Inflation risk or profit engine? High car prices are both

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Aug 10 (Reuters) – Earlier this year, Brian Benstock, a Honda and Acura dealer in New York, convinced his banker that it would make sense to buy more vehicles than he could fit in his parking lot.

The bet is successful. Popular SUV models are snatched up by customers as soon as they arrive at its dealership. Automakers can’t build new ones fast enough because of semiconductor shortages. Like its peers, Benstock is in the happy position of applying an additional charge to the listed prices.

“Dealers really don’t have a choice with such low supplies. Without the additional markups, they might struggle to keep the doors open,” he said.

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What started as a short-term disruption to automotive semiconductor shipments is becoming a long-term problem that is pushing average prices for new and used vehicles up to luxury car levels, fueling inflation fears and causing concern at the White House.

According to Cox Automotive, average new car prices have reached $42,000 and used vehicle prices have climbed to around $25,000 on average. Used car prices rose 45% year-on-year, according to the US Department of Labor, and accounted for more than a third of the overall consumer price increase in June.

The Department of Labor will release its July Consumer Price Index on Wednesday – a tool to measure the performance of the economy as a whole when it comes to inflation or deflation.

Automobiles have become increasingly reliant on chips for everything from engine management to driver assistance features such as emergency braking. The shortage stems from a confluence of factors as automakers compete with the sprawling consumer electronics industry for chip supplies.

LIGHTER INVENTORY

Rising prices for vehicles and other goods are a problem for

the administration of US President Joe Biden. Some Republicans have blamed the price spike on massive federal spending under Biden, which they want to cut. A senior White House official told Reuters: “Semiconductor shortages are at the heart of the price spikes we’ve seen in automobiles.”

The White House has been working to help address the shortage. “There is evidence that at least some auto prices may have peaked,” the official said, particularly among used cars. But the official added that there was still too much uncertainty about when prices might return to normal levels.

While high vehicle prices are causing anxiety in Washington, they’re fueling record profits for U.S. auto dealers. Automakers are enjoying pricing power they haven’t seen in decades.

U.S. dealers’ cumulative profits on new vehicles in July are expected to reach a record high of $5.1 billion, with average profit per vehicle estimated at $4,200, according to JD Power.

The chip shortage has forced dealerships and automakers to operate with much leaner inventory than usual — an approach industry executives have long dreamed of but rarely implemented, with the exception of Tesla. Inc (TSLA.O). Now, U.S. auto industry executives are working on how to keep inventories tighter and prices higher, even after the supply chain crisis subsides.

“We are really committed to moving to an order-based system and keeping inventory at 50 to 60 days of supply,” Ford Motor Co (FN) chief executive Jim Farley told analysts in late July. “I know we waste money on incentives.”

General Motors Co (GM.N), which posted record pretax profit in the second quarter, expects high prices to continue into 2022.

Going forward, “we’ll be much leaner and more efficient,” GM CEO Mary Barra told investors.

Dealers have heard such talk before. The chief executive of auto retailer Lithia Motors Inc said switching to a build-to-order model would be beneficial, but added he doubted it would happen.

“I find it hard to believe that competing automakers are going to build the right number of cars,” CEO Bryan DeBoer told analysts recently. “They have always traditionally overproduced.”

Stellantis NV (STLA.MI) chief executive Carlos Tavares expressed concern about inflationary pressures, even as the world’s No.4 automaker benefited from high prices for its Jeeps, Rams and other brands in the USA.

“We don’t want to disconnect from the middle class,” Tavares said. “We don’t want to disconnect from a citizen’s ability to buy a new car – that would impact the size of our customer base.”

USED ​​CARS ARE KING

Meanwhile, consumers with used vehicles for sale are getting a boost as dealerships take to social media and call past customers to replenish their supply of used vehicles.

“We tell customers… ‘You bought your car from us two years ago, here’s all your money,'” Joel Bassam, president of Baltimore-based Easterns Automotive Group, said in a recent discussion hosted by the dealer sales. Roadster platform.

For online used-car dealership Carvana Co , acquiring vehicles is less of a problem, CEO Ernie Garcia said, but the company faces a different kind of supply constraint.

“Over the last few quarters, we’ve actually bought more cars from our customers than we’ve sold to them,” Garcia said. “But we don’t have the capacity today to certify as many cars as we could buy and we also have more demand than we can handle.”

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Reporting by Tina Bellon in Austin, Texas. Additional reporting by Paul Lienert in Detroit and David Shepardson in Washington Editing by Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.


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