Overcharge car buyers now, and the industry will pay later

Overcharge car buyers now, and the industry will pay later

High prices are great for industry profits, but they risk racking up trouble: bloated auto loan repayments (the monthly average is now nearly $650 for a new vehicle and nearly $500 for a used car) erode household budgets and serve as a lasting reminder to customers who benefited. Dealers must be particularly careful, otherwise they will be dislodged in the long term by other methods of selling cars.

It’s hard to overstate how frustrating car shopping has become over the past year. In the United States, the majority of new cars currently sell for more than the manufacturer’s recommended price; buyers are pressured to accept dealer-arranged financing they don’t really need; and some used models cost more than the equivalent new vehicle (because it avoids a long wait).

Manufacturers have much less to complain about. Most were able to offset soaring parts and raw material costs by raising prices and prioritizing production of their most expensive models.

Stellantis NV, owner of the Ram and Jeep brands, achieved a 16% operating margin in North America last year, which is similar to the financial returns of luxury sports car maker Porsche. Dealerships are also doing well. Profit margins at some major U.S. auto dealers have doubled from pre-pandemic levels.

But car production will eventually return to a more normal pace. Once that happens, the industry is keen to avoid reverting to its self-sabotaging habits of price-cutting. Rather than crowding dealership parking lots with vehicles, manufacturers like Ford Motor Co., General Motors Co. and Mercedes-Benz Group AG plan to operate with much leaner inventory. Instead of asking customers to haggle with the dealer for a discount, they want customers to place orders weeks in advance, which should help manufacturers better control prices.

Investors are happy as automakers have struggled in the past to generate adequate returns. However, there is a fine line between financial discipline and brand-damaging price increases.

Automakers are warning dealers not to mark up prices above the RRP. While dealers need to partially make up for lost sales volumes, they shouldn’t be too greedy.

New entrants like Tesla Inc. and Rivian are bypassing state franchise laws and selling directly to consumers. Rivian’s pricing mistakes show the approach isn’t guaranteed to satisfy customers, and Tesla has also raised prices over the past year. But in general their approach is more transparent than some established manufacturers are understandably keen to copy: Volvo Car AB plans to move sales entirely online by 2030.

After an annual increase of more than 40% in used car prices, customers who trade in a vehicle have at least some financial muscle when buying a new one. On the other hand, first-time buyers or those extending their car fleet have been exposed to the full brunt of the price increase.

If they’re overcharged, they won’t just hold grudges and buy elsewhere next time: they could end up owing far more than their vehicle’s value once car prices normalize, jeopardizing their ability to afford another vehicle.

Indeed, in the longer term, the danger is that the purchase of a vehicle becomes unaffordable for low-income consumers. Stellantis CEO Carlos Tavares is among those sounding the alarm about future affordability even as his company benefits from today’s high prices. Stellantis said last week it plans to double revenue by 2030 and maintain double-digit profit margins while rolling out more electric vehicles.

Tavares intends to cut costs for European suppliers and dealers to keep these cars affordable. Highly profitable automakers should also consider copying Rivian’s newfound humility and giving car buyers some slack. Otherwise, the industry could pay the price later.

More writers at Bloomberg Opinion:

• You have not purchased an electric car. But you pay for one: Conor Sen

• Inflation is high if you have pricing power. Just Ask Mercedes: Chris Bryant

• Companies exploit inflation to boost their results: Nir Kaissar

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.