Good point by the Detroit cheer leaders today: car makers in the US might weather a recession okay right now. How come?
- Recessions are problems of too low demand—and problems that get worse
- There is a huge shortage of cars right now—that’s a supply problem
- Waiting lists and high profits mean that car manufacturers have a good buffer
When the pandemic started and governments started locking things down, many people were stuck at home and held back on spending. The second-hand car market boomed, for example. At the same time, many companies across the world couldn’t get supplies they needed for production, or stock for retail. (We saw those beautiful satellite pictures of container ships piling up in California, enjoying a maritime traffic jam.)
Tesla, GM, Ford, and other car manufacturers, too, were hit by that, and big time. No parts; particularly chips were in short supply. What did they do, since they had to cut back production? They delivered fewer cars (no choice there) and focused on premium models, read: expensive cars. Then, people could go out again, felt safer, and started shopping big things again—like cars.
The result of all this?
- It’s impossible to go anywhere and just buy a car. Waiting lists are insane.
- Fewer cars: pity for the car makers? Not at all. Profits are doing great
- Normally at the dealer ship you try to haggle down, starting at the sticker price. Now? Good luck. If you want to only pay sticker price, prepare for a journey. Read the story of this dude in The Guardian.
- At most dealerships, you’ll pay a nice premium on top—for a spot on the waiting list. (Sticker price or MSRP is the “manufacturer’s suggested retail price”, a guideline how much the car should cost.)
- People sell their good-as-new car for a tidy profit or even just their spot in the waiting list.
All that means: way too many buyers for way too few cars: a supply problem!
Enter the recession in 2022 (or maybe 2023).
What’s a recession again? While it might be triggered by a supply shock, in the end a recession is a downward spiral of demand): consumption drops, companies cut production, people lose their jobs, and so on.
Here the WSJ is arguing that while a recession may bring demand problems, that might not be an issue for two reasons:
- The car market is already stuck in a massive supply rut—they just must cancel each other out. (Maybe waiting lists get shorter … but that’s not a problem for profits in the near term.)
- The people who are typically hit the hardest by a recession are those with less income. And those are not the ones buying cars.
That last one is particularly nasty, because not only car prices are up, but fuel prices, too. So anyone buying a brand new car, particularly petroleum, is likely well off.
And that’s why the car manufacturer’s might be a “recession-proof” business—right now, in this situation.