The average new car in the United States cost $46,259 in August, according to JD Power, a new record price. The previous record was set in July 2022which replaced the record set in June 2022which replaced the recordset in May 2022. Most industry analysts also don’t think prices will drop anytime soon, so these new highs could remain the new normal for the market. foreseeable future. Industry leaders are now beginning to agree: Renault Chairman Luca De Meo said in an interview with Coach, “The era of the cheap car is over: it has to be.
And for Renault itself, he’s probably right. The company, whose traditional sales leader has been the entry-level affordable Clio three doors for years, faced heavy losses for two consecutive years before returning to black in 2021. De Meo attributed the profitable year to a focus on “value in relation to volumes”, which became an official strategy for the company in the years that followed. Renault’s “value over volumes” plan features a focus on “profitability, cash generation and investment efficiency” instead of its traditional focus on market share and overall sales. This means lower discounts for buyers, increased focus on larger, more cost-effective vehicles and higher trim levels, and up to 20% less of cars sold in total. All this is not good news for buyers in a year with ongoing vehicle shortagesbut so far was good news for Renault shareholders.
But this is by no means unique to Renault. De Meo simply recognizes the market trends that almost all car manufacturers…and car buyers— found themselves grappling with the post-COVID, high-inflation world we live in today. Low-volume luxury brands have continuously records record profits since the beginning of the pandemic and the dealers are doubling their margins. All this happens despite less car sales arising from ongoing supply chain issues and chip shortages. Where the COVID disruptions once seemed like a temporary production speed bump, it’s now becoming increasingly clear that more and more automakers are ok to sell. fewer cars at higher pricesbecause it simply makes them more money. This, of course, goes hand in hand with an environment where raw material costs have soared, and actually bring a car to its destination is more expensive—and more difficult-than ever before. With rising costs and shortage of supply, businesses still need to make money and consumers need to make up the balance.
But there could be solutions, and government policy could allow us to achieve them. The U.S. federal government has moved closer to a potential solution with the Recently Passed Inflation Reduction Act, which offers incentives for electric vehicles below the MSRP threshold ($55,000 for cars, $80,000 for trucks) and, in theory, incentivizes automakers to produce more affordable electric cars by increasing demand for these. Unfortunately, the incentives still take the form of buyer’s tax credits, which exclude the most modest buyers and offer a much less compelling case to buyers than, say, cash on the hood of a new car sale. Additionally, since the act’s incentives only apply to cars partially produced in America, up to 70% of electric vehicles currently on the market could to be completely ineligiblewhich will likely slow the impact on buyers who have already pressed for years by rising new car prices.
For an example from the Western world, there is Norway, which has used a similar approach to electric vehicle pricing by offering owners of electric cars massive financial benefits in the form of vehicle fee waiver and easy access to some of the the cheapest and cleanest electricity in the world to feed them. However, without direct pressure on the car manufacturers themselves, average Norwegian car prices still reached average territory of 40,000 euros (and climb) and have the same affordability problem as the United States.
A similar two-pronged strategy that applies direct pressure on manufacturers and incentivizes buyers could work in the United States, to the benefit of both manufacturers and buyers. Basically, if cheap cars keep disappearing and a stopgap is needed until widespread adoption of electric vehicles becomes more feasible domestically, the same game plan can be applied to hybrids or even ICE cars. Nor is it unprecedented in the United States: what I am describing is something similar to the long-established CAFE standards or NHTSA FMVSS Safety Requirementsbut with the price rather than mileage or crash test results as the goal. Such incentives would help push the market towards a new profit model, where “value over volumes” is no longer the only winning strategy. A future without cheap cars could come, but it certainly doesn’t have to be inevitable.
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