What makes cars so expensive?

[mark642]

hello,

I've always been wondering what makes cars so expensive. I did lots of research, but couldn't find the answer.

For instance a Honda Accord starts at $20,000, I know the U.S. puts tariffs on Honda's, but that isn't the point. One would think that over the years and considering the size of the market, car manufactured should have found ways to produce high quality cars at low cost. There is lots of competition, so a low cost car should sell extremely well.

With computers for instance, every couple of years, I get twice the performance at a lower cost. Why doesn't that happen with cars? A brand new Accord compared to it's 5 year old predecessor hasn't changed much. The design has been updated and maybe the performance has slightly increased. Still, it uses pretty much the same interior, gets the same gas millage, similar stereo, air conditioning etc.

So, where does all the money go? Is it the engine? Still, over the years, and by the amount of cars sold, they gotta have found a way to produce it for less. Sure, engineers and designers are not cheap, but those costs should be rather low per car due to the high volume.

So how much does it cost just to produce a car? And where does all the other money go? Car company's margins are comparable to other industries.

thanks

[mchastek]

Great question, and welcome to the forum!

I'm not an expert by any means, and this is just my personal opinion/guess.

I think the cost of raw materials has gone up pretty drastically lately. On top of that, the US dollar is much weaker than it used to be, making imports relatively more expensive. I also remember reading that the median car cost vs. the median income is at a historic low, meaning that relative to the median income, your average car is now cheaper than it has ever been.

I'd love to hear more opinions though!

[Blade]

Haven't you heard? For the domestics, it's all about the cost of health care and the horrible contracts they have with the UAW.

There is some truth to management's claims but that does not excuse the fact that management is at the center of the problems. Seems those cats still get great compensation for poor performance. Mulally was paid over $20 million in 2006 for what amounted to three months work. Of course, that included funds to make up for his lost compensation leaving Boeing. Of course, Wagoner made tons of money during a period GM was falling from the sky.

As it relates to vehicle cost, it really becomes a matter of making a profit per car. The domestics claim they lose their rear-ends. To some extent they do on "cars" because they basically abandoned that market and let the imports have it while they concentrated on trucks and SUVs. Trucks and SUVs were were the money was for domestics. Low to no R&D and overall production cost was small. At the height of the market, domestics were making a killing on trucks and SUVs [well over 50% of sales, revenue and profits]. They were making $15K per copy on the low-end models and much more on the high-end versions. Profits were over 30% per copy and as high as 40%+.

What is really crazy is that electronics advance technology and prices increase only to fall back later. Prices on computers continue to fall. Strange that doesn't happen in the auto industry. Is that all cost related? I doubt it.

[Auris]

I think the cost of raw materials has gone up pretty drastically lately. On top of that, the US dollar is much weaker than it used to be, making imports relatively more expensive. I also remember reading that the median car cost vs. the median income is at a historic low, meaning that relative to the median income, your average car is now cheaper than it has ever been.

I'd love to hear more opinions though!

Totaly agrre with you.
I'd supplement security features, new technologies(gsm, gps, TV, DVD etc.)

[Gregory A, Reichenbach]

Frankly ... I am astounded they don't cost more. My expertise and viewpoint comes from the sales side. The quality, safety and technological difference between todays automobiles compared to the 70's, (when I started to sell automobiles) is staggering. When you compare what you get today and the cost relative to todays income, automobiles are much less expensive than the last three decades.

I am not competent enough to discuss mechanical and technology cost from the manufactures end. I am amazed at the differences today. No more rust. Thanks to some chemical companies that figured out that secret. No more tuneups every 12,000 miles. Thanks to modern electronics that eliminated points and condensers and produce spark plugs that last 60,000 to 100,000 miles. Tires that last 30,000 to 60,000 miles. No more replacement tires every year. No having to buy and install snow treads each year. Thanks to mud and snow tire combinations.

Best of all safety ... to keep our loved ones well. Automobiles with built in safety cells and 60% more rigid body structures than just a few years ago.

Air bags, side airbags, canopy airbags. Ventilated disc brakes (remember drum brakes) Anti lock brakes, traction control, electronic stability control that electronically senses potential disaster and provides independent braking and more power or less power to stabilize a vehicle when in many cases the driver is not even aware of the potential looming problem. All of this is controlled and managed by an integrated crash sensor system that monitors and operates automatically.

Modern engines ... Reliable, quiet, small, powerful and efficient compared to yesterdays. Modern transmissions provide better gas mileage with improved power and better operational management at a reduced cost of operation. New ergonomic controls that operate many, many things we didn't have a short time ago. Climate control, dual zone and triple zone for rear passengers. Better paints, better materials, better leathers. Four wheel drive (can anyone remember having to get out of the car and lock in the hubs) is a drastic improvement and improving every year. It's now all wheel drive, self monitored for slippage and electronically controlled for instantaneous traction. Todays warranties are bumper to bumper with a few maintenance exceptions and getting longer. Ten year 100,000 mile warranties are out their now and other manufactures are following suit.

