, right? So it's just they go hand in hand. So you're gonna see one or the other. You're gonna see and I I wouldn't call it affordability. You would see price declines because there's too much inventory, which would be bad for profitability, or you're gonna see the pass-along in pricing, mute demand in 2020, uh, mute v output, you know, demand and supply in 2026. And I think that, as strange as it sounds, is actually the healthier option.

Jim Fitzpatrick:

Yeah. Yeah. You think we'll see manufacturers just trying to build lesser expensive, smaller vehicles to to uh accommodate the market out there? I mean, you know, I was on a showroom floor just the other day at a Ford, and they had three F-150s uh on the showroom floor. There wasn't one that was under$70,000 out of the three. Now, granted, these vehicles are all dressed up and they're you know more than the average ones out there, but I don't know where this is going. But in the event that the the manufacturers they've got to build cars, they can't all be at 60,000, 70,000, 50,000 for an average sale price. Do you think we'll see sedans coming back or we'll at least see smaller SUVs being built over the next couple of years to accommodate those younger families that are saying, hey, we we just can't afford an$800 car payment?

SPEAKER_00:

Yeah, no, and and and I think if you what you may see, and I've started to see some hints of this, would be using the electric vehicle platforms, right? And sort of moving those down market and making them affordable because you know it's the latest technology, you can you can attract new buyers, build a younger customer base with that price point. But you have to understand, though, that you would be doing that unprofitably.

Jim Fitzpatrick:

Yeah.

SPEAKER_00:

And you'd have to be you'd have to measure how many of those units you actually want to sell, how far away is that product from your actual profitable points in your portfolio, and how much are you willing to cannibalize? You know, I I mean, essentially the the question for the manufacturer becomes we either want a profitable customer or we or we don't want that customer.

Jim Fitzpatrick:

Right.

SPEAKER_00:

Right? So so you have to understand if we start attracting unprofitable customers, what do we do with them next? How long, how many purchases, how many years until we get them to the profitable part of our portfolio? Now, you know, you mentioned Ford is a good example. Their average transaction price is in the mid-50s. So let's assume their break-even customer is a$55,000 customer. Yeah. It doesn't do you a lot of good to sell a bunch of unprofitable$25,000 vehicles when that customer is still years and thousands of dollars away from buying something that actually makes them money. Right. And the and the trend in the last you know, decade or so has been we just don't want that customer anymore. We can't afford that customer because our costs keep going up and our break-even keeps going up from there, and and it just doesn't do us any good.

Jim Fitzpatrick:

That's right. That's right. Um it it is is it just a foregone conclusion that there's no way a manufacturer can build a$25,000,$30,000 vehicle and make a profit at that number? Is it just the costs are just too high?

SPEAKER_00:

Yeah, there's no way. And I would argue that even, you know, the most extreme example, China can't do it either. The only way they do it is subsidizing their manufacturers and their consumers to get vehicles at those prices. But when you look at, and and they own the supply chain as well. So when you look at the material costs, the labor costs, all the input costs, there's just no way uh that you're gonna do that in the US or Canada, maybe Mexico, but even there, you're you're always gonna be dealing with production cost inflation, and it's not going the other direction. So you're always going to have to be able to sell higher price vehicles to get above that break-even point.

Jim Fitzpatrick:

Right, right. We're seeing people deflect, well, and we have seen this from purchasing a new car to going to a late model use car. Obviously, the technology, the cars are are running or are built better. Um, a number of friends of mine have decided to do that. They're always new car buyers. They're now looking at two-year-old vehicles, three-year-old vehicles that are on the dealer's lots. And uh talk to me about that. Is that are we gonna continue to see that trend as well?

SPEAKER_00:

Yeah, but relatively speaking, those aren't affordable vehicles either, right? You know, now when you think of that's a good point, right? Right when you think when you think about the price of a new vehicle going up, you're really you're you're absorbing some of the depreciation and letting that work for you. But at the end of the day, I mean, average transaction price of a used vehicle is getting up towards thirty thousand dollars.

Jim Fitzpatrick:

Yeah, yeah. It's absolutely crazy. Absolutely crazy. What uh before I let you go, what trends or or indicators are you watching most closely uh that dealers or OEMs should be paying attention to right now? You've mentioned a couple of them, but what what are you looking at?

