Global competition creating cheaper cars
Detroit News
DETROIT — Car shoppers haven't had it this good since Ford was selling Pintos and Earth, Wind & Fire was topping the pop music charts: cars and trucks are at their most affordable levels in 22 years.
It now takes just 22.7 weeks of median family income before taxes to buy the average car, down from a peak of 30 weeks in 1992, according to Detroit-based Comerica Bank. It took 22.6 weeks of income in 1979 to buy a car.
"Things are so cheap, people are buying," Chrysler Group chief executive Dieter Zetsche said.
The favorable pricing stems from global competition and a glut of new cars, minivans and trucks.
Asian and European carmakers are using a barrage of new products and favorable currency rates to compete against U.S. auto companies, who are battling back with deep discounts and cheap financing.
Consumers such as Judith Jones are benefiting.
The 58-year-old college professor from Norwalk, Conn., was laughed out of a Toyota dealership when she offered $25,000 for a Camry with leather seats, a six-disc CD changer and a sticker price approaching $30,000. Undaunted, she scoured the Internet and found a dealer willing to meet her price.
Still, affordability is in the eye of the beholder. The wealthiest 20 percent of the U.S. population buys 80 percent of all new vehicles, which sell for an average of $22,000. The average transaction price has stayed flat for the last few years even as manufacturers have added more features.
However, such discounts are not particularly pleasurable to Detroit's automakers. Ford, General Motors and DaimlerChrysler all reported lower first-quarter earnings. As an example of how the discounts are hurting automakers, Ford discounted its car and truck offerings an average of $2,242 last month, $540 more than May 2000, estimated Deutsche Banc Alex. Brown. The difference translates to more than $160 million in lost profits.
Since World War II, automakers typically could raise prices by 2-3 percent at the start of each model year, and increase prices mid-year occasionally. But as competition has increased, prices have stabilized or dropped.
"Throughout the year, we look for opportunities where we can raise prices, " said Rick Wagoner, GM's president and chief executive. "If there's somewhere we can raise prices, we do. What has happened far more often over the past five or six years is we end up — one way or another — reducing that price."
Why don't the companies hold the line on prices? A major factor is the weak Japanese yen and Euro. The value of the yen vs. the dollar has dropped 25 percent since March 2000, allowing Asian automakers to discount in the United States without losing profits. Compared with a year ago, Toyota's incentives have climbed 71 percent to $1,100 per vehicle, Deutsche Bank estimates.
If Detroit doesn't match these discounts, the automakers risk losing more market share, which could force them into expensive factory shutdowns. Under the current United Auto Workers contract, GM, Ford and Chrysler are required to pay idled workers 95 percent of their base salary.
