Low Inventories Mean Big Profits for Automakers, Less Choice for Consumers | Automatic features
DETROIT – Strong consumer demand keeps all three Detroit automakers bullish on second-half profits, even as a global microchip shortage is expected to continue into next year amid growing cases of the COVID-19 plus delta variant contagious.
Cons for consumers: higher transaction prices and, in many cases, longer wait times for new vehicles – a trend that translates into longer term auto loans, higher prices for used car buyers overpriced new vehicles and frustrating delays in landing a hot new product vehicle from Detroit.
The waits often hampered by supply chain disruptions can be long, as Jamie MacDonald, 48, of Eaton Rapids, Mich., Discovered after booking a new Ford Bronco last July: just crazy. I moved a vacation based on a scheduled delivery window. Here I am over a year later. I have no idea what’s going on.
After realizing the benefits of keeping inventory lower, automakers in Detroit are looking to make some of the changes brought on by the pandemic permanent. A smaller offering means automakers don’t have to offer as many expensive incentives. And dealerships can lower inventory costs, effectively limiting options and forcing customers to likely order a vehicle to get exactly what they want.
“It’s nice not to have the expense of keeping extra inventory and the expense associated with that,” said Jeff Laethem, president of Ray Laethem Motor Village in Detroit. “It’s bad for customers who are looking for variety and looking to be instantly gratified.”
The numbers tell the story. General Motors Co. said on Wednesday it now expects pre-tax profits for the full year to be between $ 11.5 billion and $ 13.5 billion, up from the previously reported $ 10-11 billion. Detroit-based automaker reported record second-quarter pre-tax profit of $ 4.1 billion, including warranty recall costs of $ 1.3 billion, including $ 800 million related to Chevrolet Bolt recall EV. Profits before taxes were $ 8.5 billion in the first half of the year.
Stellantis NV last week increased its forecast adjusted operating margin for the year to 10% from 5.5% to 7.5%, assuming there will be no further deterioration in the supply of semi -conductors and blockages linked to COVID-19 in Europe and North America.
And despite losing about half of its expected second-quarter production volume, Ford Motor Co. posted better-than-expected second-quarter results last week and revised its outlook for the full year upwards. $ 3.5 billion. He now expects adjusted pre-tax profit of between $ 9 billion and $ 10 billion.
Automakers around the world are facing a chip shortage that has eaten away at inventories even as demand soars. This shortage will likely continue into 2022, but all three have expressed confidence in their ability to perform in the second half, even with the current headwinds.
“We continue to monitor COVID very carefully, take it into account and investigate what the potential might be from a COVID perspective, especially with the new delta variant,” said Mary Barra, CEO of GM. “We believe that with the strong performance and hard work of our teams, we can achieve these results.”
GM reported net profit of $ 5.85 billion for the first half of the year. Rivals
Ford declared $ 3.8 billion for the first half of the year and Stellantis declared $ 7 billion.
Earlier this year, GM said it expected an impact of $ 1.5-2 billion on profits from the chip shortage, but CFO Paul Jacobson did not quantify the impact when ‘he was asked on Wednesday on an earnings call, saying instead that the chip issues presented a “lost opportunity”. “For” even better “results.
The chip shortage, while reducing current production, including full-size trucks, is not expected to affect upcoming electric vehicle launches of the Hummer EV truck later this year, BrightDrop’s EV600 delivery van, and the Cadillac. Lyriq next year, Barra said.
“The chip shortage remains an overhead for GM and other automakers, but this quarter was ultimately another step in the right direction for Barra and the team,” Wedbush Securities analyst Dan Ives said. in a press release. “Demand appears robust and ultimately it’s a story of converting electric vehicles over the next few years with all targets appearing on time or maybe ahead.”
Others in the industry, however, are not as optimistic as the Detroit Three about the second half of the year. BMW AG on Tuesday maintained its adjusted operating margin projection between 7% and 9%, expressing concerns over the scarcity of microchips and rising prices for raw materials like aluminum and steel.
“We have seen additional challenges over the past two weeks,” said Nicolas Peter, BMW’s chief financial officer, during a presentation of the results. “Is this going to happen? Let’s see. “
Globally, Stellantis had 772,000 vehicles on dealer lots at the end of June. Overall, it lost 20% of planned production, or about 700,000 vehicles, in the first six months of 2021 due to unfulfilled semiconductor orders. The hardest hit were inventories at North American dealers, dropping 104,000 vehicles from December.
