Understanding Banked Inventory

 What is "Banked" Inventory?

The phenomenon of automakers "banking" new vehicle inventory is an intriguing aspect of the automotive industry that has significant implications for manufacturers, dealers, and consumers. This practice, where unsold vehicles are stored in massive lots, often stems from a mix of corporate strategies, production obligations, and market dynamics. I will dig into why this happens, its historical context, and potential future implications in this article. 

"Banked" inventory refers to new vehicles produced by automakers that are not sold to dealerships or consumers. These vehicles are often stored in large parking lots, sometimes for extended periods. The main reasons behind this practice include:

• Production Commitments: Automakers have long-term contracts with suppliers, especially Tier 1 and Tier 2 suppliers, which require them to continue production even when demand fluctuates. This ensures a steady flow of components and helps suppliers manage their production schedules.

• Market Misalignment: Sometimes, automakers misjudge market demand. They may anticipate higher sales based on optimistic forecasts or previous trends, leading to overproduction.

• Plain Old Corporate Mismanagement: After record highs, there are certain expectations for growth and volume by shareholders and upper-level management. As a result, some bad decisions are made. This is nothing new—it's the same logic and reasoning that caused OEMs to raise prices so drastically during the highs. Stellantis, which is in the deepest water now, also had the highest price increases. Is this a coincidence or malfeasance? 

Historical Context

This phenomenon has occurred multiple times throughout automotive history, often during periods of economic downturns or market shifts. For instance, in the early 2000s, many manufacturers found themselves with excess inventory due to overproduction and slowing sales. During these times, manufacturers resorted to heavy incentives and discounts to clear the backlog.

In the early 2020s, the COVID-19 pandemic disrupted supply chains and caused a severe shortage of semiconductor chips, leading to a significant drop in vehicle production. However, as supply chains began to recover, production ramped up quickly, sometimes outpacing the recovery in demand, leading to an increase in banked inventory again​ (CarEdge)​​ (Cox Automotive Inc.)​.

Current Scenario and Predictions

As of mid-2024, new vehicle inventory levels are starting to build up again. For instance, brands like Stellantis have seen substantial inventory growth. This situation is exacerbated by high average listing prices, which continue to rise, making it more challenging for dealers to move inventory quickly​ (Cox Automotive Inc.)​​ (Autoblog)​.

Future Implications

Looking forward, several factors suggest that banked inventory might become more prevalent:

• Economic Uncertainty: With fluctuating interest rates and potential economic slowdowns, consumer demand may not keep pace with production, leading to higher inventory levels.

• EV Transition: The automotive industry’s shift towards electric vehicles (EVs) is another factor. EV production is increasing rapidly, but consumer adoption varies widely by region, potentially leading to mismatches in supply and demand.

• Supply Chain Resilience: Automakers are working to make supply chains more resilient, but this often involves maintaining higher inventory levels of finished vehicles to buffer against future disruptions.

Why This Matters

For Dealers

Understanding the dynamics of banked inventory is crucial. It affects everything from the types of vehicles available for sale to the level of incentives manufacturers might offer. Dealers can leverage this knowledge to negotiate better terms, manage their own inventories more effectively, and make strategic decisions about which vehicles to stock.

For Consumers

This situation represents a significant potential for relief, especially for those who are currently underwater in vehicle loans taken during the pandemic highs. During that time, consumers often paid premiums over retail due to market conditions and shortages, driven by a frenzy of fear of missing out (FOMO). These purchases often came with low-interest rates, but now, with high-interest rates and a depressed market, consumers find themselves in a bind.

As inventory levels rise, particularly with automakers like Stellantis, desperate maneuvers are likely to follow. These could include:

• Deep Rebates: To clear excess inventory, manufacturers may offer substantial discounts, making vehicles more affordable.

• Subvented Rates: Manufacturers might provide lower financing rates to attract buyers.

• Negative Equity Rollover: Consumers could have opportunities to roll over negative equity at favorable terms, reducing the financial burden of their existing loans.

These measures can help alleviate consumer pressure, making it an excellent time to explore new vehicle purchases or refinancing options. 

Conclusion

Banking new vehicle inventory is a complex part of the automotive industry's operational landscape and history. By understanding the reasons behind it and the potential future trends, industry professionals and consumers alike can better navigate the challenges and opportunities it presents.