For four months, the Canadian dollar has been flirting with U.S. dollar parity. And yet the same vehicles cost more north of the border than south. As America’s NAFTA neighbor imports more and more American cars, basic theory holds that automakers would eventually cut Canadian prices to eliminate arbitrage. “Eventually” hasn’t happened. Just as it was back in October 2007, the Lincoln Navigator is still $28k cheaper in the U.S. than Canada. Why?
The answer probably lies in that great evil that has ruined many naïve economists’ dreams since man began to theorize: asymmetrical information. If we assume Canadians are rational buyers who maximize their well-being, we must conclude that they simply don’t know how easy it is to import a vehicle, or that many vehicle warranties still apply after import, or that a price difference even exists at all. So let’s call it what it really is: ignorance.
Seeking some anecdotal evidence, I probed my immense social circle on the possibility of importing a car. Most don’t even realize it’s possible. One claims there is no price difference. One claims they can’t be imported (he’s never been to www.riv.ca). Another friend claims he’d have to pay huge duties (none on vehicles built in the NAFTA zone, 6.1% on others).
And then there’s the warranty—or the perceived lack thereof. Notwithstanding that the Toyota brands (Lexus, Scion, Toyota, Subaru) all honor U.S. warranties for non-residents, the savings on an import can easily exceed the expected value of warranty repairs. It’s a medley of counter-arguments that make as much sense as Star Trek technobabble; which is to say, none at all.
The automakers, predictably, are reacting in a manner that highlights the self-imposed captivity of the Canadian market. BMW and Mercedes USA have retained the decision to allow exports from the U.S. on a car-by-car basis, forgoing the Canadian legal process for approvals en masse.
Porsche has announced a “price-matching cut” on some of its Canadian models. Cut, yes. Price match, no. A quick look at the actual numbers reveals that the 2008 base Cayenne now costs Canadians C$55,200, down from C$60,100 in 2007. That seems like screaming deal– until you discover it’s still about $7k more than what Americans pay for the exact same vehicle.
Other manufacturers played legal games. Honda, Subaru, Toyota and General Motors all refused to certify that their 2008 USDM models were equipped with immobilizers, making them illegal in Canada. In a delicious irony, a 2008 Honda Civic built in Ontario and exported to the U.S. could not, for a few months, be repatriated and legally plated in Canada. As “illegal” cars piled up in driveways and border depots, manufacturers eventually relented and gave their blessing to Transport Canada. The latest RIV.ca update includes all of Honda’s 2008 models.
Honda didn’t stop there. Last fall, Honda Canada launched an insidious marketing campaign that highlighted differences in American and Canadian Hondas, noting that Canadian Hondas are better prepared for the rigors of Canadian winters. "The vehicles that are produced for Honda Canada are supposed to be sold in Canada to Canadian buyers," said Art Garner, public relations manager for American Honda Motor Co, at the time.
Needless to say, Upstate New York, Minnesota, Maine and New Hampshire all are cursed with winters that easily match anything experienced by the 95 percent of Canadians who live within 100km of the U.S. border.
Faced with unjustifiable price differences, the apologists eventually came out of the woodworks. Consider David Booth, of the National Post, who recently advanced the idea that having Canadian prices pegged to fluctuations in the U.S. dollar is not practical due to currency volatility.
Bollocks! The Canadian dollar’s movements have been quite predictable since January 2004: a slow, steady rise from about $0.67 U.S. to $1.00 US today. The average model life of a car is about five years. Since 2004, many manufacturers have had ample time to revise Canadian pricing on newly-introduced models. This, when the trend was obvious to all but the most financially disinclined.
In fact, when the dollar hit its historic low of $0.6179 U.S. back in January 2002, the Navigator I mentioned at the beginning of this editorial was only about $2k cheaper in Canada. Put another way, the only time the Canadian dollar sank low enough to bring Canadians to the economic point of indifference for a Navigator was when it was in the biggest slump it has known since… wait for it.. 1858! Where’s the unpredictability in that?
Canadians imported over 137k vehicles in 2007. It wasn’t enough to “readjust” prices. As long as Canadians do not force equalizing adjustments to prices, automakers will be happy to trot out shady marketing and legal mumbo-jumbo in the pursuit of profits. In the meantime, captive Canadians will get the prices they deserve.
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While Subaru does maintenance valid under the US warranty, they require you to first pay out of pocket and then mail the invoices to Subaru USA for reimbursement. It’s not a deal-breaker, but it seems a large pain and is making me hold off on doing an import — after all the import/inspection/installation/food/hotel/fuel fees on the 2.5i, I’m only saving about three grand (MSRP, probably more if I can trick one of you wily Americans into giving it to me for invoice).
Additionally, the local Subaru dealer won’t get back to me on whether or not they can install the immobilizer to make the vehicle legal to operate here. Anyone know if it’s just a generic part? I suspect it’s tied to the particular engine.
I think Volvo’s one of the bigger offenders here — the non-turbo CA version of the C30 is $10K more than the *turbo* version of the US C30.
Here is a link that promotes the immobilizer as gospel and also lists the most popular and least popular rides lifted
http://www.automotoportal.com/article/top-10-most-stolen-cars
Notice how Gm and Ford products dominate the least desirable list. The most desirable is Honda, although Subaru claims a top place.
Of course thieves with tow trucks posing as repossession crews just hoist the cars up and drive away. Another side effect of immobiizers can be car jacking, where the keys are already in the ignition and the victim least suspects to be robbed.
If Canadians don’t stand up for themselves and take advantage of the lower costs below the border that is their fault. Americans take bus rides up there to buy drugs their tax dollars supplement.
Absolutely. Anytime someone mentions buying a car, I mention the USA alternative. I know a couple of poeple who have imported, but we need to get the awareness out there.
There has been a lot of hot air from the car companies, but no real action. Token prices drops and press releases are about as good as it gets.
