The Impact of Wage Increases on Car Prices

In November, the United Auto Workers Union celebrated the implementation of record wage increases from the Detroit-Three auto makers. However, concerns arose about potential car price inflation. It’s still early to draw definitive conclusions, but one thing is clear: auto workers’ higher pay has not had a significant impact on new car prices.

Recent pricing trends reveal crucial insights for both investors and the UAW regarding pricing, profits, and the dynamics of the car industry.

Key Findings from Kelly Blue Book

Kelly Blue Book recently released its updated U.S. new car pricing for December. The average transaction price reached $48,759, surpassing November’s average of $48,247 by a small margin. However, this figure represents a decrease of 2.4% compared to the previous year. Notably, December 2022 witnessed an all-time high average transaction price of $49,507.

The price increase in December compared to November can be attributed to seasonal factors, as prices typically rise towards the end of the year. Additionally, Kelly Blue Book points out that December marked the fourth consecutive month of year-over-year declines, which is an “unique” occurrence in the industry.

Shifting Market Dynamics

Michelle Krebs, executive analyst for Cox Automotive (the company that owns Kelly Blue Book), highlights the shift in market dynamics. She explains that the pandemic created a seller’s market in 2022, with new vehicles selling above manufacturers’ suggested retail price. However, this trend has significantly changed due to increased inventory leading to higher incentives and discounts. Consequently, the market has transitioned from a seller’s market to a buyer’s market.

The Role of Incentives

Most car buyers are familiar with incentives offered at dealerships, which allow them to secure attractive deals. In December, incentives accounted for 5.5% of the average transaction price, an increase from 2.7% in the previous year. Kelly Blue Book’s data incorporates both the manufacturer’s suggested retail price (MSRP) and dealer incentives, providing an accurate representation of the actual amount paid by buyers.

Luxury Cars and Battery-Electric Vehicles

Interestingly, luxury cars and battery-electric vehicles (BEVs) experienced price decreases in December compared to November. On average, luxury cars cost $62,523, reflecting a 1% decline month over month and an 8.8% decrease compared to the previous year. Similarly, the average cost of a BEV was $50,798, showing a 3% decrease month over month and a significant 17.3% decline year over year. It’s worth noting that Tesla played a significant role in driving down BEV prices through aggressive price cuts throughout 2023.

As the automotive industry continues to evolve, it’s essential to closely monitor pricing trends, incentives, and market dynamics to gain a comprehensive understanding of the factors influencing car prices.

Retail Prices Unaffected by Higher Wages: A Shift in Perspective

The significant wage increases negotiated by the UAW, totaling 25%, have not translated into higher retail prices for cars. This is a clear indication that car companies, despite concerns raised by skeptics, do not have complete control over pricing.

While the cost of manufacturing sets a boundary for car prices, it is ultimately supply and demand that determine the final pricing. Happily, the supply chain disruptions caused by the pandemic are gradually improving. In fact, dealer inventory reached 2.5 million units in December, marking the first time in two years.

These pricing trends serve as a reminder to the UAW that car companies were not exploiting buyers. During the 2023 labor negotiations, UAW President Shawn Fain frequently criticized car manufacturers for charging inflated prices to reap excessive profits.

It is important to understand that pricing is primarily influenced by the interplay between supply and demand. Furthermore, it is ultimately the dealership’s decision to sell a car above the manufacturer’s suggested retail price (MSRP).

Ford Motor, GM, and Stellantis have benefited from reduced supply and increased prices during the pandemic. They have been able to generate an additional $1,000 in profit per car compared to their average per-car operating profit in the preceding three years. This unexpected boost in profits amidst lower sales volume is a positive development brought about by Covid-19.

However, investors should prepare for a reversal of this profitability trend going forward. Wall Street analysts predict that the Detroit-three auto makers may experience a decline of a couple of percentage points in profit margin, equivalent to a few hundred dollars in operating profit per car.

Currently, traditional car manufacturers generate approximately $3,000 to $4,000 per car. In contrast, Tesla is projected to earn nearly $6,000 per car by 2024.

In the upcoming years, executives of Ford, GM, Stellantis, and other automakers will face the challenge of offsetting rising costs in order to maintain their products’ competitiveness.