Why Should Automakers Try to Meet Demand?

[pa-outdoorsman]

Here's an interesting news story today, reporting that GM's 2021 U.S. sales volume was down 13 percent, yet net profit was up an incredible 56 percent! This is due to vehicles being in short supply, pushing prices to an all-time high.

https://www.foxbusiness.com/markets/record-sales-prices-drive-gm-profit-up-56-to-10b-last-year

So, I see a direct correlation to the Maverick and all other in-demand models. If auto makers can maintain higher margins and higher profits by producing a lower quantity of product, what is their incentive to speed production? I mean, the fewer vehicles you make, the less overhead you have in the form of raw materials and labor, right?

Just put it into a personal perspective. If you could make the same salary doing half the work, would you not throttle down your production? I just think we are in for a "new normal" here, and while things may not stay as bas as they are now forever, clearly the auto makers will not be eager to return to the "good, old day" of lots full of new vehicles offered at deep discounts.

Sponsored

 

[brnpttmn]

Here's an interesting news story today, reporting that GM's 2021 U.S. sales volume was down 13 percent, yet net profit was up an incredible 56 percent! This is due to vehicles being in short supply, pushing prices to an all-time high.

https://www.foxbusiness.com/markets/record-sales-prices-drive-gm-profit-up-56-to-10b-last-year

So, I see a direct correlation to the Maverick and all other in-demand models. If auto makers can maintain higher margins and higher profits by producing a lower quantity of product, what is their incentive to speed production? I mean, the fewer vehicles you make, the less overhead you have in the form of raw materials and labor, right?

Just put it into a personal perspective. If you could make the same salary doing half the work, would you not throttle down your production? I just think we are in for a "new normal" here, and while things may not stay as bas as they are now forever, clearly the auto makers will not be eager to return to the "good, old day" of lots full of new vehicles offered at deep discounts.

Maintaining lower production to increase prices/profits is not really possible without collusion. Without that collusion (which is illegal) at least one of the manufacturers would take advantage of the low supply to grab market share, and then others would follow until we're back up to normal (or perhaps over) supply.

 

[Clarkdonbran]

OP and first response make great points. I will use this conversation when I help my students with their Econ credits!

 

[pxpaulx]

OP and first response make great points. I will use this conversation when I help my students with their Econ credits!

They are both great points I agree!

I wonder if the profitability is tied to lower dealer lot inventory, being able to limit the volume and value of discounts/incentives due to demand, and other similar factors.

On the point about market share - if your products are all in demand and production at full capacity, does market share matter? As long as you are competitive, innovative, and growing, I'm not sure that it matters so much.

I do suspect that while the manufacturers themselves are having record profits despite sales being down, they'll be looking to minimize the ADM adjustments dealers are sinking their teeth into - both by direct warnings, and by increasing inventory to the point where ADMs no longer make sense (but not increasing so much as to require significant sales incentives which will eat into profits).

 

[brnpttmn]

They are both great points I agree!

I wonder if the profitability is tied to lower dealer lot inventory, being able to limit the volume and value of discounts/incentives due to demand, and other similar factors.

On the point about market share - if your products are all in demand and production at full capacity, does market share matter? As long as you are competitive, innovative, and growing, I'm not sure that it matters so much.

I do suspect that while the manufacturers themselves are having record profits despite sales being down, they'll be looking to minimize the ADM adjustments dealers are sinking their teeth into - both by direct warnings, and by increasing inventory to the point where ADMs no longer make sense (but not increasing so much as to require significant sales incentives which will eat into profits).

Market share matters if you're trying to artificially reduce/limit production to keep prices up because, once you're a smaller share of the market, your artificial scarcity will not get you much other than greatly reduced profits because of the price drops that inevitably happen when other more competitive producers increase their production/market share.

 

[Dun4791]

Maintaining lower production to increase prices/profits is not really possible without collusion. Without that collusion (which is illegal) at least one of the manufacturers would take advantage of the low supply to grab market share, and then others would follow until we're back up to normal (or perhaps over) supply.

OPEC comes to mind!

Sponsored