How the Vehicle Production Nightmare Upended Everything and Why Automakers & Dealers Don’t Want the Old Ways Back

But There’s No Shortage of Used Vehicles.

By Wolf Richter for WOLF STREET.

Despite the ridiculous price spikes for used vehicles – the CPI for used vehicle retail prices spiked 41% year-over-year in February, and Manheim’s wholesale price index for used vehicles spiked by 38% – there’s no shortage of used vehicles on dealer lots. There is plenty of supply. But new vehicles have been in a historic shortage due to the semiconductor shortages and the ensuing production cuts. And this has changed how the industry operates.

The number of used vehicles on lots of franchised and independent dealers in February (purple line in the chart below) rose to 2.62 million vehicles, the highest since December 2020, according to data from Cox Automotive. This was down by 9% from the average inventory in 2019 (2.88 million vehicles).

But the number of new vehicles on dealer lots has been hovering at catastrophic lows. In February, dealer inventories edged up to 1.07 million vehicles (red line), which was down by 70% from the average in 2019  of 3.66 million vehicles.

Days’ supply.

The standard metric in the retail industry of days’ supply shows how many days this inventory at the beginning of the month would last at the current rate of sales, with no additional vehicles added to inventory. The metric is a function of both, the number of vehicles in inventory and the number of vehicles sold during the prior 30 days, and it eliminates the effects of inflation on inventories.

Used vehicle supply ticked down to 51 days in February mostly due to higher sales in February than in January. This supply of 51 days is above average supply in 2019 of 48 days, and above average supply in 2021 of 41 days. In other words, there is plenty of supply, at the current rate of sales:

But new vehicle supply at dealers ticked down to 34 days. Before the pandemic, 60 days’ supply was considered healthy. The average in 2019 was 90 days, which was too high due to the slowdown in new vehicle sales at the time. During the lockdowns in March and April 2020, when sales ground to a near-halt, supply spiked. But then sales picked up again in mid-2020, and the production cuts due to the semiconductor shortages became the #1 problem:

Total combined supply of new and used vehicles and of auto parts at dealers, which the Census Bureau reported yesterday for January, declined to 1.24 months (about 37 days’ supply), having stayed in the same catastrophically low range since March 2021, with hardly any improvements.

This data from the Census Bureau goes back 30 years, to 1992, unlike the above data sets that only go back to 2019. It shows just how much of an outlier today’s vehicle inventory has been. But by combining new and used vehicles and parts, it papers over the catastrophically low levels of inventories at new vehicle dealers:

Production nightmare.

When the Federal Reserve today released the industrial production data for February, which includes manufacturing, there was another bad number for manufacturing production of motor vehicles, components, and parts. This is the sector that has been most severely hit by the semiconductor shortages and by other supply chain issues.

The index for production of motor vehicles and parts has been in the same low range since the beginning of 2021, when the semiconductor shortages started to bite. In February, production was roughly level with February 2021, but was down 11% from February 2020, and was back where it had been in 2014.

Despite the drop-off in production of motor vehicles and parts (red line), the overall index of Industrial Production ticked up to the highest since 2008 (purple line):

Production cutbacks by automakers is a global issue. Toyota just announced a series of production cuts at some plants globally. EV maker Rivian, which just started getting its pickups out the factory door, announced last week that it might have to cut production this year in half. The German automakers are now coming out with further production cuts, on top of those caused by the chip shortages, because some of their key component makers – such as of wiring harnesses – are in Ukraine and have shut down. Every day seems to produce a new challenge.

Supply chain challenges always existed, but most issues could be resolved fairly quickly. Now the issues are multi-layered and widespread, with new causes being added to it, such as the difficulties of the component suppliers in Ukraine and Russia.

New Vehicle sales – and the new way.

As a result of the inventory shortages of new vehicles, customers have switched in large numbers to ordering vehicles and waiting patiently till it arrives.

But it’s hard to gauge actual demand for new vehicles because supply is so low. Vehicles are sold at mind-boggling prices, for mind-boggling per-vehicle gross profits at dealers and automakers, as customers are still paying whatever to get a new vehicle.

And there is enough demand at these mind-boggling prices, given the constrained supply, and inventories have not yet been building in any meaningful way. A significant inventory build would mean that supply is outrunning demand at those prices. But that hasn’t happened yet.

So right now, sales are limited by what automakers can produce. In February, only 1.05 million new vehicles were sold. This was down by 12% from February 2021 and by 22% from February 2020. These are historically low sales going back to the 1970s:

Automakers and dealers are loving the mega-record per-vehicle gross profits, and they’re loving that customers have stopped haggling and just pay whatever, including over sticker, and they’re loving the large-scale shift by customers to buy via make-to-order, rather than off the lot.

This is a system Tesla, which doesn’t have franchised dealers, implemented from get-go. Make-to-order solves all kinds of issues. It solves the problem of some units getting old sitting on the lot and having to be sold at deeply discounted prices. It solves the issues of inventories piling up and dealers being overstocked, such as in 2019, when automakers had to heap costly incentives on the market to get those vehicles over the curb.

Manufacturing vehicles that have already been sold is a more efficient way of selling, and both dealers and automakers want to encourage customers to keep doing that. And dealers would love for customers to keep paying MSRP or over MSRP.

But they all would like to sell more vehicles at those per-vehicle mega-profits. Which means that automakers will have to be able to get their supply chains straightened out and build more – but they don’t ever want to overbuild again, like they used to, because such inventory gluts cause profits to plunge.

The semiconductor shortages have upended the old way of doing business in the auto industry, and have upended how customers buy new vehicles, such as paying sticker or over sticker and ordering vehicles rather than picking one out on the lot. Retail customers could always order, but it was just a few customers who did. Now lots of customers are doing it.

The dream for the industry – but not necessarily for the customers who have to pay for this – would be if automakers and dealers can maintain this system of how customers buy, and what they pay, with dealers operating on very lean inventories and mega profits, even as production starts recovering from the shortages.

 

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  114 comments for “How the Vehicle Production Nightmare Upended Everything and Why Automakers & Dealers Don’t Want the Old Ways Back

  1. cobo says:

    Despite “everybody” wanting an Internet Of “smart” Things, the roll up windows in our two cars still work amazingly well. Less “chips” and less “tech” leads to a very equitable, inclusive, sustainable, resilient future.

