Car buyers can win the game of chicken for automakers and dealers

• Automakers and dealers have kept prices high and inventory low for years.
• Now, the tables are turning and the two are at odds over incentives and branding.
• Consumers may be poised to win as automakers and retailers vie for it.

Automakers and dealers play a game of chicken about how much a car should cost now — and customers might come out with winners.

Some dealers have a surplus of cars in their holdings as inventory levels bounce back after years of restrictions. They want those cars to sell faster through discounts and other incentives.

But automakers aren’t letting them pull those levers. They want to keep prices — and profit margins — high. (And new-car prices are still very high—the median deal price was $47,409 in April—$10,000 more than pre-COVID times, according to Cox Automotive.)

At the same time, consumers are tightening money as inflation persists and wages stagnate.

“Now this is a game of chicken and who will blink first?” Brian Finkelmayr, senior director of new auto solutions at Cox, told Insider.

Dealers generally don’t like having an excess of cars on their lot. They are used to selling vehicles at above sticker price for high margins with low inventory. But as the tables turn, tensions with their automakers are coming to a head.

“You have dealers on one side sitting on this inventory and looking at their manufacturing partner and saying, ‘When are you going to bring back the incentives?'” Finkelmeyer said. In the meantime, auto companies are digging into their own profit margins and looking for ways to keep inventory down without spending on big discount packages as they have done in the past.

Car companies are trying not to back down from discounting

After years of COVID-related plant closures and prolonged chip shortages that have squeezed supplies, auto companies are trying hard not to fall back on the age-old habit of relying on expensive rebate programs to reduce a bloated dealer count.

Instead, some are turning to more creative solutions. Dealers had a much higher supply of Ford F-150 and Chevrolet Silverado pickups at the end of April than they did of popular vehicles like the Toyota RAV4 or Corolla. So much so that General Motors was willing to pause truck production to keep supply down.

Historically, a company like General Motors wouldn’t consider making changes to production and instead move excess inventory with month-end deals, said Jessica Caldwell, automotive analyst for auto-shopping site Edmunds.

“The auto companies are in uncharted territory here,” Caldwell said. “I’m sure they’re writing the game handbook as we speak, looking at ‘How has this assembly line shutdown worked for us and how does it compare to incentives?'” “

High interest rates make everything more painful

Meanwhile, dealers are spending more to keep cars stationary. Merchants borrow against the inventory they hold on their lot in what is referred to as a “floor plan”. As interest rates rise, so does the cost of holding unsold cars.

“It’s going to put more economic pressure on dealers to say, ‘We can’t sit on these cars for 150 or 180 days. We need to start discounting,'” Finkelmayer said.

To make matters worse for merchants: Without discounts to cushion rising interest rates, more customers delay their purchases and hope to wait for interest rates. If and when auto companies start spending more on stimulus, Caldwell said, they will likely target interest rates.

“Auto companies know very well how high interest rates can get for their customers, so I think we’ll likely see whatever stimulus spending goes there,” Caldwell said.