German car manufacturers enjoy record prices on luxury models when production falls

Germany’s premium car manufacturers enjoyed record high prices for their luxury models in 2021 as the lack of semiconductors limited the supply of vehicles to large markets just as consumer demand increased.

Revenues per car at BMW, Audi and Mercedes-Benz increased by an average of almost 25 percent compared to the pre-pandemic in 2019, analysis carried out by Stifel-bank for the Financial Times has shown.

The increase has been caused by a reversal of a decade-long trend, in which the industry produced more cars than it sold. Car manufacturers then offered ever higher discounts to push redundant cars on to forecourts, so that sales volume targets could be reached in time for accounting deadlines.

Since 201[ads1]9, when the global economy weakened, manufacturers have started making fewer cars than they can sell, and the gap has widened to about 4 million cars this year. Although there was a similar deficit after the financial crisis in 2009, there was an anomaly in the middle of the year with overcapacity.

“We have seen a reduction in inventories for three years, driven by [restricted] supply, ”said Daniel Schwarz, an analyst at Stifel. – It has not happened before.

As a result, Mercedes-Benz’s revenues have increased from almost € 38,000 per car in 2019 to more than € 54,000 in 2021 until the end of the third quarter, while Audis has increased from more than € 46,000 to around € 57,500, according to Stifel’s calculations .

BMW, which has managed the chip crisis better than its peers, and overall lost less production time, experienced a more modest increase, from just over € 36,000 per vehicle in 2019 to more than € 38,000 in 2021 until the end of the third quarter.

Much of this has been achieved by manufacturers prioritizing the production of more profitable models.

Sales at Mercedes, for example, fell by 30 per cent during the three months to the end of September, but revenues fell by only 1 per cent.

Analysis from Stifel shows that in just one quarter, Mercedes’ earnings before interest and taxes increased by 1.4 billion euros only at better prices and by putting available chips in vehicles with higher margins.

With investors noticing the change, managers say they will continue to follow this strategy even when supply constraints ease.

“There’s no pressure to chase volume,” Ola Kallenius, Mercedes chief executive, told the Financial Times this month, while CFO Harald Wilhelm promised to “focus on where the money is.”

“This overall strategy of not looking downwards [market] segments where we are, but looking upwards, it will continue, Kallenius added.

Luxury car manufacturers were also helped by record high prices for used cars. This has not only made the purchase of new cars more attractive, but has strengthened the balance sheet of the premium manufacturers’ financial arms, which run large leasing companies.

– The cars are returned [to the manufacturer] after 12-36 months and the resale price is much higher than first thought, Schwarz said.

“From a short-term perspective, the lack of new cars today will make used cars scarce for at least the next two years,” he added. “It should support the pricing of new cars as well.”