Lower production is raising new car prices as well as automakers' profits.

Carmakers and dealers are making more money by selling fewer vehicles at higher prices, and this could be a long-term shift for the American auto industry.

Driving the news:

  • After the pandemic's chaos and disruption, vehicle sales and production in the United States remain far below pre-COVID levels.
  • The annual rate of retail vehicle sales in the United States is now hovering around 13.5 million, down about 22 percent from 17.5 million in 2019.
  • Dealer inventories of new vehicles are extremely low, with only 1.1 million vehicles available at the end of June. More than 3.5 million were on hand in 2019.

The intrigue:

  • Making and selling fewer cars may appear to be a bad thing if you work in the car industry.
  • However, the new system is working well for vehicle manufacturers and dealers for one simple reason: price.
  • According to consumer price index data, new and used car prices have risen by roughly 30% since the end of 2019.

By the numbers:

  • Price increases have more than offset revenue declines due to a drop in unit sales, resulting in strong profitability for both automakers and dealerships.
  • GM made $10 billion in profits last year, its best year in over a decade. Profits are expected to range between $9.4 billion and $10.8 billion this year.
  • Last year, Ford earned $10 billion in operating income (profits from its core car-building business). Despite producing 6% fewer vehicles than the previous year, it was the company's best performance since 2016.
  • Dealers are also doing well as rising prices have increased their profit margins. Despite a lack of cars to sell, over 82 percent of respondents in a recent Cox Automotive survey of auto dealer franchises said profits were strong.

The big picture:

The supply chain recovery story, which is primarily focused on semiconductor availability, may obscure the reality that the auto industry may never return to its pre-crisis patterns. Instead, we may be witnessing the emergence of a new business model that emphasises lower production levels, higher prices, and wider profit margins.

What they're saying:

It works well for automakers and dealers, said Michelle Krebs, a Cox Automotive analyst. They are not going to rush back to the old way of doing things. In fact, we don't think we'll ever return.

Yes, but:

Consumers are one group that is likely to be dissatisfied with the new status quo. In June, the average transaction price for a new car was $48,000.

The bottom line:

The new car market has truly evolved into a luxury market, Krebs says. A lot of Americans have opted out.

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