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.

From FT:

“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]