Here Come the Price Hikes

July 18th, 2008 at 5:34pm

As published by
WardsAuto.com

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Over the last decade the price of a new car has not gone up — at least in terms of purchasing power. It takes the average American family about 25 weeks of income to buy a new vehicle today, roughly the same that it did in the mid-1990′s. But that is about to change. The prices of new vehicles are about to skyrocket.

What prevented prices from climbing up to now is competition. Every market in the world has more car companies competing in it than it did a decade ago (with the glaring exceptions of Japan and South Korea). That competition forced automakers to wring costs and inefficiencies out of their operations, and then pass those savings on to their customers.

But with commodity prices soaring for all the raw materials needed to manufacture automobiles, the car companies just can’t cut costs fast enough. Let me give you an example.

To make cars you need steel. To make steel you need iron ore. But over the last decade three suppliers have pretty much cornered the global market for iron ore. The major steelmakers pretty much have to buy from BHP of Australia, Vale of Brazil and Rio Tinto, which is headquartered in London.

Last year those iron ore suppliers decided it would be a nice time to raise the price of iron ore by 30 percent. And then earlier this year they decided it would be even better to raise prices another 70 percent on top of that. As a result, steel prices are soaring. A ton of scrap now sells for more than a coil of finished steel did a year ago.

Up to now, automakers protected themselves by locking into long-term contracts with the steel producers. That’s why we haven’t seen the big run up in steel prices drive up the prices of new cars. But those contracts are starting to run out.

And the same sort of scenario is playing out with every other commodity. You name it — copper, zinc, aluminum, platinum, magnesium — they’re all soaring in price. And because oil is soaring, so too are the prices for plastics.

The timing for the car companies couldn’t be worse. They’re under the gun to boost fuel economy and cut CO2, and that’s going to require expensive technology to achieve. Put the two together, soaring commodity prices along with expensive technology, and my guess is that the average price of a car in the American market is going to hit $40,000 in just a few years.

Will the average household be able to keep up with that kind of price hike? No, it’s going to eat up too much of their income. They’re going to hold onto their old cars longer.

So all you product planners out there who are figuring out how many cars you will sell in the future, better start planning for lower sales volumes, thanks to higher prices.

5 Comments to “Here Come the Price Hikes”

  1. William R. Walling Says:

    John,
    “If this shocks you, wait until the energy supply companies ‘cash in’ on America’s looming land transportation change to electric vehicles.”
    Do you truthfully believe America’s historic industries are not going to further profit, read ‘price increase’ for product or services, in any direction our domestic economy turns?
    Termed ‘profiteering’ …

  2. Darrell Dean Says:

    John,
    I would think that the most cost effective way for the domestic automakers to compete would look towards alternative fuel power sources, along with structural composite materials. Ford was able to accomplish this with their EV Ford Think program.
    I believe we will see a paradigm shift towards utilizing recyclable materials in the auto industry.

  3. Tom Martin Says:

    And new fuel saving enhancements will add significantly to costs: hybrid tech, plug-in hybrids, turbos, 6-7 speed transmissions, light weight materials, all electric cars, etc.

    And the price will be mitigated somewhat by downgrading. That is, buying a Prius or Civic hybrid rather than a Camry or Accord, or not buying leather, 18″ chrome wheels, sunroofs, or 350 watt stereos.

  4. John Says:

    The average U.S. consumer is getting slammed from all directions.

    This perfect storm is for real on Main Street and the sooner the overpaid idiots on
    Wall Street and in D.C. acknowledge this, the better.

    There is no transition plan for the damage done from outsourcing of jobs.

    There is no transition plan for the damage done from the switch away from oil for transportation.

    There is little margin for error.

    I know one thing, in a storm when nobody is at the helm, the ship ends up on the rocks.

  5. Angellaa Says:

    Hmm, very cognitive post.
    Is this theme good unough for the Digg?