Why Car Prices Are Still Crazy High

part of it. We asked listeners to tell us about their recent car buying experiences. Here's what one of them had to say. Hey, I'm wilco Vara and I live in Richmond, Virginia. Uh So, my wife's car was totaled and we had to spend about a month comparing cars before settling on a Toyota route. For basically, any dealership outside of Richmond was pushing big, non negotiable markups like four thousand dollars in Virginia Beach, six thousand dollars in Springfield,

richmad is the only place selling at sticker price. With all that, it was still about a three to four month wait from pre order to pick up. It was understood that the sticker price was a deal. My colleagues Keith Notton and David Welch in Detroit cover the US auto industry, and they've written a big story about why if automakers get their way, fewer cars and higher prices. Maybe here to say, David, maybe I'll start with you.

I think anyone who's gone to look for a new car lately is realized that, Wow, cars are really expensive. But you and Keith in your story right, no cars are really expensive. Can you give a sense of just how much more expensive they've become in the last couple of years. Right now new cars are at record prices. They are pretty close to fifty hours is the average price of a new vehicle, and that's up about over

the past two or three years. The ve Cheving Impeller, which was America's family sedan when an eight vehicles sold that year, was an Impeller sold for I think a base price of about adjusted for inflation, that's about twenty five dollars. So the prices today are twice what people paid for new cars back then. So it kind of tells you that this contract with the middle class that uh, you know, if you work hard, if you behave, as Billy Joel saying, you can get your great house and

you can get your new car. It's getting further and further out of reach for everybody. In used car prices aren't much better. The average payment these days is about seven seventy a month for a new vehicle and between about five seventy a month for a used vehicle, and economists say that the average households be spending about four dred a month on a vehicle. So the prices are big, the payments are big. Part of this to do with interest rates, but it's getting very difficult, if not impossible,

for middle class, working class people to afford a new vehicle. Keith, why have cars gotten so expensive? I mean that example of the Chevy and Paula, even adjusted for inflation, is being half of what you would pay for a new car. Now that's a pretty surprising number. What is behind that?

So this all started West when the pandemic hit. Really the increase that David was talking about is, since it's not a very long time horizon, but as soon as the pandemic hit, well, first factory shut down and and you know the supply of cars went down, but then that was followed by the shortage of semiconductors worldwide. That really took a blow to auto manufacturing globally. So dealer lots emptied out with the old law of supply and demand.

There were very few cars out there to buy, and the prices of both new and used cars just went through the roof at a much higher rate than inflation, and so you now have this situation of the fifty average price was about thirty five. That's exactly right, Keith.

I mean this all started with the shortage of vehicles, and when dealers found that they could charge above sticker price and make you pay for not exaggerating special coatings on the seats that would prevent spills from staining them, clear coat on the glass, clear coat on the paint, and they would charge a thousand or two ford and

some wouldn't even give you that stuff. They would just slap thousands of dollars above M s r P. Once dealers discovered they could do that, because there wasn't very much inventory, and automakers had been raising prices very quietly on their own, everybody was sort of basking in this bananza of pricing and profits. So what was bad for the consumer started by the pandemic and the semiconductor shortage has been great for the profits of those who build,

engineering sell cars. Well, that's a really interesting point because in your story you write that, sure, this started with supply chain issues during the pandemic, and we've all heard about the chip shortage, but even after a lot of that ease, car prices didn't come back down. They stayed up. In what you write is that this is sort of by design that the auto industry has learned that scarcity is an easier way to make money than trying to

sell a whole lot of cars at lower prices. Yeah, the new formula is sell fewer cars to wealthier people and you make more money. So the industry sold two million fewer cars last year than they did in twenty nineteen, but the revenues were actually higher and their profits as well. So if you're selling to you know, very wealthy households, they not only will pay a higher average price, they go for the highest trimmed out cars that there are.

They order all the bells and whistles, and that's where you really get into the profits if you're an automaker. So they like this formula, they'd like to stick with it. They not only want to stick with it, they sort of look at the days when they didn't do this as the bad old days. And you know, the old business model for auto companies. And we're not saying it will never come back, but car companies are going to

try very hard not to bring it back. But they used to just produce, produce, produce, you know, run three shifts of plants, go for markets here, go for big volume, and then voice these cars off on dealers and use discounts if they didn't move them all in order to get the sales going. And that's where you had four and five thousand dollar rebates and zero percent financing and

cheap lease deals. Bob Blootz, the retired vice chairman of General Motors, used to call it the size of the bribe we had to give consumers in order to get them to buy the car. And these were they had. In addition to that big carrying cost. Because you need more part in inventory, you need more vehicles in inventory, dealers have to borrow money what they call floor plan financing to carry that inventory, and they have to take