Everything I was looking at would save me $5000+ to buy in the USA. For that kind of difference I will forgoe the warranty rather than get screwed over by these pigs.
Fellow Canadians. Do you patriotic duty and buy USA.
Better application of actual economic theory than tends to show up in TTAC editorials (which is still to say infinitely better than shows up in anybody else’s editorials). However, I’m unconvinced that asymmetrical information really explains the entire disparity; as you have just demonstrated it is a pretty simple matter for a consumer to find this information, and anybody who lives within such a distance of the border as would make self-importing practical has likely thought (and Googled) about it.
There are lots of potential barriers to arbitrage, of which information is only one, which in the internet age tends to approach zero. My guess is simply that, as is so often the case with cars, MSRP’s tend to be very rigid prices, as we see every time a new hot model comes out and dealers have to inflate prices to reach market equilibrium, and when a surfeit of undesirable models are moved by discounts at the dealer level instead of adjustments at the manufacturer level. As the article points out, this is slowly adjusting.
Find some data on what dealers in close proximity to the border are actually charging, and I’ll bet there will be stronger support for the law of one price.
Good editorial, a really hot topic around the water cooler lately.
I think the reluctance of the automakers to not price match has more to do with the resale values and not pissing off current customers than just being stubborn.
I leased a new vehicle in July, before all the sh*t hit the fan with the dollar. My vehicle MSRP: 27,900 CAD, but a mere 22,000 USD.
Now if the offending Automaker (Nissan for those wondering.) went and price matched the US in Sept/Oct or so, not only would I be extremely displeased, but also the Residual value in my lease would go all out of whack.
Financial chaos would ensue.
The automakers are walking a tightrope, to not detroy current relationships/values, while not turn off new customers to their showrooms. Tough spot to be in.
Devil’s advocate here!
The demographic smallness of Canada (~1/10 of US population) coupled with its even larger georaphic size than the USA contribute to substantially higher distribution and business costs. Also, the metric display and labeling required of IP and interface components also have 1/10 the volumes of the US versions. 1/10 of volumes in automtoive parts will increase the price dramatically.
Having said all the above, the difference would be expected to be in the several hundreds of dollars – not the magnitude we see in the sales price differences.
So complete parity is probably not reasonable, unless US buyers want to end up subsidizing Canadian buyers.
Put more simply – a market with 1/10 the volumes will not have the same pricing as the larger market. Anyone with business training should understand that.
NoneMoreBlack :
Find some data on what dealers in close proximity to the border are actually charging, and I’ll bet there will be stronger support for the law of one price.
Ah a man after mine own heart.
“Close” is a word you’ve got to define quite precisely here. Most Canadians live within 100 km of the border. That’s not close enough?
Also, the last time I wrote on the topic on this site (”Canadian Imports Go Loonie”), I listed the steps required for importing a vehicle from the U.S. into Canada. The barriers to arbitrage are there, but nowhere near as grand as imagined, hence the conclusion of ignorance.
Barriers are highly model dependant and some may consider them too high. The highest barriers are artifcial attempts by the manufacturers to maintian the status quo:
1: Warranty denial. Denying warranty coverage is very common one now.
2: Denial of sale. Next up is pressuring southern dealers not to sell the cars.
IIRC Honda/Toyota/Big2.5 do both of the above. So that makes very high barriers to most buyers of most cars.
That said. I will be looking for a new car in 2009-2010 and if price differentials are still in the muli-thousand dollar range, I will do without warranty and go to florida if I have to, to find a dealer. I just refuse to be ripped off in this manner.
Since most Canucks live within 100 km of the border, just take a day trip to get the warranty work done. I’ve done it.
I also had warranty work done in Canada – they mistook miles for km and worked on my car free after the warranty expired in the USA. :-)
A couple of manufacturers failing to adjust prices is coincidence. All of them doing it is collusion. Cutthroat competition drives prices up!
What are the civil servants paid to rein in non-competitive business practices doing about it? Zero, zip, bupkis.
So who determines the “correct” price?
If you think Toyota is colluding with GM to fix car prices… I’ll sell you the Burlington Skyway.
Canadian gasoline pricing? Now there’s some good collusion.
A co-worker of mine did his homework and got a good deal on a new Mazda in Canada. He had a US dealer lined-up that would sell him the car he wanted. He went to his local (Canadian) Mazda dealer with this info. They gave him a price that made it not worthwhile to go through the hassle of importing. (Sorry, I don’t know the actual numbers.) So, when shopping for a new car in Canada, do your homework. Even if you don’t WANT to go to the US to purchase, it’s a good bargaining tool.
A used car dealer near me always has current model year sports cars on the lot, selling for considerably less than brand new prices. They have some sort of arrangement with someone in the US. The cars have a few hundred miles on the odometer so they can be sold as used and be exported from the US with less hassle than “brand new”.
FYI, US Customs requires the car’s paperwork 72 hours before it reaches the border for export to Canada. When you fax the paperwork to US Customs, they WILL lose it. Happened with both the cars that I brought from the US. They almost made the cars stay in the US for another 72 hours. I’ve heard the same experience from others.
I’d urge most Canadians to vote with their wallet… I certainly did for my wife’s summer “toy” (Mini Cooper S), and will for our next car purchase as well.
That being said, I do see pricing disparities on various items every day – strictly speaking, having a different price doesn’t bother me in the least. Even warranty differences are quite common between the US/Canada – electronic items (ie home theatre equipment, digital cameras, etc, etc) often carries warranties valid only in one country or the other.
Nobody seems to complain much about these items; the only thing that has changed is the value of the purchase.
