Industry Braces for Increased Volumes, Lower-Margin Vehicles

Matt Posky
by Matt Posky
industry braces for increased volumes lower margin vehicles

It’s a little early in the year to say anything definitive about 2022 vehicle volumes, however, the automotive industry has been signaling that production numbers should begin to rise in the coming months. While that sentence should be cause for a sigh of relief, there are parts of the industry that might not feel as good about it as you probably do.

With supply chain problems having drastically limited vehicle production during the pandemic, many dealers opted to price their goods well above anything that could be considered normal. This worked out poorly for many of the smaller outfits as larger retailers enjoyed record-breaking profits in 2021. Some manufacturers also benefited financially, as the chip shortage allowed them to prioritize their highest-margin products. Unfortunately for them, 2022 is likely to bring affordable vehicles back into play and gradually pull pricing closer to something approaching normality.

Domestic manufacturers have actually been leaning into higher-margin vehicles for quite some time. General Motors, Ford Motor Co., and Fiat Chrysler Automobiles (now Stellantis) all spent the last decade removing sedans and economy cars from U.S. assembly lines to make room for crossovers and SUVs yielding higher price tags and better profits. But now they’re confronting a market that just spent the last year taking advantage of people in dire need of a new automobile (or simply too dumb to realize they were overpaying), continually rising production costs, a customer base that has less disposable income than it did two years earlier, and fuel prices that might make people think twice about buying anything too large.

Bloomberg recently extrapolated the implications of this for General Motors in a recent article, concluding that it might not even be in the automaker’s best interest to resume building economy-minded vehicles. This might sound counterintuitive considering last year’s stalled volumes allowed Toyota to take the U.S. sales crown from GM. But Chief Financial Officer Paul Jacobson has already told the public that the company expects noteworthy production gains (estimating a 25 percent YOY increase in the first quarter), adding that the bump also means higher input costs and lower margins that could negatively impact overall profitability.

From Bloomberg:

The Detroit-based automaker is “seeing sizable supply chain pressure on commodities,” Jacobson said.

GM expects 2022 earnings roughly in line with the year just ended. The company forecasts adjusted earnings before interest and taxes of $13 billion to $15 billion in 2022 and adjusted earnings per share of $6.25 to $7.25. That compares $14.3 billion in adjusted earnings last year and $7.07 a share.

“With an improving outlook for semiconductors in the U.S. and China, we expect our 2022 results will remain strong,” Chief Executive Officer Mary Barra said in a letter to shareholders.

Shares of the carmaker rose 2.1 [percent] in premarket trading, building on Tuesday’s gains of 2.5 [percent] following the earnings announcement. The stock is down 7.8 [percent] this year.

Barra told reporters on a call that GM expects to benefit from pent-up demand on the order of several million vehicles in the U.S. alone, something she said will likely keep retail prices elevated.

Helping the cause is the $13,600 Chevrolet Spark that the manufacturer has decided to kill off in the summer. The sacrificial lamb is basic transportation and the cheapest General Motors had in its whole roster. That honor will now go to the $21,400 Chevy Trax crossover, which I would argue doesn’t compare all that favorably. But GM can get better margins with the Trax — and that’s the whole point.

Expect other manufacturers who’ve ditched a responsibly varied lineup to go crossover and pickup crazy to engage in similar behaviors. While the industry-wide transition toward EVs will also come into play, truly affordable all-electric options won’t be available for a few more years.

As for dealers, most have remained confident that elevated vehicle pricing will persist well into 2022 and ensure continued profitability. However, we can’t really say how things will look by autumn. Consumers might begin seeing if they can wait things out until prices decline and lots are fuller and we’ve no real idea when the semiconductor shortage will dissipate. We’ve heard the industry repeatedly suggest it’s going into its closing act over the last few months. But that’s also what we were told at the start of 2021.

The National Automobile Dealers Association (NADA) currently believes that light-vehicle inventories will continue to be strained throughout 2022. While NADA leadership has said it believes volumes will improve, it doesn’t anticipate production to be anywhere near levels witnessed before the pandemic and is assuming it can keep pricing unreasonably high until at least 2023.

[Image: Phil K/Shutterstock]

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  • NJRide NJRide on Feb 03, 2022

    If the current market doesn't re-price and supply adjust by summer, we could see many who need to buy move down a segment. But the prices definitely are discouraging many and removing people who would normally be in market. I'm also not sure how much higher the 12 year median fleet age can go.

