Will Japan's Tsunami End The Emerging Price War?
With automakers keeping the incentive pedal pinned to the floor as they entered the new year, a price war has been brewing in the US market for a while now. Hyundai USA CEO John Krafcik has called the trend “a step backward for the industry,” pointing out that nearly every automaker had struggled to regain pricing power coming out of nearly three years of industry-wide weakness. But with GM and Detroit leading the way with high (if “targeted”) incentives, matched by uncharacteristically high incentives from import-brand rivals like Honda and Toyota, it seemed that nothing could prevent a volume-pumping, but profit-sapping price war in the US. At least until Japan was hammered by earthquakes, tsunamis and nuclear accidents. Now, with manufacturers and suppliers still struggling to understand the full impact of production shutdowns and reduced inventories, TrueCar has projected current price trends forward, and finds that supply interruptions could reduce supply to the point where prices actually start coming up again. Check out TrueCar’s spreadsheet on supply and pricing projections in XLS format here, or hit the jump for a few highlights.
TrueCar’s VP for Industry Trends and Insights, Jesse Toprak, summarizes some of the most salient issues in the following bullet points
· Almost all vehicles that have been affected by the loss in production will have an increase in transaction price. The vehicles that will have a more significant increase will be hybrids and the more fuel-efficient vehicles.
· Japanese automakers will lower or eliminate all incentives for vehicles being affected by the earthquake/tsunami while increasing incentives on models where production isn’t being hardest hit
· The rest of the industry will not be affected immediately from pricing and incentives. The real impact will be felt when inventory starts to run out, some as soon as the end of March, but most towards end of April. If most of these vehicles affected have prolonged shortages, transaction price will increase as lower supply of consumer buying power due to relative improvements and continued easing in leasing standards
· Models covered sold about 170,000 units in February, making up 17 percent of all sales
· The biggest unknown currently are the potential shortage of parts model in Japan for vehicles made elsewhere.This could have major global impact on global output, at least temporarily.
How do these dynamics play out on a model-by-model basis? As the graph above shows, TrueCar projects that Prius will not only lose its discount by next month, but will have an $800 markup come the end of April. The Leaf is projected to have a similar markup, but you won’t see one of those sitting on a dealer lot with no buyer for (at least) most of this year. Otherwise, discounts are dropping by as little as 20-25% and as much as 60% for even non-hybrid vehicles. And if parts supply interruptions stop production outside of Japan, prices could go higher still.
The only question is how the American automakers respond: will they press home their advantage by keeping incentives high, or will they dial back and try to recapture some pricing power? We’ll be keeping a close eye on incentive levels to see how this shakes out. Look for the first indications when March sales come out.
More by Edward Niedermeyer
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There are two components to this: Short-term and Mid-term. Short-term: Production issues will decrease supply of vehicles, which will result in higher transaction price as dealers have less cars to sell. Just as importantly, the yen will increase as Japanese companies sell of dollar assets to insure immediate liquidity to pay for damages. Supply chain disruptions of high-volume cars in the North American market are better insulated than the cars on that graph. Prius and Insight is one thing, but Camry and Accord is another. Obviously, even cars built in Kentucky will be influenced by supply chain issues in Japan, however, Japanese companies are well diversified in American supply chain in which it shouldn't be more than a short-term issue for their bread and butter cars built in North America. Mid-term: This is where things become tricky. The yen will fall over the mid term proportional to the amount of rebuilding cost that will become necessary. Right now, we can only speculate to the final rebuilding cost of Japan, and until the final toll of the human tragedy is calculated it won't be a center of discussion. But the Japanese government has indicated willingness to use extreme measures in this extreme time. However, given that Japan's current budget is nearly exhausted, QE (money printing) measures are unavoidable. We don't know if this will be a $100B, or $200B, or more, of rebuilding money that will be pumped into the economy. But there will be a massive influx of yen into the economy. In this case, Japanese built cars won't be at a price advantage of the high yen.
Marketing........ Any USA new car dealer selling Japanese vehicles (whether assembled in USA or elsewhere) "All our cars have those thyroid pills plopped into the fuel tank." Un- and ill-educated human herd flocks to the firm paying jacked-up price."