My five-year-old looked into the bag and spied the chocolate-covered strawberry. “Just one?” she asked with equal parts indignation and incredulity. “That cost me six bucks,” I responded defensively. “I wish they were cheap,” Lola said as the treat succumbed to dental destruction. “Then we could have lots.” And there you have it: proof that price conquers all. If Godiva wants to sell me a dozen chocolate strawberries, all they have to do is lower the price. Dramatically. Of course, they can’t do that. Ingredients, labor, transportation, administration, marketing, rent, fancy bags– it all adds up. By the same token, there’s only one way automakers seeking to sell vehicles cars in today’s market can stimulate sales: slash their prices by 50 percent or so. Of course, they can’t do that. Or can they?
If GM and Chrysler declare bankruptcy on Monday, they can sell their cars for whatever the market will bear. Which, at this point, would be a lot less than it costs to make them. Same old, same old. The ailing American automakers have been selling cars at a loss for over a decade. Even so, The Mother of All Fire Sales would mean the end of Chrysler and GM as we know them. Without any pretense of profit, the whole house of cards would collapse. Tens of thousands of jobs would disappear. But the price collapse would clear the lots and get the U.S. new car market back in gear.
Ask a five-year-old: everything sells at a price. The U.S. economy could be in a full-scale depression and new cars would still sell– if they were cheap enough. Anyone fancy a Chevy Malibu for $10k? Or a Jeep Cherokee for $12k? On the negative side, ultra-cheap cars would kick residual values off a cliff, locking even more people into their current whip. After the initial bonanza, the new car market may take a long time to recover.
On the positive side, the fire sale would provide access to better quality cars for a lot of low income buyers. Parts makers, service providers, gas stations– they’d all be better off. As supply lowered to demand, and then eventually recovered, the remaining automakers would benefit. Not to mention the profits provided by an industry-wide labor cost reduction (i.e. the disappearance of the United Auto Workers).
Yes, well. For reasons that will perplex historians for decades, President Bush decided to turn his back on free market principles and bail out the U.S. auto industry. As a result, the taxpayer is now supporting the price of automobiles.
So far, Uncle Sam has committed roughly $50b to the U.S. car industry. Let’s say ‘09 sales clock in at 10m units. That’s a $5k subsidy per car. That’s if you spread the sales amongst all the companies offering new cars for sale in the U.S. If you assume that the domestics get the lion’s share of the bailout bonanza, and round-up their market share to 50 percent, that’s a whopping $10k per car.
If the total federal swag swells to $100b– a credible enough prediction when you add in big bucks for battery research, various tax credits for alt power vehicles, more “loans” for GM, Ford’s line of credit, suppliers’ call on the public purse, money for formerly captive credit companies, etc– we could be looking at a $20k per car federal price support. Add in another $50b– well, you can see where this is going.
Truth be told, your taxes are paying people to build cars that no one wants. Or, if you factor in the extended holiday break, we’re paying people to not build cars that people don’t want.
Perception gap be damned; Detroit’s cars aren’t fundamentally undesirable. They’re just too expensive. The bailout has singularly failed to change that fact. Nor will it. But that’s how government works: whatever it touches become less efficient. And there are other costs…
When the laws of supply and demand operate in a relatively unmolested marketplace, the consumer has the final say on a product’s worth, and the company’s survival. Now that GM and Chrysler have latched onto the federal teat, they are destined to be [even more] disconnected from consumer demand.
In fact, GM and Chrysler are no longer answerable to the consumer. Forget “viability.” They must now satisfy politicians rather than the “end user.” Who knows what harm these pols will inflict on the automakers– and the car market in general– in the name of political correctness? American Leyland, here we come.
Yes, yes. Politicians already call the shots, what with Corporate Average Fuel Economy standards, E85 subsidies, safety, etc. But even those who favor government fiat in such matters must surely realize there’s a line that should not be crossed. It’s one thing to regulate, another to control the means of production. Or, as Lola said, “does anyone else make chocolate strawberries?”
