Future distribution progress depends on OEM purchasing departments…

The global car industry continues to struggle with supply in the face of the shortage of semi-conductors with extended lead times, restricted product offers and cancelled contracts.  The casual observer might then expect this to lead to huge losses, slumping share prices and dealer investors rushing to leave the sector.  But if anything, the opposite is true.  Manufacturers and dealers are reporting high margins as discounts have disappeared faster than Usain Bolt leaving the blocks.  We have entered a world where demand exceeds supply for most makes and models, and everyone – other than the brokers and price comparison sites presumably – is benefiting from this situation.

In that situation, should we expect this to become part of the ‘new normal’?  When dealer discounts and manufacturer support through finance subvention and special discounts can easily exceed 10% of the retail price of a car, and in some cases 20%, this is a far easier way to fix the business model than manufacturers fighting with suppliers over a saving of a few cents on parts, or with dealers about what it will take to get 0.5% out of the base dealer margin.  Balancing supply with demand is a key driver of better price discipline in the marketplace – an enabler of omni-channel retailing, whether through a franchise model or agency.

Lead times for some types of semi-conductors are no longer increasing suggesting that we might be starting to see the light at the end of the tunnel, though the microcontroller type chip widely used in cars remains in short supply.  However, I do not have a high level of confidence that the lessons will be learned from the recent profit boom and see a good chance that arguably the most destructive force on the automotive business model will return as the current chip shortages ease.  That is not because manufacturers or dealers are masochists who enjoy unleashing all the same forces that have caused them so much pain in the past, not to mention a lot of red ink on their profit and loss accounts.  It will most likely happen because of natural market forces, that cannot be constrained as competition law does not allow it.

If we look at the current situation, not all manufacturers are suffering to the same extent.  Hyundai, Kia, Tesla and Toyota seem to be doing relatively well, Volkswagen Group somewhere in the middle and Jaguar Land Rover one of the most severely hit, with lead times in the UK of a year or more, and some popular models on 2023 delivery dates.  Ford and Volvo have adjusted equipment levels to reduce the number of chips required, so that they can offer shorter lead times than the original ‘chips with everything’ specification.

If a manufacturer with a stronger relationship with the chip manufacturers gets back into a free supply situation earlier than a competitor who for whatever reason has restricted supply, are we to assume that the first manufacturer will bring the lead times on its products back down to a reasonable level, then stabilise production at that level?  Of course not!  If they are able to achieve higher sales at full margin because of their improved supply situation and capture sales from competitors who are not in such a strong position, they will do so.  So far, so good – if the situation then stabilised there.  But that won’t be the case, as the manufacturers who have lost out, but later achieve an adequate supply of chips will want to win back the lost market share and will ramp up production higher than their now diminished demand.  They will have to fight back with campaigns and discounts and demanding dealer targets.  The first manufacturer who made the initial gains will not want to lose out on their gains, so will fight back using the same tools.  Déjà vu – back to where we were again.

There is not a simple answer to this expression of market forces.  It emphasises the need for manufacturers to be working hard on restoring their chip supplies, to ensure that they do not end up with what might be a permanent loss of market share, and consequently a long-lasting competitive disadvantage.  The most important battles in the automotive industry today are probably being waged by purchasing departments.  The success of the individual players and the opportunity to lock in a more orderly and balanced market depend on them!