The automotive market suffered a massive drop in demand last year due to the Covid-19 pandemic. Although the situation has somewhat recovered pretty quickly after the initial drop, the market suffered yet another gut punch in the form of silicon shortage, wreaking havoc on the industry as a whole, worldwide.
While most carmakers are finding trouble keeping up with demand resulting in months-long waits and headaches for car buyers, some of them – especially those on the luxury end of the spectrum – aren’t actually too concerned, as they’ve still been making money off of the low-volume, high-margin models at high prices.
What’s worse? Don’t expect that to change anytime soon. In an interview with Financial Times, senior executives from both BMW and Mercedes-Benz indicated that they intend to artificially keep supply of new vehicles tight, so they can maximise profits and maintain higher prices.
Daimler’s Chief Financial Officer Harald Wilhelm told FT, “We will consciously undersupply demand levels, and at the same time, we [will] shift gears towards the higher, the luxury end.”
BMW’s CFO Nicolas Peter also echoed the same sentiment, saying that they plan to “clearly stick with… the way we manage supply to maintain our pricing power on today’s level,” adding that BMW has “seen a significant improvement in pricing power in the last 24 months”.
In short, Mercedes and BMW know people will (and already) pay top dollars for their luxury cars, and therefore doesn’t see a problem with maintaining a higher price even after the chip crisis ends.
Moreover, the move will also reduce the amount of discounts dealerships are able to offer, and thus bringing in more profit for both the dealers and carmakers themselves. “The pandemic has really opened everyone’s eyes – that a different paradigm is possible,” said Bernstein analyst, Arndt Ellinghorst. “Everyone loves it, including dealers,” he added. Well, probably not consumers.
Ellinghorst explains that reducing discounts by 1% will boost profits across the car industry by a whopping USD20 billion, and discounts in Europe and the US have dropped by at least double that amount from their pre-pandemic peak.
This type of strategy has already been employed by most of the ultra-luxury carmakers such as Ferrari and Bentley for a while now, but the pandemic and chip shortage has now brought it down to the more “mainstream” luxury brands.
What does this all mean, though? For us Malaysians, probably not much in the short term, as our sales model is quite different from that of the US or Europe. But do expect prices for these “luxury” brands to rise even further in the future – or at least, that’s what we’d wager on.