89 Comments on “Editorial: Bailout Watch 349: Price Conquers All...”
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Yes, the used-car market makes more chocolate-covered strawberries per buck than new-cars. People know the current whip value already fell off the cliff, thus making the miles-accrued component on the car less of a fear terms of lost-value. Hence, a) drive what you have into the ground, b) don’t be a fool and pay more than the as-run E-bay price when cost of repair exceeds value.
Another valuable lesson for a youngster is this: Even though he/she HATES Brussel Sprouts (and I gag on them even as an adult)….as a parent, you can dress up in your “Uncle Sam” red, white, and blue uniform / top hat…and FORCE THEM down your child’s throat…all the while yelling “It’s for your OWN GOOD…now EAT them!!!”. And if the little tot pukes, so be it!!
That’s how our tax / “bailout” system works. Consider it a “civic lesson”.
Has the status of the above mentioned subsidies changed from loan to grant or am I missing something?
You’re missing the fact that those loans will never be repaid.
Here’s an interesting page I found today whilst reading some Ronnie G propaganda. It is a link to all products made by the UAW. I will make sure I never buy a GD thing from this list. I do not like to pay for something 2 and 3 times over. We still have some freedom of choice.
http://www.uaw.org/uawmade/index.cfm
@ RF
Prices can’t come down. The whole economic structure of the industry would fail.
What is needed is for the oversupply problem to be fixed by one or both of GM/Chrysler going away or substantially reducing in market share (ie Chrysler gone, GM a niche player or in China only).
Then why is Ford resisting taking the free money?
Mr. Moran,
Prices WILL come down. It’s like the San Adreas fault. There might not be any slippage now, but the pressure is building up. Once it lets go, there will be Hell to pay.
jfvso:
There’s no such thing as free money. And Ford IS taking federal money; they’re negotiating with the Treasury department for money for Ford credit. They’ve also arranged a $9b line of credit with Uncle Sam.
Every American taxpayer (admittedly a dwindling breed) needs to read this editorial. RF, as always you hit the bullseye dead on and dispel every myth being spun by every Washington politician and MSM talking moron who want us to believe that Uncle Sugar Daddy’s largess is the answer. Bravo!
At least if the cars are sold at 50% off, or anything at all, they would get SOLD. Isn’t that part of the idea? Any form of subsidy allowing the building of more cars, which will not be sold any more than the current inventory, is truly pointless. I think a first requirement to this bailout madness should have been that current inventories be reduced considerably at whatever price the companies can get. Otherwise we’re just paying to build more inventory, aren’t we?
@ RF
I think you might get some price movements and only by a few percent downward, plus the manufacturers will expect dealers to take a hit on that too.
Sales of cars rely on finance. Finance for cars is broken if the “asset” value is diving.
No, the world needs GM/Chrysler to slip away, quickly.
So far.. not even a particularly good deal in the newspapers…
@ PM
I don’t think we’re arguing here. Remove the government subsidies, and GM and Chrysler go away. Prices crash, the market re-establishes itself at a “realistic” level.
I’m looking forward to GM’s bankruptcy and Chrysler’s liquidation precisely for the devastation it will cause for used car prices. That’s when we will see what the market will really bear.
Good that your daughter figured out that price matters.
Box of dozen or more fresh strawberries from the farmer’s market: $ 2.99
Godiva chocolate bar: $ 3.00
Take it home, melt it in a microwave and dip. More fun (for kids to do something themselves), more fruit, same chocolate, same price.
When is your kid going to figure _that_ out? :-)
I once got in huge trouble when I was the Editor of Car and Driver for publishing a column by the late Warren Weith, in which he estimated–and being in the business he pretty much knew–that the actual material-and-labor cost of building a certain Ford model–can’t remember which one–was something like $800. (This was in the early/mid ’70s.)
Obviously there’s more to it than that, but this is a huge value-added industry.
Robert Farago :
January 18th, 2009 at 5:52 pm
You’re missing the fact that those loans will never be repaid.
Pretty confident, eh?
Out of the the thousands of people who comment on the industry daily, the guys who use the word “never” (or, conversely, “always”) is tiny.
Novel economic reasoning.
To make the case that taxpayer money is being used to keep the price of Big 3 cars high defies logic, economic principles, and common sense.