    • rpb1001 says:

      Good comment. My phone battery went flat today and I could not charge it in the car. No street atlas, nothing written on paper, no coins for the phone on the street. No phones to be found on the street either.
      This simple oopsie was completely in my control to prepare for and I didn’t. The entirety of society is dependent on so much, right down to food, power, water and we have no control over this at all (or even understanding).

      • Sit23 says:

        Drove downtown yesterday. Forgot phone. No Vax cert. No mask exemption. no bankcards. No driver’s licence. No banknotes. Found coins in what used to be the ashtray, beside where the cigarette lighter used to plug in. Had coffee. Not totally wasted trip.

    • Finster says:

      Not quite everybody, anyway. Every “smart” device I’ve ever used tries to guess what I want to do and overwhelmingly guesses wrong. Give me something that just does what I tell it to any day. I waited months to get a non-smart TV and refuse to buy “smart” appliances.

      • Mojer says:

        It is called smart TVs for stupid people, smart people buy stupid TVs, the market is for everyone and everyone is happy.

        Future smart cars are also for those who cannot drive and there are many …….

      • gary2 says:

        Good for you Finster!

    • LK says:

      I don’t want a new car with whiz bangs, but I’ll take power windows and brakes. I can use my phone and other accessories to make my car “smart”, and even take those devices with me when I leave it!

      I’m not looking forward to a future where cars like the Honda Fit aren’t on the market for those of us that care little for bells and whistles.

  2. mike dun says:

    If there is both a limited supply of NEW, meaning reduced sales and thus the turning in of used cars, and abundant supply of USED at the same time this would suggest what has already been viewed: a market that is saturated.
    If there were actual need for vehicles and the new car market isn’t able to fulfil that, people would be buying the used. But they aren’t. And where did this large inventory come from anyway?

    • Flea says:

      I was saying a year ago used car lots were full,no one listened,every day I think society is like cattle follow the leader

  3. Hal says:

    This makes an even more compelling case for Lexus and their outstanding reliability. You don’t replace a Lexus because you have to. You replace it because you just WANT a newer one.

    When chip shortages and/or wars happen or they’re gouging for whatever reason, you just wait. As long as it takes.

    • Ed C says:

      I believe this applies their their less guilded brethren — just plain Toyotas. I expect that I bought my last new vehicle when I purchased a 2017 RAV4. That is, unless the progressives outright ban internal combustion vehicles.

      • Digger Dave says:

        When the market pivots, it changes quickly. No need to ban ICE. Once the tipping point is reached gas stations are just going to shut down their fuel pumps when it’s no longer profitable to operate them. If you’re a weirdo like me, whose basic VW runs on diesel, #2 oil, or even vegetable oil or backyard refined biofuel, then you’ll be able to keep your car running much longer. Good luck keeping a gasser when there’s nowhere to buy fuel.

    • Anthony A. says:

      20 year old Lexus’s are selling for $10 – $14 K on Bring A Trailer auction site in good condition with less than 200 K miles on them. Smart people are buying them. One of my friends drives a 2002 LS460 Lexus and it is a great car. Trouble free with over 150 K miles on it.

      No one NEEDS a new car if really good used ones are available. But, then again, this is America, the land of plenty!

  4. Ed Brooks says:

    They always have a way to take consumers for a ride and make up their losses by getting in our wallets. I think for once maybe people should just buy used cars and see where it goes.Why can’t they take at least part or half of the hit,I mean after all it was Big Business stupid decisions that get us into these messes every time.

  5. Glen says:

    How are auto sales on China? Thats a bigger market than the US. How are they handling it?

  6. 2banana says:

    It used to be car manufacturers and car dealers fought tooth and nail for market share.

    More cars on the road means more spent on OEM repair parts (talk about margins), brand loyalty through generations, brand loyalty in trading up with a promotion or growing family, etc.

    Now, the new business model is to sell the least autos possible at the highest mark up.

    “Automakers and dealers are loving the mega-record per-vehicle gross profits, and they’re loving that customers have stopped haggling and just pay whatever, including over sticker, and they’re loving the large-scale shift by customers to ordering new vehicles, rather than buying off the lot.”

    • Max Power says:

      I am not sure this is a fair assessment… that OEMs are holding back on production in order to raise unit prices. A more accurate description of the situation is that they are prioritizing more profitable models over less profitable ones, within the overall constraints of their supply production capacity.

      The OEMs really are being held back by supply issues. The auto business is cut throat and we’re it not for the supply issues you can be sure that competitive pressures would have them producing and as selling as many units as they can… because if they didn’t then their competitors would.

      • Hal says:

        I emphatically concur.

      • MiTurn says:

        “A more accurate description of the situation is that they are prioritizing more profitable models over less profitable ones, within the overall constraints of their supply production capacity.”

        Max Power, I think that you are spot on, and perfectly logical for the manufacturers as they’re for-profit organizations.

        My question is if the current situation will cause some manufacturers to either merge or finally go bankrupt. There are still too many manufacturers, in spite of the recent spate of consolidation.

        • Mud says:

          Just engineer cars with less chips ,eliminate electric windows,seat mirrors .just a start but might help supply line .damn forgot manufacturer can’t bend consumer over .

        • Augustus Frost says:

          It will take more protectionism to save the US Big 3.

          Their US market share has collapsed since I bought my first used car in 1981 and was already declining then. They may be fine as long as trucks are preferred but not even sure about that.

          I believe GM’s market share is down to 20% in the US now and both GM and Ford reduced their global presence after the GFC.

          Not sure about all the European automakers but think of many of them as weak or very weak too. Many have already merged.

          As for the newer ones, Tesla started early enough and had access to cheap capital long enough to finally achieve some scale. In a “normal” (actually fake) economy at least, they should be able to survive.

          The others like Rivian and Lucid, I don’t think the credit mania is going to last long enough.

          Another factor is whether Chinese or other developing world automakers which haven’t been a factor in developed markets do in the future. I’ve heard some reasons why they either don’t sell in some markets or buyers do not like it, but that could change too.