As far as comparing prices to falling prices (due to volume) of computers and electronics, I don't believe they are the same comparison model. Again, I have no particular expertise of mechanics and technology as they relate to cost, but I know the Automobile manufactures constantly evolve in these areas. Often, as consumers, we are not even aware of the changes and take them for granted without giving any thought to the associated cost.

Yes ... I am amazed automobile don't cost much, much more

Greg

[Blade]

The quality, safety and technological difference between todays automobiles compared to the 70's, (when I started to sell automobiles) is staggering.

The same can be said about electronics, computers and virtually every other manufactured good. Yet the pricing structure and history are much different for those products.


When you compare what you get today and the cost relative to todays income, automobiles are much less expensive than the last three decades.

The almighty dollar has really maintained its value over that time. Relative terms, yeah right.


No more tuneups every 12,000 miles. Thanks to modern electronics that eliminated points and condensers and produce spark plugs that last 60,000 to 100,000 miles.

Service absorption for domestics through the years prior indicate that domestic buyers weren't servicing the vehicles anyway. Import buyers [especially of Euro brands] have always taken always taken better care of their vehicles as evidenced by those retailers' service absorption.


Tires that last 30,000 to 60,000 miles. No more replacement tires every year.

What? There are a huge number of tires on the market with 50K + warranties. Yet, virtually every tire on a vehicle rolling out of a domestic factory is gone in 30,000. I wonder why that is the case. Could it have something to do with the deal struck by the auto manufacturer and the tire manufacturer? You bet. Domestics put soft composites on their vehicles for cheap but to the consumer those tires are the higher cost tires. The soft composite is all about handling and noise but a harder composite tire is about wear and is cheaper to the consumer than the soft. Nothing more than a low profile scam between the two manufacturers.


Best of all safety ... to keep our loved ones well. Automobiles with built in safety cells and 60% more rigid body structures than just a few years ago.

Thank the imports for the safety [again, especially the Euros] because the domestics have fought safety standards every step of the way. I believe Chrysler's stand on airbags was the first time a domestic ever took a leadership type role in safety. Still the Euros are the real leaders with Volvo well out in front of that group for a long time. Now everyone seems to be on that bandwagon. The shame is domestics should remain silent based on their long history of fighting safety [and yes, fuel efficiency] legislation.



Modern engines ... Reliable, quiet, small, powerful and efficient compared to yesterdays.

That's why the domestics have always led the way in fuel efficiency. What a load. The mass produced [not special edition models] domestics use the lower end engines because they are cheap to produce. You want the top line engine get ready to shell out the bucks. Up until all the recent issues of fuel costs, domestics wouldn't be caught dead talking about fuel efficiency because it only raised their cost to produce.



As far as comparing prices to falling prices (due to volume) of computers and electronics, I don't believe they are the same comparison model.

The advancement in cars is not driven by the auto industry but the technology industry [i.e.: computers and electronics]. The computer and electronic consumer market sees a rise in prices with new products followed by a decline. Much of that same technology is found in cars later. HMMMMM.

Which industry should have more tied up in R&D? That's where real expense can be found. Certainly, auto manufacturers foot some of the bill on R&D for the components they purchase but considering the contracts struck can be lucrative for the producers overall per unit cost is reduced because of the volume that will be realized by the producer over time.

Autos should be like any other good with a shelf life. The industry wants to turn vehicles every 36 months or so. Does durability really matter in that scenario? So much for some of those advancements you discussed. If these puppies can last 10-20 years and consumers acted according to that, what would the auto industry look like compared to now? A couple of things are for certain, the industry wouldn't be turning product every 36 months or so and it certainly would not be selling 16 million + units per year either.

[BluffGuy]

First, you are mistaken about tarriffs. Second, that cost of the vehicle is in the design, engineering, testing, cost of factories, cost of production equipment, legal expense, insurance expense, general overhead expense, administration, healthcare, pensions, and things of this nature. The actual cost of materials and labor to put the car together pales in comparison to the other costs. The reason automakers keep building cars when sales are slow, and use incentives to move them, is because the "other expenses" still go on when they are not building vehicles, so it costs them less to sell them at a loss then to shut down the plant, sell nothing, but keep paying the fixed expenses.

[Blade]

First, you are mistaken about tarriffs. Second, that cost of the vehicle is in the design, engineering, testing, cost of factories, cost of production equipment, legal expense, insurance expense, general overhead expense, administration, healthcare, pensions, and things of this nature. The actual cost of materials and labor to put the car together pales in comparison to the other costs. The reason automakers keep building cars when sales are slow, and use incentives to move them, is because the "other expenses" still go on when they are not building vehicles, so it costs them less to sell them at a loss then to shut down the plant, sell nothing, but keep paying the fixed expenses.