Let’s face it — wishing the Big 3 to go away is in no one’s interest except those who want to love their Asian or European cars guilt-free.
Anti labor union feelings leave me puzzled, unless those who are expressing anti labor sentiments are business owners. My admittedly none too deep historical understanding is that unions contributed considerably to making the working classes middle class, particularly around the turn of the 20th century. It does appear that unions have become an entrenched bureaucracy in thier own right, but to bitch how much per hour union workers make, without bitching about CEOS who make ten of thousands per day, free of any good performance obligations, is hypocritical, and a reflection of the successful brain washing / successful propogandizing / lying by our corporate culture in the USA.
Great article RF!
5 year olds are smart…It is when we get older and have our brains damaged by public school, television, sugar, alcohol that we stop making sense.
When you pay tax, you are being ‘hit’ 3 times:
1. You have less money to spend.
2. You end up propping UP consumer prices.
3. You give power to murdering scum called Politicians.
Giving money to a government is like giving someone a rope that they are going to use to hang you…What Dubya is actually saying is that “If you are not with Honda/Toyota/Nissan/Hyundai then you are for the Turr-ists”….Turr-ists being the “public/private partnership political Fascists” types..Not the Sky-god types.
Godiva’s doing just fine pricing at $6 a strawberry. If they lowered the price they’d SELL more, but who knows if their PROFIT would go up.
Likewise for auto manufacturers. Too much emphasis is placed upon sales. A company is successful when it maximizes profit. This editorial completely ignores the most basic of economic principles.
With the 1933 Agricultural Adjustment Act, FDR (more directly) paid farmers to not grow crops in a time of agricultural overproduction, a major strain on the industry and economy as a whole. Sound familiar?
“As supply eventually lowered to demand, allowing prices to return to a more profitable level, the remaining automakers would benefit.”
This is a huge assumption. If an item sells for 50% off long enough, what makes you think the consumer will suddenly see the value of the same item at twice the former price (the original price, actually, but people have short memories)?
I been through this already selling Fords. Last year as Ford kept cutting production, certain models became very hard to get. Dealers refused to trade with each other on them, and dealers who had them were asking full price. Customers could not understand why certain models weren’t being discounted (supply and demand) while others were seemingly given away.
Robert
Your editorial reminds me of a quote I heard once.
“Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it”
Where did FDR get the money to pay the farmers? He stole it from the people…The people therefore had less money to pay for higher food prices…”Major Strain” on who?
It really is a simple concept…A mugger gets to consume values without first having to produce – by stealing human values from the productive…This causes lower production and higher consumption and therefore higher prices for consumer goods and services. A government is a mugger that steals from the productive and hands over to the parasite voters.
In fact, GM and Chrysler are no longer answerable to the consumer.
I wonder how long it is going to take for Americans to wake up and realize this simple truth. I see a glimmer of hope in that more people are beginning to make the connection between government spending on anything and what gets taken from them. 30 years ago people were oblivious to this stuff, now that almost half of their money is taken by some tax or fee every day it is becoming readily apparent what could happen.
Mr. Obama has large ideas but he is 20-30 years too late. Too much else is draining the pot and there will not be enough wealth to take. At some point we had to reach the tipping point and 2009 is going to be it.
What the hell were they thinking?
I’m sure Godiva has a good idea of the location of the point that maximizes profits in terms of units and prices.
I’m not sure if GM, Ford, or Chrysler do; they probably throw darts and pick something in the vicinity. Otherwise, they would axe products people don’t want and sell more chocolate strawberries, er, Malibus/Corvettes/CTSs.
“Likewise for auto manufacturers. Too much emphasis is placed upon sales. A company is successful when it maximizes profit.”
Only works if your are a flexible manufacturer. Detroit 3 are not. Labor contracts pretty much dictate that they are paying their people to work whether they are manufacturing cars or not. Their business plans depended on continuous growth, now with more people retired than working, the legacy costs will be their doom.
In the middle of this orgasmic frothing over the righteous slaughter of blue-collar, white-trash American jobs, has anybody stopped to consider what the effect of 50%-off Malibus and Chargers would have on the sainted Toyota, Honda, and Nissan?
