With supply chain hiccups crippling the automotive industry’s ability to conduct business as normal, resulting in rolling production stalls and skyrocketing vehicle prices, manufacturers looked to be in serious trouble throughout the pandemic. But we learned that wasn’t to be the case by the summer. Automakers were posting “surprise profits” because people still needed cars. We also found out there’s been a growing appetite for expensive (see: highly profitable) models and the industry saved itself a bundle by not needing to pay for office space or line workers, as COVID restrictions kept everyone at home.
Having considered the above, most automakers are seriously considering how they can further leverage this new modality. German manufacturers have even said they’re not that interested in going back to the normal way of doing things — instead electing to intentionally limit volumes and focus on high-end models that will yield the greatest return on investment. But it’s not quite the curveball it seems, as some companies were already ditching the volume approach.
BMW and Daimler certainly were. Going down-market not only undermined their prestige as automakers but also didn’t turn out to be all that lucrative. It’s something they probably should have realized after watching how the strategy played out for Nissan on a longer timeline. But some lessons have to be learned first-hand and a few were undoubtedly reinforced after automakers started realizing they could still turn a profit selling fewer vehicles during a period of genuine economic strife.
Despite help wanted signs being placed almost everywhere, unemployment (which skyrocketed during the spring of 2020) is estimated to be hovering around 6 percent in the United States while the European Union is supposed to be closer to 7.5 percent. Meanwhile, the global semiconductor shortages and other supply chain shortfalls have made production difficult for the industry as a whole. And yet the automotive sector remains broadly profitable, even if there’s been an upsurge in restructuring and plenty of layoffs because this new methodology seems to be working fine for more than a few brands.
“We will consciously undersupply demand level[s],” Harald Wilhelm, Daimler’s chief financial officer told the Financial Times in a recent interview, “and at the same time we [will] shift gears towards the higher, the luxury end.”
This is said to continue until after the chip shortage has abated, with BMW following suit. CFO Nicolas Peter said the company had become aware that the current economic situation had given the industry a pricing advantage that it would like to retain after things stabilize. This is supposed to work in tandem with electrification strategies that will allow businesses to shrink the size of their production teams, further minimizing overhead as they price vehicles higher than anticipated.
“The pandemic has really opened everyone’s eyes — that a different paradigm is possible,” said Arndt Ellinghorst, an analyst at Bernstein. “Everyone loves it, including dealers.”
Discounts typically offered to customers at dealerships — usually around 15 per cent in mature markets — have been slashed, with some models being sold above sticker price.
A one percentage point decrease in the average discount would release $20bn in extra profits for car manufacturers, according to Ellinghorst, and discounts in Europe and the US have dropped by at least double that amount from their pre-pandemic peak.
BMW’s Peter said that the group’s US dealers, “always claimed . . . well we need the cars in the showroom, the customer is expecting to pop in on Saturday morning, 10am, and he wants to leave with everything done, fixed number plates on the car at 1pm latest.”
Now, however, they say “customers are ready to wait three to four months, and this is helping our pricing power,” he added. “Of course the waiting time must not be too long, but if you buy a premium car like a BMW, it’s an emotional decision . . . to have a short waiting time is something, I believe, which makes the customer experience even greater and better.”
Creating an artificial shortage of vehicles just to drive up prices is pretty gross, even when directed at a clientele that can easily afford it. But if this remains the norm among mainstream nameplates, I’m not sure I’ll be able to come up with a phrase that would accurately encapsulate the amount of disdain I’ll have for the industry. Businesses can operate as they wish, though that doesn’t absolve them from enacting predatory policies that have become unsettlingly fashionable. This kind of stuff also drives up inflation, which is something almost everyone is concerned about right now.
But automakers remain unconcerned as they raking in the dough, with FT noting that Mercedes achieved a 12.2 percent return on sales in its last reported quarter. That’s up from 8.4 percent in the same period in 2018, which doesn’t have the shadow of the pandemic influencing the relevant metrics. Meanwhile, BMW’s margin reached nearly 16 percent — up from 8.6 percent in 2018.
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Do these guys think they work for OPEC? This is why you don’t let CFO’s run companies – let’s just keep raising prices and increase profits! Let’s constrain inventory and make our customers wait! As long as the concept of “competition” doesn’t creep in – I imagine Lexus and Genesis are licking their chops reading this type of idiocy…
“Waiting makes the customer experience better” – yes, please tell that to the myriad of websites that Amazon put out of business thanks to Prime. The power of the BMW and Mercedes brands is incredible, as for these companies to be profitable with these idiots at the helm requires some sort of magic.
