The US auto industry is changing its business model to produce fewer vehicles at higher prices, effectively embracing the supply chain issues that sparked inflation in the global economy at the start of the coronavirus pandemic.
The result is that consumers are shut out of the new car market as automakers seek higher profit margins on limited supplies. The average price of a new car reached a record high in November of $48,681.
‘Cause there’s been this change, people who can buy [new] the cars are much richer now than before,” Cox Automotive analyst Michelle Krebs said in an interview. The less affluent people have withdrawn from the market. They either fell into the used car market or disappeared from the market altogether.
From 2017 until the pandemic, the U.S. auto industry was manufacturing about 11 million vehicles a year, according to data from the St. Louis Federal Reserve. Since the pandemic, automakers have produced an average of less than 10 million vehicles per year, for a reduction in production of more than a million cars and trucks – or up to 20% in some years – measured by a average of the Fed’s seasonally adjusted annual rate. .of production.
Production was on track to average 10.6 million vehicles in the third quarter of 2022, but has since been revised down to end at 10.2 million vehicles for the full year.
Automakers say this is due to a shortage of chips used in computers that help modern vehicles run. But those shortages have improved since at least the middle of last year, according to Wall Street analysts, while production has continued to slow.
Meanwhile, new car prices have soared, hitting record highs last summer and again in the fall. New car prices have risen 20% since the start of the pandemic, far outpacing core inflation, which rose just 12% over the same period, according to the Labor Department.
These prices have translated into high profits for automakers during the pandemic. GM reported earnings of more than $10 billion in 2021 and forecast a similar figure for 2022, as Ford posted its best operating profit that year since 2016.
“The U.S. market, like other regions, has been characterized by strong pricing power among original equipment manufacturers,” wrote Jose Asumendi, head of European automotive research at JP Morgan, in a note to investors last summer. “That was supported by low inventory levels.”
These low inventory levels have also been a boon to dealers over the past year. Over the summer, a survey by Cox Automotive found that while only 25% of dealers reported an increase in inventory, more than 80% reported an increase in profits.
Automakers have said the shift to lower output and higher margins is here to stay.
“Overall, we will remain disciplined. I think there’s an opportunity to generate strong margins,” GM CEO Mary Barra said during her company’s third-quarter earnings call last fall, referring to production levels. .
“As we work through this reduced inventory and these opportunities that we see today, we are working on how we will make this a normal part of our business as we move forward,” said Ford Chief Financial Officer John Lawler, in 2021.
He echoed Ford CEO Jim Farley who said: “I want to make it extremely clear to everyone, we’re going to be running our business with a lower daily supply than we’ve had in the recent past. because it’s good for our business.”
While economists say automakers are unlikely to have colluded to produce these new low-volume, high-margin market conditions, they note how supportive they are for the auto industry while hurting middle market consumers.
“It would have been a long drive for them to coordinate the kind of production cuts we’ve seen. The pandemic has forcefully pushed them into a different balance, which they seem to be enjoying at the moment, and there’s no obvious mechanism for them to come out,” Daniil Manaenkov, an economist at the University of Michigan, said in an interview.
“Without the pandemic and without a significant supply and demand disruption, I don’t think we would have seen this. It’s possible that all manufacturers collectively would have liked to be in this low-volume, high-margin model, but that wasn’t a possible equilibrium outcome unless they agreed among themselves,” Manaenkov said. .
The dynamic of unilaterally cutting production to raise prices is familiar from how OPEC works in the crude oil market, but it’s not supposed to happen in a free market with real competition.
Nonetheless, none of the major automakers appear to be embarking on a high-volume, low-cost strategy aimed at capturing market share and driving down prices for consumers.
“It’s similar to OPEC in some ways and different in others,” Manaenkov added. It’s similar in how they cut together – this production is low across the board. It’s different in the way OPEC does it voluntarily, and the manufacturers have been kind of forced into that balance by outside factors.
The case of higher margins driving price increases in the auto industry raises broader questions about whether inflation during the pandemic was caused more by disrupted supply and high demand, as conventional wisdom dictates. , or by the private sector seizing the opportunity to simply boost its .line fund.
A 2021 report from the United Nations Conference on Trade and Development found that “demand pressures are outpacing supply responses in the first half of 2021 [created] bottlenecks, including in certain key markets, such as automotive.
But he also noted that “between 2020 and 2022, about 54% of the average price increase in the U.S. non-financial sector was attributable to higher profit margins, compared to just 11% over the 40 years. previous”.
Margins were a major factor. In this context, competition policy and price controls have a key role to play,” the report continues.
0 Comments