The automotive industry suffered a 1-2 punch what with the coronavirus pandemic being shortly followed by microchip shortage. While customer demand for new vehicles is gradually coming back even though the COVID-19 pandemic is far from being over, the lack of semiconductors is still giving car manufacturers a lot of headaches.
For BMW and Mercedes, the chip shortage might end up as a blessing in disguise. The two German luxury brands have realized that people will not only patiently wait several months for their shiny new premium cars, but also shell out more money for a car fitted with the three-pointed star or the roundel with the Bavarian flag’s colors.
Both Mercedes and BMW have been criticized for chasing volume by launching a multitude of smaller, less expensive compact cars, and while these aren’t going away anytime soon, the duo is switching focus to bigger and pricier cars to target higher profit margins. Rather than relying on the traditional volume-based sales target, the two aim to sell fewer cars and make more money.
In an interview with Financial Times, Harald Wilhelm, Chief Financial Officer at Mercedes’ parent company Daimler, admitted that “we will consciously undersupply demand level[s], and at the same time, we [will] shift gears towards the higher, the luxury end.”
His sentiments were echoed by Nicolas Peter who has the same job at BMW. The Bavarian marque has “seen a significant improvement in pricing power in the last 24 months” and the plan is “clearly to maintain… the way we manage supply to maintain our pricing power on today’s level.”
Long story short, Mercedes and BMW know people will pay even more for their luxury cars, and therefore prices are not going to come down after the microchip shortage will end. Bernstein analyst Arndt Ellinghorst says reducing discounts by one percent boosts profits across the car industry by a whopping $20 billion. He went on to mention discounts have gone down by more than two percent in the United States and Europe compared to the high levels available before the pandemic.
Those hoping to get a good deal on a new Mercedes once the microchip shortage will end are in for a disappointment: “One day or another, the semis issue will be gone and we will carry on with the price, and the margin, and the mix focus,” according to Harald Wilhelm. It’s the same story if you’re planning to buy a BMW at a good price: “Customers are ready to wait three to four months, and this is helping our pricing power.”
This type of strategy has been used by ultra-high-end brands like Ferrari for a while now, and it seems to be trickling down to the “more mainstream” luxury marques.