Cars have been a big part of the US inflation picture over the past year. Since a computer chip shortage slowed production and drove up prices for new and used vehicles, fixing those supply chain problems in 2022 was supposed to normalize the market again, helping cool inflation more broadly.
Sorry, but no.
That's not how automakers see it, nor is it what they want. They need to invest billions of dollars into new production facilities for electric vehicles, and that money has to come from somewhere. For companies like Ford Motor Co. and General Motors Co., it's going to be from their line of traditional gasoline-powered vehicles.
What automakers are now banking on is that high car prices will mean more profits, and they're making production plans geared toward keeping prices high. For consumers, this might be the short-term cost of leaping into an electric future — but it also means inflation could stay elevated for longer than currently appreciated.
Investors heard this from themselves in the latest round of industry conference calls for fourth quarter earnings results. Tesla Chief Executive Officer Elon Musk said that the company's not currently working on the $25,000 car that it had previously discussed, saying that it has too much on its plate. Given the cost environment and the shortage of key components such as semiconductors, there's no reason for an automaker to go out of its way to make lower-priced, less-profitable vehicles right now.
Ford went into the most depth about its thinking as it balances production of gasoline-powered and electric vehicles. It gave expectations for its adjusted EBIT margin — earnings before interest and tax — of 8%, a higher level than the company projected last year. Its chief financial officer said that even though Ford projects sales volumes to be 10% to 15% higher than a year ago, it expects the pricing environment to remain strong, in part by operating "at leaner inventories than we have in the past."
GM is projecting more volume growth than Ford but made similar comments about inventories and pricing. On its earnings call, its chief technology officer said, "despite the production increases we saw in Q4, we are still not really building inventory that much, and I think that's going to probably continue throughout the year." To the extent it plans on producing lower-priced vehicles in 2022, it's because that's where they see the unmet demand after the production shortfalls in 2021 — there's no intention of flooding the market with inventory.
Even at a time of high vehicle prices and low levels of inventory, automakers have good reason to proceed cautiously. As previously mentioned, the industry is in a once-in-a-lifetime transition from gasoline-powered to electric vehicles. It's an all-in moment for a capital-intensive industry that can't afford to stumble until they're on the other side. Low inventories and high prices give them a margin of safety for any kind of setback. If electric-vehicle demand is slower to materialize than anticipated, for instance, or if there's a macroeconomic slip, low inventories and higher prices give them more resilience.
And in the case of gasoline-powered vehicles — just as in the oil and gas industry — there's a lot of uncertainty about future demand, which is projected to fall over time. When an industry is in contraction mode it's never a good idea to risk over-production. If electric-vehicle demand grows faster than expected, the auto industry could find itself in 2023 or 2024 unable to meet demand for EV's while sitting on a glut of gas-powered vehicles that consumers don't want — getting squeezed on both ends. Automakers will proceed as the oil and gas industry has, waiting for higher prices before increasing production to give itself a profitability cushion.
This doesn't mean that vehicle prices will keep rising in 2022 — production will expand and that should help relieve some of the shortages and highest prices we've seen over the past year. But the industry doesn't want and can't afford for conditions to go back to pre-pandemic levels. It's relying on having more pricing power than it's had in the past to accomplish its vision over the next several years. So while consumers can anticipate some improvement in the market this year, hopes should be kept in check.
Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.