You must be one of those domestic "excuse making" executives. They are quite similar to our politicians who talk about the need for healthcare reform and coverage for all citizens as they the pocket millions of dollars from the various medical related special interest groups that could be much better used to provide the very coverage they claim to care so much about.

The domestics are in the "cost condition" they are because they lack integrity and therefore lack credibility with their employees [blue and white alike] and have found that creeping over to consumers.

The very executives that have run the domestics into the ground have profited and continue to profit greatly despite their poor job performances. Even Ford's Mulally, the new kid in town, is a profit pirate. Executives love to talk about pay for performance but those rules don't apply to them. In Mulally's case, he gets $20+ million for what amounts to a couple of months work for Ford all in the name of that's what it takes to get great talent into your organization.

Frankly, if Mulally believes he is all that, then he would have made the move to Ford for: 1) the challenge and 2) the incentive pay for success and not a bunch of upfront money to compensate him for what he was losing by leaving Boeing. If he is pushing a wheel barrel into the office to carry his set, then take the challenge and reap the rewards of success. In other words, show them big boy.

Domestic executives [other industries as well] need to get right with themselves first. They either need to discover integrity and all that goes with it or put bullets in their brains. The domestics complain about healthcare costs and reduce what the company contributes to the worker bee's coverage. They would love to eliminate that cost as it relates to retired workers blue and white. It is easy to take such steps when you don't feel the pain that your workers do. It must be easy to cut all those benefits when it doesn't impact you. They can cut healthcare benefits because with their too fat paychecks it doesn't matter whether or not the company provides healthcare or not because it still does for them even when it doesn't if you catch that drift.

Costs are what they are due in part because the executives are robbing the companies employing them and they are simply not very good at their jobs. Of course, maybe it really isn't their fault as they have been enabled all these years even in their lack of integrity and credibility. But that's what makes them such great bedfellows with our politicians.

[Rennsport Calgary]

What makes cars so expensive..........?

Unions (healthcare, pensions and over-inflated wages)........government mandated safety features.........and marketing (rebates, % discounts on leasing, etc) that are built into the cost of the car.

[Blade]

Lobbying, fighting CAFE, fighting government mandated safety features, defeding product liability lawsuits, fighting pollution litigation, spending money bickering/fighting and/or pointing the finger at partners [i.e.: suppliers], overpaying executives and providing them with perks such as free use of the company play to fly back and forth between HQ where their office is located and their main resident 3.5 - 4.0 air hours away. In other words, generally supporting the company's lack of integrity and failure to have a plan with solid priorities and focus.

[UpBus.com]

Another huge factor nobody has mentioned...credit.

Cost of supplies, development, insurance, greed, etc are all a factor in the net cost of production but without the ability to finance a purchase and spread the cost out over a number of years for the average consumer, every deal would have to be a cash deal.

Without the ability to pay in installments, the price of autos, houses, etc would be substantially lower.

[Blade]

I guess you should thank the Fed Reserve for making money available at such cheap rates, eh?

[UpBus.com]

Not necessarily. When I was selling cars in the early 80's and the buy rate was 17% we still sold 'em like hotcakes. ;-)

[Blade]

Mobile homes sold like hotcakes too. Back then houses weren't affordable enough to sell like they are today. Despite the higher housing cost, rates are lower, subprime was hot stuff and creative ways to structure a deal are abundant.

Had cars been as expensive as they are today, fewer would be sold at 17% unless the factories and their captives had come up with creative deals. But then, a subprime situation might have taken place. Let's not forget what was going on in the 80's with that full recourse paper that buried more than one retailer into BK hell.

[UpBus.com]

Mobile homes sold like hotcakes too.


they still do.




Back then houses weren't affordable enough to sell like they are today.




no idea what that sentence means.

30 year loans were widely available and this was before the savings and loans fiasco so they were giving money away much like the sub-prime companies have been doing over the last few years. there also wasn't as much sub-prime business in the market at that time. the housing market was rocking and rolling much like it did over the past few years.





Despite the higher housing cost, rates are lower, subprime was hot stuff and creative ways to structure a deal are abundant.




I assume you're speaking of the market conditions over the past few years. Unfortunately the subprime lenders in the mortgage industry didn't read the playbook from companies like The Finance Company out of Virginia from back in the 80's. They thought they were a lender...come to find out they were really a collection agency. To bad they didn't learn that lesson before it was to late.

you can only write so many loans that are sub-prime, non qualifying, with no income verification before they start to bite you.






Had cars been as expensive as they are today, fewer would be sold at 17% unless the factories and their captives had come up with creative deals.




look at the percentage of monthly income spent on auto's then and now. the number's are not far off. the country was coming out of a recession and people wanted to spend money regardless of the rate. imports (honda accord for example) were selling with addendum stickers of $4000 in some markets - no accessories...just additional dealer markup. there was a tremendous amount of pent-up demand and the rate was the rate.