The only real problem that I currently see are issues like the “immobilizer” (since resolved) and the “illegal” behaviour of some manufacturers in regards to providing appropriate importation documentation. Ie, BMW (and Mercedes as I understand it) is now requiring rather expensive modifications in order to provide a “recall” letter for a US vehicle. They’ve also managed to convince RIV (the corporation charged with overseeing the importation process) not to accept recall letters from US dealers. As far as I can tell, as a consumer I’m entitled to know about any safety recall that a manufacture has put out. Furthermore, BMW (at least locally) is now insisting that ‘07 & ‘08 BMWs have their dash switched out to provide KM readings instead of Mile readings – as far as I know this is simply a software reprogram (it certainly is in my 2 BMWs – I can do it myself!).
Transport Canada’s rules also indicate that the dash readings need to show km marks, but that this can be accomplished by adding stickers to your dash at the appropriate intervals, so long as it is verified by a registered facility. BMW is attempting to force this unnecessary repair work by withholding recall letters until the work is performed – in my mind this would seem to be the same as the now defunct immobilizer issue…
Any how, I obviously sit a bit on both sides of the fence, but if you want to help the Canadian economy, buy your next vehicle from the US!
(And spend your saving on Canadian goods and services)
Brendon
There is a simple solution to lowering the total transaction price without screwing up resale values that still has not been implemented yet.
Get rid of the destination charge and lower the interest rate to 0%.
While this wouldn’t bring the prices all the way down to US levels, it would be a first good step.
Brendon from Canada raises some good points regarding BMW Canada’s particularly asshole-ish behaviour as of late.
Whereas previously, they (like other manufacturers) annually submitted their list of admissible and inadmissible cars to the RIV, they’ve ceased that and now demand you obtain a “letter of admissibility” directly from them prior to importation. Cars are approved for import on a one-at-a-time basis, and the charge is $350.
Additionally, only BMW Canada can issue recall clearance confirmation letters (mandatory for importation), whereas previously a letter from a US BMW dealer was considered sufficient. The charge for said confirmation letter is $500.
Finally, BMW Canada has convinced the RIV to stipulate that any modifications necessary to meet Transport Canada regulations must be performed by an authorized Canadian BMW Retailer. Formerly, you could go to your neighbourhood garage and have a daytime running light kit installed for $50 and meet Transport Canada regs. Now BMW dealers are insisting that a complete instrument cluster replacement is required, to the tune of $1200 + labour!
I’m just glad I pulled the trigger when I did, and imported my 330i last September (prior to this nonsense becoming effective).
This price difference also hits the ATV industry and Honda pulled the exact same BS with the “built for Canadian winters” ads. In the end they ended up lopping off $3600 on every 2007 ATV to get rid of them, and yes it did piss off people who bought them before the deal. The 2008’s however, are right back to the old pricing, and are not moving at all, wait a few months and you’ll probably get those for $3600 off too, or go to the US right now and get one for that price.
Being in need of a midsize car, I am in quite a dilemna right now. Waiting until the price adjusts or paying, in some cases, over $15,000 more for the same car, or doing a whole lot of work and research to shop stateside and feeling like I’m doing something illicit.
I thought the job of the car salesman was to put together a deal that would make buying a car acceptable from the customer and the manufacturer’s perspective.
I think I’ll just hold off a few more months. I hope auto sales in Canada totally tank.
There is a class action lawsuit in the works claiming certain manufacturers and dealers have colluded:
“The statement of claim names as defendants:”
“General Motors Corp., General Motors of Canada Ltd., American Honda Motor Co. Inc., Honda Canada Inc., Chrysler Canada Inc., Chrysler LLC, Nissan North America Inc., Nissan Canada Inc., along with the Canadian Automobile Dealers Association and the National Automobile Dealers Association in the United States.”
“The firm also plans to add Toyota and Ford, including their Canadian units, once it has signed up representative plaintiffs for each one.”
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20070926/automobile_lawsuit_070926
I think many, if not most, Canadians are aware of the price discrepancy but I’ve read that unless the savings are in the $5,000 range, it’s not worth the cost and time. The MINI is so overpriced in Canada, I’ll just tell BMW to stuff it.
BTW – I just saw an ad in a Toronto Newspaper this weekend for Lexus where they have cut prices on all models in Canada. The 250is has dropped from about $36,500 to $31,900 ( http://www.lexus.ca/lexus/experience/en/home/vehicles/BK262M2008/veh_intro.jsp?model=BK262M&year=2008 )
This is about the same as the U.S. base price (from Edmunds) of $30,555 after the Canadian import duty is factored in.
Audi Canada base MSRP for 2008 A5 Coupe: $51,850
Audi USA base MSRP for 2008 A5 Coupe: $39,000
@CanuckGreg – I actually had the DRLs on my MINI enabled at the dealership (back when things where a little easier) – cost $35 hook up to the computer. I also had all digital read-outs (ie speed/mileage/temp/etc) switched to metric at the dealership – cost $65 (can’t figure out why the two where different; both done at the same time – dealership probably just wanted $100 for the charge).
@John B. I priced out MINIs two years ago between Canada an the US; at the time, the same spec (Cooper S with most options save NAV) was ~26k USD or 43k CAD! While I didn’t buy until the following year (and bought a gently used model) I was rather surprised. It just made the decision to buy in the US that much cheaper…
In regards to the IS250 – check the price on the options – I had read earlier today that a bunch of common upgrades have jumped significantly in price. A user from another ‘board mentioned that his pricing still came out to 14k difference (he wanted AWD, NAV, etc)….
Seems to me that all 3 of the BMW’s I have bought in the past 8 years had DRL’s. The dealer did have to program whether or not you wanted them on or not, as well as a few other options, but they did that free at delivery.
I think BMW is taking you guys for the “Ultimate Ride”.
Didn’t somebody mention a trade of our cars for your perscription meds a while ago?
