April 12, 2022

Want to Buy a New Car – Not at these prices  

The Covid 19 Pandemic has unleashed a number of events and behaviors different than just people getting sick. Without question, it has disrupted the supply chains of the world’s interconnected economies to such an extent that it may be a long time before business as usual or business back to normal. Harbors like the Los Angeles harbor have seen as many as 250 world-class tankers sit for as much as a month before being unloaded. Once unloaded there aren’t enough long-haul trailers or railroad capacity to move the merchandise to its next destinations.

Let’s take one industry, the automobile industry, and see what this means. For the last 15 years, cars have become more and more electronically oriented than mechanically based. This is irrefutable. The number of computer chips in vehicles has increased almost exponentially during that period of time. Nobody will argue this.

Now let’s couple this increasing complexity with another management concept and that’s the process known as Just – In – time manufacturing or JIT. For almost the entire history of automobile manufacturing, Detroit has always inventoried parts for car production. Every car needs 4 tires plus some kind of spare. So General Motors might inventory 300,000 or 400,000 tires at any time, which is enough to build 75,000 or 100,000 cars. They don’t give you a full-size spare anymore. Ford, Chrysler, it was the same deal. It was the same way with every car part that was utilized.

The Japanese more than 30 years ago, turned this management practice on its head and said no, we will no longer inventory parts by keeping a month’s worth or two months’ worth of inventory on our premises. They told their suppliers that they only wanted to keep 2 or 3 days’ worth of inventory and now you must deliver parts to us every day so that we always have 2 or 3 days’ worth, not a month or two.

What did this mean? It meant that Toyota would receive parts on a Monday that were meant to be used on a Wednesday or a Thursday. But Toyota might not pay for those parts for 30 days or 60 days whereas GM might have two months of inventory and be required to pay for it in 30 days or 45 days or at most 60 days. This means the inventory was paid for before it was utilized in many instances for the Japanese. The Japanese were making money on the inventory by having their suppliers pay for it until weeks after it was already in the cars and the cars were out the door.

It took decades but in the end, GM and the rest of the industry moved towards Just in Time manufacturing. Now it has come to bite the world in the rear end and upset every modern and major manufacturing process in the world. When the Virus hit and the supply chains became interrupted of necessity, JIT collapsed as a management tool. The car builders can’t get enough computer chips, and you can’t build cars without the chips. Production collapsed and it is going to take months and months to bring things back to some kind of normalcy.

So what ensues when you Screw Up like this?

It’s always about supply and demand. The supply of cars has collapsed, but the demand is still there. Consequently, the price of the supply of cars must rise to meet the established demand. Car dealers everywhere are taking advantage of this by dramatically increasing their prices and basically gouging the consumer for all they can get. Then it drifts over into the used car market where prices are seemingly up 40% from a year or two ago because you can’t buy new cars and buyers are bidding up the old ones.

We looked at a car database composed of 1,200,000 cars that have actually been sold and we found that the average car is up 9.9% over its MSRP price which is the price the manufacturer sticks on the window of the car when you are in the dealership. Now let’s look specifically at certain cars and see what they are actually selling for out the door. The list is written from the highest increase over sticker price down to the lowest for the following cars. These are new car prices.

Jeep Wrangler                 26.7%
Ford Maverick Hybrid      25%
Porsche Macan               23.3%
Jeep Wrangler Unlimited 22.9%
Jeep Gladiator                 22%
Ford Maverick                 22.2%
Lexus RX 450H               21%
Ford Bronco                    20.6%
Genesis GV 70                20%
Mercedes Benz GLB        19.8%
Chevy Corvette               19.3%
Ford Mustang                  19.1%
Mini Countryman            18.9%
Lexus RX 350L               18.6%
Mercedes GLA                 18.6%

Now, these prices won’t last forever. If you buy a new or used car now, at some point the inventory problems will be solved and prices will COLLAPSE for both new cars and used cars leaving people holding the bag as usual. For some, it won’t matter because if you need a new or used car now, you just have to pay to play and that’s the business way. The politicians will somehow manage to explain that it’s not their fault and you should re-elect me anyway because I’m for the little guy.

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