News & Analysis

Supply and demand determines the price? Not at Daimler and BMW

Joe Jabar, Monday, 13 September 2021

Some companies understand the art of converting temporary price increases into permanently higher prices. That's the plan of Daimler and BMW, of all companies. But first things first.

We currently have a worldwide shortage of microchips. These are not only needed in the Sony Playstation 5 or smartphones, but can be found in every luxury car. The price increase in microchips has been passed on to customers, who now have to pay more for their 7 Series or S-Class. It is expected that this situation will ease again and microchips will become cheaper again. Will this then also make luxury cars cheaper again? Of course not.

The German carmakers have been thrilled to see how, despite sharp price rises in the top segment, customers have continued to buy heartily. Daimler and BMW have deliberately decided to build fewer cars than are in demand, but to keep prices at a high level and thus significantly increase margins - on the backs of consumers.

The dispute over microchips has arisen because various industries are fighting over the coveted product and there are hardly any new technologies that do not fully rely on microchips.

COVID has opened the eyes of car manufacturers to the fact that it is possible to be successful in the market without producing more and more vehicles. For decades, sales figures were the only important measure of a car manufacturer's success.

If you have ever bought a new car from a dealer, you know that haggling is part of the business. For many this is the most interesting part of buying a car and discounts of 10-15% were not uncommon. With it now an end is to be. Estimates show that a 1% discount on car purchases is equivalent to a $20 billion margin. Gone are the times where one with the promise the car directly and fast to buy, a good deal could secure.

Now, customers are kept waiting for a long time and it is much more difficult to get a desirable luxury car. This makes the decision even more emotionally charged and the customer is willing to put significantly more money on the table for a new car.

For companies, this is a dream come true. On the cost side, there is a considerable reduction in personnel, and on the earnings side, the margin goes through the roof. At BMW, this has even doubled. We are already looking forward to the upcoming inflation. The next reason to continue raising prices permanently.

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