Brendon from Canada:
I forgot to mention Saturday’s Motoring Television (on TSN) which I only occasionally watch. One of the presenters, who had tested the Mercedes C350 Sport, had a rant about the pricing. Not only was the U.S. MSRP substantially lower, but to add insult to injury the transportation charge to the U.S. (roughly $750) was included in the MSRP. In Canada, the transportation charge (about $1,450) was added to the MSRP.
All of this is great..and I enjoy the wall of savers on Carburner as much as the next guy. That said, the automakers are laughing their heads off still.
January 2008 car sales in Canada were the second HIGHEST on record.
http://www.forbes.com/reuters/feeds/reuters/2008/02/01/2008-02-01T224208Z_01_N01432635_RTRIDST_0_CANADA-AUTOS.html
“General Motors (nyse: GM – news – people ) Canada , the country’s biggest automaker, recorded January sales of 26,509 units, up 18.1 percent year over year, while Ford Motor Co (nyse: F – news – people ) of Canada sales climbed to 12,708 units, an increase of 9.7 percent, DesRosiers said.
Chrysler Canada posted sales of 16,952 units, up 3 percent year over year.
Honda (nyse: HMC – news – people ) Canada Inc reported record January sales of 12,022 units, a 69 percent increase over last year, and up 31 percent over its previous January sales record of 9,211 units in 2002…”
It’s kind of funny that nobody mentioned that Subaru Canada decided in December to sell 2008 Legacies and Outbacks at quite good prices. The relevant page has been taken down from their website, because the deals were only good until Feb 01/08.
The Legacy GT, for example, had 8 grand off, taking its price down to Cdn $32,295, precisely 700 bucks less than a new WRX. Hmm. Only 4K more than the US price, and of course forget about any fancy schmanzy deals. Invoice prices are NEVER mentioned in Canada, and the freight/PDI cost of $1495 implies that Skidoos are used to truck the vehicles from the US border. I guess that’s part of the uncompetitive nature of Canadian business.
Anyway, I decided to bite (partly because of Megan Benoit’s review here on TTAC) and found that there was almost no choice and only a few vehicles available. Mine hasn’t been delivered yet, hopefully by this week’s end, as it was a Subaru Canada executive vehicle, and I got a bit more off for the mileage, but lost some warranty time. I guess regular Legacies and Oubacks have been flying off the shelves these past few weeks, according to the dealer.
I agree with the article about the BS stories manufacturers have come up with to justify high pricing. They srain the credulity of anyone with an organized thought in their heads. However, the other problem for Canadians wanting to shop in the US for decent car pricing is what to do with the old vehicle. Not many folks can afford to just buy a new car outright, and they have to get rid of the old buggy somehow. That’s one reason why more people are not going to the trouble of shopping in the US.
The other is selective memory. An acquaintance of mine seems to think he has just leased a mid-range model Honda CRV, but in fact it’s the base model, and costs $7K more than the same car in the US, $27,790 instead of $20,790. A trip to the US last summer had him thinking CRVs were in the high $20K’s. They are, for the mid to high models. So he has chosen to ignore the facts and be happy.
With logic like that, not too many people are going to go to the trouble of importing a car. They just imagine they got a good deal instead.
I just buy cheap used cars, so I don’t care how much a new car is in either Canada or the States – I can’t afford a new car anyway.
And the manufacturers saying they can’t keep up with price fluctuations is BS. They can charge whatever the f*** they want, people won’t complain if the price goes down – or up for that matter. Most people, I think, don’t know how much a car cost two weeks before – dollar price changes wouldn’t matter to most Canadians. Plus, if the manufacturers did have price parity, there’d be some real good PR there, and likely a good number of extra sales.
Why don’t you knuckleheads get some sophomore Economics major as an intern to vet this naive nonsense. The simple, rudimentary economic fact that no one on staff of TTAC is capable of grasping (even though I return to repeat it with each of these types of articles) is that fundamental price differentials between the U.S. and Canada are unavoidable, because the U.S. economy is significantly more productive than the Canadian economy. Period; full explanation; end of story.
A day’s work by an American produces greater value-added than a day’s work by a Canadian. And that has real-world price tag consequences.
BTW Canadians, don’t waste my time arguing. This is a thoroughly documented and completely boring and uncontroversial fact of economic statistics, and no Economist in Canada would argue it. Nor is this an insult or indictment of Canada. When you count the numbers that’s just the way it is. Maybe Canadians like the resulting lifestyle for other reasons. Maybe it has to do with frozen tundra and sparsely populated landmass. That’s all fine.
Now this fascinating reality can manifest itself in many ways. If the U.S. and Cdn dollars are at parity, then stuff in general in Canada will be more expensive, or wages in Canada will be lower, or some mix of the two. It doesn’t matter specifically WHY that happens with product Y or business X or job title Z — somehow it’s going to happen.
It’s a tautology: if that were NOT the case, then the Canadian economy *would* be as productive as the U.S. economy. Which it’s not.
Yes, of the 10 billion SKUs available in the Canadian economy, you can point to certain exceptions — especially where there is a big pipeline and few barriers to the US for trade. But that’s all they are: exceptions. Things are *relatively* more expensive in Canada, for many many reasons.
If all Canadians DID import cars from the U.S. — or if Canadian dealers had to sell cars at parity — that would probably lead to some unpredictably chaotic pukefest of unintended consequences. Starting with, what happens when Canadian businesses (car dealers) suddenly experience a MASSIVE drop in revenue? Did it occur to you that they still have to pay wages, utility bills, taxes, leases, in CANADIAN dollars? What do you think will happen?
And as always I’ll ask: why are you focused on cars? Why not everything? If cars should cost the same, are you advocating that the prices of EVERYTHING (wages, goods, services) be the same? Why not? Why aren’t they? Why not write an article about that?