          The elephant in the room of course for all automakers is what happens when credit conditions don’t support subsidized financing and extended payment terms. I don’t believe this will survive the end of the credit mania either.

          Given some of the prices, payments must commonly be $700 to $1000 per month now. I know it isn’t one but that’s a rent or house payment to me.

          No way that will be affordable for a mass market when the mania ends.

        • El Katz says:

          Having spent several decades in the auto biz on the manufacturer side, I don’t think that the manufacturers are “loving” the current business conditions. They are coping with it.

          There are balances of production mix that make the factories profitable. Yes, they can build higher margin cars and increase cash flow, but they also lose the economies of scale in parts purchasing (volume discounts, etc.,) and the longer this condition continues the more risk they have of suppliers going toes up because the volume is no longer there for them either. Some manufacturers have equity positions in their suppliers as well… which increases their pain financially. Then there’s the employment issues (qualified workers) where many of these plants are placed (corn field locations in OH, IN, AL, SC, TX, etc.) where skilled labor doesn’t exist in great numbers.

          You can’t just shut down factories… even if you can, you still have the sunk cost of keeping them from deteriorating. If it’s casting (aluminum for example), the cost to bring those smelters back on line is enormous (takes lots of electricity to melt metal and the time it takes is longer than one thinks). Factories (as in auto manufacturers) need to meet certain volume levels and product mix or they turn into huge money losers in a New York minute.

          The last position I held had a large impact on plant production balance. The “featured” offers on the TEEVEE and other advertising media would skew what was sold at the dealer level. We (marketing side) would find a sweet spot on a mid-priced vehicle and tailor the offer to meet it. Customer demand would increase for that product and then the dealers would order that mid range product at the expense of higher trim vehicles to meet said demand. Then the manufacturing plant execs (they are often different corporations) would descend upon us sales folks and beg us to move the promotions to higher level trims so they could hit their revenue targets…. which we couldn’t because the higher trim cars had lower residuals and higher dealer net… and then our costs would skyrocket. Occasionally, the finance company would screw up on a residual and we’d take them to the woodshed because it was fun.

          It’s a dance….

          The dealers? That’s a different story. However, the behemoth facilities that the manufacturers pushed the dealers into require volume to support them. Some of these newer facilities hit the $100M mark for land and buildings. Takes a lot of hay to feed that beast and the high profits on low volume doesn’t feed the fixed operations. Right now, the UIO’s (units in operation for those who don’t speak car) are sufficient to support them. But as the UIO’s decrease due to various factors, the fixed ops can’t make it either. The parts issue is serious too…. I tried to find some parts for a clunker I put together for one of my kids to sacrifice in the airport parking lot and the list of parts I can’t find was long. Moldings… air conditioner condenser…. interior trim…. specialty tiny plastic “rivets” and clips that hold bits to the car body…. rear brake pads…. and as more suppliers go bust, that situation will worsen and we could end up with more Frankencars on the roads.

        • Wolf Richter says:

          El Katz,

          “I don’t think that the manufacturers are “loving” the current business conditions.”

          I think you got sidetracked by something. I never said that. What I said was this:

          1. “Automakers and dealers are loving the mega-record per-vehicle gross profits, and they’re loving that customers have stopped haggling and just pay whatever, including over sticker, and they’re loving the large-scale shift by customers to buy via make-to-order, rather than off the lot.”

          2. “But they all would like to sell more vehicles at those per-vehicle mega-profits. Which means that automakers will have to be able to get their supply chains straightened out and build more…”

          Note that it makes no difference to the manufacturer whether the customers specs out and orders the vehicle (at home or at the dealer) or whether the dealer specs it out and orders it for inventory. It’s all the same to the manufacturer. They have an order bank, and they draw from it to manufacture vehicles in the most efficient sequence possible. Some vehicles will get built shortly and others will stay in the order bank for months. This is how it has always been. It doesn’t matter to the manufacturer who orders the vehicle. But the efficiencies in terms of inventory, incentives, and floorplan are massive.

        • Enlightened Libertarian says:

          El Katz,
          Thanks for taking the time to write such an educational response.
          It is posts like this that make Wolf Street the best site on the web.

        • JayW says:

          I believe car manufacturers are going to start offering discounts to people who order cars and wait 30-45 days to receive them. This way the consumer gets exactly what they want at a discount with a few extra upgrades. The discount would come in the form of % off MSRP which are already well above profitable and a little more on the no-haggle trade in. This model supports the JIT mode of production & delivery the manufacturers want. This also means the new car dealers of the future will be much smaller and more like Tesla.

        • El Katz says:

          Wolf:

          IMHO, the manufacturers don’t give a tinker’s dang what a dealer makes on the vehicle at retail. Sure, we looked at it when doing business management counseling for the basket cases who were about to go toes up, but in reality, we already got full price for the vehicle when we sold it to them. The only variable would be if incentives were required to move the less desirable vehicles… and even then, sometimes we just didn’t care as those units were no longer our problem – especially if the national inventory was small enough not to impact floor plans.

          The haggling isn’t gone… it’s just that those buyers who would haggle aren’t buying. They either read the news and don’t bother or just give up after having the door slammed in their face often enough – knowing full well that the worm will turn at some point. I would fit into the former category (won’t bother).

          As far as the “who orders it”, in most cases, the factories create the mix and allocate it based on supply chain and factory profitability. At least in the import world where I lived. We didn’t do bespoke…. you wanted a 4 door mid level trim, this is what you got… want white? Had a grey interior. Wanted white with a different color interior? Dye it or call Katzkin (no relationship). The dealers could accept, reject, online trade them, or attempt to reconfigure the colors… but then they would fall into lot size balancing and the order might be rejected which then shows as a “refusal” which could cost the dealer future special allocations. There was no such thing as an “order sheet” to spec bespoke vehicles in our little slice of heaven.

          I realize you were with Ford…. domestics are a different animal.

  7. Max Power says:

    Dealers should be afraid rather than embrace the make-to-order model because there is even less of a value-add proposition in having franchised dealer network in a world where vehicles are made to order.

    Without the giant parking lot full of cars and the buy-here-pay-here sales model all that’s really needed is a delivery and service center with a few demo/test-drive units on hand… an operation which takes up a much smaller footprint that your typical car dealer.