“let’s just keep raising prices and increase profits”
That’s the job description of a corporate leader. They don’t run charities.
The Laffer Curve in economics tells us that you can’t raise prices too high, or profits suffer because volume drops faster than your price increases.
Unless you’re dedicated to a certain market niche, every mfr should be trying to maximize profits. Lamborghini can’t be GM because they don’t try to sell in every market space, but they still need to manage cost and price to remain competitive in the market and viable to the shareholders.
However, as mfrs abandon the cheap and cheerful bottom end of the market, that vacuum will draw new entrants to make money there. But those companies probably won’t be building $80k pickups, either.
We’ll see just who ends up living in there bottom of the market, because it seems everyone’s answer to the “Affordable car” question is “Check out our used lot”.
Then the problem becomes “if the only ‘afforable’ cars to purchase are heavily optioned gizmo-laden rides with a high initial price point that are now out of warranty and will cost a mint to fix…”
In theory you can’t raise them too high but it can go much further then people think. It’s a weird moving point. raising prices when demand is high and you can’t keep up is a pretty sound economic principal but you don;t want to get caught with a competitor undercutting you with a similar quality product.
I’m sure they’re going by touch and feel. During the Japanese trade embargo of ’80s decade, Honda, Toyota, etc, loaded up their cars hard with “options” plus special editions, sporty cars left/right (good times) not to mention the debut of Lexus, Acura, etc.
17 band Graphic EQs? I’m not sure we needed them before or after.
The thing is that MB and BMW aren’t Amazon.
They sell luxury goods. A luxury manufacturer realizing that they are better off sticking to a premium experience, isn’t actually a bad thing.
This is more like DeBeers figuring out that just cause you can mine a bunch of diamonds doesn’t mean you need to sell all of em. The people who can afford it will, and the ones who can’t were never your customers.
Debeers – the ethical diamond people. lol.
They might pay their diamond warehouse staff more than Amazon does, perhaps. I don’t really know. They do have huge warehouses full of diamonds, in order to intentionally keep supplies down, and prices up.
Debeers monopoly has fallen apart somewhat when a Canadian geologist “discovered” a prime clue to finding diamonds. DeBeers had managed to keep that technical fact somewhat to themselves as well as hording diamonds. The Canadian arctic has been a big diamond producer.
Funny you should write this, because just today I was wondering if the current situation could become permanent.
Unfortunately, it hastens (but did not initiate) the move toward toward high-end vehicles, longer finance terms, more bling, and therefore a smaller new car market. These trends have been going on for 20 years, but really picked up speed since 2019.
If I can make $1 billion net income making cars regardless of volume, it’s a lot more fun to build fewer of them because I don’t have to work as hard.
“and at the same time we [will] shift gears towards the higher, the luxury end”
These jokers introduced the A-class and 2-Series GranCoupe to the US market fairly recently. I have a feeling this is spin more than an actual strategy shift.
I’m mixed on this. The Germans were at their best when they weren’t chasing volume so maybe this will get us back to them just building great driving automobiles.
It’s one thing to charge everything the traffic will bear. It’s another to limit production in hopes of triggering a bidding war among customers. Jack up prices too far, without offering fair value in return, and hungrier competition will undercut you with similar (or better) products at lower cost.
This is why I don’t care if dealers add surcharges to MSRP, because only fools will pay it.
You can always buy a different brand.
You are right, Kendahl. Now would be the perfect time for Suzuki to return to the US market, as long as they have enough vehicles available. Almost no one else is selling economy cars or mid-sized sedans, and Suzuki has small SUVs ready to go. Gasoline is approaching five bucks a gallon with the Southeast pinch in the supply chain, so the economy car market should pick up a bit. Price ’em fairly with no additional dealer mark-up, and watch the Jimnys, Swifts, Celerios, Ignuses, Balenos, S-Crosses and Vitaras fly off the lot.
I bought a used Audi A3 and loved it. I would of liked to buy a new one when the time came, but I just can’t see paying that much money. So maybe they are right, forget the poor folk and milk the rich.
Us eats (and drives) the scraps from their tables. Arr.
What spec is your A3?
I don’t think this will be a popular opinion but here goes. If the domestic and European market sell fewer, more expensive cars,guess who will swoop in. The Chinese automakers. They have the battery capacity and it seems, the chip capacity to come in at the bottom of the market. I’m only thinking of electric cars at this point, but even Sandy Munro is trying to warn the current automakers of the serious threat posed by those of China. CATL and BYD have capacity to build the safer but heavier LFP batteries. If EV sales take off and I think they will, the traditional ICE manufacturers are in deep trouble. Only Tesla has the capacity to build the batteries needed and they have an agreement with CATL for the LFP batteries. Plus the Chinese government has always encouraged the training of engineers unlike our government. I believe they have far more engineers that the U.S. I hope I am wrong. We will soon find out.
