Editor’s Note: If you’ve enjoyed Peter’s recent columns about his High-Octane Life, I’m sure you will enjoy his special series – “The Glory Days” – the inside story of his brother Tony’s racing career, which begins in this week’s “Fumes.” Tony is one of the most successful Corvette racers of all time and a member of the Corvette Hall of Fame (2009). And Peter’s recounting of the exploits of the famous Owens/Corning Corvette Racing Team has been one of the most popular and widely read pieces ever to appear in these pages. I think you’ll really enjoy it, because it perfectly captures a different time and a different era, one never to be repeated. -WG
By Peter M. DeLorenzo
Detroit. This business has become a churning, burning hunk of love-hate. On the one hand, dealers are making ca$h-ola hand over fist (more on that later). On the other, automotive production is spiraling downward, as are automaker profits. And the list of ingredients churning the “new” auto business is growing more precarious by the day.
The silicon chip shortage situation isn’t going away. In fact, it is being amplified by the war in Ukraine. It turns out that several key automotive components are sourced in Ukraine, and the shortage has already decimated European automakers in particular, and it threatens the rest of the global automakers as well. A specific example? Between 45% to 54% of the world’s semiconductor-grade neon, critical for the lasers used to make chips, comes from two Ukrainian companies, according to Reuters. Both firms have shuttered their operations, according to company representatives contacted by Reuters. The stoppage casts an ominous cloud over the worldwide output of chips, already in short supply after the coronavirus pandemic drove up demand for cellphones, laptops and eventually, automobiles. This situation will become even more critical as it plays out over the next few months.
But that’s just one part of this burgeoning Shit Show. As I said, auto dealers are very happy, at least for now, because the dealer business has been turned upside down overnight. The old days of floor-planning costly inventory to cater to the instant gratification whims of the traditional American car-buying consumer are over. This has been replaced by the European model of car shopping, where consumers are forced to plan ahead by ordering their vehicles, and then wait for them to come in to the dealer. The result? Discounting has gone right out the window; with vehicles in short supply, the gross profits on each vehicle are soaring. And “added market adjustments” to the sticker prices are gaining favor with some dealers as well, which isn’t sitting well with consumers. But it’s not the first time car dealers have gorged on short-term thinking. That’s why I mentioned that the dealers are exceedingly happy right now. Their profits have been jaw-dropping over the last eighteen months, and gloating could be seen and heard at the recent NADA convention.
But unfortunately for dealers who are incapable of seeing the big picture, this cannot and will not last. As this chip shortage situation grows more serious by the week, the already precariously short supply of vehicles will get worse. Production is already being severely impacted – again – and in turn, corporate profits are taking a huge hit. With sales sliding between 15-25 percent for the major automakers doing business in this country in the first quarter, the skies off to the horizon are growing even more ominous.
Added to all of this is the inexorable push to EVs that is dominating every waking moment at the automakers and eating every bit of their R&D budgets as well. Yes, this Big EV Push seems to be moving at a glacier pace in terms of waiting for these vehicles to actually materialize in showrooms, but that doesn’t alter the fact that vast amounts of money are being consumed at an alarming rate to design, develop, engineer, produce and market these vehicles. And when production is being slammed by material shortages, directly affecting profits and cash flow, it’s no wonder this business feels like a pressure cooker.
But there’s one more thing that’s about to wreak havoc in this business, and that is the ominous lack of affordability in the vehicles being made available for sale. I have been writing about this issue for several years now, and it seems to be reaching a critical point. It’s a fact that manufacturers are building more and more expensive vehicles, and while their dealers gleefully extract big-time grosses on every one they sell, I believe the point of diminishing returns is being reached.
But wait, it’s all good, right? From the manufacturer and dealer perspective it certainly is, but from the consumer perspective it is definitely a depressing development. Cars and trucks are just too damn expensive. Mainstream vehicles costing $65,000, $75,000, $85,000 or even much more have become the norm, and that’s just ridiculous. And it isn’t sustainable either. That’s why I applauded Ford for the Maverick pickup when it was first announced. It would behoove other manufacturers to follow Ford’s lead and start offering vehicles costing around $30,000. Real vehicles with enough real features to make them livable and serviceable for everyday driving by real consumers.
Now that would be a development worth celebrating in this business.
I’ve been taken to task by some of our readers for referring to this business as being a swirling maelstrom, that from their perspective things just aren’t that dire and things will work out, and that my-doom and-gloom bleating isn’t helpful. With all due respect, I have been immersed in this business one way or the other for more decades than I care to count. I’m not in the business of giving “head-in-sand” feel-good perspectives for the sake of putting a sunny slant on things, because that definitely isn’t helpful for anyone.
I try to give an insider’s perspective for those who are interested in this business from afar, but I also call ‘em like I see ‘em for the people immersed in this business up to their eyeballs too. The High-Octane Truth is what people in this business have grown to expect from me, and even if they may not agree with everything I have to say, they wouldn’t have it any other way.
And that’s the High-Octane Truth for this week.