And the other thing I always ask: you expect car prices to readjust as a result of the currency. How many Canadians have volunteered for a 30% pay cut to readjust for the currency? Are Canadian incomes in Canadian dollars 30% less than they were 2 years ago? Huh? And if not, why do Canadians expect stuff to magically become cheaper?
Kevin:
Now that your rant is finished, you may want to pick up the phone and call Toyota in Canada and enlighten them:
Toyota Slashes Canadian Prices to Reflect the “New Normal” (see the article in TTAC.
“The automaker is slashing its Canadian prices to reflect what Stephen Beatty, managing director of Toyota Canada, calls the ‘new normal.’ Driving.ca reports that ToMoCo CA’s cutting the manufacturer’s suggested retail price (msrp) on 16 Toyota and Lexus models by a range of $750 and $8,100.”
Canadian manufacurers responded with rebates during the last 2 months of 2007, and last week Toyota finally lowered its MSRP’s across the entire offering of Toyota and Lexus.
Manufacturers are well aware that 50% of all vehicles, and easily 70% of luxury vehicles are leased in Canada. Its the Canadian way of making vehicles that are more expensive than the US, more affordable for the consumer.
The “prospect” that has $5,000. to put down, and can afford 499/month that the same vehicle is $5,000 less in the US is a moot point. Manufacturers know this, and use it to their advantage.
The Canadian automotive landscape is not transparent, manuafcturers and a variety of pundits make it a point to uphold an “opaque facade” to keep the consumer partially informed. In a Web 2.0 environment information is power. There are certain folks of the Canadian automotive media, especially those that espoused the mission the inform everyone about the disparity in the prices. Some of these folks must have attracted “unwanted attention” from Canadian manufacturers.
Franchised dealers were afraid to talk to the media for fear of retributions from the manufacturer. In early November when the “residual value issue” was put in the open in the Canadian media, it forced the hand of manufacturers.
Manufacturers through their captive finance companies are aware that in 2008 there is a high number of “lease returns” accompanied by “residual liabilities”.
Why don’t you knuckleheads get some sophomore Economics major as an intern to vet this naive nonsense.
LOL. Great tone. Best way to get people on your side.
A day’s work by an American produces greater value-added than a day’s work by a Canadian. And that has real-world price tag consequences.
The whole crux of the article is that if Canadians were more knowledgeable, they would effectively homogenize their retail market for cars with America’s. So Canadian productivity has little to no impact here.
And the other thing I always ask: you expect car prices to readjust as a result of the currency. How many Canadians have volunteered for a 30% pay cut to readjust for the currency? Are Canadian incomes in Canadian dollars 30% less than they were 2 years ago? Huh? And if not, why do Canadians expect stuff to magically become cheaper?
Did you miss the last line of the column?
Kevin, -50% in rudeness, +50% in logic, and you’ll be ready for the big time.
@Kevin:
I won’t argue economics with you because, frankly, I’m not qualified to argue economics with anyone… I will say that I’ve been following this story for the last 8 months or so, and this is the first I’ve heard anyone mention economic production of a given Canadian vs. an American as being the reason for car pricing in respective countries (if this is indeed the sole reason (!), those Europeans must be horrible producers ;) ).
However, in response to:
And the other thing I always ask: you expect car prices to readjust as a result of the currency. How many Canadians have volunteered for a 30% pay cut to readjust for the currency? Are Canadian incomes in Canadian dollars 30% less than they were 2 years ago? Huh? And if not, why do Canadians expect stuff to magically become cheaper?
You might want to check out this pdf outlining the class action lawsuit in Maine brought about by US citizens who where attempting to import Canadian vehicles to the US in 2003 when the Canadian dollar was much lower (~.65 US). Apparently some US citizens wanted stuff to either become “magically cheaper”, or have free access to import (and have warrantied) Canadian vehicles. Regardless of the outcome of the case, it would seem that the same basic desire is there on both sides of the border….
(BTW, There is at least one similar lawsuit occuring in Canada – probably more…)
This has been a hot (as in hot under the collar) topic for months. That I can travel 40 miles from Montreal(pop 3 million) to Champlain NY (pop 5000) and buy an Audi A4 12k cheaper is burning a hole in my gut.Why have I and many others not done this? Not out of ignorance as Samir has implied but rather a feeling of intimidation and perhaps yes….I’ll say it-fear that perhaps the car will somehow be declared an illegal “alien” and be sitting immobile in my driveway. The car manufacturers are charging what the market will bear in Canada including exorbitant transportation costs. I believe that that it is not that we are paying so high a price here in Canada but that Americans are being treated to extremely advantageous pricing relative to the rest of the world. It just becomes more obvious in the adjacent Canadian marketplace much to our chagrin.
Hello I am a car salesman in Canada and have been following this issue for awhile. There are many factors involved in the price disparity between prices of vehicles in the U.S and Canada. Economies of scale, difference in standard equipment and financing rates to name a few but not all of the factors. When looking at the price difference one thing to consider is the popularity of the vehicles you are comparing. The more popular and lower end the car the closer the prices are. The option packages are different as well. Our higher price frequently includes more equipment. Not Canadian winter specific equipment but more equipment.
Financing rates also factor in. People are learning the price is different from the cost.
Using your own money to purchase a new car does not usually make financial sense when it can be invested. The price of the vehicle ($X lower in the U.S) does not always make up for the cost of borrowing on the lower price. Candian dealerships are importing U.S vehicles to fill the gap in the market as we have little say in the M.S.R.P.
The prices will get closer. It just will not happen overnight and the lease residuals are the main reason. The manufacturers stand to lose a large sum of money if the M.S.R.P drops signifigantly quickly. This will affect trade in values as well.
Not to be ignored are the people who recently purchased. That is why many manufacturers have assigned a cash value to their financing and applied as a cash incentive. The cash incentive can adjust to the new reality while the M.S.R.P comes down gradually.