This is exactly what has happened in Australia. First Ford, Toyota, and Holden cease manufacturing revert to being importers only, or in the case of Holden stabbed in the back by GM, disappear entirely. Then, the lower marques up their game and pricing and become mainstream, Hyundai & Kia start knocking on Toyota’s door. Now the Chinese HAVAL, Great Wall, LDV, MG (SAIC) are now established, with more bang for the buck than even KIA can match. It would be interesting to see if a Chinese brand can make it in the USA, Volvo excepted.
Popular or not, I think you’re right!
It’ll be a cold day in Hell when I buy a Chinese-manufactured automobile. Anyone paying any attention to geopolitics knows how communist China rolls. The least we can do as citizens of Western democracies that are their adversaries is to use our consumer power and DISENGAGE commercially from communist China whenever we can. There are plenty of other auto makers in the big wide world to chose from.
Here in Canada, Honda started importing Fits from communist China in the early 2010s, switching from Japanese-made Fits initially sold here until their Mexican plant was up and running. (I own a 2010 Fit made in Japan and it’s been trouble-free.) There were many anecdotal accounts of problems dealers had with these vehicles from China, like having to purge fuel systems of just-delivered Chinese-made vehicles due to bad gas. Frankly, I wouldn’t even trust the metallurgy in ANY Chinese-made vehicles – their mantra seems to be “maximize profits and cut any corner you can to do it, customers be damned”, based on the quality of products they already bury us with. And no, this is NOT a racist screed against “The Chinese”. I’m referring to the mainland communists. I would gladly buy a vehicle from Taiwan if they sold one here. The Taiwanese have demonstrated an entirely different production and marketing ethic than the communists, gaining a well-earned reputation for producing quality products. Unfortunately, that boat’s about to sail, since communist China has clearly stated they intend to “retake” Taiwan, by force if necessary (as if the communists ever “had” the island of Formosa/Taiwan to begin with) within the next few years (by 2025?) and there’s absolutely nothing the West can do to stop them, short of starting WW III.
All to say, Hell no, I’ll NEVER buy a communist Chinese automobile.
Except for the communist part, my dad said the same thing about Japanese products in the ‘60s. Yet here we are. (Typed on my China-made iPhone)
US lemon laws, safety and emissions are too tough for Chinese automakers to consider the US a realistic market. Australia/Africa are way different here.
I’ll let you know how the HAVAL H9 copes with an extended stay in the family. At present, our main gripes are (1) lack of dealerships (2) lack of customer service, seems most Great Wall/HAVAL dealers are ex Chrysler/Dodge/Fiat dealers and they have carried their bad habits over! (3) Speed of spares delivery. (4) lack of some features that are taken for granted, i.e. satnav.
In their favour is the fact that what I bought for AUS$45,000 drive away I couldn’t buy for less than AUS$65,000 from the established marques, KIA, Hyundai & Toyota $20,000 buys a lot of tolerance!
Americans would love the option and there’s nothing preventing them from importing to the US or partly built like the Mercedes Sprinter. We’ll even pay more for poor reliability and expensive repairs!
You are letting propaganda and politics fog up your mind.It is just a matter of time, like Australia,Canada will have no auto industry and you will be seeing red and blame Chinese commies.
You keep saying “communist China” as if China hasn’t been a rabidly capitalist country for 30 years.
“But we learned that wasn’t to be the case by the summer. Automakers were posting “surprise profits” because people still needed cars. We also found out there’s been a growing apatite for expensive (see: highly profitable) models and the industry saved itself a bundle by not needing to pay for office space or line workers, as COVID restrictions kept everyone at home.”
I take it that is a typo!
“apatite, any member of a series of phosphate minerals, the world’s major source of phosphorus, found as variously coloured glassy crystals, masses, or nodules. … The series includes fluorapatite (the most important mineral commercially), chlorapatite, hydroxylapatite, and carbonate-apatite.”
In 2013 I gladly paid full boat $30k for my MINI Cooper S ordered from the factory. Everything I wanted and nothing I didi not want. Still love the car. The problem is that most people can not wait 6 weeks for their car to arrive.
My next car, I would gladly pay full boat for less safety nannies and less tracking. No connectivity or over the air updates.
