The many faces of ‘pricing power’

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Supply chains updates

The global shortage of semiconductors has an upside — at least it seems that way to the chief financial officers of BMW and Daimler: it has revealed just how much “pricing power” they have. In future, even once the scarcity of chips eases, the two automakers plan to limit sales of their most premium cars, permanently locking in the higher prices — and boosting inflation.

The comments by the carmaking executives, in an interview with the Financial Times, feed into fears that temporary interruptions to international supply chains will lead to higher prices. The disruptions have causes ranging from pandemic-provoked factory closures and disruptions to global shipping to the after-effects of natural disasters. But a top executive at the logistics chain UPS said this week that multinationals were already retreating from globalisation as a result, shifting production to more expensive but closer locations. This, he said, would lead to permanent scars on the economy.

Sustained higher inflation has been towards the top of investors’ list of worries as the coronavirus pandemic eases. While total spending has been boosted by the combination of high consumer savings, easy monetary policy and government stimulus, the capacity of the economy to supply the goods and services to meet that demand has been harmed by lockdown restrictions and other bottlenecks. Debate between economists has focused on whether these pressures will prove transitory and ease as economies reopened — or whether they will lead to something more permanent and will soon be embedded in long-term expectations.

Daimler and BMW’s conviction that their ability to charge more is due to their own pricing power will be tested by the competitive pressures of the market. At present, their competitors are facing the same supply shortage as they are; would-be luxury car buyers face a wait and higher prices whoever they choose to buy from. If the bottlenecks ease, then consumers may be able to choose, instead, between paying more for a luxury BMW or less for one of its competitors’ cars. Profit margins that can be sustained in one market cannot necessarily be sustained in all.

When it comes to deglobalisation, too, companies will face similar calculations. Adopting more “resilient” but less efficient production processes could raise costs. That might make sense for some businesses, using “just in case” rather than “just in time” processes as a form of insurance against disruption. Yet it could leave others exposed to lower cost producers that stick with further-flung, yet cheaper, supply chains allowing them to pass on the savings to their customers and undercut their more circumspect competitors on price.

It is the labour market, however, that central bankers are watching most closely for any signs that temporary bottlenecks and shortages are leading to a more permanent increase in prices. For the moment, while truck drivers and others in certain high-demand professions are enjoying their first pricing power in decades, there is little sign yet of wider increases in pay. It is unlikely that workers today have the same sort of ability to restrict supply that their more heavily unionised predecessors enjoyed in the 1970s, the last period of sustained inflation in many rich countries.

Companies, too, may find that when faced with higher wage demands from workers it makes more sense to absorb those costs, maintain market share and earn a lower profit margin, rather than passing them on to customers. Unfortunately for BMW and Daimler, it is not always clear exactly where “power” lies.

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