Industry Braces for Increased Volumes, Lower-Margin Vehicles

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.

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    • 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.

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  • Master Baiter The D-bag elites like Al Gore demanding that we all switch to EVs are the type of people who don't actually drive. They get chauffeured around in black Yukon Denalis. Tesla does have a good charging network--maybe someday they will produce a car that doesn't suck.
  • MRF 95 T-Bird As a Challenger GT awd owner I lIke it’s heritage inspired styling a lot. There’s a lot of 66-67 as well as 68-70 Charger in there. It’s refreshing that it doesn’t look like a blob like Tesla, Volt/Bolt, Mach-e BMW I whatever etc. The fact that it’s a hatch makes it even better as a everyday driver thus eliminating the need for a CUV. If it’s well built and has a reliable track record I can see trading up to it in a few years.
  • Jbawden I thought sedans were dead? Coupes even more so. The core Charger/Challenger buyer is in it for the Hemi. To whom is this and the presumed EV Camaro marketed to? The ICE versions of these cars have a LOT of shortcomings, but rear drive, a V8, and a Tremec 6 speed made all that disappear. If you're forcing me into a 1,000hp appliance, then give me some visibility and practicality while your at it. And for the love of all things holy, please allow me to maintain a little dignity by leaving off the ridiculous space jam sound effects. What out of touch focus group think approved that? It's almost as embarrassing as the guy who signed off on the Pontiac Aztec.
  • Jalop1991 The simple fact is, America and Americans excel at building complex things (bridges, for example) but absolutely SUCK at maintaining them. We're too busy moving on to the next new shiny thing that a politician can get good airtime for. Fixing the bridge? Not sexy. Cutting the ribbon at a new EV charge site? Photo-op worthy. Demanding that the owner of said charging site be accountable and not let his site become the EV equivalent of a slum? Hard and not a newsworthy event.I have a PHEV and once tried some sort of public charging, just to see what happens. Failed miserably. We'd all be riding horses today if gas stations performed like EV charge stations do.
  • SCE to AUX Apps like PlugShare prove a few points:[list][*]Tesla's charging network is the best, almost always earning a 10/10.[/*][*]Dealer chargers are the worst, often blocked (ICE'd) or inaccessible behind a locked gate.[/*][*]Electrify America chargers aren't bad; my few experiences with them have been quite good. But they are also very new.[/*][*]Calling the help line is nearly useless.[/*][*]There are still charging gaps in high-travel flyover areas, which coincidentally have a lot of "Trump" flags waving in them.[/*][/list]As an EV driver and engineer, I don't understand how public chargers get so screwed up. They are simple devices. My home charger is 10 years old and has never missed a beat, but it only gets one cycle a day and lives indoors.