If you could wave a magic wand and imagine what a “perfect storm” scenario would look like to drastically reduce automakers production capabilities, you’d probably describe something like what we’ve seen in 2021. Whether it’s supply chain constrains, virus outbreaks, or workers who are simply quitting, automakers are facing a series of setbacks that are unprecedented in scope and scale.
This “perfect storm” has had meaningful and material impacts on the everyday consumer. Everything is more expensive. Not just cars, trucks, and SUVs (did we mention that wholesale used car prices have increased 40%+ in 2021 alone?), but in other categories such as household goods, food, and more. We’re in the perfect storm, and for better or worse, that’s going to have major impacts on our pocketbooks next year, in 2022.
How big will the impact be in 2022? What changes do we expect automakers to make heading into the new year? And most importantly, when will things “go back to normal” (or will they?)? We’ll answer these questions and more. Let’s dive in.
What got us here
Automakers, like all major manufacturers, operate on just-in-time (JIT) manufacturing practices. Just-in-time manufacturing is a business operating model where finished goods are created to meet demand. That’s it. Plain and simple. Finished goods are not created in surplus or in advance of any need. The benefit of JIT production is that the manufacturer can (in theory) avoid the waste associated with overproduction, the carrying costs of holding and storing inventory, and the burden of housing input materials that are necessary to create the finished good.
Henry Ford, in his 1923 book, My Life and Work describes just-in-time manufacturing:
We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time. If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials.
For all the benefits that JIT brings, it also has some downsides; mainly, when one piece of the intricate global system that delivers input goods to manufacturing plants on-time goes down, the whole system can be effected. What does this mean? It means that if one component of a vehicle doesn’t make it just in time to a production facility, then the whole process can come to a standstill.
That’s exactly what happened towards the end of 2020 when automakers slashed their orders of many input components. With the uncertainty of what was going to happen as a result of the coronavirus pandemic, automakers did not want to hold onto excess inputs at their production facilities (remember, JIT requires you to only have what you need). What no automakers expected was for new vehicle demand to stay steady in 2021. The expectation was that consumer demand would decrease because of the pandemic, that never panned out.
For months major original equipment manufacturers (OEMs) struggled to get their hands on the materials they needed to produce vehicles. The component that became the most challenging to source was (and still is) integrated circuits (also called semiconductors, or chips). These circuits are everywhere in our cars. From turning on the air conditioning to changing your turn signal, ICs play a major role in how your vehicle operates.
We’ve documented the chip shortage at great length. Suffice it to say the auto industry’s commitment to JIT manufacturing has completely backfired. With demand for semiconductors through the roof, price gauging has become rampant. It’s a classic case of the golden rule: she who has the gold, rules. Whomever has the chips right now, they rule.
In addition to input costs rising, OEMs have been faced with other pandemic induced challenges. Manufacturing plant shutdowns because of the virus have been rampant in 2021.
Automakers have collectively lost over 3,000 production days in assembly plants so far in 2021. That data comes from Bill Rinna, LMC Automotive’s director of vehicle forecasts for the Americas.
The impacts we’ve seen so far
Used cars typically depreciate. Actually, let me rephrase that. Used cars depreciate. Never in history have we seen used vehicles appreciate in value like we are seeing so far in 2021.
Did you buy a brand new Toyota Camry three years ago and put a couple thousand miles on it? Guess what, you can sell it back to the dealer right now for likely exactly what you paid for it back then (or potentially more!). Seriously.
Because automakers have not been able to produce new vehicles at levels they expected to, used car prices have gone through the roof. New car prices have too. If a car does make it to a dealers lot, it is being sold with additional dealer markup (ADM) and all sorts of “accessories” or “add-ons” to boost dealer profit.
The days of buying a car, truck, or SUV at invoice price are long gone. And the premise of buying a used car that has depreciated a bit, because it represents a “better deal” is entirely dead. In a market where new cars sell for significantly over MSRP, and used cars sell for more than their original MSRP, us consumers are at a loss. If you’ve tried to search for a car recently and said to yourself, “WTF!!!” you are not alone.
From the thousands of CarEdge members we help each month, we’ve seen most new car deals include at least $1,500 in additional “stuff”. This “stuff” can come in the form of dealer markup (market adjustments, additional dealer markup, etc.), accessories (appearance packages, protection packages, etc.), or general add-ons (window tint, nitrogen in the tires, etc.). If you’re able to buy a new car at MSRP without this additional markup/fees, that represents an incredible value right now.
The impacts we’ll see next year
MSRP stands for “manufacturers suggested retail price”. Over the past few months we’ve seen first-hand how important the word “suggested” is. Dealers have marked up their vehicles well above MSRP, and consumers are paying. With such limited supply, dealers are able to make ridiculous amounts of profit. Every publicly traded auto dealer made record profit in Q3 of 2021 as a result of this.
Next year we don’t think dealers will be able to make quite as much money. Why? Because the OEMs are going to get in on the fun — they’re going to drastically increase the MSRP. This won’t inherently stop car dealers from marking up even further past the MSRP, however we expect and anticipate very significant increases in MSRP for all new vehicles for the next model year.
We’ve already begun to see this. Tesla recently increased the price of its model S and Y by $2,000, followed by a $5,000 hike on for the model X and S.
Other automakers are already doing the same thing. The MSRP on a base Ram 2500 has increased 5% from 2021 to 2022 for example. We expect, and wouldn’t be surprised if more automakers increase their MSRP by double-digits in 2022.
The impacts we’ll see forever
Many of the major automakers have already signaled that they like their dealers having less inventory. The United States is the only major market where car dealerships have massive lots full of inventory. In many markets the dealership is simply a showroom with customers placing orders for the vehicles they want.
As more and more manufactures aspire to provide a “Tesla” like experience, we would not be surprised to see less inventory on dealer’s lots, and more factory orders.
Factory orders will also become more of the norm. Consumers may go to a dealership to test drive and “experience” a new car, but instead of buying it right there on the spot, they’ll place an order. This is a common practice in Europe and other major markets, however in the US it has never caught on. That’s likely going to change.