German Automakers Aren't Interested in Returning to Normal
With supply chain hiccups crippling the automotive industry’s ability to conduct business as normal, resulting in rolling production stalls and skyrocketing vehicle prices, manufacturers looked to be in serious trouble throughout the pandemic. But we learned that wasn’t to be the case by the summer. Automakers were posting “surprise profits” because people still needed cars. We also found out there’s been a growing appetite for expensive (see: highly profitable) models and the industry saved itself a bundle by not needing to pay for office space or line workers, as COVID restrictions kept everyone at home.
Having considered the above, most automakers are seriously considering how they can further leverage this new modality. German manufacturers have even said they’re not that interested in going back to the normal way of doing things — instead electing to intentionally limit volumes and focus on high-end models that will yield the greatest return on investment. But it’s not quite the curveball it seems, as some companies were already ditching the volume approach.
BMW and Daimler certainly were. Going down-market not only undermined their prestige as automakers but also didn’t turn out to be all that lucrative. It’s something they probably should have realized after watching how the strategy played out for Nissan on a longer timeline. But some lessons have to be learned first-hand and a few were undoubtedly reinforced after automakers started realizing they could still turn a profit selling fewer vehicles during a period of genuine economic strife.
Despite help wanted signs being placed almost everywhere, unemployment (which skyrocketed during the spring of 2020) is estimated to be hovering around 6 percent in the United States while the European Union is supposed to be closer to 7.5 percent. Meanwhile, the global semiconductor shortages and other supply chain shortfalls have made production difficult for the industry as a whole. And yet the automotive sector remains broadly profitable, even if there’s been an upsurge in restructuring and plenty of layoffs because this new methodology seems to be working fine for more than a few brands.
“We will consciously undersupply demand level[s],” Harald Wilhelm, Daimler’s chief financial officer told the Financial Times in a recent interview, “and at the same time we [will] shift gears towards the higher, the luxury end.”
This is said to continue until after the chip shortage has abated, with BMW following suit. CFO Nicolas Peter said the company had become aware that the current economic situation had given the industry a pricing advantage that it would like to retain after things stabilize. This is supposed to work in tandem with electrification strategies that will allow businesses to shrink the size of their production teams, further minimizing overhead as they price vehicles higher than anticipated.
“The pandemic has really opened everyone’s eyes — that a different paradigm is possible,” said Arndt Ellinghorst, an analyst at Bernstein. “Everyone loves it, including dealers.”
Discounts typically offered to customers at dealerships — usually around 15 per cent in mature markets — have been slashed, with some models being sold above sticker price.
A one percentage point decrease in the average discount would release $20bn in extra profits for car manufacturers, according to Ellinghorst, and discounts in Europe and the US have dropped by at least double that amount from their pre-pandemic peak.
BMW’s Peter said that the group’s US dealers, “always claimed . . . well we need the cars in the showroom, the customer is expecting to pop in on Saturday morning, 10am, and he wants to leave with everything done, fixed number plates on the car at 1pm latest.”
Now, however, they say “customers are ready to wait three to four months, and this is helping our pricing power,” he added. “Of course the waiting time must not be too long, but if you buy a premium car like a BMW, it’s an emotional decision . . . to have a short waiting time is something, I believe, which makes the customer experience even greater and better.”
Creating an artificial shortage of vehicles just to drive up prices is pretty gross, even when directed at a clientele that can easily afford it. But if this remains the norm among mainstream nameplates, I’m not sure I’ll be able to come up with a phrase that would accurately encapsulate the amount of disdain I’ll have for the industry. Businesses can operate as they wish, though that doesn’t absolve them from enacting predatory policies that have become unsettlingly fashionable. This kind of stuff also drives up inflation, which is something almost everyone is concerned about right now.
But automakers remain unconcerned as they raking in the dough, with FT noting that Mercedes achieved a 12.2 percent return on sales in its last reported quarter. That’s up from 8.4 percent in the same period in 2018, which doesn’t have the shadow of the pandemic influencing the relevant metrics. Meanwhile, BMW’s margin reached nearly 16 percent — up from 8.6 percent in 2018.