Here are some predictions: Toyota and Nissan would basically have to shut off truck production until the closeout sale was over. The Tundra and Titan are losers competing against full-price domestics; what would happen against cheapos?
Honda could also stop selling Odysseys. They’d have to, with $15,000 Caravans available.
At $8,000, the Caliber and Cobalt would be competing against decade-old Civics and Corollas with 100,000 miles on ‘em, so you could go ahead and shut down East Liberty and the plant formerly known as NUMMI, too.
Don’t forget the fact that all those filthy subhuman Morlocks who currently suckle from the disgusting teat of corrupted assembly-line American industry are unlikely to gratify the assembled cubicle-dwelling beta males of the Internet by just dying off. They’ll be unemployed, they will be angry, and they will not be easily reasoned with.
Be careful what you wish for; you might get it.
The ultimate example of Price Conquers All
http://mythbustersresults.com/episode7
Even the foul smell of death can be overcome by a sufficiently low price.
Roberto, U lost me right at the beginning with the $6.00 strawberry ( chocolate covered or not ). ;-)
¡ Mother Goose ! Our family of four’s TOTAL daily average food budget is less than double that amount. Two of the four in the family are our two sons, 15 and 19, who are still growing.
Back in the days of lots of wine and damn few roses ( and a family income six times bigger than the present one ), it would never have crossed my mind to pop for $6.00 or even half that amount for a single strawberry no matter with what it was covered.
Different strokes for different folks I guess.
As to cars and their prices, it has always amazed me how my first new car, a Ford hardtop in ‘57, was just over $2,000.00 and my new car, a Toyota wagon in ‘71, was within $100.00 of that price.
Yeah, I know that ‘71 was bought almost forty years ago. Yet, the 4 X jump in average salaries is by means equal to the 10 X jump in today’s car in the same time period.
Pricing is a signaling device that conveys more than just a dollar figure. Car manufacturers “benchmark” pricing to their competitors. For years, GM matched its vehicles’ sticker prices with the Japanese (on a feature-for-feature basis) in an attempt to “prove” the value of its vehicles. But consumers knew better and wouldn’t pay those prices.
IIRC, Mark LaNeve introduced GM’s new “Value Pricing” initiative a few winters back (was it 2006?) where prices were lowered at sticker to be more aligned with transaction prices. GM also thought it would give them an advantage on the internet where people price compare in their underwear. But it also boxed in GM by suggesting that lower price vehicles were less “valuable” or “cheaper” than the competition, hence not as good.
Regardless, it didn’t work anyways – and GM still has to continue rampant discounting via incentives. Perhaps they simply didn’t lower the prices enough to provide a real value for consumers – who would make certain tradeoffs for lower prices (notably reliability, resale, etc.).
When GM does file bk, prices will be lowered – and consumers will respond.
Jack Baruth:
UAW workers are coddled compared to the white collar rat race, with pensions instead of volatile 401(k)s, job banks instead of layoffs and advancement based on age, not performance.
The people working in cubicles are the people with blue collar parents that decided to work hard to try to advance and control their destinies (this is Alpha behavior, not Beta).
The UAW workers are the slackers with well paid blue collar parents, that had the opportunity to move ahead, but said “[f]uck it, why work hard, this pays pretty damn well.”
I don’t support liquidation, but given the self righteous sense of entitlement that comes from the various leaches (management, dealers, the UAW) on the Detroit automakers I can understand the frustration of those who do.
At some point the GM and Ford are going to be left to the market, to go into Chapter 11s (with government backing); that is the only way to cut the internally competing brands and dealers, redundant workers and massive debt. This will be better than both liquidation and the other inevitable conclusion, American Leyland.
Hopefully Chyrsler will just be liquidated, since they aren’t making cars anymore there shouldn’t be many Chryslers that have to go at fire sale prices.
But are cars in the United States really overpriced? Take a look at new car prices in Mexico, Canada, and Australia for example. Many times the same car is 10 to 40 percent more expensive with far fewer choices of options. It’s not all bad in America.
Cars in the US are way overpriced for the market, or they wouldn’t be piling up on every open surface across the country.
