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Economics, Environment, Governance, Investing

No relief on car prices

Auto sales are slumping in the USA, yet on dealer lots across the country, customers are paying more says the Wall Street Journal

The phenomenon — sales down, prices up — is based on a long-term strategy to charge customers more for their vehicles, especially as the major auto companies seek profitability on lower overall volumes.

Soon auto makers also will be forced to pass along to consumers a good portion of the rising regulatory costs for meeting more-stringent fuel-economy standards.

But if they push too hard on prices, car companies risk stunting the sector’s recovery.

Firm pricing may have worked for the auto industry when a sales level of 16 million cars and trucks a year in the U.S. was considered normal; now the annual-sales rate is less than 10 million. Meanwhile, the average sticker price, the average transaction price — typically lower because of incentives — and the average monthly payment are generally at their highest points since 2002.

The government’s Consumer Price Index for new vehicles, which accounts for improvements in vehicle quality, shows that prices have generally remained stable or slightly declined in recent years. The high rate of sales before the auto market tanked last year can be traced to this increased affordability of new cars and trucks.

This declining cost of ownership was built on stable pricing but was aided by attractive lending rates, large incentive packages and other consumer sweeteners from manufacturers, says Jeremy Anwyl, chief executive of Edmunds.com, a Web site that gives car-buying advice. Mr. Anwyl said “a turnaround in this cost does not bode well” for auto makers counting on a return to sales near previous highs.

But without rock-bottom interest rates and sky-high incentives, consumers could soon feel the pinch. Six years ago, the average buyer spent $445.95 on a monthly payment for a new car or truck. Today, according to Edmunds.com, consumers are paying $471.73 a month.

“Cars and trucks are likely to be less affordable over the next year,” said Dana Johnson, chief economist at Comerica and author of the financial-services company’s auto-affordability index. “The Fed is likely to be tightening interest rates; it’s going to become more expensive to get a loan. There’ll be fewer car dealers, though they’ll still be intense competition.” As demand returns, auto makers will try to restore some profit margins through more-aggressive pricing, “and they’ll be semisuccessful,” Mr. Johnson said.

Some auto-industry executives caution that with sales so low, any analysis pointing toward significantly increased pricing could be fundamentally flawed.Inventories remain swollen, forcing auto makers to keep incentives high. Car companies are able to charge more in some ways because they are selling to a fraction of their former market. Those shopping are often also trading in old cars and buying at a class above.

Many car companies are counting on pent-up demand to return sales levels to at least 12 million annually, while many expect intense competition to keep a lid on aggressive pricing.

“With GM and Chrysler going through what they are going through, I don’t really see how they are going to keep up incentives,” said Jim Bender, Florida regional president for AutoNation, the largest chain of auto dealerships in the U.S. He adds that he doesn’t see incentives disappearing completely.

Auto-company officials say they are encouraged by the levels of content and features demanded by remaining consumers. On Ford Motor’s new Fusion sedan, 60% of customers choose to buy the higher-priced hybrid or well-equipped gas-engine packages. As a result, the Fusion’s transaction prices are $1,800 higher than the previous model, which sold for $18,700. Ford says its new F-150 pickup introduced last fall also is seeing transaction prices more than $6,000 higher than the earlier model. The current average transaction price for an F-150 is $30,300

General Motors has been implementing a strategy of closing pricing gaps with new products “and improving our position in the segments where we already enjoyed strong share, image and price premiums,” GM sales chief Mark LeNeve wrote in an email. Transaction prices, he added, are up.

Those willing to pay include Brian Thompson, a law partner in Baltimore and married father of three. Mr. Thompson, 43 years old, started shopping for a new Chevy Suburban after his growing family needed a larger SUV. But he said he was struck by the rigidity in pricing.

“I thought I’d be getting the deal of a lifetime,” said Mr. Thompson, who settled on a new Suburban for $55,000 after a $5,000 discount in late June. “I mean, the company was ready to go into bankruptcy.”

Ford, Toyota Motor and GM decline to say by how much they think they could raise prices, citing the instability of the market. “We would expect pricing to firm up some as the industry comes back,” GM spokesman Tom Wilkinson said, adding that new models are expected to be priced modestly higher. “We have forecasts that we work with internally, but about a year and half ago, we got out of the public-forecasting business.”

Emboldened by a recent increase in the residual values of its vehicles, Chrysler Group is sticking by its estimate of an average price increase between $1,000 and $2,000 a vehicle over the next year or two, according to a spokeswoman.

In addition to pressure to boost profit margins, looming environmental standards are likely to be a driving force on price. In 2006, the Energy Information Administration estimated that the increased adoption of fuel-economy technologies would sharply increase the average price of a new car in 2016. Adjusted to today’s dollars, the figure is $2,176, according to auto-forecasting firm CSM Worldwide.

The Obama administration said in May it would raise cars’ mileage to an average of 39 miles per gallon and trucks’ mileage to 30 mpg by 2016, and the Department of Transportation puts the average per-vehicle cost to meet this standard between $3,000 and $5,000. GM Vice Chairman Bob Lutz said last year the cost could approach $6,000 on average for every car and truck the company sells.

On top of it all, there are signs of changing tastes. The number of vehicles per household has dropped. Used-car sales are up. Americans are driving less and holding on to their vehicles longer.

According to a survey released last week by market researcher AutoPacific, 59% of those polled said they wouldn’t be shopping for a new vehicle for four years or more, compared with 46% in a 2005 survey. The survey also found the percentage of people intending to replace their vehicle within the next two years had fallen.

Full article here


About steveblizard

Steve Blizard commenced his financial planning career in 1988 from a background of life insurance broking, a field in which he still works. He is a member of the Financial Planning Association and the Responsible Investment Association. His experience ranges from administration of Superannuation to advice regarding insurance, retirement, remuneration and investment planning. Steve is an accredited Remuneration Consultant, specialising in salary packaging. He is a columnist for the Swan Magazine and the WA Business News


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