Thinking of buying a car? Kimberly Walker, a mother of two in Columbia, SC, can tell you exactly what it’s like these days.
She recently found herself having to buy two vehicles from opposite ends of the market. For herself, she wanted a late-model electric Audi, and after looking around, she was able to find a used 2021 e-tron at a local dealership.
The price? An impressive amount of $68,000 without trading margin.
“We went back and forth. We stayed there for four hours,” she says. “They haven’t budged on that price.”
For his teenage daughter, Walker was looking to spend a few thousand dollars on an old car. The experience was no better. For four months they tried private sellers and kept losing bidding war after bidding war. CarMax didn’t have a single option under $15,000.
Eventually they found a car. There was only one catch.
“We ended up buying a 2009 Toyota Camry that wasn’t running at the time,” says Walker. “But the mechanic agreed to put a new engine in it and gave it to us for $3,500.”
Buying a car has been a frustrating experience over the past year as automakers continue to struggle to find computer chips and other critical materials due to tangled supply chains.
Unfortunately, it didn’t improve.
The University of Michigan has been surveying consumers for over 50 years and asking them if they think now is a good or bad time to buy a car. Today, more people are saying it’s a bad time than ever before in the history of the survey.
And for people on a tight budget, it becomes a real crisis. According to Kelley Blue Bookthe average used car is now selling 42% more than before the pandemic.
“People looking for as-needed transportation as opposed to as-needed transportation — people looking for the traditional $10,000 or $12,000 car that has, you know, 95,000 or 105,000 miles — those people are going through very difficult times in this market right now,” said Matt Jones, communications manager at TrueCar.
“It’s disturbing,” he adds.
It’s always the supply chains
The automotive market is still in shock after the pandemic completely upset the balance between supply and demand.
Automakers have had to cut production as they struggle to source critical materials such as chips, creating a shortage of vehicles that has caused ripple effects in new and used markets.
And it’s not just the number of vehicles they produce, but what kinds. Automakers have responded to shortages by focusing on their most profitable, i.e. most expensive, cars.
Compared to a few years ago, companies are making fewer entry-level sedans and crossovers — and more luxury vehicles, SUVs and pickup trucks, all packed with fancy features. This trend predates the pandemic, but the chip shortage has dramatically accelerated it.
“The companies made a definite decision that says, ‘If I only have this many chips, I’m going to put those chips in my most expensive models,'” Volkswagen of America CEO Scott Keogh told NPR in January.
This drove up average new vehicle prices significantly, and because people no longer priced new cars into used cars, every car shopper felt the impact.
But it’s a good time to be a car maker
This focus on more expensive cars has been good for automakers’ results.
Tesla and General Motors posted record profits last year, and executives largely attributed a focus on higher-margin vehicles like the Model Y for Tesla and full-size pickup trucks for GM.
Ford had its best year since 2016, citing a “strong mix,” which is business jargon for a higher ratio of more profitable vehicles.
It’s also been good for unionized autoworkers: They’ll get big profit-sharing checks — up to $10,250 for GM workers.
Dealerships also benefited. Scarcity makes vehicles fly away, and they too benefit from the move to the top of the range.
“It’s very easy to operate as a car dealership in this environment,” says Arnaldo Bomnin, CEO of Bomnin Automotive Group, a Miami-based dealership group. His company just raised $1 billion in annual revenue for the first time ever.
Jim Watson/AFP via Getty Images
How long can the car market stay like this?
The upheaval in the auto market has been so good for automaker margins that it raises questions about whether some changes will become permanent, even when chip supply chains return to normal. (As for when that will happen, optimists think the crisis will ease in a few months, while pessimists predict shortages until next year.)
Auto executives told investors that those very profitable months made them realize they may have been making too many cars before. At some point in 2019, there were 4 million cars waiting to be sold; the current stock is around one million vehicles.
But many analysts believe that once chips become available, companies will likely return to the fight for market share by offering higher volumes, lower prices and more options.
There is certainly a demand for cheaper vehicles; Ford’s new low-priced pickup offering, the Maverick, quickly sold out.
“You put in something nice and attractive and you put in a price tag of $20,000 – the whole world will cry about it,” Jones told TrueCar.
Also, trying to squeeze margins with fewer more sophisticated vehicles may spur automakers now, but it could easily come back to bite them.
“It’s a huge inconvenience for the customer,” says Bomnin, the Miami dealership’s owner. “If I have to choose, I’d rather have 1,700 cars in the lot.”
Kimberly Walker in South Carolina is an example of what the industry stands to lose. She says that if market conditions stay like this, she will change her behavior.
“I won’t buy a new car every few years,” she says. “I’ll probably ride this e-tron until the wheels fall off, then hand it over to my 6-year-old when he starts driving.”