Can car makers maintain high profits as discounts return?

Car makers could compensate for increasing raw material prices, because the parts shortages meant the high demand for cars was being artificially constrained. For example, de Meo said the Renault Group could have built 300,000 more cars in 2022 if parts supply had been normal. The company’s order book now stretches to 3.5 months worth of manufacturing output, over its ideal of two months. If you wanted a new car, you had no choice but to pay more. 

Now, however, as shortages (especially of chips) are easing and production can ramp back up, there’s increasing evidence that car makers are having to stimulate demand by cutting prices.

Tesla’s price cut of up to £8000 for the Model Y and Model 3 – Europe’s two best-selling electric cars in January – set the tone for the start of the year, in part because it was so visible, due to the company’s transparent pricing policy. 

Most other car makers use the wholesale model, where discounts are better hidden within dealer pricing actions. But What Car? data has shown that the average cash discount across all makes and models ahead of the plate change in March is 4%, or £1875 per car. This is still low, but there are signs within that of increasing manufacturer generosity, including a 43% increase in PCP finance deposit contributions, up from £784 to £1119 per car over the last three months. 

“The direction of travel is clear,” said Pat Hoy, automotive industry researcher and head of What Car?'s Target Price mystery-shopping team. “Discounts and finance offers will have to increase to persuade more buyers to buy more new cars.”

What Car? identified Nissan dealers as currently the most generous with cash discounts, at an average of 7.4%, followed by Peugeot at 7.1% and Seat at 6.2%.

Car sales are definitely on the up, especially among those volume brands that struggled in the worst of the parts crisis as parent companies diverted parts to more expensive brands.

In January, the UK registered 131,994 new cars, up 15% on the same month in 2022. Amid that was a 45% rise in Volkswagen sales, a 49% rise in Skoda sales, a 45% boost for Citroën, a 23% jump in Ford sales and a 29% increase for Nissan.

“Pricing power is under pressure for next few quarters, because of the rebalance between supply and demand,” said Stellantis CEO Carlos Tavares on a recent call with journalists.

At the same time, though, higher inflation is working to cool demand for raw materials, making them cheaper for customers like Stellantis and driving down the cost to build a car. If that works in the company’s favour, new cars from Fiat, Peugeot, Vauxhall and others can become cheaper while Stellantis keeps the same margin profit. 

This isn’t entirely in the control of the car maker, though. “What is going to move faster? Is it the total production cost going to be ahead of pricing power erosion or the opposite?” asked Tavares on his company’s earnings call.

However, manufacturers are promising that they won’t go back to the bad old days of deep discounting.

“I never gave a target for market share or volume to the teams, because I don’t want to wake the monster that was in the house before,” de Meo said on the Renault Group's earnings call. He boasted that his company had earned more money selling two million cars than when it sold 3.5 million by putting value over volume. “That proves that this was the necessary detox treatment,” he said.

Renault dealers are now incentivised on the margins they bring on the cars sold, rather than outright volume, de Meo said. “That means richer cars, which is good. Not original, maybe, but in our case not always the focus of the thing,” he added.