[Image: Sklo Studio/Shutterstock]
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- 56m65711446 Well, I had a suburban auto repair shop in those days.
- Dukeisduke Yikes - reading the recall info from NHTSA, this sounds like the Hyundai/Kia 2.4l Theta II "engine fire" recall, since it involves an engine block or oil pan "breach", so basically, throwing a rod:"Description of the Safety Risk : Engine oil and/or fuel vapor that accumulates near a sufficiently hot surface, below the combustion initiation flame speed, may ignite resulting in an under hood fire, and increasing the risk of injury. Description of the Cause :Isolated engine manufacturing issues have resulted in 2.5L HEV/PHEV engine failures involving engine block or oil pan breach. In the event of an engine block or oil pan breach, the HEV/PHEV system continues to propel the vehicle allowing the customer to continue to drive the vehicle. As the customer continues to drive after a block breach, oil and/or fuel vapor continues to be expelled and accumulates near ignition sources, primarily expected to be the exhaust system. Identification of Any Warning that can Occur :Engine failure is expected to produce loud noises (example: metal-to-metal clank) audible to the vehicle’s occupants. An engine failure will also result in a reduction in engine torque. In Owner Letters mailed to customers, Ford will advise customers to safely park and shut off the engine as promptly as possible upon hearing unexpected engine noises, after experiencing an unexpected torque reduction, or if smoke is observed emanating from the engine compartment."
- Dukeisduke In an ideal world, cars would be inspected in the way the MoT in the UK does it, or the TÜV in Germany. But realistically, a lot of people can't afford to keep their cars to such a high standard since they need them for work, and widespread public transit isn't a thing here.I would like the inspections to stick around (I've lived in Texas all my life, and annual inspections have always been a thing), but there's so much cheating going on (and more and more people don't bother to get their cars inspected or registration renewed), so without rigorous enforcement (which is basically a cop noticing your windshield sticker is out of date, or pulling you over for an equipment violation), there's no real point anymore.
- Zipper69 Arriving in Florida from Europe and finding ZERO inspection procedures I envisioned roads crawling with wrecks held together with baling wire, duct tape and prayer.Such proved NOT to be the case, plenty of 20-30 year old cars and trucks around but clearly "unsafe at any speed" vehicles are few and far between.Could this be because the median age here is 95, so a lot of low mileage vehicles keep entering the market as the owners expire?
- Zipper69 At the heart of GM’s resistance to improving the safety of its fuel systems was a cost benefit analysis done by Edward Ivey which concluded that it was not cost effective for GM to spend more than $2.20 per vehicle to prevent a fire death. When deposed about his cost benefit analysis, Mr. Ivey was asked whether he could identify a more hazardous location for the fuel tank on a GM pickup than outside the frame. Mr. Ivey responded, “Well yes…You could put in on the front bumper.”
This is also a cultural difference. We've been raised on GET A NEW CAR TODAY, take it off the lot, easy payments. Europe is save, buy to order, and pay most or all up front. A Euro car store is a nice showroom in a trendy part of town, with service across town in the industrial area. There is no huge Sales Bank of stock. This is easier for the OE maker, I think, in that you don't have to guess what folks want, with the problems of guessing wrong...too much of one, not enough of another. It's better for the buyer in a lot of ways, they can offer colors and options that the sales manager might not want, like anything other than grey, a sports package, or anything that might make a buyer decline...so it's lot vanilla at all times for us. The only problem is that as Americans, we are conditioned not to wait for anything...trust me, if you can, waiting on YOUR build is well worth it...and you'll never see yourself coming and going.
Agree about the cultural differences. My parents ordered new cars in the past but it was only a 4 to 6 week wait. I understand about the chip shortage and other shortages but long term ordering a new vehicle will not be viable for most people if the wait is 4 or more months and if it is a year or more then forget it. I am willing to wait for my new Maverick up to a year because of the product and I have a good solid truck for now but the manufacturers will have to get better at their just in time production and shorten the waiting period for ordering new vehicles especially if the customer is going to pay full MSRP. If and when we get back to normal the waiting period for an ordered new vehicle should average no more than 4 weeks otherwise few will want to wait.