The car buying ritual of negotiating the price for a new vehicle at a car dealership has been turned upside-down. Before the COVID-19 pandemic, the Manufacturer's Suggested Retail Price (MSRP) was simply the starting point for negotiations, and the final price went down from there.
As recently as a year ago, only 2.8 percent of car buyers paid more than the MSRP. According to a survey conducted by Edmunds.com of car buyers in January 2022, 82 percent paid above the sticker price for a new vehicle. The MSRP is still the starting point for negotiations, but now the final price goes up from there, not down.
The bad news is that the price situation is not likely to get better any time soon. What has caused this drastic transformation in new vehicle car prices, and what can you do about it?
New Cars Are Selling Above Their MSRPs
The Edmonds survey revealed that the average sales price for a new vehicle in January 2022 rose to $728 above the MSRP. This is a huge increase from previous years. The average sales price for the past year at the end January 2021 was $2,152 below the MSRP, and in January 2020, the average price was $2,648 below the MSRP. Sales incentives have mostly disappeared.
Cadillac had the highest markup above sticker price with an average markup of $4,048 in January. Land Rover was next with an average markup of $2,565 followed by KIA with an average markup of $2,289.
At the other end of the scale, Alfa Romeo had the most substantial discount below sticker price with a discount of $3,421. Volvo followed with an average discount of $869 and Lincoln came in next with an average discount of $510.
And it's not just the hottest sedans, trucks and SUVs that are getting the highest markups. Even more ordinary vehicles, such as the Toyota RAV4 hybrid, the Chrysler Pacifica, Mercedes Benz G-Class, the Honda CR-V and the Kia Telluride, have been selling for several thousand dollars above the MSRP. Kelley Blue Book reports that the average transaction price for a new car has risen to $48,043, an increase of $5,410 over the past year.
Ford and General Motors have been encouraging their dealerships not to sell their vehicles above the MSRP, but this request has mostly fallen on deaf ears. Many dealerships are anxious to make up for profits lost during the pandemic. However, some dealerships are refusing to sell above the MSRP because they don't want to risk alienating their loyal customer base who feel like they may be getting gouged with higher markups.
Low inventory levels and a microchip shortage have led to car dealershipS charging prices for new cars above the MSRP.
Why Are Microchips in Short Supply?
Semiconductors or microchips are in extremely high demand because just about everything uses them, from video games to household appliances such as dishwashers. To make the situation worse, over the years, cars have gotten more complicated with increased automotive electronics, which leads to even more demand for microchips.
As a result, many automakers have had to either slow down their production or cease production altogether. For potential car buyers, this chip shortage means dealer inventories will be skimpier and buyers will be paying more with no relief in sight for the near future.
The United States only manufactures about 12 percent of the world's total production of semiconductors. Countries in Southeast Asia, mainly Taiwan and South Korea, produce about three-quarters of the world's production. As a result, U.S. manufacturers are increasingly reliant on foreign manufacturers to produce the semiconductors.
Geopolitics also comes into play. The Trump Administration imposed tariffs and trade restrictions on China’s semiconductor manufacturers. These actions have made it difficult for China's companies to purchase the sophisticated machinery needed to expand their plants and increase production. Consequently, increased semiconductor output from China is not available to ease the global demand.
Recognizing the strategic error in relying on foreign countries for critical electronic components, the U.S. government is finally encouraging manufacturers to build semiconductor plants in the United States. Unfortunately, it will take years from the start of an idea of building a plant to actual production coming out.
How Did COVID-19 Affect the Auto Industry?
Covid-19 has affected the global supply chain. Factories have closed or reduced production as a result of government mandates or concern for their employees’ health. Fewer people were going to their offices or workplaces, and they were urged to find ways to work from home.
As a result of being encouraged to stay at home, consumers have increased their purchases of video game consoles (especially PlayStations), 5G cellphones, PCs, laptop computers and other types of at-home entertainment. This has created an enormous demand for microchips that competed with the electronic needs of new vehicles.
The shift in product usage of semiconductors from cars to entertainment devices was okay until the pandemic eased and lockdown restrictions began to end. Then consumers began to release their pent-up demand for new cars.
This is the classic case of supply versus demand: an increased number of customers chasing and a lower supply.
Car Shopping Tips
Even though you won't get much of a discount, if any, on the MSRP, there are still some ways you can save money when shopping for a new car.
Be flexible. With limited inventory on the dealers’ lots, be willing to accept a different color or maybe consider a sedan instead of an SUV or truck. If you can't find the new vehicle you want, consider buying a used car.
Expand your search. If you aren't able to find a vehicle at the price you want in your local area, take a look at dealerships further away or maybe even in a different state. You can increase your options if you're willing to travel to other dealerships or shop online.
Consider other brands. You may have a favorite brand that you've been buying for years, but the time may have come to consider other carmakers.
Still negotiate. Even though a dealer may initially offer the vehicle you want at $10,000 above the MSRP, it doesn't mean that you shouldn’t still try to negotiate. The dealer may start with a higher markup but in reality, they might be willing to accept a lower markup, like $5,000. This also means that you should try negotiating to get the best price if you’re trading in a used car. Prices for used vehicles are at all-time highs.
Consider leasing. If you can afford to wait before purchasing a new car, leasing might be a short-term solution. A 2- or 3-year lease could be a good alternative to get past this semiconductor shortage and get back to more normal pricing methods when automakers are able to increase their production levels and inventories.
- CNBC: With Limited Inventory Due to a Computer chip shortage, 82% of Consumers Are Paying Above Sticker Price for a New Car
- Consumer Reports: Worst Deals on New Cars Right Now
- Edmunds: 8 out of 10 of Car Shoppers Paid Above Sticker Price for New Vehicles in January
- CNET: Why the Heck Is There Still a Chip Shortage for Cars?
- Edmunds: Should You Pay More Than MSRP for a Car?
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.