care of those cars. So everybody's paying more money up and down the system to sell a car that they're going to have to discount. It was kind of insane, but there was a reason for that. Throughout the past decade, the average new car payment was about four durs a month, and at the beginning of the pandemic it hit four ten. And then as things got tighter and things got tougher for all the reasons Keith explained, it just got worse

and worse for consumers and better for everybody else. And there's another factor here too, is to make all those vehicles that flood dealer lots, you're running plants at three shifts. A lot of plants have scaled back. They're still running two shifts. But if they're paying fewer people to get more revenue with that's another thing the car companies really would rather not do. And Keith is not like the

automakers are making a secret of this. The CEO of General Motors, the CEO of Already have kind of come out and said, we don't want to go back to the old days. Is that right, Yeah, they don't want to use the old push model where they're selling the

deal rather than the car. They want to have what Jim Farley, the CEO of Ford Motor Company, has said, he'd like to have an ordering system like they do in Europe, where you order your car and then you wait for several weeks for it to arrive, and then it comes and you pay the price that is on the sticker and you get on with it. That's not the way Americans have been buying cars for a century. We show up on the lot and the dealer says, what do I have to do to get you into

a car tonight? And you know, they have every color and combination scattered across that lot and you can go find the car you want. That requires very high inventories, and it's what David was talking about, these very large overhead So the automakers want to get rid of that. They it will lower their marketing costs, it will lower all these this discounting that they have to do. So

they measure inventory in days supply. The historical rule of thumb was keep sixty or more days supply on a dealer's lot, and it would bloat up to a hundred on some hard to sell cars. They would like to have it now more in the range of forty to fifty days thirty five days if they could get away with it. But that means the choice consumers have when they show up that a dealer will be very limited and they'll be channeled into this system of ordering cars

that Europeans accept. It's a big question as to whether or not Americans would would accept that. General Motor CEO Mary Barrows, and they never want to get back to the days where they carried this huge amount of inventory. Now, that doesn't mean they also want to run the way they did during the pandemic and the semiconductor shortage, where they had almost no inventory and they were signing cars over to consumers who had already paid for them right

off the delivery truck. So they're looking for a happy medium that still gets them very good pricing. That does tell us that new vehicle prices will come down, but they probably just won't come crashing down to the point where we go from payments that are seven seventy a month to four hundred a month. Again. Yeah, Well, over at ford Um, the CEO Jim Farley covets the direct sales model that Tesla has. Tesla doesn't have dealer showrooms, it doesn't advertise and Farley says that gives Tesla a

four thousand dollar car advantage. That's why Tesla's auto profit margins are close to and you know Ford is trying to get up to eight percent. So you know what Farley says about the inventory and the marketing and the advertising is we need to get rid of all of that. David and Keith, please stick around. We'll continue talking after the break. My name is Peloplin from l A. I purchased brand new luxury truck last November f King Ranch.

I paid one thousand dollars less than M S r P. And ironically, I was very content with that deal, given how ridiculous the expensive luxury trucks have gotten over the past few years. The selling price of the truck itself was sixty nine thousand dollars, and with M S r P E plus tax, plus licensing fees plus extended warranty, it came in grand total justin eighty thousand dollars out of door. There's another listener telling us about trying to

get a new car. Keith, you described how many Americans, milk class Americans simply can't afford a new car anymore either, because the cars themselves are so expensive, or the interest rates make the payments crazy. Are we now headed for a world in which only the rich can afford a car, and middle class earners and people who aren't in the middle class by used cars, like we have a two

tiered system for sure. The historical precedent was set over a century ago by Henry Ford when he said he was going to build a car for the great multitude, and he paid his workers five dollars a day so they could afford to buy them. So that compact is being broken in this latest pricing scheme that is aimed at the wealthy. So what that does is it drives the middle class to the used car market, where they're going to find prices are high there too. The average

used car now is thirty tho dollars. I mean a seven year old used car is close to twenty dollars. It's just this incredible inflation where if your middle class or or less, you're just gonna have a hard time getting into wheels, whether they're new or used. I think we'd be remiss if we didn't mention electric vehicles, which are the hot news segment in the market. I need to show you, right how the problem is even sort of worse there because those cars are just more expensive

than their gasoline powered counterparts. They're basically luxury cars right now. Yeah, the average price of a new electric car is sixty one dollars um and that's come down because Tesla justst did this big round of price cuts. It was closer to seventy tho before the Tesla price cuts. So that's another thing that is pushing up the average price of new cars and and pushing it farther out of reach of regular Americans. As David said, an e V is

a luxury car. Yeah, that's right, even if it's not sold under a luxury brand, they have all the amenities, they have cool technology, and they certainly sell at those prices you're seeing for de f one fifty Lightnings, so for eighty thousand or more. I believe, as you say, the automakers would like to keep supply low and prices high. So do you think ultimately competition comes back and pushes