I don’t know if prices will plummet this week or next. But by summer I would not be surprised to see prices start to plummet. With the 09s (and 08s) crowding lots, overflow areas, seaports, there will be no room for 10s. Now is not the time to buy a car, just as 2005 was not the time to buy a house- why buy at peak car price?
Well, if you cheapen cars enough, you’ll enter into the “Wal-Mart” model; the way it was in the past – a car is cheap to buy, lasts 3-5 years, you throw it away and buy another.
Do we really want to go back there?
But, it was the “Golden Age” of Detroit…
@ shaker
A frightening thought there friend. (Not saying you’re suggesting it).
A “Wal-Mart” model for cars would be an environmental disaster for the planet. The current “Wal-Mart” model is a disaster for the planet via a count of disposable crap that is beyond belief.
If America wants cars that are ever cheaper, don’t last as long, or hold their value, or support a network of employment from supply chain to dealers and servicing, then China will be happy to build them for you.
Just jump on the Dell train….
Anyone advocating cheaper cars as a positive outcome from the Bailout debacle, fails to recognize that those cars can’t (or won’t) ever be made in the USA.
This thread reminds me of the day I drove past a Yugo dealer when they were offering their cars for pocket change. I kept driving.
Jack Baruth: Honda could also stop selling Odysseys. They’d have to, with $15,000 Caravans available.
Just saw a Kia Sedona ad. They’re selling for $16K already. I think most people will pay a little extra to get a vehicle with an actual warranty and dealer service.
At $8,000, the Caliber and Cobalt would be competing against decade-old Civics and Corollas…
I have to admit at that price I’d be tempted. Then again, what happens if it dies after 3 months? It’s a gamble.
“Quote:PeteMoran
The current “Wal-Mart” model is a disaster for the planet via a count of disposable crap that is beyond belief.”
Buying and selling disposable crap is what keeps the world economy going nowadays. If manufacturers made stuff that lasted a lifetime, and if people held onto their cars until they were totally worn out, we’d have a world economy that would be worse than the way it is now.
When you buy that cheap $50 DVD player you’re creating jobs in foreign factories with cheap labor, but you’re also maintaining jobs for the material suppliers, the companies that created the machinery at the factories, the warehouse workers at the factories, the truck drivers that took the goods from the factories to the dock, the people on the dock who handled the goods, the shipping company that brought them over to the USA, the dockworkers to unload them in the USA, the truck drivers who drove them from the dock to the distribtion center, the warehouse workers at the distribution center, the truck drivers who drove them from the distribution center to your local Walmart, the warehouse workers and shelf stockers at Walmart, the sales person or cashier who rung up the DVD player for you, and the guy who had to go out into the parking lot to bring your cart back to the store. And THAT’S only a small sample of the people who were involved in being employed by you buying your cheap disposable consumer goods.
Retail sales are the #1 employer, based on the number of employees, in every state in the USA.
@ Usta Bee
Retail sales are the #1 employer, based on the number of employees, in every state in the USA.
No doubt. But if some-one else has the primary industry and the value-add industry, then service and retail is all but meaningless, as the USA appears to be finding out right now.
You can’t run a real economy on Wal Mart and Starbucks (or Wall Street).
It sure is a boondoggle. Government requires airbags, safety structures, certain fuel economy standards, and the cars end up costing more than John and Jane Doe are willing to pay for them in this economy.
I disagree that cars currently are priced too high for what you get. So, obviously, it’s time to design and make cheap cars, with cheap manual seats, rubber floor mats, no navigation, simple instrument panels, small engines, small tires, steel wheels, etc. In other words, the way they used to be. They’ll have to keep ESC and the airbags, because that’s the law, but sealed beam headlights and cheap bumpers that still do the job are going to have to be the order of the day. I don’t see that such a vehicle has to be less durable since rustproofing and paint shops are already in place. But cows could die in peace if the current love of leather went away.
Then people will come to understand what the actual new standard of living really is. Back in the sixties and seventies, people couldn’t afford a Mercedes or BMW 5 series at 10 grand or so. Now the average car is better made and has far more toys than those vehicles did at the time. Through the eighties, leasing became the way to drive a new car for 60 percent of the cost of actually, really buying one.