One issue I rarely see raised is will lowering the M.S.R.P result in signifgantly more sales? Will people not want to negotiate because the price has gone down? Or will the manufacturers suceed in lowering the ceiling of vehicle prices?
On a personal note I can tell you people do not always remember when the price went down but they will never forget when the price went up.
I hope I have contributed to the discussion.
Thank You.
The only defensive remarks thus far have all been red herrings.
The additional cost of doing business in Canada might be 1% or 2% at worst. Quite simply, this is simply a big profit bonus for Canadian car wholesalers.
The extra equipment is likewise a joke. I priced out two near identical Miatas, the different was about $7000 and the equipment with essentially identical.
To Kevin who wants to insult others understanding of economics, while presenting no coherent arguments about why cars alone should be exempt from fair pricing. Everything else I am interested in has moved to parity. Computers (I recently built one and the price at my local shop and Newegg was essentially identical) cameras etc. All mainline consumer goods are essentially at par.
Only automobile remain so unfairly priced. This has nothing to do with economics or market forces and everything to do with coercive force keeping the barriers up (denying warranties, threating dealers not to sell to Canadians). Also it is not the job of the car companies to look out for upholding Kevins sophomoric economic views.
Market forces have deemed the dollar to be worth par and I can go to the bank and exchange for US dollars at will. There should be no barriers erected to stop me from buying a car in the US with those dollars, if local car companies continue to prop up there hefty profit margins.
If the market was wrong then the dollar will shift again. It is not the job of car companies to try to correct that.
The bottom line is we should buy goods at market prices, but with automobiles the market prices is being artificially and coercively propped up. We need to fight this to get market forces back in operation.
Swervin,
Manufacturers in Canada literally had to get “bullied” by the media to adjust the pricing of their vehicles. It set the tone that they have poor credibility, and are out to not earn but “grab” a buck.
When a manufacturer gives an $8,000. cash rebate on a luxury vehicle what does it do to residual values, to used vehicle values. Manufacturers with their monthly “tactical” incentives are their own worst enemies when it comes to upholding values of used vehicles, and residuals.
Lowering the MSRP and in the process probably squeezing the dealer out of some margin, is the published price that everyone can measure. The monthly tactical incentives are there to “move the metal” depending on each manufacturer’s situation, and strategy.
If the captive finance establishes its lease rate at 8% as an example, and the marketing of a specific model requires a rate of 5% as an example, the manufacturing/marketing arm pay the finance arm for the 3% difference. Which as you mention can be converted into a cash discount.
Its the same with residual values, the finance is comfortable at 50% the market requires 55%, this gets very counter productive when the MSRP is artificially high, and adjusted by “cash backs”. There is a sharing of residual liabilities.
By lowering the MSRP manuafacturers might not sell more vehicles, they will garner improved credibility, be perceived as less confrontational, stabilise the market for used vehicles, and residual values.
Manufacturers are using a myriad of tactics with CPO programs through their franchised dealers to maximise the value of lease returns(residual values), and inexorably apply pressure on independent dealers.
As you probably know in Canada when a US car goes on the auction block the blue light comes on, since the provenance is not Canadian.
Brendon:
I will say that I’ve been following this story for the last 8 months or so, and this is the first I’ve heard anyone mention economic production of a given Canadian vs. an American
Yes, and you can imagine my frustration! It’s like the news media spending a year constantly reporting the fact that people don’t float away off the surface of the earth, and railing at the injustice of it all and blaming George Bush, without any reporter ever thinking to ask the nearest high school physics teacher for an explanation.
You make an interesting point Brendon — and I’m not going to insult Canadian consumers the way Samir Syed has done. There is obviously a rational reason for Canadians to make the choices they make, whether I know the reason or not, even if it’s just that they don’t have time enough in the day to seek out the information they’d need.
Your point is that imports can be a good deal: Formerly Canadian imports to the US; now the other way around. Often consumers want cheap imports, and they would be better off — but industry and governments erect barriers to the free flow of goods. NAFTA be damned. But it’s a tradition going back to David Ricardo and Adam Smith that international trade makes both parties better off and enhances economic productivity for both.
But key is — at the moment we’re talking about imports benefiting Canadians. The valid part of Samir’s article is that Canadians would seem to be better off right now to buy cars in the U.S. and drive them home. That is the non-magical way to get lower prices — consumers benefit but if everyone did it, in the immediate term there would be lots of job losses in the Canadian car-selling industry.
However, expecting products sitting on Canadian lots (sold by Canadian salesmen under lights generated with Canadian electricity on property subject to Canadian taxes) to suddenly be as cheap as in the U.S. — that’s a free lunch. I would think it likely that car dealerships would have to shut down before being able to reach parity with U.S. prices.
Finally in all this I can’t see any evidence Canadians are worse off than they were 3 years ago. Are they? If they sued for damages, what are the damages? The only difference as far as I know is that suddenly the math has become simple, and so it’s visible to Canadians that their price tags are higher. But in terms of relative
prices and incomes, they always have been and nothing has changed.
Indeed little has fundamentally changes. So why is a Canadian car wholesaler today getting $30000 USD for a car, when 2 years ago he was getting $20000 USD. This is simply a 50% increase in profit margin and nothing else.
It is no insult to Canadians to suggest that market forces be allowed to work themselves out. The result of Canadians buying cars in droves south of the border would not be mass layoffs in Canadian dealerships. It would be massive price corrections as market forces took effect.
The price differential is only being propped up by coercive force right now.
Right now it is only automobile companies that have these protectionist powers available to threaten dealers(with punitive action) and consumers (with warranty denial).
It is not GDP productivity economic relationships keeping prices up in Canada. It is protectionism, coercion, greed and big fat profit margins.
The reality is that the dollar is at par, and Canadian car companies are profiteering and artificially holding up the price through protectionist coercion.
