Sunday, October 24, 2021

BMW and Daimler pledge to keep prices high when chip crisis ends

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Automakers Daimler and BMW plan to limit the volume of premium models they ship even as chip shortages wane across the industry, in a bid to block the steep price increases they have achieved during the pandemic.

A chronic shortage of semiconductors, which cars depend on for everything from electronic windows to driver assistance systems, has hampered vehicle supply just as consumer demand recovers from repeated shutdowns.

Although German luxury automakers were already moving away from a volume-based approach before Covid-19, the willingness of customers to pay higher prices during the pandemic has encouraged them to go further.

“We will consciously underestimate the level of demand[s]”Harald Wilhelm, Daimler’s chief financial officer, told the Financial Times,” and at the same time [will] shift gears to the top end, luxury. “

BMW had “seen a significant improvement in pricing power in the last 24 months,” said CFO Nicolas Peter. The Munich-based automaker’s plan was “clearly stick with. . . the way we manage supply to keep our pricing power at the current level, “he added.

Industry executives, auto dealerships and analysts say the chip shortage, which has its roots in a competition between the automotive and consumer electronics industries for a limited supply of semiconductors, will herald a new focus on fixing prices and the sale of premium models.

“The pandemic has really opened everyone’s eyes – that a different paradigm is possible,” said Arndt Ellinghorst, an analyst at Bernstein. “Everyone loves it, including the distributors.”

Discounts typically offered to customers at dealerships, typically around 15 percent in mature markets, have been drastically reduced, with some models selling above the tag price.

A one percentage point decline in the average discount would free up $ 20 billion in additional profit for automakers, according to Ellinghorst, and discounts in Europe and the US have fallen at least twice that amount since their pre-pandemic peak. .

BMW’s Peter said the group’s US dealers “always wanted it. . . Well, we need the cars in the showroom, the customer expects to come in on Saturday morning at 10 am and wants to leave with everything ready, with fixed license plates on the car at 1 pm at the latest. “

Now, however, they say that “customers are ready to wait three to four months, and this is helping our pricing power,” he added. “Of course, the waiting time should not be too long, but if you buy a premium car like a BMW, it is an emotional decision. . . having a short wait time is something, I think, that makes the customer experience even greater and better. “

The increased pricing power has already been transferred to the results of BMW and Daimler. Mercedes achieved a 12.2 percent return on sales in the latest reported quarter, down from 8.4 percent in the same period in 2018, the latest measure unaffected by the pandemic or litigation costs by diesel emissions. BMW’s margin reached almost 16 percent, down from 8.6 percent.

Daimler’s Wilhelm said that while the chip shortage has artificially pushed prices up, “one day or another, the semis problem will go away and we will continue to price, margin and focus on the mix.”

Signs that pricing power is proving difficult for luxury automakers come as central banks remain vigilant for signs of inflation as the world economy recovers.

This week, the European Central Bank raised its inflation forecast for this year to 2.2 percent, but predicted that it would again fall below its 2 percent target next year and remain at just 1.5 percent. cent in 2023.

With reporting by Martin Arnold in Frankfurt

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