Sky-high car prices are expected to start declining
As chips and other auto components flow more freely, consumers should finally get some relief
For much of the past three years, car prices knew one direction: upward.
This was simple economics: There was far more demand for new vehicles than manufacturers could meet due to pandemic-related disruptions. As chips, wire harnesses and other components in short supply flow more freely again, a slow but inevitable march to normalization has begun.
Tesla and Ford were among the manufacturers making noteworthy cuts the last couple months, with the latter predicting new-vehicle pricing will fall 5% in the US this year. Elon Musk embellished a bit Wednesday when he suggested Tesla had made minor adjustments to the cost of its models and described affordability as a limiting factor for the company.
In Europe, Volvo and MercedesBenz remain bullish on pricing, citing healthy order books. Still, analysts expect that easier access to parts and stretched wallets will eventually bring auto prices back down. With energy, food and borrowing costs on the rise, consumers will think twice about splurging on a new set of wheels.
Net pricing for Volkswagen, BMW and Stellantis may drop 6.1%, 5.6% and 1.4% respectively this year, according to RBC Capital Markets. Mercedes may be the exception, with analyst Tom Narayan expecting the company to eke out 0.5% growth, he wrote in a report last month.
The German luxury-car maker has reaped huge benefits from focusing on its most expensive models even more so than its peers. The average price of a Mercedes climbed to around €72,900 ($77,485) last year, up 43% from 2019. That chimes with Ola Källenius’s push upmarket with topend models like the S-Class sedan and the G-Wagon sport utility vehicle.
Downward pressure in the mass market looks clearer-cut. In Germany, several Volkswagen dealers have been rebelling against a new agency franchise system that Europe’s biggest carmaker is introducing for its EVs. While dealers have no balance sheet risks because they’re selling cars belonging to VW, they also get less flexibility to offer the rebates customers have been used to and are worried about losing them if prices won’t come down.
Talk of an imminent full-blown price war is probably overblown. Tesla turned heads with its radical reductions in January, but it’s long taken a unique approach to pricing, often changing them multiple times a year. While executives including General Motors CEO Mary Barra have sworn against going back to inventory levels they used to reach, don’t discount the likelihood that manufacturers eventually will return to chasing volume and market share. Old habits die hard.