    Of course though, the franchise dealers will have their state lobbyists working overtime to make sure this never happens.

    • El Katz says:

      There once was a time that the buying public would tolerate that (BTO). In this day and age of instant everything, it would take only one manufacturer to break that mold and it would be game over.

      You can do that in the $100K range (or in times of component disruption)… but someone looking for basic transportation that wants “new” isn’t going to tolerate it. Once the used inventory starts to deteriorate due to age and lower volume of new to feed the future sales demand, the dynamic will shift.

      The other thing being missed is many manufacturers aren’t equipped for build to order. They build cars in lots. 50 white. 50 blue. 50 red. Then they build runs of mix. Some cars have moon roofs. Some don’t. Some have alloy wheels and others don’t. Toyota isn’t going to have their purchasing folks calling the local Discount Tire to get a set of rims. They need to order volume. And that’s done with production forecasts, purchase commitments from vendors, and delivery timelines. Most factories are “just in time” and can’t store a boutique level of components. A lower trim car has a different wiring harness. Those aren’t ordered one at a time. Making a “one size fits all” wiring harness isn’t always cost effective, especially in times of high raw material cost (copper for example).

      Believe it or not, some of the plants we ran had days they couldn’t paint metallic paint or pearl due to emissions and impact on air quality. Factor that in as well (might help explain the paint color surcharges you see on the Monroney’s).

      Honda has a factory in Ohio that started life to build the latest generation NSX called the “Performance Manufacturing Center”. The volume for “bespoke” was too low, so they added MDX, RDX, and TSX to the mix. To say it’s struggling is to be the master of understatement.

      It’s not at all like ordering a couch. Even then, you wait 4 months for a couch. Someone who wrapped ol’ Bessy around a pole doesn’t have 4 months.

      And before you point to Tesla, keep in mind that the demand isn’t high for them… and that demand it’s very regionalized. Living here, near their Scottsdale office, they also have parking lots full of inventory scattered nearby. One is just down the street from Costco.

      Manufacturers once had what was called a “bailment pool” where dealers could pick out of the manufacturers inventory to meet a sold order. That lasted about 10 seconds because dealers, being dealers, faked the sold orders and cherry picked the inventory – leaving the dregs that no one wanted. Then the other dealers complained and “factory allocations” then became the rage.

      • LK says:

        Excellent summary. Reminds me of my Supply Chain Management classes.

      • Wolf Richter says:

        El Katz,

        Thanks for posting the two long comments. There are a few things I want to quibble with in your two comments, but I don’t have the time, unfortunately … could be a nice discussion. So I’ll just quibble with this one point, which is crucial for people to understand:

        “The other thing being missed is many manufacturers aren’t equipped for build to order. They build cars in lots. 50 white. 50 blue. 50 red. ”

        You need to look at how you can order a vehicle for purchase, and how the dealer orders a vehicle for inventory. It’s the same for the manufacturer. It makes no difference if the dealer specs out the vehicle or a customer specs it out. The order goes into the order bank. The manufacturer draws from the order bank and assembles the vehicles in the sequence that is the most efficient for the manufacturer, given the constraints they have. That’s why some vehicles will get built very quickly and others might not get built for months. That’s how it has always been, and that’s how it still is — and it doesn’t matter who orders them. Build-to-order changes nothing for the manufacturer, except it cuts down inventory, incentives, and floorplan.

        • El Katz says:

          But again, respectfully, that would be in the domestic world. Imports traditionally play a different game.

          I was with multiple imports… we “dabbled” in bespoke but quickly ran for the door. Too complex and not really as profitable as “one size fits most”…. which is why many of the import manufacturers are more profitable than the domestics.

          Domestics had suppliers clustered around them in Detroit or Chicago or KC or Kenosha. Imports built in the middle of nowhere so they could avoid union influence and either attracted domestic suppliers or relied on the Keiretsu from the mother land to figure it out. Domestics could play in the build to order but the imports not so much.

      • monday1929 says:

        Fantastic. I just got an eye-opening education.
        Thank you El and Wolf.
        I recently cracked up my 2005 elantra. I was all set to buy an Impreza or Tuscon, or maybe a Kona, but fit into the same “won’t bother” catagory. So I now have a black hood on a blue car and will be out next weekend with duct tape to patch up missing chunk.
        Cash is not the problem, I just won’t pay these pirates.

  8. w.c.l. says:

    What can I say, nurse your current car, drive ‘em till they drop and don’t play into their game. Dry up demand till they’re ready to deal. I don’t know what else one can do.

    • El Katz says:

      Great plan as long as parts are available.

      I’ve been gluing together a 2006 import sedan for my daughter to sacrifice in the airport parking lot. Lots of bits are NLA or on inter-galactic back order. Yes, you can get made in China aftermarket stuff, but it’s mostly puke. Virtually anything that’s trim (like sill moldings) is a fool’s errand – the newer stuff is plastic backed and cracks when you go to the pick-a-part and try to remove it.

      Even windshield wiper inserts from the OEM were NLA. Had to resort to Amazon because the Autozone ones were so inferior it was hilarious. The windshield I got was Chinese. No OEM available, and this specific model went out of production in 2011, so it’s not quite a clunker yet.

      • w.c.l. says:

        Understood. If some one has another way to combat this I’m all ears.

      • khowdung Flunghi says:

        I’ve been pondering this parts availability issue as well. I’m looking for “sacrificial” vehicle to use as a summer car at a mountain cabin. It’s going to lead a tough life and reliability and maintainability are paramount – don’t care about aesthetics or features. Been pondering an older Ford Explorer vs the equivalent Honda/Toyota/Nissan with parts availability the key decision point. There were a kajillion Gen. 2/3 Explorers and I’m guessing there will always be parts, either new or salvage. Not sure how maintainable anything imported will be going forward.

        I wonder if there isn’t going to be a demand for a “transportation appliance” type vehicle? I suspect a stripped-down EV might be big seller.

