Price increase in the automotive industry, without brake in the short term

Price increase in the automotive industry, without brake in the short term

The car price increase new ones is a problem that has been recorded since the beginning of the pandemic. There are those who consider that phenomena such as the paralysis of distribution channels, the semiconductor demand for other devices that are not vehicles, as well as the increase in the costs of raw materials and supplies, were responsible for this escalation. However, there are voices that affirm that this situation began a couple of years before 2020 and only worsened as it happens with a drastic change in temperature that ends in a bad cold.

According to the study “Building the Supply Chain forward, strategies to mitigate disruption in the automotive chain”, prepared by Maersk “the semiconductor shortage intensified during 2021 and this phenomenon impacted all original equipment manufacturers and automobile assembly regions. In 2021, chip shortages are estimated to have reduced light-vehicle production by 10 million units or more, putting billions of dollars of revenue at risk. According to industry experts, shortages are expected to persist through the remainder of 2022 and impact 2023, lowering estimates of recovering pre-pandemic volumes.”

In addition, it must be taken into account that assembly lines that are closed or partially stopped (mainly due to the lack of semiconductors), has caused global production planning uncertainty as well as supply chain havoc, with suppliers and logistics facilitators unsure of production schedules and supply levels; some have faced plant closures and shift cancellations in a very short time.

According to this study, the specialists considered that the impact on production would be only 200,000 units worldwide for all of 2021, but the calculations made by AutoForecastSolutions show that the negative impact for that year was more than 10 million units, a balance that is only compared with the crisis caused by Covid-19 in 2020.

Within this panorama, we must also look towards the dealers, which faced with a slow supply of units, saw their inventories disappear, falling to almost record levels in the United States and Europe. It is undeniable that the lack of availability has as a consequence the decline in sales of vehicles in recent months, but it is also true that due to the increase in demand, prices have gone up.

material costs

The Automotive Industry has to face more than just the crisis of the lack of semiconductors. The low availability of materials and products such as textiles, leather, the steel, rubber or wood, has automatically caused its price increase. “Global increases in energy costs could even drive some smaller or niche suppliers to ration production. There is concern about factory stoppages in China, for example, as the country tries to reduce coal consumption”, refers to this research by putting on the table the role that different materials have in the manufacture of a vehicle.

According to figures provided by Automotive From Ultima Media, the cost of steel, used in the manufacture of the chassis or body, engine, various mechanical components and suspension, increased its cost between 34% and 41% from 2020 to 2021 depending on the grade or type of steel. Aluminum, destined to manufacture engine parts, transmission, wheels, panels, among others, increased by 62% while rubber 100%, just to cite a few examples.

Logistics and its impact

For Oscar del Cueto, President of Kansas City Southern of Mexicothe trigger in the logistics cost was Covid 19. Interviewed by Cars The Economistthe executive mentioned that the closure of ports had a negative impact on distribution and transportation operations.

“The issue of congestion or delay in some ports (remember that some in the Asian area were closed and today those in Long Beach and Los Angeles are blocked), was a phenomenon that made the logistics chain semi-slow with little availability of containers to move auto parts, and all this affected the delivery and reception of vehicles at a logistical level. In the case of KCS, the logistical issue occurred a lot in the United States with some congestion last year in the Houston area and another was due to the lack of equipment. So they did not arrive at the ports and there were no containers to transport them. I think that it is currently a little recovered but logistics costs are still very high and this undoubtedly has an impact on the entire logistics chain; we are a part of the chain but costs have risen in that sense due to low availability”.

Logistics cost forecast

Far from expecting a recovery soon, for del Cueto, the armed conflict between Russia and Ukraine is severely complicating logistics. “Hopefully the Covid issue does not pick up because we have heard about cities that are once again considering confining people. If this does not happen, I think the trend will have to go down”, he concluded.

Price, a complicated equation

For Alfonso Chiquini, Marketing Director of Volkswagen from Mexicothe increase in the price of automobiles only worsened with the pandemic but it was a fact that occurred before.

“The increase is an issue that comes from the pandemic. Materials are appreciating and their costs continue to increase, but as a result of the pandemic there were costs that increased more than had been a normal trend. For example, logistics costs rose due to issues such as the fact that there were fewer operators to move the goods.”

He added that before the pandemic, increases were already seen in materials such as steel, rubber, among others. He stated that among the key elements in the increase in the final cost of a vehicle are logistics costs and the higher price of materials such as steel. He ruled out that the exchange rate is a determining factor because today our currency is very strong.

Being local is not everything

The global connection in terms of production and costs must be considered in determining a price.

“Having national production is not a decisive factor to have a lower final cost either. Nowadays, although we produce here, we obey a global reality because we don’t buy everything in Mexico. Here you finish it but you don’t buy everything here; not all the supply is in the territory. In addition, the costs of a product also refer to the operation of other regions. Such is the case of the Consolidated Return. A project or a vehicle as such combines the performance of various markets where it is sold. So, if the profitability and volumes are lower here, the total costs have to be distributed among the total number of units sold. So not necessarily because you manufacture here the costs are very low. You always depend on other markets.”

Profitability issue

It is common that when making a quick estimate of what a car that is not sold in our country could cost, we resort to the conversion of the exchange rate.

“There are many elements that affect the determination of the profitability of the project. The cost of the car is one thing, but it is not the same amount of money that is invested to sell it in Mexico as what is required for the United States or Europe. The cost of operating the brand and the cost of the incentives that are set are not the same in all countries. Figuratively speaking, not all cars are invested $100; there are places where $1,000, another $100 or another $300 are allocated, because a lot depends on the competition, the position of the brand, etc. All this makes up what the fixed costs are and from this what is also determined is the impact on the profitability of the project”, he explained.

Price increase in the automotive industry, without brake in the short term

Dealer Bonanza

Gone are the days when you visited more than one distributor to find out which one offered the most benefits. The current high demand and low costs of operation have distributors at their best.

“Price is one of the main determinants of buying a car. Speaking of Fixed Costs, today our distributors are being more profitable because there are costs that they are not having to charge today, such as the Financial Cost or not having a very large inventory. Today what arrives is distributed and sold, the logistical costs for the distributors such as the need to have large yards to store the units, today they do not exist. On the other hand, due to today’s high demand and low supply, distributors are selling at full price, without discount. So today they have greater profitability with lower costs, which is why the industry, today, is being more profitable.”

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