[Blade]

Quote:
Originally Posted by Blade
Mobile homes sold like hotcakes too.

__________________

they still do.
************************
Not like they did then when interest rates were at or near 20% and buying one was a more affordable option than a more expensive fixed foundation home. As a commercial lender providing inventory financing to mobile home retailers, I saw it firsthand.

Quote:
Originally Posted by Blade

Back then houses weren't affordable enough to sell like they are today.

___________________________

no idea what that sentence means.

30 year loans were widely available and this was before the savings and loans fiasco so they were giving money away much like the sub-prime companies have been doing over the last few years. there also wasn't as much sub-prime business in the market at that time. the housing market was rocking and rolling much like it did over the past few years.
*********************************************
You must have lived in a parallel universe. Interest rates of 15-20% hurt the housing market. That’s why mobile homes were huge during that period. After the crash there were fields full of them from retail repossessions. They sat along site the oil field equipment in Texas and who knows what in Washington and other states.
While lenders love high rates because they can generate strong profits per deal, loan volume is down because of tighter lending practices. When rates are low, lenders loan more money because of its abundant availability and because they need more volume to generate the profits they are seeking. These situations result in loans being issued to every corpse that walks through the door.
In the case of the subprime market, he who makes the loan won’t be the one holding the bag if and when the deal goes bad. The down the line investor will be the one holding the bag and they are banking on several things to carry the day for them. They are betting on continued appreciation, stable or better rates, and the discount they took on the loan purchase. Seems a perfect storm is brewing currently that takes all those out of play for these guys.


Quote:
Originally Posted by Blade


Despite the higher housing cost, rates are lower, subprime was hot stuff and creative ways to structure a deal are abundant.

______________________

I assume you're speaking of the market conditions over the past few years. Unfortunately the subprime lenders in the mortgage industry didn't read the playbook from companies like The Finance Company out of Virginia from back in the 80's. They thought they were a lender...come to find out they were really a collection agency. To bad they didn't learn that lesson before it was to late.

you can only write so many loans that are sub-prime, non qualifying, with no income verification before they start to bite you.
***********************************
Subprime read the playbook entitled, “Greed for the Green” and Gordon Gekko’s book, “Greed is Good”. Very few learn the lessons of history. That is the reason history is so often repeated. Unfortunately, it is the bad history that is repeated.
When short term goals and personal gain are more important than long term goals and mutual success, situations like the subprime fiasco occur. This industry is set up so the big score is at loan initiation [brokers]. Other score points are available when the loans are sold at discounts. Some might even score on the default side.
No need for these characters to learn from history because they are in it for the personal score and not that of the company or borrower.



Quote:
Originally Posted by Blade

Had cars been as expensive as they are today, fewer would be sold at 17% unless the factories and their captives had come up with creative deals.

__________________________________

look at the percentage of monthly income spent on auto's then and now. the number's are not far off. the country was coming out of a recession and people wanted to spend money regardless of the rate. imports (honda accord for example) were selling with addendum stickers of $4000 in some markets - no accessories...just additional dealer markup. there was a tremendous amount of pent-up demand and the rate was the rate.

********************************************

That’s why the domestics have been in a discount environment for decades now, eh? Demand has been primarily driven by payment and discount. At least that has been the case with domestics. Look at what GM and Ford did coming out of the post 911 sales slump. They employed their typical discount, discount, discount plan. They are addicted to the “take tomorrow sales today” drug.

The domestics drove SUV and truck sales through a marketing campaign. Initially they drove the demand for those types of vehicles, not the market. It was like pouring gas on dry grass and lighting it with a match. The domestics don’t want it to die because it’s really all they have going for them. They don’t want higher CAFÉ restrictions hurting that market. Mulally prefers a tax on gas because he knows consumers are stupid enough to carry on high consumption and he can continue to rake in high profits on trucks and SUVs because he can’t build sedans with any profit in them at all.

Aside from emotion, buyers purchase based on payment more than anything else. If the captives weren’t putting together attractive leases [not so much domestics] and retail loan payments, sales would be different and have been partially impacted by that given GM and Fords ratings and that impact on their captive arms lending.

The 16 to 17 million units a year is an inflated figure and is driven by they way the vehicles are sold. When a person can do a deal on a new car for a payment that is equal to or lower than one available on a used car, what happens? Is it any wonder that captives don’t provide as attractive financing on used as they do new? If you can’t follow their plan, find the higher profit centers and work your way back.

[UpBus.com]

Blade, either we are talking about two different periods of time or one of us IS in a parallel universe...my guess would be bizarro world ;-)


The housing market, starting in about '83, started to roll and by '85 was booming in many parts of the country in spite of high interest rates. This is what I recall and I can probably find a half dozen places to cite in under 5 minutes that back up my memory with data (ain't the internet great).