Yeah, you might get a bargain on a current new car this summer due to the glut, but for the future if all cars are going to cost less all the time, then they’ll have to have less content. I was quite happy with my ‘65 Volvo, and it was as basic as you could get. Still got me from A to B and was fun to drive. Welcome to lowered expectations in the 21st century. Your car might not be so grand, but you might actually be able to afford one and still eat.
@ wmba…I like your last sentence! We’ve come to expect (like it’s a birthright) cars that do it all, and unfortunately were allowed to finance these wundermaschines, even though a large portion of the buying public couldn’t actually afford it.
This doom and gloom of failed manufacturers, lost jos, etc…(and I work in the sector) is driving me crazy. I, for one, am a fan of this “market correction.” Let the cars settle back to realistic prices, and if it means some decontenting of them, so be it.
Also, if it pushes us back to center in terms of personal fiscal responsibility, I’m also all for it (never mind that our politicians might never understand that). Buying new cars every three years is nuts, but the automotive world has done such a fabulous job of beating into our heads that we MUST have the latest and greatest that we’ve bought into it, hook, line and sinker.
I drive a 2006 Fusion (not sure that was my best choice, but oh, well) with a 6 CD changer, steering controls, aluminum rims, etc…even given all of that, it’s still not my favorite car of all that I’ve owned. Heck, with an impending move coming up, I’d love a basic 4 cylinder, 5 speed pickup with hand crank windows (tempted to look at a 2002 Frontier I saw advertised, actually).
We’d all survive with a little less coddling and a lot more accountability…
Usta Bee: You rattled off a bunch of jobs; all service jobs other than the making of equipment used to make stuff. What makes you think that equipment would be made here? We’re already importing about $40B per month more than we’re sending out. Talk about non-sustainable. On the ‘bright’ side, this is way down from a few months ago, but it’s because our economy is very sick.
ttacgreg:
Anti labor union feelings leave me puzzled, unless those who are expressing anti labor sentiments are business owners. My admittedly none too deep historical understanding is that unions contributed considerably to making the working classes middle class, particularly around the turn of the 20th century… to bitch how much per hour union workers make, without bitching about CEOS who make ten of thousands per day, free of any good performance obligations, is hypocritical, and a reflection of the successful brain washing / successful propogandizing / lying by our corporate culture in the USA.
Amen. Especially to the successful brain washing and successful propagandizing. It’s amazing to me to continually read bullshit on this and other forums that sounds so much like what Limbaugh spouts. Just plain lies that people have taken in as received wisdom. Climate change has reached runaway status; we’ve pissed away 8 years when we could have been doing something. I’m waiting on the neocon’s explanation of how this is the fault of the ‘libs’.
Look what’s happening to the tax base as jobs are devalued and lost. We borrow more from foreigners to support what’s left of our standard of living. Schools and libraries close, etc. etc. When that union guy’s house up the street or across town is foreclosed, what happens to the value of your house? When GM quits paying the medical bills of current and former employees, and a good hunk of what hospitals get stiffed for by those who don’t pay, who is going to pick up the slack? Can’t we think?
ttacgreg,
I agree the CEO benefits are unbelievable! The CEOs should only get paid if the company has a profitable year. If the profit is good, the executives’ bonuses should be good. I will not even mention the CEOs of the big 3 and what they were paid in 2006 & 2007. I am sure we all know that. I will mention Jeff Rein, former CEO of Walgreens. Mr Rein was paid 5.6 million in 2008. The share price dropped by more than 50%, the company had to scale back expansion, and their credit rating dropped because of his reckless and failed acquisition of Long’s drug stores. Getting paid to lose. That business model has to change. Every time I have to proxy vote in a shareholder’s meeting, for any company I am in, I vote for performance-based compensation for executives. It is sadly amusing that the directors always recommend a vote of “NO.”
Now onto the unreasonable nature of the UAW and the fallacies they hide under. The union does not contribute to the health of the economy or our standard of living. Please see the following essay by Nathaniel Branden:
http://www.nathanielbranden.com/catalog/articles_essays/labor_unions.html
He explains it much better than I could.