Ignore Kevin, a likely auto industry plant. Who else would support protectionism and coercion that benefits only one small group.
Free the market. Buy American. There is no reason to accept being gouged here.
Kevin, your argument about macro-economics and relative purchasing powers have some basis (theoretically), in a non-global economy. It would make sense if the Canada depended on a domestic car industry for its vehicles, since the cost of producing them would remain essentially constant (like wages, and certain other local expenses), regardless of currency fluctuations. But that’s not the case.
Look at the situation vis-a-vis Europe and US. European cars imported to the US are mostly being sold at a loss due to the strong euro (currency hedging has blunted some of the actual losses). And Europeans are importing American cars like the Mustang because the are cheap (in euros).
The European manufacturers would love to raise their prices in the US to compensate for the cheap dollar, but the US market is way to huge and price sensitive for them to do so. So they swallow the losses.
But Canada is too closely linked to the US, and it’s too easy to self-import for a substantial difference in prices to be upheld. The manufacturers are making windfall profits in Canada; the vehicles they sell there cost them the same as the cars they are selling in the US. Prices will drift down to as low as the manufacturers think they have to, as well as how concerned they are about market share.
This has nothing to do with the local cost of selling vehicles in Canada or Canadian’s purchasing power, and everything to do with the global economy.
AGR
The residuals are calculated as a percentage of the M.S.R.P. The monthly incentives are not logged retroactively by most consumers. So if a vehicle has a incentive during one month and not the next it will affect relatively few customers as opposed to an across the board price reduction that would affect the whole market for a particular vehicle.
The M.S.R.P should be looked at as the ceiling for a particular car. Where I work we are not allowed to charge more than M.S.R.P even if the vehicle is in high demand but in short supply. I have heard of “market adjustments” in the U.S or expensive mandatory “enhancements” (pin stripe, undercoating etc.). Sometimes demand is low and supply is high exceptional good values can be found.
My point is that before looking at the disparity in M.S.R.P customers should look at incentives etc. to figure out what the cost (travel time, lost wages, hotel stay and fuel etc.) before saying I can save $X. Also they should see what the actual transaction price is in there area. You maybe surprised to find the deals that are out there.
I rememeber reading an article on TrueDelta explaining that tying vehicle prices to the exchange rate would create big fluctuations in the price of vehicles. Before committing a vehicle to a certain price change comapnies have to take a lot into consideration and make decisions months or even years in advance. Making tough decisions is cam sometime result in unpopular choices. In my opinion this is the situation manufacturers found them selves in. If they had responde to prices at par at $1.10US only to raise them a few weeks or months later, what do you think their credibility would be like then?
I think some people may consider that the U.S market is actually artificially low compared to the rest of the world. (I use the term artificially very loosely. In a true capitalist free market no price point is artificial)
I do think that prices will and should come down. I just want to make sure people are looking at the big picture as I hope my manufacturer is.. It is easy to blame things on greed when it is not your money at risk.
What are the civil servants paid to rein in non-competitive business practices doing about it? Zero, zip, bupkis.
The government is doing zilch because just like the US we in Canada have the best government money can buy. The only time competition raises it’s head is when a new player enters the fray, like when Japan and Korea started shipping cars to North America. They came in with low prices which lasted until their execs started golfing with the Big 2 1/2’s execs.
The dealers here in Canada must be feeling the pinch of cross border shoppers because there are ads on tv touting Canadian adjusted pricing. These are the same dealers who 2 months ago said they couldn’t possibly lower their prices, duh.
Kevin: your argument is based on the strawman that Canadians expect pricing at par.
Some of us may, but I and others I know do not. We understand that our productivity gap results in lowered real purchasing power, and we expect to pay more in Canada. But we expect to pay 10-15% more, not the 30%-plus more that we are routinely gouged on higher value vehicles.
I think Paul is probably right, though. It isn’t that Canadian prices are too high, its that US prices are too low.
“And the other thing I always ask: you expect car prices to readjust as a result of the currency. How many Canadians have volunteered for a 30% pay cut to readjust for the currency? Are Canadian incomes in Canadian dollars 30% less than they were 2 years ago? Huh? And if not, why do Canadians expect stuff to magically become cheaper?”
I did, in fact more than 30% cut, try 90%. That’s the reality of being in the export business when your only customer was the failing US economy. Now I have a different job.
@Kevin: However, expecting products sitting on Canadian lots (sold by Canadian salesmen under lights generated with Canadian electricity on property subject to Canadian taxes) to suddenly be as cheap as in the U.S. — that’s a free lunch. I would think it likely that car dealerships would have to shut down before being able to reach parity with U.S. prices.
This sounds like a misleading statement – I don’t think any bright Canadians question the actions of individual dealers (anymore now then the did before!), but more so the manufacturers. In simplistic terms, if a dealer made a 1k margin on a 26k vehicle and sent 25k (16.5k USD) to the American “mothership” 4 years ago, would likely be clearing roughly 1k; I assume (definitely an assumption) that Canadian dealers pay with Canadian dollars – their buying power hasn’t increased. However, that same dealer is now sending 25k CAN or roughly 25k USD back to the mothership! The manufacturer’s profits have increased dramatically, however the dealer is a bit stuck (lower their price too parity and they make no money!). This is obviously an oversimplification, but I’m hoping that it illustrates where some of the frustration may lie with some Canadians who feel gouged. (Unfortunately many Canadians simply may not understand whats going on, and blame the dealers – It’s ok, I can insult Canadians ’cause I’m a Canuck (what a world we live in!)).
I suspect that the losses in the Canadian automotive selling industry would not be that great – I would venture that if a manufacturer could make a larger margin in Canada, they would simply adjust their profits downwards until such time as the desire for imports reached an acceptable level – ie, simple economics!