        • VintageVNvet says:

          2003 Ford Explorer parts readily available here in the Saintly part of the tpa bay F.
          Other than that, Ford F-150s of same era and even earlier are even more available, SO FAR…
          Seems like the ”strategic parts” concept of various manufacturers lives on: they sell the vehicle cheap, then be getting top dollars and margins on the ”fix” for those cheap parts,,, rinse and repeat, etc…
          Just remembering having to pay 5 times the cost of domestic to replace a european alternator years ago, and only available from dealer versus go into any dime store for USA vehicle parts,,,eh

  9. Bernard says:

    The problem with the supply chain is that lots of manufacturers including automotive companies took the Japanese “just in time (JIT) ” delivery system and perverted it.

    The JIT delivery system/supply chain was implemented in Japan for a domestic supply chain/industrial base with all factories located within a reasonable distance from the main factory.

    It was never envisioned that the supply of parts would be coming from another factory located in another country or in a country that required transport via airplanes or ship to another factory.

    Take a look at the Toyota factories and parts suppliers that are around the Nagoya area. This is how the original JIT system was set up years ago.

  10. Frank says:

    If we’re not buying off the lot then why have dealers at all? Just need a factory showroom to show the vehicles physically. I hear Ford is aiming to sell their new electric vehicles direct to public. The only real reason for dealerships is to convince marginal buyers (massage the funding) and those on the fence, to buy a vehicle. Those who know what they want and can pay for it will buy it anyway and would just assume buy it online, maybe after seeing a up close example at a company showroom. Long-term, companies can’t help themselves but to overproduce, in which case they will need the dealers to push out the cars.

    • Augustus Frost says:

      i”ve never read the history behind it but assume the dealer model is partly the result of prior communication limitations.

      Without a showroom, no way for the end customer to see or drive it and manufacturers didn’t want to use their capital. So they created the franchise network where dealers used theirs..

      Now the “legacy” automakers are stuck with this model.

      Someone correct or clarify if I am wrong.

      • El Katz says:

        It was due to the cost of building a network of service and repair facilities, staffing them, managing them, etc. Manufacturers can build stuff, but make lousy dealers because they are not playing with their own chips.

        The most unprofitable stores are “factory stores” that are temporarily owned when a dealer goes BK. The theft and shrinkage is astounding.

    • Wolf Richter says:

      “If we’re not buying off the lot then why have dealers at all?”

      Answer: State franchise laws.

      These franchise laws are designed to protect the dealers from their manufacturers. So a manufacturer cannot sell directly to the public around the backs of its dealers. Tesla is the only exception. Tesla is still not in all states. But in the states where it is allowed to have showrooms and sell vehicles, it had to make a deal with the state government. They found some kind of way around the state franchise laws, possibly the fact that there are no Tesla dealers, and therefore there is no one to protect. Years ago, I read how Tesla accomplished this, but I cannot remember the details.

      • lisa2020 says:

        Probably by a nice legal document referencing that all they’re selling is a software application and a “case”.

    • Masked Ghost says:

      Frank wrote: “If we’re not buying off the lot then why have dealers at all?”

      You sound like my dad. He let some “shade tree” type mechanics work on his cars. Some of them really made a mess of it.

      I find that it costs more to let the Dealer do the work. But they fix things right.

  11. R2D2 says:

    The car market is the new house market.

    Buoyed by Internet tips (hacks)…

    Everyone thinks they are a trader.
    Everyone thinks they can resell higher.
    Everyone expects future prices to rise.
    Everyone wants artificial shortages.

    Western culture has changed. Cars are in a new paradigm.

    • Zark Muckerberg says:

      Soon there will be car gurus posting on youtube and tik tok. “How I made thousands with a Camry”

      🤣🤣💀

  12. gorbachev says:

    Relatives who are first-time car buyers Asked my
    opinion as money for them is tight. I suggested the equinox.
    I said when I was young Japanese cars were not in
    demand but the few friends who purchased them
    were pretty happy with the price and quality. Although I own a Rav 4 they are now pricey but the equinox though similar in size is quite a bit less on a lease. They ended up leasing an equinox and I sure hope the quality is there.

  13. Wisdom Seeker says:

    Re “they don’t ever want to overbuild again, like they used to, because such inventory gluts cause profits to plunge.”

    They won’t have a choice about this, overbuilding is endemic to a competitive industry and it’s a good thing for consumers and workers even if not shareholders.

    And Auto manufacturing IS a globally competitive industry, unlike the mono- and duo-polies prevalent in most other areas of business nowadays. Many nations need domestic auto manufacturing as a matter of national security as well as prestige. So supply will normally be sufficient to give consumers many choices at reasonable prices.

    How long it takes to get back to “normal”, though, is a big question… especially if EV mandates get more aggressive before manufacturers catch up on delivering market-palatable EV options.

  14. gerry says:

    Elon Musk is a con man and a fraudster. Teslas are a miracle of technology until they break down. Parts for Teslas are always in short supply. The lifespan for the lithium ion batteries is, AFAIK, a big question mark. As they get older, do these Li-ion become more flammable as there is greater dendritic growth? His Starlink satellite service is SkyNet. His Power Wall storage devices are pretty much dead in the water. Musk seems more interested in taking over all the homes in Boca Chica, Texas than his SpaceX launch facility, which is a money pit. Once Musk get Texas politicians to pay for an aqueduct to Boca Chica, the value of Musk’s land holdings there will skyrocket. The bagholders as usual will be taxpayers and the dimwits who believe Musk’s lies about the long term viability of his technology.

  15. Cynical Engineer says:

    It all depends on how much self-discipline the various players in the auto industry possesses. Keeping to a build-to-order model can maximize profits.

    The domestic unionized auto producers have the problem that their union contracts tend to make it very expensive to shut down a factory and furlough the workers due to insufficient demand. This leads to building vehicles that cannot be sold at a profit, but may lose the company less money than idling the factory.

    Spread across all the manufacturers, if running at full speed, the current factory capacity likely exceeds demand. Will these companies be willing to shrink their factory capacity and sales volume but retain the higher profits? With Wall Street’s habit of severely punishing companies that fail to show growth, will the management that chooses this path be able to keep their jobs?

    More likely, once the current manufacturing constraints are removed, the industry will revert to it’s old habits and the profits will again evaporate.

    Even Tesla: To date, they haven’t been in a position of being able to build more cars than they can easily sell. Not sure what Tesla will do when the competition in the EV market heats up and they find themselves building more cars than they have outstanding orders. The rest of the auto industry is spending $Billions on adding EV manufacturing capacity and I’m hard-pressed to see how an oversupply will be avoided.