Also, if my memory serves, the home loan I closed on in 1984 was around 11% which was of course substantially below the going rate for an auto loan at the time.


Otherwise, I'm in (more or less) complete agreement on your other points about sub-prime lending and the state of the domestic manufacturers.

[UpBus.com]

oh, to your point about domestics being in a state of discount. in case you forgot, in the early 80's MANY domestics were being sold for full sticker, above sticker (remember the fiero), and NO sticker at all...so the price was whatever the salesman said it was that day.

[Blade]

Otherwise, I'm in (more or less) complete agreement on your other points about sub-prime lending and the state of the domestic manufacturers.

Oh, goody.

[Blade]

oh, to your point about domestics being in a state of discount. in case you forgot, in the early 80's MANY domestics were being sold for full sticker, above sticker (remember the fiero), and NO sticker at all...so the price was whatever the salesman said it was that day.

Weren't the 80's a few decades ago now? At one time, the 80's was considered to be a big decade for Volvo. It too was selling a bunch of cars in relative terms and were getting all the money for them too. In today's market, only the hot model is getting above sticker. That might have something to do with the vehicle being the hot design, etc. and the maker keeping the volume [supply] tight. Call that the HD approach.

The domestics had decades of no foreign competition. Once the foreign makers gained a good foothold in this market, it didn't take them too long to begin stealing the domestics thunder in sedans as they are now beginning to assault the domestics' thunder in trucks.

The days of above sticker are fewer and farther between and isloated to a model not a complete line-up. Since you have such total recall about the 80's, you should also recall is was really the period in which 0% financing was introduced. Why would domestic captives offer 0% financing if they were getting all the money and then some?

[mark642]

Another huge factor nobody has mentioned...credit.

I disagree. I'm not even talking about the drive out price, I was just talking about the list price itself. Yes, I know. List price is not what you pay, but after taxes you end up with the list price again.

Financing makes a car more expensive, but that could be avoided by paying cash. Those 0% APR offers are just incentives to get rid of their old inventory, so that doesn't count since any other industry does that as well. So financing is something they charge on top, but that's no different than financing a computer or whatever.

[UpBus.com]

I don't think you understand the concept mark. The very idea that you can spread the cost over a period of time allows for a greater purchase price. Forget the apr or interest paid.

If you removed the ability to finance the purchase, the price would simply come down. Think about it.

Think of it this way. How many people can walk into a dealership and pay cash for a car? How many would the manufacturers sell every year if cash was the only way to purchase a car?

Now, how much less would today's vehicles cost without the ability to spread the cost over xx number of months?

They can only charge what the market can pay....forget the "going price" of steel, etc - these are inflated also based on what the market is paying...and without the ability to finance a car, the cost of steel would be less also.

Hope that helps.

[UpBus.com]

Oh, goody.


At least you gave your reply some thought.


I'll take that to mean you were wrong about the rates, etc.

[UpBus.com]

Since you have such total recall about the 80's, you should also recall is was really the period in which 0% financing was introduced. Why would domestic captives offer 0% financing if they were getting all the money and then some?


GM "invented" subvented rates in the 70's. Why would they not continue to offer subvented rates in the 80's?

[Blade]

What it really comes down to is selling the vehicle for what it is worth. The maker that throws down on that one is the one that establishes or re-establishes integrity and credibility in the marketplace. Car prices are over-inflated that is why there is such a difference between sticker and transaction. Throw in subvented rates [BTW, subvented rates are subvented rates and 0% is the ultimate subvented rate. Please post a print ad of 0% dating back to the 70's.] and you have an even larger inflation of the price. Of course, that is the point you are attempting to make without explanation. Sounds like something read and repeated.

Speaking of inflated cost, that's the story of the world these days isn't it. You need only look at electronics and computers to see how it should really work. The dynamics of R&D and product cost is quite evident with those products. Initial high cost followed by lower prices. Even though autos have incorporated new technology, at the end of the day they remain frame, engine, wheels etc. Yet the price continues to rise only to be reduced by little games to a transaction price that remains at least slightly higher than the previous transaction price.

It's all a game and the fact that the domestics have to churn out more vehicles than they sell because of their labor contracts shouldn't be forgotten or lost in the equation.

[UpBus.com]

...Of course, that is the point you are attempting to make without explanation. Sounds like something read and repeated.





ah yes.....the ad hominem response surfaces. Looks like this conversation is over.


btw blade, this statement...

Throw in subvented rates and you have an even larger inflation of the price.


is not necessarily true but given the shifting sand of your replies, it would be pointless to explain the math to you.


While I appreciate the knowledge that different people bring to the table, your practice of attacking statements of fact every time you are wrong makes the conversation far less interesting.


I guess I'll go back and fill in some detail for you in response to your question about the 80's. I assumed that since you lived through it you retained something...my error.


Your question was..if the domestics were getting all the money why were they offering 0% financing.

