If you’ve been looking to
buy a new car, you’ll be painfully aware of the record-high prices being quoted at dealerships across the country.
The reasons for this are twofold. Firstly, consumer demand is rebounding aggressively after much of last year was spent under lockdown, and secondly, a
shortage of semiconductor microchipshas restricted new car supply.
Many drivers have put their search for a new car on hold, hoping that prices drop back down once the supply has caught up with demand, but announcements from two carmakers might cause some concern.
In the last few days, both
BMWand Daimler (the mega corporation that owns Mercedes), have pledged to keep prices high, even when the chip crisis ends.
With trademark German forthrightness, the companies say they hope to lock in the price increases seen over the last few months, by continuing to limit the number of premium models rolling off the factory floor.
Why do BMW and Mercedes want to inflate prices?
The pandemic has shown luxury car makers that they can take a different approach to pricing and selling premium models, and still make a fortune. The plan is simple: sell fewer cars for more money.
Financial Timesreports that Mercedes were already moving away from a volume-based approach to car sales, even before the pandemic, but the high prices customers have been willing to pay has made them more confident.
Daimler’s CFO, Harald Wilhelm, is quoted saying "one day or another the semis issue will be gone and we will carry on with the price, and the margin...We will consciously undersupply demand levels...and at the same time we will shift gears towards the higher, the luxury end."
In a separate interview, BMW CFO Nicolas Peter commented that BMW had "seen a significant improvement in pricing power in the last 24 months...the way we manage supply to maintain our pricing power on today’s level...would be through a number of measures including digitally tracking customer demand."
It’s hard to argue with the math. Almost all
luxury automakers have seen a boost in profitsfollowing COVID-19, and the two German giants are no exception.
Mercedes reported a 12.2% sales margin in the last financial quarter, 50% higher than the last period before the pandemic. In the same time frame, BMW’s margin has almost doubled, going from 8.6% to 16%
Long waits for new cars, no more customer discounts
Before the pandemic, it was common for customers to be offered discounts at dealerships, with sale prices around 15% lower than MSRP (manufacturer's suggested retail price).
The assumed wisdom was that drivers needed these discounts to find satisfaction in the purchase, and feel like they had gotten a good deal.
However, with the chip shortage savaging inventory, these discounts have evaporated and
new car prices have reached record highs.
This shift is excellent news for the likes of BMW and Mercedes, who have proof they can achieve higher profits with fewer cars. According to one analyst quoted by Financial Times, a 1% decrease in customer discounts can release an extra $20 billion in profits for car manufacturers.
BMW’s Nicolas Peter says U.S. dealers have overstated the importance of having a full showroom: "(customers are now) ready to wait three to four months, and this is helping our pricing power."
While the microchip shortage has helped luxury car makers like BMW and Mercedes with higher profit margins, they will have to be careful not to squeeze too hard.
Especially as other major car makers, including Ford and Toyota, are expecting to see their new car prices drop again after the chip shortage ends.