The United Auto Workers Union’s record wage increases from the Detroit-Three auto makers went into effect in November amid cries about coming car price inflation. It’s early, but auto workers’higher pay has, essentially, shown no impact on new car prices.
Recent pricing trends hold some important information for both investors and the UAW, about pricing, profits, and how the car industry works.
Kelly Blue Book, on Thursday, updated U.S. new car pricing for December. The average transaction price came in at $48,759. That’s up from the $48,247 average transaction in November but down 2.4% year over year. The December 2022 average transaction price of $49,507 was an all-time high.
The rise in prices in December 2023 from November reflect some seasonal factors, as prices typically rise at the end of the year. What’s more, December marks the fourth consecutive month of year-over-year declines, which is “unique,” according to Kelly Blue Book.
“When we look at price strength, the pandemic created a seller’s market in which new vehicles were transacting above manufacturers’ suggested retail price in 2022,” said Michelle Krebs, executive analyst for Cox Automotive, the company that owns Kelly, in a news release. “That market is all but gone now, as higher inventory has led to higher incentives and discounts…. the shift from a seller’s market to a buyer’s market is well under way.”
Most car buyers are familiar with incentives — getting a deal at the dealership. Incentives amounted to 5.5% of the average transaction price in December, up from 2.7% a year ago. Kelly Blue Book data factor in MSRP and dealer incentives. The numbers it reports are what people pay to drive off in their new car.
Luxury cars and battery-electric vehicles both got cheaper in December compared with November. The average luxury car cost $62,523, down 1% month over month and 8.8% year over year. The average BEV cost $50,798, down 3% month over month and 17.3% year over year. Tesla deserves some credit for the BEV drop, because the EV pioneer cut prices aggressively in 2023.
Retail prices just don’t seem to have been affected by higher wages. The UAW won base wage increases of some 25% over the life of the contract, which runs through April 2028. This all reminds naysayers — who warned that UAW wages would lead to unattainable high car prices — that car companies aren’t fully in control of car pricing.
To some extent, the price of a car is bounded by the cost of making one but supply and demand are what ultimately set pricing. Supply has been improving from COVID-19-induced supply chain disruptions: Dealer inventory in December hit 2.5 million units for the first time in two years.
Pricing trends are also a reminder to the UAW that car companies weren’t gouging car buyers. During 2023 labor negotiations that wrapped up in November, UAW President Shawn Fain frequently accused car makers of gouging buyers to generate record profits.
As mentioned, pricing is more a function of supply and demand. What’s more, selling a car over MSRP is decided by the dealership.
Ford Motor, GM, and Stellantis did benefit from lower supply and higher prices, making $1,000 more per car during the pandemic, compared with the average per-car operating profit in the three years coming into the pandemic. Higher profits on reduced volume was one surprise Covid-19 brought to the auto industry.
Looking ahead, investors should be ready for the profitability trend to reverse. Wall Street projects the Detroit-three auto makers will give up about a couple of percentage points of profit margin, or a few hundred dollars in operating profit per car.
Traditional car makers earn, very roughly, $3,000 or $4,000 per car these days. Tesla is expected to earn almost $6,000 a car in 2024.
In coming years, it will be the job of Ford, GM, Stellantis, and any other auto maker’s executives to offset rising costs to keep their products competitive.
Write to Al Root at allen.root@dowjones.com