Mustang Mach-E GT Performance Edition. Ford
Car companies have fewer vehicles to sell so they are making more money on the ones that do.
Bloomberg was told by a consultant that US automakers receive up to $10,000 more for trucks and SUVs.
Ford's CEO stated that the price power was "breathtaking", and is currently changing his production strategy.
The relationship between prices, supply, and demand is the most fundamental tenet in economics. It's likely that there will be fewer of the product people are looking for, and it will become more expensive.
However, competition in the marketplace encourages suppliers and buyers to increase supply and lower their prices to gain a greater share of the market.
Ford, General Motors and Stellantis' predecessors have played this game for decades. They made as many cars as possible and cut prices to attract customers.
All of that was thrown out the window by this year's shortage in semiconductor chips.
Automakers had to reduce the number of vehicles they could make with the chip they did have because there were real limitations on what this component was available. They chose to prioritize the models with the highest demand and the highest profits.
The reduction in supply of all brands also meant that dealers could sell the vehicle without having to haggle over its sticker price. Automakers have benefited from this.
AlixPartners consultant Mark Wakefield in Detroit told Bloomberg that US car manufacturers are now making up to $3,000 per car more than the average and up to $10,000 more for certain pickups or SUVs.
Morning Brew was told by an Ohio dealer that he recently closed a deal in 52 mins. This is compared to the four hour time it would take before the chip shortage.
The dealer stated that the surprising thing about these trucks is their average selling price of close to $100,000. Consumer demand is still high."
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Ford's CEO Jim Farley stated in June that this pricing power is "breathtaking". He also indicated that Ford would not be going back to the days when it had to guess how many cars it should make and mark them down until they sell. Mary Barra, GM CEO, stated that customer orders would play a greater role in her company’s production strategy.
Insider was told by Kevin Tynan, a Bloomberg auto analyst, that the industry has tried to end the incentives and discounting model since the 1970s.
He said that the shortages are not something they hate. "Moving forward, you're likely to get an industry that's more like what we see now, where supply and incentives are a bit more controlled."
Wakefield stated that the automakers will be tied up in an economic version of "The Prisoner's Dilemma" and forced to cooperate to ensure that inventory remains low and prices remain high after the chip-supply issues are solved.
Once this happens, the first company that sacrifices profits in order to gain market share will likely be followed by others, and they would be back to where they were before the pandemic. As a reminder, the federal law forbids companies from coordinating their strategies.
Tynan believed that the improved margins enjoyed by automakers this year would convince them to abandon the old model.
This may be good news to automakers and investors but it also means that consumers will continue to see fewer options and higher prices and a tighter used vehicle market.
Business Insider has the original article.