    • See 2 previous
    • Jeff S Jeff S on Feb 04, 2022

      @DenverMike After looking at Craigslist I would agree with your assessment. Around where I live a rusted out hulk that is barely running will easily sell for a couple of grand. Before Covid those same vehicles were feedstock for the crusher. Really bad time to buy an inexpensive older vehicle and that is why there will be a market for newer inexpensive vehicles even if they are from China, Vietnam, or other countries that are developing their auto industry. Fewer new vehicles being made during Covid means less used vehicle in the future and the US population is still growing especially those new drivers. Where I live the salt and chemicals used to treat roads during the Winter will eat a body up even with the better metal corrosion of today's vehicles. Hard to find an older affordable used truck that hasn't been eaten by the tin worm and most body shops will not touch a rusted vehicle regardless of how minor the rust is.

  • Johnny ringo Johnny ringo on Feb 04, 2022

    Occam's Razor-the simplest solutions are usually the best. Recessed tie down bolts to me sound like a better idea. The magnets would probably work on relatively small objects but in the case of large heavy objects like a refrigerator or a water heater you would probably need tie downs as well.

  • Funky D I despise Google for a whole host of reasons. So why on earth would I willing spend a large amount of $ on a car that will force Google spyware on me.The only connectivity to the world I will put up with is through my phone, which at least gives me the option of turning it off or disconnecting it from the car should I choose to.No CarPlay, no sale.
  • William I think it's important to understand the factors that made GM as big as it once was and would like to be today. Let's roll back to 1965, or even before that. GM was the biggest of the Big Three. It's main competition was Ford and Chrysler, as well as it's own 5 brands competing with themselves. The import competition was all but non existent. Volkswagen was the most popular imported cars at the time. So GM had its successful 5 brands, and very little competition compared to today's market. GM was big, huge in fact. It was diversified into many other lines of business, from trains to information data processing (EDS). Again GM was huge. But being huge didn't make it better. There are many examples of GM not building the best cars they could, it's no surprise that they were building cars to maximize their profits, not to be the best built cars on the road, the closest brand to achieve that status was Cadillac. Anyone who owned a Cadillac knew it could have been a much higher level of quality than it was. It had a higher level of engineering and design features compared to it's competition. But as my Godfather used to say "how good is good?" Being as good as your competitors, isn't being as good as you could be. So, today GM does not hold 50% of the automotive market as it once did, and because of a multitude of reasons it never will again. No matter how much it improves it's quality, market value and dealer network, based on competition alone it can't have a 50% market share again. It has only 3 of its original 5 brands, and there are too many strong competitors taking pieces of the market share. So that says it's playing in a different game, therfore there's a whole new normal to use as a baseline than before. GM has to continue downsizing to fit into today's market. It can still be big, but in a different game and scale. The new normal will never be the same scale it once was as compared to the now "worlds" automotive industry. Just like how the US railroad industry had to reinvent its self to meet the changing transportation industry, and IBM has had to reinvent its self to play in the ever changing Information Technology industry it finds it's self in. IBM was once the industry leader, now it has to scale it's self down to remain in the industry it created. GM is in the same place that the railroads, IBM and other big companies like AT&T and Standard Oil have found themselves in. It seems like being the industry leader is always followed by having to reinvent it's self to just remain viable. It's part of the business cycle. GM, it's time you accept your fate, not dead, but not huge either.
  • Tassos The Euro spec Taurus is the US spec Ford FUSION.Very few buyers care to see it here. FOrd has stopped making the Fusion long agoWake us when you have some interesting news to report.
  • Marvin Im a current owner of a 2012 Golf R 2 Door with 5 grand on the odometer . Fun car to drive ! It's my summer cruiser. 2006 GLI with 33,000 . The R can be money pit if service by the dealership. For both cars I deal with Foreign car specialist , non union shop but they know their stuff !!! From what I gather the newer R's 22,23' too many electronic controls on the screen, plus the 12 is the last of the of the trouble free ones and fun to drive no on screen electronics Maze !
  • VoGhost It's very odd to me to see so many commenters reflexively attack an American company like this. Maybe they will be able to find a job with BYD or Vinfast.