If you actually read my post instead of jumping ahead to write your response, you would see that I said in the early 80's MANY domestics were being sold for sticker or above. Also, if you recall, the 80's had several different economic stages...inflation coming in, a period of tremendous growth, a stock market crash (adjustment) in '87 (?), and general apathy (and slight stagnation) to close out.

So there's really no question as to why they were offering subvented rates. During the stagnant periods they were shoring up sales...during the good times they were moving inventory that wasn't hot..these are typical sales tactics that you should understand. 0% is just another subvented rate...to suggest it is anything but that is another red herring in your sea of red herring.

How do I know this? I was there..in the business. Selling cars, working finance, penciling deals, running stores.

Pundits who think they have the auto business figured out because they go on a forum and espouse their theories on the state of the industry and the legacy contracts of the domestic manufacturers...well, they're a dime a dozen. I saw their types coming into dealerships in the 20+ years I was in the business and now apparently they've migrated to forums.

It's the same rabble you get from talk radio hosts who have the perfect solution for curing (insert the issue of the day) but what they don't say to their foaming at the mouth listeners is they are feeding them the truth of the issue AS THEY SEE IT..nobody needs them to spell out the problem and since they have no new information or insight, and congress isn't going to pass their perfect solution, in the end it's just a bunch of hot air.


The questions/challenges you pose in response to my posts show both a lack of understanding of basic sales concepts as well as a general disdain for the business (especially domestic manufacturers). And yes the 80's was about 20 years ago..I'm not sure why you can't remember events that we're so recent.

We are starting to get OT here so let's try to keep any additional responses in this thread to the topic at hand....


what makes cars so expensive.

[mark642]

They can only charge what the market can pay
I see what you are saying. People make monthly payments and therefore the market can charge more since car makers can simply increase the number of payments and therefore end up with more money at the end without having to increase the monthly payment amount.

However, I would think that competition takes care of that. Otherwise, why are electronics so cheap? Because of competition. Computers are getting cheaper and faster. I was willing to pay X amount for a new computer 5 years ago. Why would I all of a sudden only be willing to spend half of that amount for a substantial better product? Doesn't make any sense. But competition forces manufactures to produce for less and pass that saving on to the customer in order to stay competitive.

Now, if car manufactures really make so much money on cars, why wouldn't car company X come along and sell their fully loaded car for the price their competition sells their basic model? Because I don't think they can. In the past, car makers had to constantly cut costs for producing their cars, replacing interior with cheaper materials etc.

[UpBus.com]

No, electronics are cheap because by and large they are inexpensive to produce. Most families can afford to pay cash for a computer...many families don't even see the need to have one. But autos are an essential part of our society for most.

I keep seeing the comparisons between computers and cars but that argument doesn't make sense. It would make more sense to compare the purchase of houses and cars. Two expensive items that, at today's prices, would be simply unaffordable for the average citizen...unless they could finance the purchase over time. What do you think the housing market would look like if you had to pay cash for homes? Would pricing be any where near what it is right now? Of course not.

You have to get to the point where you see cash as THE only way to pay for cars. Then you begin to understand the huge impact financing has on the price of the product.

I'm not discounting any of the other thoughts on what drives the price of cars...

[mark642]

so you are pretty much saying, car companies have huge profit margins, because they found some way to overcharge customers due to cars being a necessity and most people have to finance them? If that's true, I don't see any of those huge profits in their financial statements...

[UpBus.com]

well, in a simplistic way, yes that's what I'm saying and you DO see the money if you look at their financials...you just don't see it hitting the bottom line. much of the profits that SHOULD be showing on the bottom line for the domestics is taken away by bad decisions (like the legacy contracts with the unions for example). If you want to see the money trickle to the bottom line you have to look at companies like Toyota.




Now, if car manufactures really make so much money on cars, why wouldn't car company X come along and sell their fully loaded car for the price their competition sells their basic model? Because I don't think they can. In the past, car makers had to constantly cut costs for producing their cars, replacing interior with cheaper materials etc.


This actually does take place. The biggest difference in net savings though usually comes from lower labor costs (including no health care). Then as the "low price" company gets a foot hold in the market, their prices tend to rise. Hyundai and Kia would be recent examples.

Considering competition...there are other things to consider like market forces (including potential backlash) that help to keep prices where they are for some companies. For example, just in the last year as Toyota over took Ford, they had real concerns about potential backlash from pro american groups. They are constantly fighting cost and branching out to develop engines and other parts in countries where the wages are lower. But given their concerns about backlash in their biggest sales market, what value would they see in dropping the cost of the Camry by $4,000? None of course. So they continue to bank record or near record profits instead. I haven't looked at their cash position in some time but last I saw they were VERY healthy.

Have you seen their commercials? They want to be perceived by john and jane doe to be a good company producing good vehicles at plants in the US assembled by your friends and neighbors.