So how soon now till the big three run out of money again? They haven’t changed one bit.
If I pay someone to steal my neighbor’s car for me or if the UAW pays politicians to steal from everyone…What is the difference? I am a common criminal where the UAW is a terrorist organization. UAW – Hamas…What’s the difference?
The failure of Linens ‘n’ Things did not prompt Bed Bath and Beyond to slash its prices, nor is the liquidation of Circuit City causing Best Buy to give away televisions. If Detroit failed completely, the rest would hold firm to their prices, and just ride out the temporary domestic inventory wave until it’s gone. If the domestics liquidated by blowing cars out the door at a fraction of parts costs, that inventory would be gone in a matter of months, so the hit would be temporary.
The domestics don’t offer good value for money. If the vehicles were better, they could get the prices that they are asking, at least once the credit markets are restored. A Cobalt should be worth $15,000, but it isn’t because of what goes into and what doesn’t go into it. Consumers know that, so they demand to pay less.
Detroit’s cars aren’t fundamentally undesirable. They’re just too expensive..
A product that cannot be sold at a profitable price point is inherently undesirable. If GM is in a position in which it will never be able to pass on its costs to the customer, then it’s in the wrong business.
wmba said “Welcome to lowered expectations in the 21st century. Your car might not be so grand, but you might actually be able to afford one and still eat.”
Interesting. When I got laid off in Colorado in 1985, it was in the middle of “yet another” recession and I was fed up. Threw in the towel; started over in the UK – why not? I was young enough to, and married to a Brit, it was legal. I knew the supposed “standard of living” would be lower, but then again, I wasn’t exactly having people bang on my door in Pueblo wanting to hire me.
Within a year, we had our first purchased home (albeit an old, small, row house) and had purchased a new car. In order to still have the money to eat, it had to be inexpensive – as in CHEAP. With cars literally costing twice as much in the UK compared to the US at the time, how do you suppose I got a cheap new car? Answer: I decided that a new 1967 Fiat 124 built by drunken Soviets was a better proposition than a nearly worn out, Citroen Dyane. And it was. It was very much like a mid-1960’s car – because it WAS a brand new mid-1960’s car.
But you know what? It ran reliably (and when it broke, it had a warrantee or else I could fix it with the tool kit included). These cars were sold in Canada until the mid 1990’s, and sold for silly (cheap) money for folks who didn’t mind simplicity and supposed crudeness for a lower price point. In fact, the car was good enough that I bought another in 1990. $5000. Five seats (in fact, room for 2 adults, a Newfoundland dog and two children plus luggage). Not a microcar, but a family car.
Interestingly, when we chose to give a 1999 Neon to our college age son in 2003, we needed a car for us.
This was after Daewoo USA had had the rug yanked from under them by GM, and had been forced out of biz. I found a new Daewoo Nubira online at a huge Ford-Hino dealer in Ohio, 7 hours drive away. $7800 (vs. $14,800 MSRP). The 2002 car was sold as “used” but it had 25 miles on it. I understand “Nubira” means “It’ll get you there” in the Korean language. Honesty in advertising!?
Interestingly, the car was considered “basic” but it STILL had A/C, front power windows / rear crank, AM FM and cassette, power steering front air bags and front wheel drive. (All things that the Lada lacked). I “took a huge gamble” on this car for the sake of being able to afford to give our older car to our son – and it ended up to be one of the best new cars I’d ever bought. Of course, “somebody” lost out big-time on my buying a car for virtually 1/2 price (probably less than it cost to manufacture and ship to the US).
Being the resident auto historian around here, I wanted to share something with the TTAC B&B.
Remember me saying before (several times) about how automotive sales dropped to ONE QUARTER of the 1929 levels by 1932, in the depths of the Great Depression?
So, with that in mind, let’s take a peek at CAR PRICES (MSRP) for three cars – one was “low priced three” and the other was “lower middle class” and the third “upper middle class”.
The samples are the lowest priced cars listed. We’ll look at 1929-1933, to see what happened to car prices after the worst of the depression.