“We’re pretty happy that semiconductors aren’t expected to get worse from first to second half, although we obviously have to caution that with the lack of visibility, frankly, within the supply chain there is. therefore had some quiet events in the first half of the year. Richard Palmer, CFO of Stellantis, said during Tuesday’s earnings presentation. “Malaysia continues to be a problem for us and others at the start of this quarter.”
GM ended the quarter with about 212,000 vehicles in inventory and expects to see continued high demand and low inventory through 2022, CFO Jacobson said Wednesday.
Jacobson also noted the difficulties GM has had with Malaysia, a key semiconductor maker and where the virus has hit hard recently, but chip-related challenges are expected to ease in the fourth quarter.
In the second half of the year, GM will be hit by headwinds of $ 3.5 billion to $ 4.5 billion, including rising commodity prices, Jacobson said. The automaker predicts these costs will be between $ 1.5 billion and $ 2 billion more than in the first half of the year.
“We expect North American volumes to be approximately 100,000 units lower in the second half of the year compared to the first, including an impact from our full-size pickup truck and SUV plants, primarily due to some of the short-term pressures in Malaysia affecting factories in North America, “said Jacobson.” Otherwise, we expect the robust demand and pricing environment to continue as we approach 2022. “
Ford also expects headwinds in the second half. Executives said last week that rising commodity costs, investments related to the company’s growth plan and declining profits in the company’s financial services arm are expected to lead to operating profits for the second. semester lower than the first semester results.
However, executives said the worst of the chip shortage could be behind them and said they expect vehicle production and deliveries to improve in the first half of the year. They also expect growth driven in part by a new range of vehicles that is seeing strong early demand from customers.
“The main advantage we currently have is the strength of our product portfolio – and it’s about to get a lot stronger,” CEO Jim Farley said on a conference call last week. “Having successfully managed the first half of the year, we are poised to grow in the second half and beyond with these hot products. “
Seeing the success of keeping inventory lower, Ford intends to rely more on an order bank system in which customers reserve, configure and order vehicles online, wait for them to be built and then take delivery of vehicles. their local dealer.
“Navigating these (supply) constraints has led us to make significant permanent changes to our business model at Ford. We are modernizing our go-to-market strategy, ”Farley told Wall Street analysts.
It looks like a 50-60 day supply stock and increased online sales in the order bank system. Ford is hoping that a quarter of its sales will come from orders this way, John Lawler, Ford’s chief financial officer, said this week.
Andrew Frick, Ford’s vice president of sales for the United States and Canada, said in a statement Wednesday that Ford’s retail order bank grew by more than 70,000 in July, excluding Bronco and Maverick retail orders, which are 10 times higher than last year. .
In a research note following Ford’s earnings call, Morgan Stanley analysts called Farley’s strategy of switching to an order system “one of the most notable events of the earnings season. second trimester”.
“In our opinion, this is part of a bigger narrative shift on go-to-market strategy than it looks,” they wrote. “CEO Jim Farley appears to be living up to some extremely interesting strategic growth drivers behind the scenes here.”
Dave Kelleher, a dealer in Glen Mills, Pa., And chairman of the US dealer board of Stellantis, predicts it could be a year before inventory drops to 60 days.
“Our traffic is tremendous,” he said, noting that he had 42 cars at the start of July, has sold 155 and now has 48 in inventory. “I have 148 orders sold. These are the best selling orders I have ever had in the system. If you know how to work it, it is remarkably effective. We do not incur giant floor plan costs, interest charges. This is my most successful year so far.
GM’s average transaction price in the second quarter of 2021 was $ 48,550, according to Edmunds.com Inc., a vehicle information website, up 12% from a year ago. GM executives expect the high prices to continue until 2022.
Regarding the right amount of inventory, Barra said GM thinks “the optimized inventory level is higher than it is today, but I think we would all agree that ‘it’s pretty low, a lot lower than it used to be… we’re going to be much more efficient and it will be a real partnership with our dealers, as we optimize our system. (C) 2021 www.detroitnews.com. Visit to detroitnews.com. Distributed by Tribune Content Agency, LLC.