    • El Katz says:

      You can’t use “self-discipline” and “auto industry” in the same sentence.

  16. Duke says:

    Maybe the top 5% wealthiest will buy all the scarce new cars every year and the rest of us will just buy used a few years later.

    Dealers are dead. F just killed them.
    New cars will be delivered to your door and cut out middlemen.
    And when robo taxi rides and self delivering truck rentals by the hour cost pennies in a few years all these high dollar buys will seem ridiculous.

    • El Katz says:

      You might not want to count the dealers out. Take a look at what businesses many legislators come from. You might be surprised.

      I’m always surprised at the hatred people have for auto dealers – up until they need a sponsor for their little league uniforms or football stadium. Need a convertible for the homecoming queen? Which is the first business they go to? If you guessed car dealer, you’d be right.

      • Jake W says:

        the hatred i have for auto dealers is similar to the hatred i have for realtors and sales people in general. they are parasites. they don’t add value. if people could buy the product without them in the way, they’d pay less and everyone would benefit, except for the parasitic salespeople.

        • Cookdoggie says:

          Bingo! And it doesn’t help that they are composed entirely of liars, thieves and con artists. Unfortunately they won’t go away until intelligence levels improve among their customers. So, never mind.

      • Zark Muckerberg says:

        You’ll build a hatred if you dealt with enough car salesmen. They play mind games and if a buyer is unable to say no to something, he’ll get raked over the coals.

    • El Katz says:

      PS: The dealer laws are quite robust. The NADA, AIADA and other state dealer associations are huge political contributors. Musk got away with it only because he had a unicorn. However, he can’t truly service his vehicles nationwide and that will call for a push to franchise as the other volume players will have a network and his “unicorn” will look like a bad choice. Imagine someone in their Model S stuck in Midland, TX with a breakdown vs. someone with a Brand X that has a local dealer available with access to the tools, parts, and technicians to do the repair. I can assure you that my wife would pick the latter over the former. Then there’s the state attorney’s general that would prosecute for breach of warranty. You do know why the incidence of Teslas in minor accidents are totaled don’t you? Priced insurance on one as compared to a competitor?

      PPS: The UAW may choose hook up with the Teamsters and Ford may have to hire the USPS to deliver them.

      PPPS: Over the years, an assortment of new players initially attempted the “direct to consumer” model and then tried to sell them through Sears Roebuck (remember them) early on. It didn’t work out too well.

  17. Josh says:

    Wolf, you are missing the “million” in this sentence: “In February, only 1.05 new vehicles were sold”. Things aren’t that bad yet!

  18. dang says:

    The cause of the current inflation is being blamed on everything that it isn’t and selling the lie that severe industrial coordination, enhanced by illegal industrial concentration, enables monopolists and near monopolists to raise prices without fear of competition. Competition is the last thing that business really wants.

    Like taxation to cover the true cost of production, consumption, and disposal, competition limits business flexibility.

  19. VintageVNvet says:

    Having tried to buy a brand new ”hybrid” sedan that got 50 miles per gallon and being totally flabbergasted at the incredible amount of ”tech” that was mandated, we said no.
    Instead, bought a 20 year old vehicle in great shape for less than the savings in gas for the hybrid at $10 per gallon.
    Still can’t understand why we can’t have a simple but economical NEW vehicle for at least close to the $14K new mentioned in a comment above.

  20. Xavier Caveat says:

    I used to enjoy jousting with new car dealers back in the stone age before computers. You could find out their cost easy enough versus MSRP and go from there.

    With computers it became easy to do a deal online, no need to drive all over tarnation looking for a deal on wheels. My last new car cost $27.5 on a $32k sticker, kind of typical of what I always paid off of list, a few times more.

    You used to be so overwhelmed with choice too, guess that’s a thing of the past, along with discount deals.

    Every new car dealership it seems tried to outdo each other with putting lawns, lotsa fluff and spendy digs. They have to be losing money now, you can’t make it only on service.

    • El Katz says:

      Service and Parts (aka fixed operations) make all the money in a modern dealership, followed by used cars, with new being break even or possibly a loser. That’s why units in operation and replacement volume is important to the long term viability of those businesses.

      BTW, those of you who *think* you paid *invoice* for your car have likely been duped – unless you know the dealer personally. There are two invoices…. the both show all the same data, but one has encoding on it that shows the “funny money” that goes back to the dealer and the other does not. You’ll see letters such as HB, FTF, FPA, and other codes with numbers behind them. One (the same one you’re shown) is given to the sales staff because they can’t retain profit if their life depended on it and the other is only seen in the business office / GM’s / Dealer Principal’s office where they have to actually figure out how to make money.

      Then there’s volume bonuses, contest money, customer satisfaction “bonuses” and the like that are also kept away from the lot lizards. That’s why the dealer communication systems have different access levels so the “sales” communications don’t get mixed with the “administrative” communications. There are even separate pricing sheets published that do not reflect the below the line money that are given to the factory reps (even though any one of them with an IQ above his shoe size knows the truth).

      Trust me. You didn’t pay “invoice”. Not even close.

      Do you honestly think the margin on a Mercedes is 8%? You’d have to be nuts to inventory those with that slim of a margin.

      • Trailer Trash says:

        I turned wrenches for a Ford tractor dealership in the mid ’90s. The owner cried constantly about losing money on every sale, but never mentioned the big rebate check at the end of the year. And we weren’t supposed to notice that despite the boss’s “poverty”, he managed to buy his wife a new Caddy every year or two, as well as new pickups for himself and his kids.

        In all fairness the whole family worked at the dealership and put in plenty of hours, but it’s hard not to resent the bosses when they refuse to pay their mechanics enough to make a decent living, and expect their workers to subsidize the bosses’ livestyle.

  21. dang says:

    Like the soldier who cannot wipe the sweat from his brow because his hands are covered in the blood of an innocent victim, the chasm between what we are told is the truth and the truth becomes too wide to believe the doctrine.

    Maybe the new generation that’s taking over won’t continue to allow an aristocracy to reestablish a hereditary right over everyone else. Only the Hollywood hero likes a fair game. Everyone else likes a leg up on the “competition”. The bigger the leg the better.