I did the same in the summer of 2007 for an Infiniti G37S coupe and took delivery in mid November. I still have the car and like it well enough that it’s hard to find a replacement enough better to justify trading.
I agree, if the MB and BMW vacate the non premium end of the market (and they have an absolute right to do so, nobody asked Picasso to paint fences) then others will move in. Given that small cars are HARD I’m sure the return on engineering bucks is greater at the higher end of the market.
If MB and BMW shareholders disagree with this approach then they have the means to express an opinion.
When Sergio Marchionne was still among us he was pushing heavy for a merger because he felt there was a chronic overcapacity in the auto market. IIRC around 20%. We’d probably grow into that capacity but building cars at a loss in the interim isn’t wise.
I believe German car makers, especially Mercedes and BMW have had an epiphany of sorts. They can blame the pandemic and shortages to shutdown unprofitable lines. They can do this without much wrath from the trade unions.
They will focus on what they do best which is higher end cars. Ford chose to focus on pickups and SUV’S. It isn’t much different a strategy.
The waiting is the hardest part.
The Chinese are going to seize this opportunity to enter the market and undercut the competition. In the short run reducing supply will increase profit but long term continually increasing prices while decreasing supply will eventually come back to bite most of the manufacturers. Mercedes and BMW are more likely to profit from reduced supply and increased prices because they are luxury brands. There are also union contracts that make it harder to reduce production and close plants. I think many of us can wait a couple of weeks and maybe a few months for a new vehicle but if the plan is to wait 4 months or more then most will not wait. I can wait longer than many for my new Maverick because I don’t really need it now but if you desperately need a new vehicle or as some you are more an impulsive buyer then you will not wait. There is also the problem that if a new vehicle is harder and more expensive to get people might just hold on to their vehicles longer.
If the manufacturers leave a gap in the lower priced vehicles someone else will fill it and that someone else will be the Chinese or another developing Asian country like Vietnam.
“I’m not sure I’ll be able to come up with a phrase that would accurately encapsulate the amount of disdain I’ll have for the industry.” – how about Soul-less Scumbag [email protected]*ckers? Oh wait we already call them that
I honestly don’t know who can stomach the exterior “design” on a BMW or Mercedes. Both extremely ugly. Sadly the rich have no style and just buy the most expensive one. Shouldn’t hurt them sales wise
I like the EQS, but I can’t stand the tacked on beaver faces on BMWs. Lyriq so far out uglies everyone. Take a look at that tacky lighted illuminated/animated front end. It’s hideousness taking to an extreme level.
I haven’t seen any merkins on the new BMWs…. yet.
I’m no MBA, but I think this is a short term thing. For now, it makes sense to sell fewer, more expensive products. But that’s short term only. Automaking is HUGELY capital-intensive, and all of these companies have facilities and equipment that aren’t being used. That costs money.
As soon as the chip shortage works itself out, I think we’ll see a return to the older model and a desire to build in greater volumes.
“German manufacturers have even said they’re not that interested in going back to the normal way of doing things — instead electing to intentionally limit volumes and focus on high-end models that will yield the greatest return on investment.”
Good thing they didn’t waste time trying to compete in every segment with substandard products that sold on the badge and nothing else.
A year from now when these dildo geniuses are still limting supply the luxury buyer will go genesis or lexus, or one of their competitors be it BMW or Audi will sneak up and grab market share. If ferrai had not been such Aholes, the Lambo Aston and Mclalen would not have the space they do.
its one thing getting out of selling crappy a A clases which they should never have done(MBA geniuses), its another pissing off and loosing customers of the rest.
Not every premium buyer is a moronic brand hound, in fact they’re mostly smart and logical. the people who have to have a benz to show others are the ones on serious finance, hardley a brand builder stable customer.
lately I’ve been buying Alfa instead of BMW, apart from being a far better car, its a far better deal. For my wife, once the benz lease is up, well genesis looks good.
Its not about the total cost, no on wants to be played for a sucka, and the Germans think thtas the game now. These are the same geniuses who at MBZ cut quality in the 90’s, and went downmarket in the 2ks, so limiting supply is the new genius plan then? It took MB 10 years to rebuild their brand after destroying quality in the 90s. MBA’s should not run car companies. A MBA/accountant can be CFO’s and COO’s, but never product or sales.
You just know 5 years from now when competitors have permenantly captured the clients they refused to serve, the next CEO will be declaring the last plan a mistake and the new plan is…
Fact in the elctric car era, the premium brands should move heaven and earth to hang on to their existing customers, because the points of differentiation will be far more muted and new players can emerge with great cachet, look at tesla, or lucid etc. Frankly i can see cadillac creaming the germans in elctric cars, at least theyre really trying.
