There are about 40 different car brands in the United States, there are American brands and imports, trucks, SUVs, sedans, sports cars and of course, lots of crossovers. There are pricey cars and perhaps more affordable cars. But one kind of car that appears to be disappearing is the cheap car. Auto industry analysts say sales of very inexpensive cars these days, meaning any new car with a starting price somewhere below 20000 dollars are declining. In fact, they have fallen off a cliff. Historically, about one fifth of new vehicle sales would have transacted below 20000 dollars. But in the last few years, those have completely dried up. New cars are becoming more expensive, and it’s unlikely those cheap cars will ever be back. Buyers who love them may be left out in the cold.
- Earlier companies used to make cheap cars to bring consumers into their brand hold.
- Later mid range cars took over cheap cars by providing more features.
- Finally SUV’s took over the market.
- People are ready to pay more even on loan and buy a better car, even if it is little expensive.
Why companies make cheap cars?
The nascent years of automotive manufacturing were dominated by what we would today think of as coach builders, basically shops that hand assemble vehicles one at a time. This was the way horse drawn carriages or coaches were built and automotive manufacturing adopted both the assembly line and the name. As such, early cars were expensive. Industrialists such as ransom olds and Henry Ford changed all that by introducing assembly lines and interchangeable parts, dramatically reducing the price of a car.
Ford’s Model T was one of those early vehicles in Europe. There was a movement to develop inexpensive cars for the masses, which many proponents dubbed people’s cars. In fact, German automaker Volkswagen’s brand name translates to people’s car making and selling. Practical, affordable and dependable cars has long been a key goal of automakers. Affordability was a key ingredient in legendary and extremely strong selling cars, such as the original Volkswagen Beetle, the Ford Mustang and countless others.
Japanese automakers penetrated the U.S. market in the latter half of the 20th century, in part by selling affordable and dependable vehicles. Typically, the most affordable cars are the smaller ones that would fit into the so-called compact and subcompact categories. Some midsize vehicles can also start at prices below twenty thousand dollars in 2020. The subcompact segment in the U.S. included cars such as the Honda Fit, Hyundai Accent Aryo and Nissan Versa. Vehicles in this segment are typically priced below twenty thousand dollars, a cutoff point for what auto industry analysts consider the cheapest cars available. The 2020 Nissan Versa, for example, starts at a price of around fifteen thousand dollars.
Cheap cars make less money for automakers
Cheap cars have a problem that might seem rather obvious, they don’t make a lot of money. Automakers, like any company, have certain fixed costs built into their business models. They have to build factories, keep the lights on, pay for product development and pay workers and executives. Many of these basic costs exist whether the product they are selling is cheap or expensive. So an automaker basically has two choices sell a little of something pricey or a lot of something cheap. The problem for automakers is that relying on volume to make money can be hard. Margins can be razor thin, and any challenges or missteps can eat into already slim profits.
Automakers can try to protect against this, in part by spreading costs across a range of vehicles, a pricey car might share some parts with a cheaper one. Obvious examples of this or the Ford Mustang, Dodge Challenger and Chevrolet Camaro, the cheapest versions of the start in the mid 20000 dollar range. But the most expensive versions, which share a lot of the same basic parts, can cost more than 90000 dollars.
Who buys the cheap cars?
But at least in the U.S., the overall market appears to be moving away from the cheapest price points. So who buys cheap new cars? Why do they matter?
Well, the short answer is young people, mostly younger buyers, are usually not loaded. They can be people as young as teenagers, but also folks in their 20s and even 30s. Most of the consumers that are in the subtree space tend to be younger consumers and first time buyers. And so it’s a very critical demographic for getting new customers into the industry in general, but into your brand in particular. So as consumers get their first jobs, establish a career going to family and they’re looking for a new car, they’re in that twenty thousand dollar space.
In spite of the fact that cheap cars are less profitable, automakers are still keen to lure younger buyers who likely have many car buying years ahead of them. Selling cheap cars creates the possibility of building brand loyalty in a consumer over a lifetime. Even luxury makers such as BMW and Mercedes have moved into the lower end of the market in recent years in the hope of boosting volumes and getting younger buyers in their vehicles.
