Navigating the new road in automotive retailing

The automotive retail sector faces several challenges that threaten traditional operations and dealer networks. Rising tariffs present a major challenge for the automotive industry by driving up the prices of imported vehicles and parts. As these tariffs continue to change, they inject new volatility and uncertainty into the sector. Consequently, OEMs are rethinking their supplier relationships and expanding domestic production capabilities to buffer against these unpredictable tariff fluctuations.

OEMs appear to have taken a measured response to tariffs thus far. As of August 2025, the average new vehicle MSRP of $51,099 was only 3.3 percent higher, and incentive spending then was unchanged, at 7.2 percent of average transaction price over the same period. However, more recent reports suggest that some automakers are actively adjusting incentives to respond to ongoing tariff impacts⁵. It remains to be seen how much OEMs will need to adjust pricing once the full cost of tariffs begins to affect day-to-day operations and component costs.³

Another major challenge is the evolving electric vehicle (EV) market. The auto industry faces significant uncertainty regarding long-term consumer response to the expiration of EV subsidies. According to the JD Power E-Vision Intelligence Report (October 2025)⁴, EV sales in October plummeted by 53 percent, now representing only 6 percent of total monthly new vehicle sales. It remains to be seen whether this marks a lasting shift in consumer behavior or a temporary rebound from September’s spike.

Looking ahead, the market faces additional threats: in 2026, 243,000 franchise EV leases will end—more than three times the volume of lease returns in 2025—forcing a large cohort of current EV owners to make new purchase decisions. According to the same JD Power report, while a majority of these owners say they will definitely (79 percent) or probably (15 percent) consider an EV for their next vehicle, only time will tell how this will translate into actual sales. On a more optimistic note, EV consideration among active new-vehicle shoppers reached its second-highest level of the year in October, with 24.2 percent saying they are very likely to consider buying or leasing an EV in the next 12 months, up from 21.6 percent in September. The top reason for choosing an EV remains expected lower running costs, and JD Power reports that 86 percent of EV owners find these expectations are met. While these changes impact all EVs, the percentage shift in price may be more significant for lower-priced models compared to higher-priced. Understanding these relative impacts helps OEMs strategize effectively for different market segments.

Moving to challenges at the dealer level, used car inventories in 2025 are below the five-year historical averages (excluding 2021, which is viewed as an outlier due to the pandemic-induced new car shortages).⁶ This shortage is being driven by a surge in consumers looking to avoid tariff-induced price increases on new models. Although used cars remain profitable, their scarcity presents challenges for dealers, who now must effectively manage limited stock while navigating competitive pricing models.

Dealers face a potentially enduring challenge due to the issue of vehicle affordability. There are growing concerns that high vehicle prices could reduce sales, burdening dealers with expensive inventory that risks going unsold. This could prompt OEMs to compromise by offering incentives to help move inventory, which would help dealers. However, dealers may also need to adapt by improving profit generation from finance and insurance (F&I) products like maintenance insurance and service add-ons like rustproofing. Furthermore, optimizing fixed ops profitability could become a priority as margins for vehicle sales continue to diminish.

The higher financing rates mentioned earlier in this paper can also affect consumer purchasing decisions and prompt dealers to explore new financing solutions, such as longer-term leases, and adaptive strategies that can ease the burden on consumers while sustaining sales volumes.