The reality is you dont want to oversupply or undersupply, its called balanced supply with the product fetching a price based on its merits, I guess theye dont teach that at harvard.
I feel like this is a dealer squeeze so they can shutter a bunch of stores that depend on sales volume and back-end profits and more easily implement a direct-sales model down the road. Anyone else have this same brand of tin hat?
Interesting thought, though who will be performing the warranty work and handling trades/turn ins… whatever dealers survive? If so, how are they going to feel competing directly with the factory in sales? Or perhaps a new factory owned type of service company comes up similar to the concept of an distribution center?
Isn’t this how the Chinese ended up controlling most of the manufacturing other countries rely on?
Yes but China is also now the largest market for German brands so they might not care. German automakers are also pushing for subscription models and putting vehicle vehicle features behind digital paywalls a litter harder than most Japanese or American firms.
Every single trend observed in this article is temporary and will evaporate once companies seek to expand their market share.
No capitalist organization will be satisfied with stagnant or slow growth.
All it takes is ONE manufacturer to lower their prices and increase supply – the rest will follow or die.
Interesting. Perhaps this explains why the first electric BMW SUV is $82,000-odd. I was really hoping to buy a X3 SUV at a price I could more or less afford, so a bit of a disappointment. Guess it means I need an Audi E-Tron instead, but I don’t think it’s as good.
“…focus on high-end models that will yield the greatest return on investment.”
Just like Detroit didn’t want to focus on competing with those cheap Japanese imports…..
The Germany which mattered, was killed by ECB machinations around 2009. Now it’s increasingly little different from any of the other financialized dystopias cluttering up the once-was West. Replete with all the same pathologies and dysfunctions which killed the Anglo countries post Nixon’s 1971 economic suicide: Rising cost for houses obviously decaying as they sit there out in the weather. Childish belief that “finance” and “idiocy” aren’t straight up synonyms. And all the rest. What two World Wars of allied carpet bombing couldn’t accomplish, the ECB did at the push of a few buttons.
I guess it makes some sense. After all, all of those 2010-14 CTS-V Sport Wagons that GM had to discount to the price of a loaded Accord when they were new now can sell for $85k plus with 50,000+ miles on them on BaT. A perception of scarcity can really drive up the price. So you can build fewer cars and make the same or more money. Less overhead, employees, materials, etc.
If you time it right. But timing will be the issue.
I’d like to think the strategy will fail due to greed, because someone will break-ranks and oversupply, but if not and competition is stifled by manufacturers colluding to maintain higher prices that’s called a cartel and more car-manufacturer executives will end up in prison.
Greed and arrogance is a bad recepie for future success. What are they going to do next? Share buybacks,focus on the stock market. Do they want to end up like Boeing who can no longer make any decent plane.
“Greed and arrogance is a bad recipe for future success. What are they going to do next? Share buybacks, focus on the stock market. Do they want to end up like Boeing who can no longer make any decent plane.”
They are already there. Their business is to maximize profits while reducing costs at the expense of quality. This has been GMs and Chryslers model for years and Ford is now following the same model. BMW and Mercedes quality has been going downhill for years. Alan Mulally was the CEO of both Boeing then Ford.
This is also a cultural difference. We’ve been raised on GET A NEW CAR TODAY, take it off the lot, easy payments.
Europe is save, buy to order, and pay most or all up front. A Euro car store is a nice showroom in a trendy part of town, with service across town in the industrial area. There is no huge Sales Bank of stock.
This is easier for the OE maker, I think, in that you don’t have to guess what folks want, with the problems of guessing wrong…too much of one, not enough of another. It’s better for the buyer in a lot of ways, they can offer colors and options that the sales manager might not want, like anything other than grey, a sports package, or anything that might make a buyer decline…so it’s lot vanilla at all times for us.
The only problem is that as Americans, we are conditioned not to wait for anything…trust me, if you can, waiting on YOUR build is well worth it…and you’ll never see yourself coming and going.
Agree about the cultural differences. My parents ordered new cars in the past but it was only a 4 to 6 week wait. I understand about the chip shortage and other shortages but long term ordering a new vehicle will not be viable for most people if the wait is 4 or more months and if it is a year or more then forget it. I am willing to wait for my new Maverick up to a year because of the product and I have a good solid truck for now but the manufacturers will have to get better at their just in time production and shorten the waiting period for ordering new vehicles especially if the customer is going to pay full MSRP. If and when we get back to normal the waiting period for an ordered new vehicle should average no more than 4 weeks otherwise few will want to wait.
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