BTW, you installed some curiosity in me in regards to per capita production value. Of the handful of data I could see, it seems Canadians produce roughly 80%-90% of what Americans do (various studies from 1997 through 2002). A myriad of possible reasons are listed (seems like no one can really nail ‘em down), but the two that seem most likely two me are the greater left leaning tendencies of Canadians (ie socialistic) and a greater comfort with risk taking amoung the US population.
-Brendon
@Bytor – don’t ignore Kevin. While I was a bit thrown by the tone of his first comment, he obviously has some input into the discussion. This is why I like TTAC!
Ignore Kevin, a likely auto industry plant. Who else would support protectionism and coercion that benefits only one small group.
Ha, you caught me Bytor, I’m really Bob Lutz :) I think you’ve misread my argument — I do not support protectionism! I think it should be recognized as the felony theft that it is. I’m just noting that it happens.
What I think Canadians should do is import ALL their cars from the U.S., and the soon-to-be unemployed Canadian car dealers and salesman should all go back to school and get degrees in Electrical Engineering or Computer Science. That would likely improve Canada’s productivity, eventually.
Look folks, I’m going to repeat something I said ages ago here in response to a similar article:
I’m merely explaining why what you see happening is happening. It’s very Zenlike actually.
Yous guys are the ones who are twisting yourselves into pretzels and barking horrible accusations of greed and malice trying to explain why what you THINK should happen is NOT happening.
Believe it or not.
Ahhh timing… Kevin, I must admit that I didn’t understand your first post (nor do I agree with you 100% (yet)) – I certainly agree with this one! If you didn’t jump in on the gas prices debate in California (really an offshoot of the “ridiculous” (my editorializing!) gas guzzler tax), I wouldn’t mind hearing your opinion.
Additional to Kevin
The dealers may suffer when they have to sell cars at realistic prices but tough, they have gouged us for years. I don’t know about you folks down south but here in Canada dealerships have gone from a modest single story building to huge chrome and glass edifices that occupy prime downtown real estate. I suspect the price differential north to south may have had something to do with finacing these new buildings.
Potemkin
I don’t know where you live but I can tell you that it is not usually the Dealer principals who want to build these Taj Mahal’s. Often the manufacturer dictates the size, design and even location of a dealership.
For your information Brendon from Canada has the mostr accurate take on what is happening on a dealership level. Our invoice price has not changed. We have not been making record profits with the dollar making parity. Our situation is the proverbial rock and hard place. Sometimes our invoice is more than the U.S M.S.R.P and we cannot compete on price alone.
It is a unique time in the automotive business and I am sure the market will adjsut.
To Swervin:
I have some sympathy for the position of the dealers in Canada. I never thought they were gouging or making money from this. I consistently labeled wholesalers or Car companies as the culprit here.
They are the ones that have seen their import prices drop dramatically, they have not passed the savings though the distribution chain. Instead the have erected protectionists barriers to create a monopoly on distribution to eliminate normal market forces.
Unfortunately the only way to force them to correct is to struggle around the barriers and buy outside their system enough for them to see clear downward trend in sales.
That is why I suggest everyone who is able, import their car from the USA to send that message. Token price drops are merely token lip service to the necessary cuts.
The price levels need to get within $1000. I won’t import at that level, but for $5000 I certainly will.
swervin,
The MSRP is public information, the monthly sales incentives are self serving to the manufacturers, and become public when it suits the manufacturers, its dealers. The non publicised rebates that manufacturers give to dealers are not made public.
The Canadian cconsumer is aware of these tactics, and usually does business during the second half, and especially the last 10 days of the month.
With so many vehicles leased it becomes a game of “get me out of my lease, if you want to get me into a new lease” or a game of churning customers “come on down you can lease a new vehicle for less money than you are paying now, and with this American pricing thing, with the kickback we are getting I’ll get you out of your present lease”.
Information in Canada is opaque, JDPower makes its American PIN information readely available, in Canada its not available.
Month end sales figures are quickly broken down by WSJ on the US side, in Canada its bulk figures that are made public, accompanied by the asinine comments of the same pundits every month.
The positive side is that the Canadian consumer leases its vehicles, does not want to be taken advantage by multibillion dollar corporations and its dealers, and leaves the multibillion dollar corporation liable for the residual value of the lease.
Manufacturers are well aware of this, and resort to the “end of lease” inspection to grab money or at least keep the security deposit especially when a customer leases a vehicle from another manufacturer.
Since the cash rebates are good, the financial deals are good, dealers during the past few months have been using manufacturers money to “pile on the F&I in showroom” to increase their grosses.
Manuafcturers by lowering the MSRP and resorting to less incentives remove a portion of the easy F&I game, and ultimately the manufacturer keeps more money for itself.
Ah a man after mine own heart.
“Close” is a word you’ve got to define quite precisely here. Most Canadians live within 100 km of the border. That’s not close enough?
Mr. Syed: Wrong side of the border. We need data on US car dealers to see if Canadians are crossing the border to buy here. Canadian dealers aren’t going to be able to compete with a $28k discrepancy, but American dealers are certainly going to notice a line of Canadians out their door and price accordingly.
Your story is by no means implausible, but discarding any of the classical assumptions (in this case, perfect information) requires persuasive arguments, not plausible ones. And for the definition of persuasive, see: empirical.
MSRP is simply a bad measurement; in fact, the movements we see in Canadian prices support this line of reasoning: since the majority of Candians live close enough to the border to engage in arbitrage, the price discrepancy has an impact on Canada-wide prices, and MSRP’s are slowly falling. However, MSRP is going nowhere in the US, because a small minority of dealerships are close enough for the manufacturer to raise prices on its entire line. Thus, Canadians will be able to win out by importing, Canadian dealers get the short stick, and American dealers near the border (should) be getting markups roughly equal to the difference in prices minus transaction costs (including non-fiscal costs, such as the pain in the ass of paperwork travel etc)