Cars will remain expensive for one simple reason: dealers and automakers love them

Cars will remain expensive for one simple reason: dealers and automakers love them

New Jeeps at a New York City auto show.Spencer Platt / Getty Images

  • New cars became more expensive during the pandemic due to lower stocks at dealers.

  • Even as supply chains recover, prices for new cars can remain high forever.

  • Car companies and their dealers are enjoying big profits and want to keep the supply of cars low.

If you’ve been waiting to buy a new car until the next “memorable December” sale, forget about it: Big discounts from car dealers may never come back.

New cars have become more expensive during the pandemic thanks to a shortage of computer chips that have reduced the supply of cars and prompted automakers to focus on building more expensive models. But there’s another reason entirely for car shoppers to expect stocks to stay tight and prices stubbornly high in the long run: car companies and dealers love them.

They’re used to the solid pricing power and fatty profit margins that a supply crunch gave them and they have little incentive to get back to the way things were before the pandemic, when lots of dealerships were flushing and manufacturers had to offer deep discounts to move cars to customers.

“The industry is going to have to go a long way back to the oversupply model, to get back to where prices, bargaining and incentives are where they were before, and there’s no need to do that,” said Kevin Tynan, senior auto analyst at Bloomberg Intelligence, for Insider.

Automakers could build up their old production volumes and lose control of prices. But many have made it clear that they are intent on maintaining this new paradigm, or at least something close to it.

In an interview with Insider, Volkswagen of America CEO Scott Keough said he “definitely” sees a significant reduction in supply as the “new normal”. Last year, Ford CEO Jim Farley said the company was “wasting money on stimulus” and was aiming to keep stocks well below pre-pandemic levels.

At the beginning of May, US dealers had 1.13 million new vehicles on hand, 2.2 million fewer than at the same time in 2020, according to Cox Automotive. As a result, the amount that merchants can charge has gone up.

In April, the average new car sold for $45,736, which is $685 above the manufacturer’s suggested retail price, according to Edmunds. Average spending three years ago was about $37,000, including a $2,500 MSRP rebate. The heights are particularly mind-boggling for coveted models like the Jeep Wrangler SUV, which now commands nearly $9,000 above the label, according to auto researcher iSeeCars.

It’s clear to see why automakers like the way things go; They are making more money even amid declining sales. In 2021, GM’s profit jumped 47% to $14.3 billion despite selling 500,000 fewer cars than the previous year.

The dealers have also done very well and want the party to continue. Mike Manley, CEO of AutoNation, the nation’s largest auto dealer, told Bloomberg that the pandemic has hit the “reset button” for auto sales, adding that cars will sell for an MSRP of going forward and the big discounts are over.

Pete DeLongchamp, senior vice president at Group 1 Automotive, a large group of dealers, told Insider he hopes dwindling stocks will return to a “balance” that’s easier on buyers but maintains the company’s strong margins.

These bargaining shoes do not close yet.

Historically, automakers have missed opportunities to switch to a slimmer, more profitable way of doing business, according to Tyson Gomini, vice president of data and analytics at JD Power. Keeping prices high will require discipline everywhere, he said, and if some automakers start flooding the market with cheaper cars, the entire house of cards could collapse.

“Despite a lot of advertising in the past and the industry has had more profitable times when volumes are a little lower … eventually the pricing system breaks down and we kind of go back to the old ways,” Jomini said.

Read the original article on Business Insider

2022-05-30 11:15:00

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