[Blade]

Interesting that GM is throwing down big incentives and even 0% financing in China as its sales increase lags behind the market [12% vs. 26%]. The relative nature of things.

[Blade]

For the domestics the huge profit margins have for some time been in trucks and SUVs. At the pinnacle, Ford was making over 30% profit on every SUV it sold to its retailers, which was driving company profits at the time. The factories were working overtime churning those puppies out and it was not unusual for motivated factory workers to knock down $100,000 per with OT. At the time, the company was making money hand over fist. What happened to end all that money printing? Legacy costs? That's just their excuse for horrible mis-management and no vision of the future.

Legacy costs have been out there in a big way for a long time for domestics. It isn't something that just popped up over the horizon. What did them in more than legacy costs was an almost endless list of miscalculations and poor business decisions. Paying factory workers for up to two years for sitting around in a work pool did much more damage than retirement legacy costs. The work pool resulted in over production of vehicles, which in turn led to more discounts and subvention to move the metal.

The hit the economy took after 911 compounded the issues for domestics and GM lead the charge with steeper discounts and rate subvention. The boys in Detroit like to point to retirement legacy as a cause of all evil because they want to at least partially pawn it off on the government or a joint venture with the UAW.

The domestics continue to endure an assault on their market share in this country. Had they employed a "shrink to grow" plan long ago rather than having it taken from them, they might be well ahead of the game today.

Efficiency or the lack thereof impacts the cost of vehicles as much as the cost of the sum of all their parts.

[mark642]

The biggest difference in net savings though usually comes from lower labor costs (including no health care).
that brings us back to my original question. So it does take lots of labor to assemble a car? That's something I find interesting, because one would think that's something a machine could do.

[UpBus.com]

i don't have time to read the entire article at the moment mark but maybe this answers the question....

http://www.autoobserver.com/2007/05/harbour_report_.html

[Topshop]

Interesting question, especially since I often ask myself why cars are so cheap considering all that goes into them. Cars in the mid to low price range ($10-20K USD) are pretty amazing pieces of equipment which can be purchased by the average person for a few months wages...seems like a bargain to me. On the other hand if all the government mandated expenses were removed, the value would be even better.

Tom Ham
AutomotiveManagementNetwork.com

[mark642]

i don't have time to read the entire article at the moment mark but maybe this answers the question....

http://www.autoobserver.com/2007/05/harbour_report_.html

from the article:

In contrast, the Japanese made per vehicle about as much as the domestics lost. Nissan, despite its sales drop in 2006, is the most profitable of the six major companies building cars in North America, earning $1,575 per vehicle. Honda made $1,368; Toyota earned $1,266.

that pretty much negates your theory of car makers overcharging customers.
30 labor hours go into a car. so, I'm still not sure where all the money goes. Must be materials then, but what could possibly be so expensive?

[Blade]

The manufacturers point to labor [including legacy] and steel as the biggies.

[Rennsport Calgary]

FWIW.....my wife is a Brasilian....we have a place in Rio de Janeiro and a car there that we bought 3 years ago. $7,000 CAD is the equivalent price that we paid for a new 2003 FIAT Uno 1.0 litre 16 valve.

It is a far better car than the Hyundai's Kia's GM's etc of today. 1/2 to 1/3 the price of these cars locally. Sure, no airbags and only a 12 month warranty, but it has ABS, A/C, a fantastic engine, and a great stereo. Gets 30 MPG in the city and is a rip to drive.

$7,000 CAD....back then about $5,000 USD. A new car......a really good new car.

[UpBus.com]

from the article:



that pretty much negates your theory of car makers overcharging customers.
30 labor hours go into a car. so, I'm still not sure where all the money goes. Must be materials then, but what could possibly be so expensive?



No it doesn't...how did you arrive at that?


I just read that article and in no ways does it negate any point I've made...my business is rolling right now so I'm not on the board much this week. If I get time I'll try to get back to this discussion.

[andree1023]

Car is so expensive because of some factor. Design, Production, Material, Distribution, Promotion and every country imort tax policy. Lets we see the production. Car design is the most important represent the brand and manufacturer. Production and material also important factor. Let see this example, how much cost to buy front lamp in after market ? average car arround USD 300 - USD 500. But how much it cost for production front lamp ? To produces front lamp, we have to invest for Mould price arround USD 30,000 - USD 50,000. Juts only mould the price is more expensive than new Toyota corolla or new Honda civic, allright ?