    • dang says:

      I submit that the last few (50) years of the financialization of America has revealed at least several macroeconomic manifestations that contradict the planks of the dominant economic proclamations.

      for instance:

      Free trade will generate oodles of new high paying jobs in the domestic economy, with comprehensive benefit packages.

      That QE forever too rescue the criminal banks from their gambling losses has been good for Jane Q citizen.

      That the concentration of wealth has expanded the opportunities available to all Americans.

      That the Federal Reserve is an agency of the US Government that is independent from the private interests that it has been authorized to supervise.

      That more and more military spending will reduce the national security threat.

      Just a few examples.

  22. Depth Charge says:

    If it’s not on the lot where I can look at it and decide if I like it, then I’m not buying it. They lose me as a customer. Enjoy your paltry production numbers, with record per unit margins, greedheads.

  23. DawnsEarlyLight says:

    As I recently traveled from South Bend IN to Tucson AZ, I saw car lots with a lot of used vehicles. I’d assume a good coin was paid, even as a trade in. Is there any chance of dealers, forward on, making a sales profit? BTW, the new vehicle lots were lacking a majority percentage of vehicles.
    Also, I was certainly happy I was traveling in my Rav4 Hybrid! 😁

  24. dang says:

    Life’s lessons are lost on the rich. A cautionary phrase but accurate.

    Appointments are a social decision, not even subject to vote by a minority of the wary inhabitants and eligible voters that bother to vote of this great nation. The Supreme Court is appointed, for life no less, and has become a right wing focus group that doesn’t have the capacity to understand the life experience of the 89 pct of Americans, that live in terror of which precedence they’re going to revise next.

    • dang says:

      Sometimes, love seems like the worst that can happen to anyone.

      • dang says:

        Like getting old, not always pleasant, but at least, a challenge.

        Faced with the facade of who I wanted to be and sorta became, the magic of love was always transparent, taken for granted in the sense of a shared existence.

        • dang says:

          My emotion has always overwhelmed my brain. The story of modern mankind. It is not the leader that makes the mistake.

        • dang says:

          One would think that being acquainted for 43 years would give me the correct perspective of what a lout I really am and what a vision she is.

          All true. I once pulled a standard college football locker room joke on someone that had never seen the inside of any gym.

          I scared him, inadverantly, and live with the added burden on my reputation, which was always under assault, in small western town.

        • dang says:

          So I raise my glass and cheer ” Heck of a job Browney” Jerry Powel, either a traitor or a fool. The only thing I can be sure of is that he’s lying. A mouth piece for his clients, the raptor banks that almost lost all their money and went out of business because their greed was fertile ground for the collapse of a previous Fed funded bubble. They were bankrupt, all of them.

        • Michael Gorback says:

          Dang, you sound like the guy sitting next to me at the bar the other night. Maybe you should call the suicide hotline.

    • Michael Gorback says:

      Never delegate decisions to people who don’t suffer any consequences if they screw up.

  25. whatever says:

    My kid gets a new car for college graduation, wanted a RAV4 hybrid. Started looking.

    It was hell – they are not to be had, and if you could see an offer before it was purchased it was listed at $5k over “invoice”, which they are getting. The dealer system is hell, you have to go negotiate with each one individually to see inventory, pricing, and so on. With no inventory I had to search email and talk to 10 dealers in an hour radius. And they won’t deal over the phone or internet, just give enough info to get you to the lot. I wanted an Amazon click-and-buy, but Toyota won’t have any of that (or their dealers won’t)

    Eventually I said “you get a gas one”. Still almost impossible, dealers asking and getting $3k over invoice. I finally went to a lot and they promised me one still on the boat from Japan for $2k over, and financed through Toyota (dealer gets a $500 kickback and I pay off in month so I don’t care).

    I have a “deal” but the car arrives in three weeks, and I have no illusions that if someone comes in and offers them $4k over invoice during that time that a “problem” will come up with my paperwork, and the higher bidder gets the car, and I get a “gee we’re sorry we messed that one up”, which they can do legally since no money changes hands until the physical car is on the lot.

    At any rate buying a new car always sucked, it’s now much worse.

    • Anthony A. says:

      This above is exactly why buying a good, clean used car is the best way to go.

      • Michael Gorback says:

        And what happens when you need replacement parts?

        Besides, the used ones are overpriced too.

        OTOH the value of your trade-in should be equally inflated. With all the data out there you should know FMV for both sides of the trade.

        One weasel trick I learned years ago was that the dealer offered a $1500 rebate, but only if you financed the purchase. The interest rate wasn’t high at all.

        But I’m the kind of guy who actually reads the size 3 font language on the back of the loan application and there it was: some of the interest payments may be remitted to the dealer.

        I asked to speak with the finance person. Turns out it was a simple interest loan, payable in full at any time.

        I took the loan and the next day paid off the loan in full, pocketing the rebate.

        As for the gadgets, the worst value is GPS. The software usually sucks and they add on about $2,000 and charge for updates. Although I couldn’t avoid it in 2018, the car I bought before that was a former loaner with no whistles and bells, including no GPS. So what? I had Google maps.

        Do you need 8 speaker stereo? Is a moving car where you get your “golden ear” experience? Fancy wheels, bah. Run flats double bah. Low profile run flats – you need a psychological evaluation. Interior wood paneling? Who notices?

        I have people point out to me that I have some scratches and dings on the car and that it needs to be washed. I tell them I don’t care because I sit on the inside.

        But I did go through my “penis car” phase 30+ years ago so I can’t throw too many stones.

        • aqius says:

          ” have people point out to me that I have some scratches and dings on the car and that it needs to be washed. I tell them I don’t care because I sit on the inside.”

          ” . . sit on the inside”

          genius! pure gold right there.

        • SK says:

          I drive a 2005 Subaru Outback. Bought it used 8 years ago with nearly 100K miles, 2 previous owners, and dings. I beat on the car, hauling around all kinds of dirty crap (compost, wood chips, paint, various recovered materials, yard sale finds, etc.), and the car gets dirty and more dings, so a creampuff is not a good fit.

          I like the dings, never had to spend a moment worrying about anybody scratching the car in a parking lot since it already had them.