prices down more? Actually, Ford just said that they see overall industry wide prices coming down about five this year. The supply of chips is starting to improve, so that bottleneck is is finally breaking, so we're gonna see an inventory rise. And the dealers that we talked to, they think this notion that the automakers are going to be

able to restrain inventory is just crazy. They say, as soon as the guy down the street starts discounting as cars, I have to discount mine or I lose all my business. So it'll be interesting to see if the American culture can support this restraint that the automakers would like. It feels like once you have supply and the American free market goes to work, we might even right back where we used to be. All that depends on how quickly

the supply comes back to people. You're interviewed in the story Mary Barra and the other one, Jack Howiss, Toyota's top sales executive in the United States, both said the industry should have enough semiconductor chips to make fifteen million vehicles in the US this year, which is still better than last year, but historically down a couple of million vehicles worth. If that's the case, and if pricing and interest rates keep buyers away, you you don't have enough

supply out there to bring prices crashing down. If Ford is correct, prices are going to Overall pricing drops five percent this year. That's from fifty that kids should have fifty, which is still a historically very high number. So that's what we say in the story, is that prices will come down because we'll have supply. Remember that this record pricing came out of a period of absolute, unprecedented scarcity.

We're not going to have that forever, but we will have a different paradigm for a while because there just won't be chips supply to go back to seventeen and a half million vehicles a year, probably this year, maybe not next year. We will get there eventually, and then it will really test whether or not automakers have discipline. But for the foreseeable future, you'll see new car prices come down, but they have to come crashing down for middle class people to buy them. There's another factor to

west that will be hitting this year on supply. So use car prices and new car prices sort of moving tandem. They affect each other and supply affects them both. The used car market gets a lot of its inventory from cars coming off three year leases. Three years ago, the pandemic was hitting the leasing market stopped entirely like every other market. So we're about to enter a period when there's no cars coming off lease because nothing was being

leased three years ago. So that means the used car market will have a shortage of supply again, and that will prop up used car prices, which will then prop up new car prices. Get welch, Keith not thanks so much for coming in the show. Thank you West. Thanks West. When we come back. One country that's not cutting back on production, it's China. So we've heard how automakers like GM and Ford are embracing this new business model for

your cars at higher prices. But at the same time, automakers in China are cranking out cars at a record pace and selling them often at far lower prices. All over the world except in the US. Bloomberg reporter Tom Hancock has taken a close look at China's booming auto industry, and he joins me now from London to explain, Tom, you've written this story with a great headline. The US hasn't noticed that China made cars are taking over the world.

And one thing that really stood out was that China is now poised to become the world's number two exporter of path your cars, right behind Japan, which has been the leader for a long time. Yes, that's right. So China is on the verge of overtaking Germany, which has been the world's second largest car exporter after Japan in terms of the number of cars ship per year. And

that has happened extremely quickly. Basically, it's all happened during the pandemic and we've seen a tripling of Chinese shipments since. And so in the last two years, basically Chinese car exports have exploded. So just in two years, they've tripled

their experts, how is that even possible. Well, the groundwork for this has been laid for a long time, and the background really that I get to in the story is about how Chinese cars are of a much higher quality than they used to be, and there are a number of reasons why that's happened. In twenty eighteen, the Chinese car market, which is the largest in the world in terms of sales, actually shrunk in terms of sales

for the first time in several decades. And that was really a wake up call, I think for the Chinese car industry and they started looking around and thinking, now we've got pretty good quality cars, we can focus more

on exports, so it's a change of strategy. Another big factories electric vehicles, and China has really got behind electric vehicles or e v s as they're sometimes called, with subsidies for suppliers all up and down the chain from battery metals to batteries and car makers, and that's really given Chinese car makers a level playing field with the foreign car makers because everyone is starting to make evs from scratch basically, and China is where the supply chain is.

There's been a very large increase in EV exports, particularly to Europe, where there's a hunger for cheap evs, and Chinese brands are filling that niche and they're often doing it not under their own brands, but under acquired European brands.

The most obvious example are Volvo Vehicles. So we start the story by talking to a British man, Andreas Tat, who was looking around for a premium EV and he thought about a Tesla, he thought about some other models, and he settled on a pole Star pole Star too, to be precise, and that is a Volvo brand. But Volvo, of course was acquired by a Chinese company Geelie about

a decade ago. They still produced cars in Europe, but the pole Star, partly because the advantages of making electric vehicles in China is made in China, and so he bought a made in China car. He was a little bit worried maybe about the quality, but he said he took it for a test drive and then he no longer had any doubts. He's been very happy with it since. And there are now a lot of Europeans driving around