1929 Chevrolet $525
1930 Chevrolet $495
1931 Chevrolet $475
1932 Chevrolet $445
1933 Chevrolet $485
1929 Dodge $945
1930 Dodge $835
1931 Dodge $815
1932 Dodge $795
1933 Dodge $595
1929 Buick $1195
1930 Buick $1270
1931 Buick $1025
1932 Buick $935
1933 Buick $995
Some other salient facts; inflation was obviously not a problem prior to WWII’s end, and the actual value of a dollar actually was pretty much the same, so the numbers are realistic.
The auto manufacturers were not yet unionized, so fixed costs were significantly less for them when they chose to shut down auto production or slow it down – they simply laid off the workforce.
Did you notice the other interesting fact? In 1929, a lower middle class Dodge cost 1.8 times as much as a Chevrolet.
This was the norm in the industry and had been since the beginning; there were real differences in price between “classes” of cars, and real differences in cars, too.
By 1933, you can see that Dodge was only 1.2 times as expensive as a Chevy. From that time onward, middle class cars were much closer to the “low priced three” and this trend continues today.
Look at the Buick vs. Chevrolet. In 1929, the Buick was 2.3 times as expensive as the Chevy, and by 1933, it was about 2 times as expensive. Later, even the upper middle class cars suffered the fate of the lower middle class cars and by 1957, for example, a Buick Special V8 2 door sedan was only about 1.4 times as expensive as the cheapest Chevy 6 cylinder 2 door sedan – and was a WHOLE lot more car for the money, too.
Extrapolating these figures, tempered by the realization that prices CANNOT come down as much due to the UAW and other fixed costs (obviously not taking into account monies thrown in by Uncle Sam), we can see that the price difference between 1929 and 1932 for the cars was:
15% lower for the Chevrolet
37% lower for the Dodge
22% lower for the Buick
Even a 15% reduction in the MSRP of vehicles across the board, were it even possible (given the fixed costs), might not spur demand suffiently to save the Detroit 2.8.
In fact, I’m going to hazard a guess that in real terms, car prices are going to go down temporarily, then GO UP in real terms. Once the excess and poorly run car companies, or the weaker sisters in the industry are culled off by the Greater Depression, there will be even less competition, which always brings – higher prices.
Guess we’ll see in about another 2 years.
DrBeets :
The argument made in your link is fallacious. Look at the wages paid in the GM/Ford, etc. factories in Mexico vs. those in factories of the same companies in the US. While it’s possible, and in some cases may well be the case, that Mexican factories have less automation than their US counterparts, I know that at least some of the GM Mexican plants have equipment that is more current than US plants. What investment allows a companies to do is increase production per employee and thus allows that company to pay higher wages from lower unit cists. Assuming the lack of corporate altruism, a company will not actually pay higher wages unless competitive pressure forces them to. In fact the opposite is true. Higher payroll costs make a company less competitive than one with lower costs; thus the massive offshoring we’ve seen and the race to the bottom here.
The article in the link claims that real wages have increased: Not true for the last few decades.
Absent excess labor, higher wages beget higher wages. Of course given the globalization development with massive populations in China, India, etc., excess labor is now the norm. In our very much class-based society, the effects have yet to perc all the way up, so the manufacturing people have taken the early hit, and those higher on the labor scale can cruse along feeling safe and superior with their MBA, engineering and law degrees covering their asses. Or so they think. As the pain spreads, and it is, so might some humility and empathy.
WalMartization has nothing to do with it. Reducing the prices of cars follows because all costs associated with the car- raw and finished materials, and yes, labor-first indirect and then direct- are and will be going down.
The US carmakers owned their own little quality (or lack thereof) pond by the 70s. It is competition- and only the competition- that forced them to up their quality.
With the US gov giving free taxpayer money to the domestics, there is no longer any incentive for the US makers to offer quality- they survive on welfare, not on selling a competitive product. So their prices stay artifically propped up and quality wanes. There is nothing in this mix of too-high-priced cars to guarantee any quality.
Competition forces quality, as the market has shown. We laughed at the first Honda CVCC in 72, and the Toyota Corollas and Tercels and Coronas were something real Americans did not buy. Until of course they did.