How Excess Car Production Will Smooth Inflation

Cars Economy
  • UBS analysts say the market will experience excess production and trigger a price war in the auto industry.
  • This problem will cause companies to lower their prices in order to compete and also to free up inventory, something that will help lower global inflation.
  • It should be noted that car manufacturers have already begun to reduce the price of their units. The most significant case was Tesla, which lowered the price of one of its models by up to 8,000 euros.

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There is a surplus of cars on the market and UBS has estimated that global production will outsell sales by 6% this year, leaving a surplus of five million vehicles.

This problem will trigger a price war among manufacturers in the industry since supply will be greater than demand. Consequently, companies will need to lower their prices to remain competitive and free up excess inventory.

As long as people have a higher cost of living and units remain unsold, the price of vehicles will plummet, which is good news for central banks that are fighting inflation.

It should be noted that companies have already begun to lower the prices of their vehicles, especially manufacturers of electric units, due to high energy costs.

The most significant case was shown by Tesla, which dropped one of its models in the United Kingdom to 8,000 euros, with the aim of matching the prices of Skoda and Kia.

According to AutoTrader, the cost of second-hand electric vehicles is also falling, with the average used price falling by 13% in the past year to €33,060.

“Given the bullish production schedules, we see a high risk of overproduction and increasing price pressure as a result. The price war has already started to play out in the EV space, and we expect it to spread to the combustion engine segment.”

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The trend in the automotive market is changing big. It is that during the pandemic when people chose not to use public transport, the demand for new and used vehicles skyrocketed. In addition, the closure of factories due to the same virus also increased costs.

As a consequence, the big automakers saw record profits. Toyota, Volkswagen, BMW, Mercedes and Renault went from showing losses in 2020 to excellent income in 2021, something that followed in 2022.