Why are car prices so high?
It is one of the most common questions of anyone looking to buy a car at the moment.
In the last 12 months there has been a 34% increase in used car prices and a 5 - 20% increase in new (depending on the segment).
Like the complexities of cars themselves the reasons are many and varied, we will try and go through them all here.
Safety Tech, 5 star safety ratings & 5 year warranties
In 2019, ANCAP advised OEMs that in order to qualify for the maximum 5 star rating then they would need to fit advanced collision avoidance technologies. In addition, consumers were also demanding these technologies along with motor industry journalists. Therefore, the OEMS felt they had no choice but to make these technologies standard across their model range -sounds good, right?
Well, these complex options are very expensive and can add anywhere between $1000 & $2000 to the cost of production. As the whole industry made the decision in lockstep it almost guaranteed an increase in vehicle prices.
Around the same time, the ACCC was also investigating several car brands for their consumer guarantees and their failures as per the ACL. It was determined by the ACCC that failures even outside a warranty period would still be liable to OEMS, where consequently many made the decision to increase their warranties to 5 years. Once a few OEM’s shifted their warranties, the rest followed – also sounds good, right?
Well, these coverages cost a lot of money and they had to increase their provisions for future claims, resulting a provision against the vehicles sold which eventually must be recouped by increases in car prices.
Decreasing Car Parc
Prior to Covid, the Australian car industry sales (as reported by VFACTS) were down for almost 3 years, the longest downward trend since the finance crisis. Every year, around 800,000 vehicles are deregistered due to being written off or mechanical failure, and therefore unless a large number of new cars enter the market each year then the Australian car parc ages. In fact, since 2016 the average car age in Australia has increased from 9.8 to 10.4 years.
When you also consider that the Australian population has increased from 24.3m to 25.7 million over the same time, then there has been a shortfall in the number of new vehicles coming into Australia.
TAKATA
The Takata airbag recall was the biggest recall in automotive history, with 100m airbags needing to be replaced worldwide. In Australia the number of affected airbags was 4 million. Towards the end of the recall (end of 2019) a number of vehicles were identified with another type of inflator issue and were categorised as alpha. The vehicle manufacturers calculated that it was cheaper to destroy the affected vehicles rather than engineer a new airbag replacement.
So in 2019 and early 2020 a total of 78,000 vehicles with these defective airbags were purchased from their owners and crushed, an unprecedented number of vehicles were taken off Australian roads just before the biggest supply constraint in Automotive history – COVID-19.
COVID-19
As has been explained above, leading into the Covid-19 crisis the automotive industry was primed with huge cost increases, however huge factory outputs were keeping a lid on prices as OEMS struggled to find demand for their huge factory production. Some brands were starting to close factories and looking at ways to make their businesses more sustainable. But then along came Covid.
The initial reaction by many manufacturers was to dramatically cut production and cut costs. This involved a huge drop in inventories and orders and at first this seemed like the correct course as people stayed home and kilometres travelled reduced dramatically.
However, there were other outcomes from Covid; a drop in public transport, increase in local tourism, reduced interest rates and huge amount of stimulus resulted in only a temporary fall in vehicle sales and many OEMS were caught short of stock.
Many dealers went from massively oversupplied too massively under supplied within months.
CHIPS & PARTS
The headline at the moment is that the cause of vehicle shortages is the huge shortage of semi-conductors. The story goes that OEMS cut orders at the same time that electronics companies increased orders in order to fulfil demand for lock downed consumers. In addition over the past 3 years, car models have had an increased number of micro-chips because of infotainment and safety tech features. In addition, hybrids and EV’s have also increased in popularity which typically have 10x more semi-conductors. The specialist chip makers that supply car companies had no chance in keeping up.
So what is the future of car prices?
All these factors have led to a permanent base cost increase for all manufacturers and we can’t see new cars decreasing in price. Like safety tech before it, the mandating of EV’s in many dominant overseas markets will permanently increase the cost of cars and OEMS will be recouping the massive R&D spend for years to come.
Unfortunately, the price increases in new vehicles and likely supply constraints will likely last 12 -24 months. Cheaper alternatives (used cars) will only keep demand high and therefore used vehicles are unlikely to fall.