Cars are going to stay expensive for one simple reason: Dealers and automakers are loving it

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  • New cars have gotten way more expensive during the pandemic because of low inventories at dealers.
  • Even as supply-chains recover, new car prices could stay high for good.
  • Car companies and dealers are enjoying fat profits and want to keep the supply of cars low.
New cars have grown more expensive during the pandemic thanks to a computer chip shortage that has squeezed the supply of vehicles and pushed carmakers to focus on building pricier models. But there's another reason entirely that car shoppers can expect the tight inventories and stubbornly high prices to stick around long term: Car companies and dealers are loving it.

They've gotten used to the strong pricing power and fat profit margins that the supply crunch has afforded them and have little incentive to return to the way things were before the pandemic, when dealership lots were flush and manufacturers had to offer aggressive discounts to move cars to customers.

"The industry would have to go a long way to get back to that oversupply model, to get back to where pricing, haggling, and incentives are where they used to be, and there's just no need to do it," Kevin Tynan, senior automotive analyst at Bloomberg Intelligence, told Insider.

Automakers could build back up to their old production volumes and lose their stranglehold on pricing. But many have made clear they're determined to maintain this new paradigm, or at least something close to it.

In an interview with Insider, Volkswagen of America CEO Scott Keogh said he "absolutely" sees greatly reduced supply as the "new normal." Last year, Ford CEO Jim Farley said the company is "wasting money on incentives" and that it aims to keep inventories significantly below pre-pandemic levels.

At the beginning of May, US dealers had 1.13 million new cars on hand, 2.2 million fewer than the same time in 2020, according to Cox Automotive. The amount dealers are able to charge has shot up as a result.

In April, the average new car sold for $45,736, $685 above manufacturer-suggested retail price, according to Edmunds. The average spend three years prior was around $37,000, including a $2,500 discount to MSRP. The hikes are particularly mind boggling for sought-after models like the Jeep Wrangler SUV, which now commands nearly $9,000 over sticker, according to automotive researcher iSeeCars.

It's plain to see why automakers like the way things are going; they're making more money even amid slumping sales. In 2021, General Motors' profits jumped 47% to $14.3 billion despite selling 500,000 fewer vehicles than the previous year.

Dealers, too, have fared incredibly well and want to keep the party going. Mike Manley, CEO of AutoNation, the country's biggest auto dealer, told Bloomberg the pandemic has pressed a "reset button" for car sales, adding that vehicles will sell for MSRP going forward and big discounts are over.

Pete DeLongchamps, senior vice president at Group 1 Automotive, a large dealer group, told Insider he hopes dwindling inventories bounce back to an "equilibrium" that's easier on buyers but maintains the company's strong margins.

Don't hang up those haggling boots just yet, though.

Historically, automakers have squandered opportunities to shift to a lower-volume, more profitable way of doing business, according to Tyson Jominy, JD Power's vice president of data and analytics. Keeping prices high will require discipline all around, and if some automakers start flooding the market with cheaper cars, the whole house of cards could come tumbling down, he said.

"Despite a lot of proclamations in the past and the industry enjoying more profitable times when volumes are perhaps a bit lower…eventually the pricing discipline breaks down and we kind of go back to the old ways," Jominy said.
 

Sulu

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My wife went shopping for a HEV/PHEV two weeks ago, at the Nissan, Hyundai and Toyota dealerships (Honda sells only the overly-large Accord Hybrid, too large for her needs). Each dealer had crossovers in the showrooms (we are not interested in a tall and heavy crossover) but no cars and we were told to order and the vehicle would arrive in 8 to 12 months. Those showrooms were so empty!

The Toyota salesperson told us that the factory is building and delivering for orders only (i.e. no unsold vehicles are being built). A purchase contract would be signed at the current, 2022 MSRP, but it is very likely that the car, when it arrives, will be a 2023 model so the MSRP will rise (but the exact figure is unknown at the moment).

When I bought my Camry last December, I had to wait 3 months but I bought a model already allocated to the dealer. All dealers told me at the time that all allocated models were pre-sold before arriving on the lot.
 

Gecko

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Historically, automakers have squandered opportunities to shift to a lower-volume, more profitable way of doing business, according to Tyson Jominy, JD Power's vice president of data and analytics. Keeping prices high will require discipline all around, and if some automakers start flooding the market with cheaper cars, the whole house of cards could come tumbling down, he said.

"Despite a lot of proclamations in the past and the industry enjoying more profitable times when volumes are perhaps a bit lower…eventually the pricing discipline breaks down and we kind of go back to the old ways," Jominy said.

This.

Adjusting to some sort of low(er) volume, higher price play is only going to last for so long. Once inventory, chips and parts come back, whether it's Nissan, Kia, or someone else, brands will realize there is opportunity in volume and lower pricing, and many others will end up following suit because they'll have to.

No doubt they're enjoying it in the meantime though.
 

Will1991

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The strangest thing is that seems some are getting both volume and high price... Porsche for example, is selling amazingly well around here, it's nuts how many you see everyday.
 

Levi

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The strangest thing is that seems some are getting both volume and high price... Porsche for example, is selling amazingly well around here, it's nuts how many you see everyday.
Maybe because when you spend such money, the little extra is worth it for a Porsche. Non premium/luxury cars are too expensive for what they are. Toyota is okay because it will drive without issues in 15 years. New cars are simply not worth it anymore. Overpriced for what they offer, and it is not like there really is anything else required from a car. Does someone want it to make your laundry?
 

mikeavelli

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It’s crazy to see how the supply chain still hasn’t recovered. Also remember when the Germans moved to leases and incentives as they wanted more volume. They also moved downmarket. That has lost steam.

Crazy times still!.
 

IS-SV

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Ford CEO Wants Vehicles Sold Online Only With Non-Negotiable Pricing. I guess if you are good at negotiating, tough apples.

When I review sales contracts of many people that claim to be "good at negotiations" I often end up being amused by the additional high profit ripoff "dealer-installed" extras plus extended warranties they bought. Not impressed.
 

NXracer

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When I review sales contracts of many people that claim to be "good at negotiations" I often end up being amused by the additional high profit ripoff "dealer-installed" extras plus extended warranties they bought. Not impressed.
a little knowledge is a dangerous thing as they say.
 

mmcartalk

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A possible recession will help rebalance things.


In a normal recession, I'd tend to agree. But this would not be a normal recession, where the economy slackens because of lessened demand for goods and services. With new vehicles, the problem today is not necessarily low demand, but the worldwide shortage caused by the computer chip shortage and a simple lack of production. People WANT new vehicles...they simply are not being built in adequate numbers to satisfy demand.
 

IS-SV

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In a normal recession, I'd tend to agree. But this would not be a normal recession, where the economy slackens because of lessened demand for goods and services. With new vehicles, the problem today is not necessarily low demand, but the worldwide shortage caused by the computer chip shortage and a simple lack of production. People WANT new vehicles...they simply are not being built in adequate numbers to satisfy demand.
Yes, if demand stays the same, it's likely not even a recession (normal or not normal). That's why I said "possible recession". WANTING a new vehicle doesn't always equate to needing or buying a new vehicle especially during a recessionary period. If demand cools adequate numbers of supply becomes a moving target.