A gentle slope or a rush to the bottom?

A busy week in the run-up to the holiday period, so my blog is a little later than usual.  However, there was no shortage of topics that caught my attention over the last several days.  The one that stood out however was around new car pricing.  Manufacturers and dealers have both benefited from strong new car pricing due to product shortages making it a sellers’ market, and this has fed through into the used car market, so traders have been achieving higher pricing for the cars they can offer, and leasing companies and private owners have had a pleasant surprise in respect of residual values.  If that position was sustained, we would have a much more stable market without the distortions that simply cost everyone money over the long term.

Many manufacturers look at Tesla with their “zero marketing spend” strategy and direct sales model with envy, and there is no doubt that this has worked for Tesla in driving (now) profitable growth over recent years, from less than a quarter of a million units in 2018 to around 1.2 million units this year.  (ICDP members can see our Tesla case study from June 2021 through our website).  However, the market is now more competitive than it was even four years ago, with competing premium BEVs from all the established manufacturers.  With new assembly plants in Berlin, Shanghai and Texas, there are a lot of hungry mouths to feed, and the pressure is beginning to show.  With demand in China affected by the Covid restrictions, Tesla has cut production and made two rounds of “heavyweight” price cuts.  In the US, a price promotion has been launched worth US$3,750 per car in the face of slow demand, though this is partially linked to new Federal tax incentives that will only apply from January 2023 which have this value to customers.  However, as a direct seller, with no dealer wholesale route, Tesla can only report registrations in its revenue numbers, so sales slipping into the next fiscal year results in lower reported revenues and profits.

Turning to the more mainstream manufacturers, most are starting to talk about improved product availability and reducing lead times for new cars.  According to research by Carwow and Bernstein, a leading equities analyst, average lead times for news cars in Europe dropped by around two weeks to 8.2 months between August and December.  This compares to less than five weeks two years ago when the pandemic was in full swing, but is still a long way from a situation where manufacturers are pleading with dealers to pre-register cars to sell on as nearly new, but with improving parts supply and weakening demand, the supply and demand lines could converge quite quickly over the coming months.  For sure, within the overall market averages, there will be brands and models where this will happen in the first half of 2023.  Although dealers are delivering from their order bank today, and will continue to do so for much of next year, we will reach a point when there are cars in the pipeline or in stock that are looking for buyers.

This will coincide with the point when some manufacturers are going live with their switchover to agency agreements, and it is unclear how many are fully prepared for the new world that they will face.  Senior management have looked on with envy at Tesla’s zero marketing budget and fixed prices, but there has always been some marketing expense, even if this has been hidden in referral bonuses and free supercharging offers.  Now that they are becoming part of the mainstream, we are seeing more frequent price adjustments being made in the full glare of publicity, and there is no reason to assume that they will be able to return to their previous practices.  This will most likely not show up as cost of distribution, but as a reduced revenue line because of the direct sales model, and the influences of demand balancing will be lost alongside market and model mix variations.

For the traditional manufacturers, they will have some opportunity for a few years to conceal the effects of agency markets amongst the other markets and models that follow a traditional model, but the key question is whether they are fully prepared to manage pricing at the dynamic, deal by deal, level like airlines and hotels, or will they resort to much blunter approaches like that of Tesla?  Dynamic pricing support can be hidden in the finance deals or part exchange offers, but unless the total effect of this can be wound back to lower levels than the total effect of campaigns and discounts today, all the effort will be for nothing.  As we go through next year, are the manufacturers, their pricing teams and their supply chain managers going to guide us down some gentle slopes through alpine meadows, or will it be a scary race down the ski jump with a potentially painful landing at the bottom?