If you want to know about behind the scene of making product, please visit : http://www.megaarta.com/information.html


Andri
www.megaarta.com

[wallis]

everyone is correct in there responses, but the biggest cost, is really safety equipment. Did anyone see the news post, MSNBC,CNN, etc., on the new car in India that will cost $2500 ? If cars in this country, weighed between 1500 to 3000 lbs, we could get rid of a lot of costs, and weight, and make car far more efficient, cheaper, better fuel mileage. But, how can that happen, when people are being marketed,constantly by the American makers, 6000 lb gas guzzlers. 6000 lbs gas guzzlers certainly have allowed Toyota, Nisson, etc. to take away market share. While the US industry, in the last 35 years, uses lawyers, to fight the people of this country, foreign makers just make them. A few years ago, the Chinese, showed a car actually made of molded plastic, two parts split down the middle, with a modular engine/drivetrain dropped in the front end, costs, about $1500. There is no reason for high costs of cars, except of safety concerns, and Americans buying into the false cowboy mentality, of what we are suppose to be driving.

[Blade]

Labor in India is as good as free in comparison to other countries. Certainly, making a cheap decontented vehicle lowers expense and ultimately the cost to the consumer but cheap labor is a major factor in that vehicles cheap cost. It certainly can't all be laid off on the lack of safety features and standards. Spartan content, fewer materials [some motorcycles are larger and require just as much, if not more, materials to build] and cheap labor a major factors here.

[wallis]

Electronics should make cars cheaper, but I suspect auto makers don't recycle electronics from year to year. They redesign electronics ever year. Safety is one of the biggest costs. A small 35 MPG car against a 3 ton 18MPG SUV in a wreck, means disaster. If all cars were more evenly match for weight, less safety equipment. With the current gas gouging SUV/trucks they, american automaker, keep splattering all over the TV and newspapers, were to disappear, costs would come down, in all areas, insurance, gas prices, road repair costs( higher/bigger road equipment for taller vehicles) instead of just going up. I would be nice to have special lanes for light cars that get at least 100MPG, in areas for people driving to/from work everyday. If car companies were run like electronic companies, cars would be very cheap. The chinese a few years ago demo a car molded in 2 parts, totally plastic(read recycleable), and you drop in the drive train in the front. Would it be cool to just buy a new car body every couple years, to keep up with the styles, and swap out the drive train. At last, it ain't gunna change anytime soon. So pay up !

[diamondgoldsilver]

I think the cost of raw materials has gone up pretty drastically lately. On top of that, the US dollar is much weaker than it used to be, making imports relatively more expensive.

[mw1]

Useful write up
Keep the information coming
:)

[wallis]

If you want to give tax breaks to American auto maker, then the Department of Transportation, and the EPA should run them. Over the last 30 years, American auto companies have done nothing in the best interests of this country, only waste our tax dollars, create more and more horrible pollution, force us to be more and more energy dependent. They are arrogant, and do not need to be patted on the back. You should be railing against them inn the public, and tell them, in the news, that if they want help, help America first, when they show some responsiblity if anyone deserves tax breaks, its Honda, Toyota, Nisson, Hyunda, who have served Americans with their vehicle, in an honorable way. Enough is enough of these wolves in sheeps clothing! Turn America around, don't bury it.

Only sent you this because you are obviously intelligent, not swayed by marketing nonsense, and an interested person. Email your representative and tell them hell no to automakers. they dug their own graves. Fell free to use my note to you. Spread the word.......
One who is putting them in a bill is Max Baucus, of Montana; http://baucus.senate.gov/contact/offices.cfm

[qtrmile]

hello,

I've always been wondering what makes cars so expensive. I did lots of research, but couldn't find the answer.

For instance a Honda Accord starts at $20,000, I know the U.S. puts tariffs on Honda's, but that isn't the point. One would think that over the years and considering the size of the market, car manufactured should have found ways to produce high quality cars at low cost. There is lots of competition, so a low cost car should sell extremely well.

With computers for instance, every couple of years, I get twice the performance at a lower cost. Why doesn't that happen with cars? A brand new Accord compared to it's 5 year old predecessor hasn't changed much. The design has been updated and maybe the performance has slightly increased. Still, it uses pretty much the same interior, gets the same gas millage, similar stereo, air conditioning etc.

So, where does all the money go? Is it the engine? Still, over the years, and by the amount of cars sold, they gotta have found a way to produce it for less. Sure, engineers and designers are not cheap, but those costs should be rather low per car due to the high volume.

So how much does it cost just to produce a car? And where does all the other money go? Car company's margins are comparable to other industries.

thanks



Everything today has increasing prices. But i think taxes contribute a lot to its amount.

[Blade]

is a product of rising fuel prices. We have the perfect storm right now with rising fuel prices and a declining Fed Discount Rate. In other words, we have inflation in the face of declining rates or vice versa. The great wizard Greenspan was scared to death of inflation and always answered that fear with rate increases. He was always seeing phantom inflation. Now we are faced with true inflation driven by the master driver fuel in a credit crunch period that resulted from greed in the mortgage loan industry. The perfect storm.

Economists and analysts are six months [minimum] and millions of dollars short each and everytime. Guys like Greenspan are held up geniuses when in reality they know very little about what is going on in the economy or marketplace because they are out of touch, much like our politicians.