Car buyers could win in the game of chicken of car manufacturers and dealers

• Automakers and dealers have kept prices high and inventory low for years.
• Now, things are changing and the two are at odds over incentives and benefits.
• Consumers may be about to win while automakers and their retailers struggle.

Automakers and dealers are playing a game of chicken over how much a car should cost right now, and customers could come out the winners.

Some dealers have a surplus of cars on their lots as inventory levels recover after years of constraints. They want to sell these cars 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 pretty high: The average transaction price hit $47,409 in April, $10,000 more than pre-Covid times, according to Cox Automotive.)

At the same time, consumers are tightening their wallets as inflation persists and wages remain stagnant.

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

Dealers generally don’t like to have a surplus of cars on their lots. They have become used to selling vehicles above sticker price for high margins with low inventory. But as the tables turn, tensions with its automakers are coming to a head.

“You have the dealers on one side who are sitting on this inventory and they’re looking at their manufacturing partner saying, ‘when are you going to bring incentives again?’ ” Finkelmeyer said. Meanwhile, auto companies are looking at their own profit margins and looking for ways to keep inventory low without spending on big discount packages like they did in the past.

Car companies are trying not to back down on discounts

After years of plant closures related to COVID-19 and a prolonged chip shortage that limited supply, auto companies are scrambling not to fall back into the old habit of relying on costly rebate programs to cut inflated dealer lots.

Instead, some are turning to more creative solutions. At the end of April, dealers had a much larger supply of Ford F-150 and Chevrolet Silverado trucks than popular vehicles like the Toyota RAV4 or Corolla. So much so that GM was willing to stop truck production to keep supply down.

Historically, a company like GM would not account for changes in production and instead move excess inventory with end-of-month deals, said Jessica Caldwell, an automotive analyst at the shopping website Edmunds automobiles.

“Auto companies are in uncharted territory here,” Caldwell said. “I’m sure they’re writing the playbook as we speak, looking at ‘how did shutting down that assembly line work for us and how does it compare to incentives?'”

Higher interest rates make everything more painful

Meanwhile, dealers spend more to keep cars sitting. Dealers borrow the inventory they have on their lot in what’s called a “floor plan.” With interest rates rising, the cost of holding unsold cars is getting more and more expensive.

“That’s going to put more financial pressure on dealers to say, ‘We can’t sit on these cars for 150 or 180 days.’ We have to start discounting,” Finkelmeyer said.

To make matters worse for dealers: Without discounts to ease rising interest rates, more customers are delaying their purchases and expect to wait out interest rates. If and when auto companies start spending more on incentives, it’s likely to drive interest rates, Caldwell said.

“The auto companies know very well how expensive interest rates are for their customers,” Caldwell said, “so I think we’re likely to see some stimulus to spending.”