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Dec 08, 2023

The sneaky way automakers are keeping car prices high

Throughout the height of COVID, carmakers got used to getting high prices. Now,

Throughout the height of COVID, carmakers got used to getting high prices.

Now, that's not as much the case as shoppers become more price-sensitive.

But some carmakers might limit their inventory to keep supply down and prices up.

Car companies have a new way of keeping prices up: limiting options on the dealer lot.

Since recovering from COVID-related plant shutdowns and an extended shortage of chips required for today's tech-laden cars, companies like Ford, General Motors, and Stellantis have finally seen more cars head to dealer lots.

Each of the companies had 63, 47, and 69 days worth of vehicle inventory on dealership lots, respectively, at the end of March, according to Deutsche Bank analysts, substantially higher than the overall industry's average of 35 days supply.

But now, carmakers want to keep options slim for shoppers and are racing to counteract that inventory buildup in order to keep profits flowing.

"Some companies are looking to proactively manage inventory levels with planned downtime, as seen with GM's Fort Wayne and Silao production plants," Deutsche Bank analysts wrote in an April 27 note.

That's especially abnormal, particularly for the US car industry. Before, automakers here prioritized volume and market share — but they're swapping both for profits.

Throughout the height of the pandemic, car companies and auto dealers couldn't get their hands on enough cars due to supply constraints like the chip shortage.

But they got used to selling vehicles for high prices with minimal inventory on their lots.

"The COVID experience showed both automakers and dealers the upsides related to higher margins and reduced sales," Karl Brauer, executive analyst at iSeeCars.com, told Insider. "I suspect there's a realization that having fewer, well-moneyed buyers has its advantages — at least in the near term."

Now, while more inventory hits the ground as the industry recovers from the chip crisis and consumer demand wanes amid macroeconomic concerns, intentionally shutting down factories for short periods of time could be a way to limit how many vehicles are sitting (and thus limit the real estate that dealers have to pay for). It could also send the message that buyers' options are somewhat limited.

"We've also seen the cancellation of many base trims, and I'm seeing less effort put into the annual upgrades a given model receives to continue to draw in new buyers," Brauer said. "I think the attitude is that demand is strong enough to not sell lower margin base models, and to not spend as much improving the cars year-over-year. All of this saves the automakers money while simultaneously increasing margins."

It's true: Even though stock levels have increased notably in recent months, the average transaction price for new cars has remained relatively high, hitting $48,008 in March, according to Kelley Blue Book.

Carmakers ultimately want to prioritize profits and that means buying is never going back to normal.

"Prior to the pandemic, many automakers really focused too much on filling production capacity, building as many units as they could, and in doing so, they often would build more vehicles than the market really wanted," Ed Kim, president and chief analyst at automotive research firm AutoPacific, said.

"They got a real taste of what it's like when you build to demand, or even build to less-than-demand, as opposed to the common practice of overproducing and then moving metal with rebates or incentives," Kim added.

But shoppers shouldn't necessarily see some automaker's low inventory as a signal of high demand for a vehicle that they'd have to pay big dollars to compete on. Having fewer vehicles available could be on purpose.

Certain segments, like compact and midsize SUVs, are always going to be popular regardless of the pandemic — and likely come with higher price tags. Others, like sedans, may be produced less as they're losing popularity — and it's possible there are deals to be had there.

This story was originally published in May 2023.

Read the original article on Business Insider