Nothing screams affordability crisis like a cardboard car
Amen to that. While gadget-laden SUVs and trucks remain extremely popular, they have also become extremely expensive, especially the electric versions. The average price of an electric vehicle sold in the United States now exceeds $66,000; Ford Motor Co. last week raised the price of its best-selling F-150 Lightning electric pickup truck for the second time in about two months, blaming rising raw material costs.
High prices are socially regressive and jeopardize a recovery in car sales following the pandemic, while undermining the energy transition. Even the beneficiaries of this trend, such as Elon Musk of Tesla Inc., acknowledge that sticker prices have reached “embarrassing levels”. I would add potentially equally dangerous levels for the industry.
With low-cost credit no longer fueling sales and growing recession fears, automakers will have to find other ways to give buyers some slack. Otherwise, they risk being replaced by cheaper competitors or alternative modes of transport. Those able to offer consumers a no-frills vehicle at an attractive price – like Dacia, Renault SA’s economy brand – stand to benefit.
The semiconductor shortages that have plagued the industry of late are slowly improving, but any respite for car buyers has been tempered by the rising cost of financing a vehicle.
The average interest rate on a US auto loan hit 5.7% in the third quarter of this year, while the average monthly repayment soared to over $700; one in seven consumers have committed to spending more than $1,000 a month for their vehicle, according to Edmunds analysts.
Anyone hoping to find a cheap used vehicle is likely to be disappointed: used car loans tend to be even more expensive and inventory levels are tighter at lower prices.
General Motors Co. and Chrysler filed for bankruptcy in 2009 (and Ford narrowly avoided a similar fate) when soaring fuel and commodity prices caused buyers to reject Detroit’s gas-guzzling trucks and SUVs and consumers shifted to more fuel-efficient Asian sedans instead.
Manufacturers’ finances are now in much better shape; their order books are still well filled, dealer inventories are low and the SUV trend seems irreversible. Still, there are growing signs of an affordability shock.
Last month, used car retailer CarMax Inc. warned that high prices, rising interest rates and low consumer confidence were all impacting used car sales (often an indicator what will happen to new car sales).
So far, customers have suffered more than manufacturers. Automakers have taken full advantage of the chip shortage by raising prices, reducing buying incentives and prioritizing production of their most expensive models.
Stricter emissions standards and the need to include expensive entertainment and safety equipment had already shaken the economic case for building small vehicles; many of these entry-level models are not replaced.
“Value, not volumes” has become the industry mantra, and it’s done wonders for automakers’ profit margins. But such an approach “leaves a potential market void that Chinese competitors and low-cost brands can try to fill,” Jefferies analyst Philippe Houchois told me.
This is especially true for electric vehicles, as consumer brand loyalty is not yet firmly established.
According to Schmidt Automotive Research, about 5% of electric vehicle sales in Western Europe in the first seven months of this year were made by Chinese automakers. China’s BYD Co. extended a nascent European sales offensive last week with a 100,000-vehicle contract with German car rental company Sixt SE. Great Wall Motor Co. is preparing to ship small electric vehicles to Europe, despite the bloc’s 10% import tariffs.
Governments can help struggling consumers by subsidizing leasing for low-income people or offering greater purchase incentives for the cheapest electric models. From a consumer perspective, however, the Biden administration’s electric vehicle tax credit reforms are a mixed blessing, as domestic manufacturing and raw material sourcing rules will make cheap Asian imports less competitive. .
The industry can do a lot on its own to bring prices down. Automakers can start by giving up some of their record profit margins. Dealers can also afford to leave money on the table – no more selling above the recommended retail price. Their slice of the financial pie can be further reduced by automakers negotiating directly with consumers – the so-called agency model.
Above all, the industry needs to focus more of its efforts on cars that mainstream customers can afford. Although Tesla has yet to introduce a budget model, kudos to General Motors for reducing the price of the Chevrolet Bolt (despite very high demand) and committing to launch a battery-powered SUV in 2024 at a cost of 30 $000.
Cheap doesn’t have to mean unattractive. Dacia’s electric Spring, which is built in China and costs around 20,000 euros ($19,800) before incentives, scored more than 30,000 global orders in the first half of this year. In total, Dacia sales increased by 5.9% over this period, one of the few major brands to avoid a decline.
Stellantis, whose CEO Carlos Tavares has been candid about the affordability crisis, is also well positioned in economy cars, and I’m not just talking about concepts like the Oli.
The Fiat 500 mini was the best-selling electric model in Western Europe in the second quarter, helped by a shrewd Leonardo di Caprio marketing campaign and Tesla’s production problems in China.
And how about the bug-eyed Citroën Ami? With a top speed of 28mph and just 2.4 meters (8ft) long, the Moroccan-made utility urban runabout is available in the UK for just £20 ($22.50) a month plus a deposit from £2,369. Although technically not a car (meaning it can be driven by 14-year-olds in its most popular market, France), this so-called quadricycle has logged over 23,000 European orders in July.
SUVs and heavy trucks are often not the best mobility solution for crowded cities, especially not during a cost of living crisis. Electric bikes are another increasingly attractive alternative. Automakers must price their products at levels ordinary consumers can afford, or risk keeping them from owning a car for good.
More from Bloomberg Opinion:
• Rivian looks for ways to avoid losing billions: Chris Bryant
• Why are electric vehicles still so expensive? Blaming the Makers: Anjani Trivedi
• What automakers need to tell you about their electric vehicles: Anjani Trivedi
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.
More stories like this are available at bloomberg.com/opinion