          Living in an affluent town in metro-Boston, I am probably one of 3 people in town who drives a shitbox. I don’t care. I could buy whatever I wanted but am not interested in spending more than the minimum on a depreciating asset (or at least cars used to be).

    • SK says:

      My son was looking to buy or lease his first car and was interested in a Toyota Prius or Camry hybrid. They’re hardly available, priced way above MSRP even if you can get one, from what I’ve heard the dealer makes you jump through hoops.

      I suggested he look at Hyundai or Kia. He ended up leasing a Hyundai Elantra hybrid at MSRP ($24K) and it only took about 1 1/2 months from putting down the deposit to driving off the lot. 52-54 mpg but he got 100-something driving around town. He loves it.

  26. RedRaider says:

    Buy via make to order

    Does that mean you pay when you make the order or pay when you receive the car?

    The latter is fine but the former – never!

    • reskiles says:

      I believe you pay a small non-refundable deposit. My gripe with that is that you may not get favorable financing when the car finally comes in. Now it’s bite the bullet or surrender the deposit.

  27. unamused says:

    So corporations get more and the general population gets less. Again.

    It doesn’t seem to break the other way very much any more. I’m sure there’s a reason for that.

  28. Yancey Ward says:

    Your Lada will available in 2028. Thanks for shopping with us.

  29. Nemo 300 BLK says:

    One of our corporate vehicles is a 2019 Platinum Expedition Max that has 100K on it. We have tried for a year first to get a 2021 Platinum Expedition Max, and when they said it wasn’t coming, in September of 2021, we ordered a 2022 Platinum F150.

    The F150 won’t be here for another couple of months, so we have a 2022 Tundra coming from a well-known broker in Philly who has the best Toyota allocation along the east coast.

    The Ford dealer we deal with locally is giving us $48K for this 2019 Expedition that will have 102K miles on it. Unreal! Obviously, it is going to retail in at least the mid-50s.

    The Expedition is flawless and maintained with an open checkbook, but I wouldn’t give you $40K for it.

    What a crazy auto market we are in.

  30. Tom says:

    Somewhat off topic: the the US auto market is changing. The Millennials are not as interested in cars as were their parents, grand parents and great grand parents were. Boomers couldn’t wait to get their licenses; Millennials don’t care. Earlier generations saw driving as a joy; today’s generation view driving as a chore. The War and Silent generations would flock to dealerships just to see the new models. A four-year-old car was considered old. Boomers dreamed of Stingrays, Thunderbirds, Mustangs, GTOs, Road Runners, etc. The War generation dreamed of Cadillacs, Imperials and Lincolns. Now cars are viewed as appliances. In the 1950s, the nation was fiercely split between Ford vs Chevy. One had to be careful about expressing their personal views on that topic. And no one dared drive into the Rouge Plant or Local 2 parking lot in Chevy. Now, no one cares.

  31. joe2 says:

    How come Wolf never gives any numbers on private sale of used cars? I would expect private sales or even barter would increase if used vehicle prices increase.

    • Michael Gorback says:

      Some web sites have private sale data. Thank goodness the guy who bought my Cobra AC never saw it. A car with no roof, windshield wipers, windows, or AC. Basically a hideously priced version of two motorcycles welded together.

      And it wasn’t a chick magnet. No matter where I stopped, whether to gas up or get a triple death burger at Sonic, it was always guys that came wandering over to ask me about the car. So if you’re attracted to men, get that Cobra.

      • joe2 says:

        Ha Ha! In college in the 60s I had a 10 year old Alfa Spyder in “questionable” condition that I half rebuilt. Sounds like your Cobra but smaller.

        I would tell the girls at frat parties about my Italian sports car and ask them out before they saw it. It worked better than cruising around.

        When it died on the street I had to abandon it. One of my many poor decisions.

    • Wolf Richter says:

      joe2,

      Compared to the HUGE used vehicle market at retail dealers and wholesales (around 40 million units a year combined), the private sales numbers are very small.

      I don’t even know of any data provider that is attempting to count private sales volume. The DMV data combines them into one.

      BTW, unrelated, just reminds me: private sales are risky for buyers and for sellers, for a bunch of reasons, and lots of things can go wrong. And then there may be no one to go back to if something goes wrong. I personally don’t want to take those risks.

      • joe2 says:

        Thanks Wolf. I guess times have changed. I remember when the newspaper want ads were the way to buy and sell cars and bikes.

  32. DanS86 says:

    What about prices in MX? Maybe risk getting shot to buy there?

  33. DanS86 says:

    I have a 2013 Honda Accord 6MT (Car and Driver Car of the Year Award). I love driving the car and hated the redesign. My main driver is a 2019 Mazda CX-9 Sig. My Honda Dealer keeps texting me to sell the car back to them. I am tempted but would miss the 6MT. Paid cash for that car and got a good discount.

  34. Amander says:

    With this shortage of replacement parts the US should start poaching auto mechanics from Cuba. I bought my current car from owner, a Cuban guy. I got home and opened the air filter receptacle to find some sort of polyester fiber mat glued to a cardboard frame. Since it was clean, for a fraction of a second I considered leaving it in place.

  35. SpencerG says:

    I appreciate both the article and especially El Katz’s comments here. Eye-opening stuff.

    For what it is worth, a friend of mine replaced her 2017 Toyota Highlander last week with a 2022 Toyota Highlander. Took her a couple of weeks to find a dealer willing to sell AT the MSRP (most wanted $5000 to $10,000 above MSRP to take her order) and with the colors she wanted… she looked in five states but got on the list at a dealership about an hour away.

    Numbers in the deal:

    Price she paid: $48K and change
    Interest Rate: 2.7%
    Trade-in Value: $21K
    Blue Book Value: $22K to $24K
    Trade-in’s list price on the lot right now: $27,995

    Make of all of that what you will.

  36. Michael Gorback says:

    Hey, more good news! Ukraine is a major producer of auto wire harnesses. /sarc

  37. Cookdoggie says:

    This is the auto industry’s version of Work from Home – just order online. The risk for WFH going overboard is global outsourcing. The risk (and my eternal hope) for Make to Order cars going overboard is no more dealers or their BS.

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