BMW And Daimler Want To Keep Prices High

Industry News / 13 Comments

Reducing supply keeps pricing high.

The global shortage of semiconductor chips is wreaking havoc on the automotive industry. Toyota recently announced that global production would be reduced by 40 percent, while Mercedes-Benz warned that the shortage would continue into 2023.

Supply is essentially the biggest problem, as it's impossible to build cars without a massive pile of semiconductor chips. These are used to control almost every electric device in the car, from the power-adjustable seats to the active safety systems. The automotive industry is also in a constant battle with the consumer electronics industry, as both rely heavily on this technology.

There is an upside for high-end manufacturers, however. It showcases how limited supply can actually work in favor of manufacturers, as Insider Voice has recently explained.

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Historically, dealerships had to rely on discounts to get customers to the dealership floor. Chevrolet's current Silverado HD discount is a prime example. This business model relies heavily on customers wanting their cars as soon as possible, which is why Chevy's deal comes with a time limit. The semiconductor shortage and the resulting lack of supply led people to pay ridiculous prices for cars they really want - take a look at the Ford Bronco and Chevy Corvette.

BMW and Daimler have noticed that the effects of the global pandemic and the shortage of semiconductor chips have given them more pricing power. In other words, getting customers to pay the full sticker price, or perhaps even more.

According to BMW's CFO, Nicolas Peter, it has significantly improved its pricing power in the last 24 months. Since customers want their cars right away, they're willing to pay a premium. According to Daimler's CFO, Harald Wilhelm, it will consciously underestimate the level of demand going forward.

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This is an obvious win for the manufacturers, especially when you look at how much money is in play. Financial analysts that a mere one percentage point drop in discounts would result in an additional $20 billion profit. Keep in mind that manufacturers are in this business to make money, so it's in their best interest to try and keep this status quo, even if the semiconductor industry catches up.

Wilhelm's comments on underestimating demand are particularly relevant. By doing so, Daimler can artificially create shortages by limiting the production of high-end vehicles. In essence, the availability of cars like the new AMG GT 63 E Performance and BMW 8 Series will be limited.

This will create a waiting list, which BMW's Peter thinks customers will be fine with. High-end vehicles are usually an emotional purchase, and customers are willing to wait and pay the full sticker price. Compare that to the former status quo, which was around a 15 percent discount in mature markets.


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