SPEAKER_00:

Yeah, I think I think we're gonna see in 2026 it's going to behoove the dealer base to really lean into that pivot, which is away from that dependence on new vehicle revenue and gross profit and into the used vehicle segment, which still isn't great, but I think it's starting to cycle around. And I think we saw that in Carmax as a results, right? CarMax had a real tough quarter, CEO is out, and I think that was more to do with the franchise base getting back into the used vehicle market than the overall pre-owned segment being bad. I think you're starting to see the franchise base leverage some of that revenue diversity and say, boy, the new vehicle market's getting getting tough. Where do we go? We look a little bit more into the used vehicle market, and obviously part service, you know, the fixed operations part of the business is going to make up a bigger percentage of the gross profit in 2026. And I think this will be the year for that transition. It's going to be very difficult for dealers and manufacturers to make money in the gross line. You know, just your your revenue versus your cost of goods is going to be very difficult. I think where it's going to happen for the dealer base is that revenue diversity and also on their operating expense lines, efficiencies in software or AI or whatever there is out there to actually be more efficient, be uh productivity to go up. That's where it's going to happen for the dealer base. It's not going to be, you know, this 2021-2022 where the consumer's paying over MSRP and prices are going up and margins are getting wider. It's going to be way more difficult to find profitability in 2026 than it has been in the past couple years.

Jim Fitzpatrick:

You mentioned CarMax, and we all saw what's what's happening there with a changeover management and not they're struggling a little bit. Um, what about Carvana? They've just purchased now their third dealership, the uh Chrysler Dodge Deep uh dealership. Um what's what's your take on Carvana and and its future? You think we'll see more acquisitions by them in the new car franchise business?

SPEAKER_00:

Yeah, I mean, being opportunistic, I you know, I would say arguably that of all the manufacturers, Stillantis is probably the most over-dealered. You know, so I would think that the opportunity was very uh, you know, contrarian, I guess, you know, buy low, sell high kind of idea, if that's possible down the road. But yeah, interesting. And and I think it speaks to the point that Carmax and Carvana are disadvantaged in the sense that they're only doing used vehicles. Right. Right. So when we talk about that pivot to other business units that can absorb some of the the deterioration in the new vehicle segment, they don't have that, right? You know, or in their case in the used vehicle segment. So I think that's a little bit of that revenue diversification that says, you know, hey, if the used vehicle market is difficult for us, we have no way out except to to go through it. Um and this gives them a little bit more diversity in in that sense that they can do that. And I and I would think that Carva Carmax is a kind of similar story. They do a little bit with their finance unit, but there's nowhere to go when your you know when your core business turns for the worse.

Jim Fitzpatrick:

Yeah, yeah, good point. Overall, how do you feel about 2026 and the year ahead at this point? Here we are in the middle of December for 2025. Do you think it's going to be a good year for us in the car business again?

SPEAKER_00:

Yeah, in the in the sense that I think that the stability of you know, a lack of uncertainty is a good thing, right? Where it's a sort of middle of the administration year, and there's uh, you know, unless we're seeing these wild tariffs or, you know, external sort of shocks, I think that lack of uncertainty is actually a good thing.

Jim Fitzpatrick:

Okay.

SPEAKER_00:

And dealers can get down to business, do what they do, see what they see in the new vehicle market and the pivots and and things like that, where they're sort of left alone to do what they do best. And I think 2026 will be that year, probably for the first time in a very long time, right? Yeah. Um, as uh we went through the pandemic, the the business was strange. Um, you know, pricing and margin were something that we had never seen before.

Jim Fitzpatrick:

That's right.

SPEAKER_00:

And then coming out of it, you you where is where do we find a bottom? And then you throw in this tariff and expiration of credits. And so, I mean, the industry always has great uncertainty, but I feel like 2026 can be a year where at least none of that uncertainty is visible quite yet. And you it can be for as much as it is possible, business as usual for the dealer base.

Jim Fitzpatrick:

Yeah, good point. Very good point. Kevin Tynan, Director of Research at the Presidio Group. Thank you so much for joining me on the show. Very much appreciate it. I know our dealer audience gets a lot out of your visit with us, so thanks so much.

SPEAKER_00:

Thank you, Jim.

unknown:

Thanks.

Jim Fitzpatrick:

Thanks for watching. Inside automotive with Jim Fitzpatrick.