So there’s a lot of risk here in that first time buyers now are having to wait many more years to get a new car. And so now you’re kind of allowing the risk there that these first time consumers will rely more on Uber, will live urban life and not even need a car. So we as an industry could be making a lot of long term actions here, long term implications from moving the first time buyers either back or into something more expensive.
What happened to cheap cars?
Despite the risks of selling cheap cars, they historically made up a considerable share of the new car market. This appeared to be the case even in recent years, as the U.S. economy recovered from the financial crisis of 2008 and 2009. Cheap cars made up a good sized slice of the auto market prior to 2018. The segment was about 20 percent of the industry pretty consistently and so on. On the retail side, we’re talking in excess of about two million sales annually in the space, just below 20000. But something strange happened in 2018.
Sales of some 20000 cars seem to suddenly plummet. And a closer look at sales numbers shows that cheaper cars were disappearing faster and earlier than it seemed for some of those years following the recession. Two of the cars that made up a considerable portion of sales transacting below 20000 dollars were the Toyota Camry and the Honda Accord. Neither the Camry nor the Accord are compact or subcompact cars. They are slightly larger and are usually grouped in the mid-sized car category. They typically sell at or above 20000 dollars, but both were selling at very low prices for several years due to incentives dealers were offering on them.
It is worth noting that the Toyota Camry and Honda Accord are two of the most popular cars in America. And among the most popular of all time. In 2017, both manufacturers were scheduled to release new versions of the sedans. And when they did, the prices of each car shot up past the 20000 dollar mark. Causing sales numbers in these sub 20000 category to cut in half. So the reality is that the cheapest tier of cars had already been shrinking for years in the wake of the recession, even though it looked like sales were a steady fifth of the total new car market.
Why were sales of these cars shrinking?
Why were dealers offering steep incentives on these strong selling and practically iconic Camry and Accord nameplates? The all too familiar answer is in three letters SUV.
Rise of SUV
Sport utility vehicles have taken over the auto market in the United States, as well as a growing share of the global market. SUVs went from twenty nine point nine percent of sales in 2009 to fifty one point five percent in 2019. They are found in practically every segment, size and configuration. Consumers appear to love them, but so do automakers. The smallest SUVs sell for higher prices than comparable cars, even cars built on the same platforms as the pricier SUVs.
For example, four years Ford sold the subcompact car called the Fiesta in the United States. When Ford released its subcompact eco sport SUV, the brand’s smallest utility. The carmaker, said U.S. average transaction prices for eco sport were 4500 dollars higher than Ford would get from the Fiesta, even though the SUV and the car share the same basic platform.
So now you have consumers wanting SUVs. Automakers making almost for the first time the cheapest SUVs you’ve ever seen. Coalescing at the same moment so that we saw consumers lose that 20 thousand dollar vehicle. But then very quickly have that SUV there for the first time.
Individually, consumers are willing to pay higher prices for SUVs. Primarily because they feel they are getting more with their taller shape and more spacious cabins. SUVs are seen as more flexible. Many of them have slightly higher ground clearance, making them a bit better to drive off road. And thus use recreationally. But the SUV is not the only reason auto industry analysts think car prices are rising. Another key piece of the puzzle is technology.
Impact of technology on cheap cars
Today’s cars are packed with it and customers want more of it when they drive off the lot. This includes safety features and driver assistance technology, like cameras and blind spot monitoring systems. But it also includes robust infotainment systems compatible with Android Auto and Apple car play, voice activated commands and comforts such as heated and cooling seats. Consumers today, even young ones, don’t seem to want to wait for those features.
The trouble is that consumers are paying more for these cars. Loan terms have grown in length. In 2020 the share of loans spanning 72 to 84 months has grown considerably from where they were decades ago. And some consumers are increasingly faced with fewer options at the lower end. More likely to shell out more for a new car or turn to the used car market.
The U.S. market is massive. At their peak, new car sales reached about seventeen point five million units in 2015. But the used car market is more than twice the size of that at about 40 million units per year. The good news for buyers is that cars last longer than they used to. So buying used often does not come with the risks it might have in the past. And it means that consumers shelling out more than they ever have for a new car may at least get to hold on to it for a while longer.