With high financing costs, massive dealer markups, and rampant inflation, it’s safe to say that now is not the best time to buy a car. It wasn’t always this way, but in recent years, new car sales have lost a major factor that could exacerbate the situation. Manufacturers are now spending a fraction of what they used to to incentivize sales — and we are unlikely to return to the good old days anytime soon.
Companies spent nearly $6.5 billion on incentives in August 2019, according to Cox Automotive. The incentives were used for a variety of purposes back then. A tempting discount may entice a buyer to purchase a model that is overstocked or simply not selling well. Dealers could also use incentives to persuade a customer to buy a car from their specific manufacturer rather than a competitor.
It appears that there is no longer a need. By August 2022, incentive spending has dropped to $1.24 billion, a fraction of what it was three years earlier. Auto sales are also down overall, but this isn’t due to a lack of incentives. Simply put, there aren’t as many new vehicles on the market, and the ones that are are selling at a much higher margin.
There is a major vehicle shortage
One of the reasons new cars have been selling at or above their sticker price is a scarcity of supply. The coronavirus pandemic, combined with a global semiconductor shortage, has forced major automakers such as Ford and General Motors to reduce production. Earlier this year, Ford reduced output at eight of its North American plants.
Things are also bad at General Motors, which has had to shut down most of its manufacturing plants due to a lack of parts. Before the plants were shut down, GM showed us what happens when a company tries to keep going during a major parts shortage. Over 90,000 vehicles are essentially built but cannot be completed due to a lack of parts, according to the company.
So, when supply runs out and demand remains constant or rises, only one thing happens to the price. While fewer vehicles are sold overall, the margins on those vehicles are significantly higher than they were prior to the pandemic and the semiconductor shortage. Despite the fact that now is a good time to raise prices from a business standpoint, companies are still doing everything they can to keep dealerships in check.
Manufacturers attempting to stop dealer scalping
Despite manufacturers’ efforts to keep prices stable during the shortage, dealers are taking advantage of the opportunity to maximize their profits. Markups have been seen across the board, with vehicles like the Jeep Wrangler seeing price increases of more than 20%. Things are even worse for popular vehicles such as the Ford F150 Lightning, which has been seen selling for more than three times its MSRP. The price gouging on vehicles like Ford’s electric pickup is so bad that the company is considering removing its EVs entirely from dealerships in the future.
Ford believes that by shifting to an online-only sales model, it will be able to deliver EVs directly to customers at a reasonable price. Ford isn’t the only company that’s tried to put a stop to dealer price gouging. When it came to the rollout of the Dodge Demon in 2017, Dodge, another Michigan-based manufacturer, prioritized dealerships that sold at or below MSRP.