Industry Braces for Increased Volumes and Low-Margin Vehicles

It’s a little early in the year to say anything definitive about 2022 vehicle volumes, however, the auto industry has signaled that production numbers are expected to start increasing in the coming months. While that phrase should be cause for a sigh of relief, there are parts of the industry that might not feel as good as you.

With supply chain issues having severely limited vehicle production during the pandemic, many dealerships have opted to price their merchandise well above anything that could be considered normal. This has worked poorly for many small businesses, as large retailers have made record profits in 2021. Some manufacturers have also benefited financially, as the shortage of chips has allowed them to prioritize their highest-margin products. high. Unfortunately for them, 2022 is likely to bring affordable vehicles back into play and gradually bring prices closer to something closer to normal.

Domestic automakers have actually been looking at higher-margin vehicles for quite some time. General Motors, Ford Motor Co. and Fiat Chrysler Automobiles (now Stellantis) have all spent the past decade pulling sedans and economy cars from American assembly lines to make way for crossovers and SUVs that fetch higher prices. and better profits. But now they’re faced with a market that’s just spent the last year taking advantage of people who are desperate for a new automobile (or just too dumb to realize they were paying too much), cost ever-increasing production, a customer base that has less disposable income than two years earlier, and fuel prices that might make people think twice about buying something too big.

Bloomberg recently extrapolated the implications of this for General Motors in a recent paper, concluding that it might not even be in the automaker’s best interest to resume building economy-conscious vehicles. This may seem counterintuitive given that last year’s stalled volumes allowed Toyota to take the U.S. sales crown from GM. But CFO Paul Jacobson has already told the public that the company expects notable production gains (estimating a 25% year-over-year increase in the first quarter), adding that the increase also means production costs. higher inputs and lower margins which could negative impact on overall profitability.

From Bloomberg:

The Detroit-based automaker “sees considerable supply chain pressure on commodities,” Jacobson said.

GM expects 2022 earnings roughly in line with the year just ended. The company forecasts adjusted earnings before interest and taxes of $13 billion to $15 billion in 2022 and adjusted earnings per share of $6.25 to $7.25. That compares $14.3 billion in adjusted earnings last year and $7.07 per share.

“With an improving outlook for semiconductors in the U.S. and China, we expect our 2022 results to remain strong,” Chief Executive Mary Barra said in a letter to shareholders.

Shares of the automaker rose 2.1 [percent] in premarket trading, building on Tuesday’s gains of 2.5 [percent] following the announcement of the results. The stock is down 7.8 [percent] This year.

Barra told reporters on a call that GM expects to benefit from pent-up demand on the order of several million vehicles in the U.S. alone, which she says will likely keep retail prices high. .

Helping the cause is the $13,600 Chevrolet Spark that the automaker decided to kill off this summer. The Sacrificial Lamb is a basic and cheapest form of transportation that General Motors had in their entire roster. That honor will now go to the $21,400 Chevy Trax crossover, which I don’t think compares very favorably. But GM can get better margins with the Trax – and that’s the whole point.

Expect other manufacturers who responsibly ditched a diverse lineup to go crossover and pickup crazy to adopt similar behaviors. While the industry-wide transition to electric vehicles will also come into play, truly affordable all-electric options won’t be available for a few years.

As for dealers, most remained confident that high vehicle prices will persist through 2022 and ensure continued profitability. However, we can’t really say what things will look like by fall. Consumers might start to see if they can wait for prices to drop and lots to get fuller and we have no real idea when the semiconductor shortage will dissipate. We have heard the industry repeatedly suggest that it will be entering its closing act over the past few months. But that’s also what we were told at the start of 2021.

The National Automobile Dealers Association (NADA) currently estimates that light vehicle inventories will continue to be tight through 2022. Although NADA management has said it believes volumes will improve, it does not expect not that production will approach pre-pandemic levels and assumes that it can sustain unreasonably high prices until at least 2023.

[Image: Phil K/Shutterstock]

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