Inflation Is Great If You Have Pricing Power. Just Ask Mercedes.

For years, Mercedes-Benz Group AG’s profits failed to match the desirability of its luxury vehicles. Now, semiconductor shortages have given it the perfect cover to hike prices and prioritize production of its most expensive high-performance models.

The impact on earnings has been stunning. Mercedes reported a 15% operating profit margin during the final three months of 2021 — about double the car unit’s average return during the past decade. With inflationary pressures building across the supply chain, there could be no better demonstration of the benefits of the German giant’s pricing power.

Warren Buffett once described pricing power — the ability to raise prices without curtailing demand or losing share to a competitor — as the single most important decision in evaluating a business. Considering the frequency with which the subject is now debated on quarterly earnings calls, plenty of investors agree.

If companies are unable to fully pass on soaring raw material, energy and logistics costs to customers, their profit margins will suffer or they’ll have to find cost savings via more onerous productivity improvements.

With a value chain spanning component suppliers, tires, steel and semiconductors, as well as auto dealerships and rental firms, the automotive world reveals plenty about who has pricing power, who doesn’t, and why.