in evs made in China. And it's not just Chinese own brands that are producing a lot of cars in China, but some of the best known non Chinese brands like Tesla are churning out a huge number of cars in China. Absolutely. So Tesla opened a facility in Shanghai. They got permission in eighteen that it could be wholly owned. So that was a big break from what happened previously where foreign car makers if they wanted to access manufacturing in China,

they had to form joint ventures with local companies. But China really wanted a Tesla factory, and so they said you can completely own it, and that means Tesla gets all the profits and so they realized that they could use China as an export hub because the e V supply chain is centered there. That means it's cheaper to make cars there than almost anywhere else. And so Tesla started using the Shanghai factory not just to serve the Chinese market, which is in normal US, but also to

export cars to Germany and other European countries. And that was a big part of the surge of electric vehicle exports. Because you write that now more than half of the cars Tesla makes every year are made in the Shanghai plant, right, So by that measure, it's the biggest factory. Now, not all of those are exported. A lot of them are sold in China. Chinese people love to buy Tesla's but it also makes sense when you can't meet the demand from your US factory and because of costs, it makes

sense to use China as an export hub. And that's been what's happening. The cars have not really been going to the US, and that opens up another discussion about why they haven't been going to the US. Yeah, let's talk about that. We're the biggest markets for these Chinese made vehicles. You know, I've talked a lot about electric vehicles. They're an important part of the story, they're an exciting part of the story, and they are probably the fastest

growing segment of Chinese car exports. So that's one part of the story. But if we look at Chinese car exports overall, most of them are still internal combustion cars, your old fashioned gas guzzling cars, and they're exported in large numbers now to emerging markets. So in Saudi Arabia, in Chili, in Brazil, in Mexico, in Malaysia, people are buying Chinese branded and they do actually come under their own Chinese brands and not using necessarily foreign brands that

have been acquired. People are buying these internal combustion cars that are made in China, and that's really because they're now competitive with the South Korea and Japanese brands that have often had that sort of budget niche in those countries. Chinese cars are now visible. And Europe also it now imports these internal combustion cars from China. But evs are sort of the growth market of the future, and it's what Chinese car brands of all stripes really see as

the future. Now, you raise a very important question why aren't they going to America? The people that I spoke to in the industry, we're saying the number one reason is really tariffs. The fact that Donald Trump introduced very heavy tariffs on Chinese cars means that it doesn't make a lot of sense to manufacture in China and export them, So that's an obvious reason. Also, there's probably more suspicion of Chinese brands in general. This is at least what

the Chinese companies think. They are worried about what US consumers will think of them as Chinese brands, and they're also worried about what the US government will do. Who knows what regulations there might be coming in. And then the final piece in the jigsaw puzzle really is Biden's Inflation Reduction Act. So that's all about making sure that

evis are manufactured in the US. If you manufacture them in the U s you get all kinds of tax breaks, and if you manufacture them in China you won't get those. So now what we see is, for example, pole Star, which is ultimately owned by Chinese company Geelie, they are thinking about opening a factory in the US. That's clearly a response to the Inflation Reduction Act, and they'll get

credits for doing that. So you might see more Chinese cars sold in the US, but that's not the focus because of these trade disputes, And if they want to enter the US market, it's likely they'll set up shop in the US, or maybe if their internal combustion, they'll set up shop in Mexico. US is a very tough market and it's sort of the last one that these

car makes want to crack. They've got enough on their hands with Europe really town when you look down the road a few years from now, do you think that China will be able to crack the US market? There we're going to see maybe some of these Chinese brands with big factories in the US or have some other arrangements where Chinese cars are going to be competing head to head with all the other brands trying to find buyers in the US. I think it's really a political question.

I think that if these brands have the economic and business case for selling in Europe, then it's not that hard to imagine that it could also work out for them in the US. Like I've said, probably they'll prefer to manufacture in the US but maybe US politics would even allow that. I think we have seen some Congress people making noises about they don't want Chinese battery factories, they don't want Chinese manufacturing FDI it's a foreign direct

investment in their regions because they don't trust China. They think maybe they could be spying going on from the factories, or it's a strategic risk or something like that. And so it depends really if there is a political blocking of Chinese investment, and then Chinese companies won't want to go there. So I really think it's a political question. Tom Handcock, thanks for coming on the show. Thank you

very much for having me. You can read more reporting from Tom Handcock and David Welch and Keith Norton at Bloomberg dot com. Thank you for listening to us here at The Big Take. It's a daily podcast from Bloomberg and I Heart Radio. For more shows from my Heart Radio, visit the I Heart Radio app, Apple Podcast, or wherever you listen. And we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net.

The supervising producer of The Big Take is Vicky Bergolina, our senior producer is Katherine Fink, our producer is Rebecca Chasson, and our associate producer is Sam Gobauer. Phil de Garcia is our engineer. Our original music was composed by Leo Sidrin. I'm Westcasova. We'll be back tomorrow with another big take.