Overcharging car buyers now will cost the industry later

Rivian Automotive Inc., a rookie manufacturer, reversed course following an online reaction and a slew of cancelled orders only a few days after upping its electric vehicle costs on pre-existing orders by as much as 20%.

Despite the company's struggle with substantial cost inflation for raw materials and parts, Rivian CEO RJ Scaringe claimed the decision to boost pricing on existing orders was a costly mistake. In a letter to clients, he stated, "Trust is difficult to earn and quick to lose."

Rivian can afford to be accommodating after raising over $14 billion in an initial public offering in November, despite the fact that the company isn't profitable (and has only lately begun bringing in money). However, Scaringe, who launched the electric vehicle manufacturer in 2009, makes a key point regarding trust and pricing that the automobile business (and all industries, for that matter) should pay attention to.

Unfortunately, with new vehicle supply being depleted due to semiconductor shortages, consumers looking for a new or used car are pressed for cash. In the United States, the average used car now costs around $30,000, while new cars cost more than $46,000.

High prices are good for industry earnings, but they can lead to problems: Car loan repayments that are ballooning (the monthly average for a new vehicle is now about $650, and close to $500 for a used car) are eroding household budgets and leaving customers with a lasting reminder of who took advantage. Dealers must proceed carefully, or they risk being dislodged in the long run by alternate methods of selling automobiles.

It's difficult to express how aggravating automobile shopping has grown in the last year. 

In the United States, the majority of new automobiles are currently sold for more than the manufacturer's suggested sticker price; purchasers are persuaded to accept dealer-arranged financing that they don't really need; and certain used models are more expensive than the identical new vehicle (as this avoids a long wait).Manufacturers have far fewer grievances. The majority of companies have been able to overcome rising parts and raw material costs by raising pricing and prioritising manufacture of their most expensive models.

Last year, Stellantis NV, the owner of the Ram and Jeep brands, achieved a 16 percent operating profit in North America, which is comparable to Porsche's financial results. Dealers are doing well as well. When compared to pre-pandemic levels, several large U.S. auto dealers' profit margins have doubled.

However, auto production will resume at a more typical rate in the near future. Once that occurs, the sector is eager to avoid reverting to its self-destructive price-cutting practises. Rather of stocking dealer parking lots with vehicles, Ford Motor Co., General Motors Co., and Mercedes-Benz Group AG aim to operate with significantly less inventory. Rather than haggling for a price at the dealer, they want buyers to put orders weeks ahead of time, which should help manufacturers better control pricing.

Investors are ecstatic since automakers have hitherto struggled to deliver acceptable returns. However, there is a narrow line to be drawn between financial restraint and brand-damaging price hikes.

Dealers are being warned by automakers not to mark up prices above the recommended sticker price. While dealers are attempting to make up for lost sales volume, they should not become overly greedy.

Tesla Inc. and Rivian, for example, are evading state franchise regulations and selling directly to consumers. Rivian's pricing blunders illustrate that the strategy isn't certain to please customers, and Tesla has raised prices in the last year as well. However, in general, they take a more transparent approach, which some major manufacturers are obviously eager to emulate: Volvo Car AB wants to move all sales online by 2030.

Customers who trade in a vehicle have some financial muscle when they buy a new one, thanks to a more than 40% annual increase in used car prices. First-time customers and those growing their car fleets, on the other hand, have been hit hard by price rises.

They won't just hold a grudge and shop elsewhere next time if they're overcharged: they could find up owing far more than their vehicle is worth once auto prices return to normal, limiting their capacity to acquire another vehicle.

Indeed, the worry is that acquiring a vehicle will become costly for lower-income consumers in the long run. Even as his company benefits from today's robust pricing, Stellantis Chief Executive Officer Carlos Tavares is among those raising concerns about future affordability. Stellantis announced last week that as it expands its electric vehicle fleet, it aims to treble sales by 2030 and sustain double-digit profit margins.

To keep such cars affordable, Tavares aims to pressure suppliers and European dealer prices. Rivian's newfound humility should be emulated by high-profit automakers, who should cut automobile customers some mercy. Otherwise, the industry may have to pay the price afterwards.