Most auto manufacturers have long ignored the wisdom of the angels. And yet we all hear them so clearly:
- "Never exceed a 60 days' supply of on-ground inventory."
- "Keep fleet to less than 12 percent of your total sales."
- "Incentives should never exceed 10 percent of your transaction price."
Before 2020, most automakers disregarded one or more of these long-standing principles for running a healthy auto business.
Conventional wisdom has always been that the manufacturers with the highest output and largest scale would enjoy a competitive advantage over smaller volume producers.
Ford Motor Co. was the first automaker to demonstrate the enormous benefits of economies of scale. In 1908, it built 10,000 Model T's at a unit cost of $950. By 1924, it was building 2 million Model T's per year at a unit cost of $300. As volume exploded, so did their margins — and their bottom lines.
Nearly 100 years later, most car companies were still running their "the more we build, the more we make" playbook by consistently adding production capacity to their manufacturing operations. Unfortunately, this added capacity often creates extreme imbalances between available supply and natural demand.
It's the devil's work. Carmakers pile on incentives and volume-based bonus programs and fulfill big fleet orders to chase volume and share and maintain capacity. Margins suffer significantly from this behavior. According to Securities and Exchange Commission filings, Ford's margins dropped to 3 percent in 2019, when in the past they've been well above 10 percent.