Why Are Cars So Freakin’ Expensive Now?

LeeAnn Shattuck (00:01)
Hey everyone, welcome back to the straight shift. I have been talking to a lot of people in the last couple of weeks about their car buying goals. And a common theme that I am seeing is sticker shock. People who have not bought a car in a long time because they tend to keep their vehicles, especially if they haven’t been car shopping since the pandemic are like, whoa, what the heck is going on? When did cars get so expensive? I had to break the very bad news to one person who thought they would be able to replace

their 15 year old mini van for $22,000. I can’t even buy anything with less than 100,000 miles on it in many cases with the bells and whistles that they wanted. So it’s just crazy how expensive cars have gotten. How expensive exactly? Well, the average car price in the United States right now for a new car is almost $50,000.

And in looking at that average, I’m not even including things like exotics, you your Ferraris, your Bentleys, your Rolls Royces. Those are not even in the equation here. Just the average new car price for a type of car that you or I would buy is nearly 50 grand. And some of them make some models start

at over $100,000. I mean, that’s just absolutely crazy. And again, I am not talking about Ferraris and Lamborghinis here. I’m talking about Yukons, Jeep Wagoneers, some of your bigger SUVs. And that’s the starting price. That’s not including cars that may have a lower starting price, but once you get up into the higher trim levels, boom, yep, you are near or over that $100,000 mark. mean, that used to be the price of a house. That’s almost what my first house was.

It’s just crazy.

Monthly payments are also at an all-time high thanks to interest rates plus the initial cost of the cars. That’s why so many people are underwater on their loans. They owe more on the loan than the car is worth because they had to finance for a really long period of time in order to be able to stomach those high monthly payments. So why are there no cheap cars anymore? Why can we not have the U.S. automakers actually make

cheap cars like they used to, things that we can afford. China can do it. Why can’t we? That’s what we’re going to talk about today on The Straight Shift.

In order to look at why there aren’t any cheap cars anymore in the U.S., we first need to look at how cars got so expensive in the first place. Everyone’s first inclination is to blame the COVID-19 pandemic. And believe me, there’s a lot of blame to go on there. With the disruptions to the supply chain, everything has gotten more expensive. But car prices have increased more.

Regular inflation has been about 23% since 2019. And that’s ridiculous. It’s so high. But car prices have gone up 30%. So they have outpaced regular inflation. A lot of people are going to say, well, you know, all the rapidly advancing technology cars are just more expensive to make because of all that tech. That is also true. But there’s still some more things going on under the covers.

Before we take that deep dive, let’s pause a moment to consider what is an affordable car? How much car can the average person really afford given where interest rates are and where the average salary is? The US Bureau of Labor Statistics says that for 2024, the average US income is $62,000. Americans spend about 15 % of that income

on their transportation. So that’s the cost of the vehicle, the gas, the insurance, maintenance, etc. So if we do some math, there’s always math, the average person could afford about a $25,000 car. Prior to 2018, there were lots of new cars that could be had for under $25,000, at least at a starting price. Today, almost none. The cheapest new car

that you can buy in the U.S. market today is the Mitsubishi Mirage. And I would argue that that’s not actually a car. It’s more like a soda can on four wheels. The Nissan Versa is the other one. It’s a much better car. Granted, the Mirage has not set the bar very high, but guess what? Those models are both being discontinued after 2025. There will be no sub

$20,000 cars after next year. There won’t even be many sub $25,000 cars. Realistically, the starting price for an entry level vehicle in the US is pushing 30 grand. That’s insane. Yet the cars that started that $65,000 and up price range, those have increased.

Five years ago, there were only about 75 models that started north of 65 grand. Now there’s over 110. I mean, $65,000. That is well over a thousand dollar car payment. It’s over a $1,200 car payment at 60 months. I mean, that’s getting close to what my mortgage is. It’s just insane. So what is going on? Why are we seeing this trend toward more more expensive cars?

When we as Americans are looking to cut costs, where can we save money? We’re looking for less expensive things. Well, part of the problem is while we want less expensive things, we want to pay less, we still want our bells and whistles. We want a lot of that new technology in the cars and we want SUVs.

Well, I say we, I do not include myself in that because I am perfectly happy driving my Mini Cooper. Thank you very much. But Americans in general love their big cars. so SUVs only accounted for about 30% of the vehicle market back in 2009. Jump 10 years ahead, it was 50% in 2019. Today, it’s nearly 60% of all cars sold are SUVs.

So the automakers are targeting those customers instead of the people that want something smaller, something more affordable. We have also seen a fundamental shift in the priorities of the automakers themselves in the U.S. And they’ve been completely open and honest about it. They’re not trying to hide the fact that they are going for profits over volume.

They will happily sacrifice market share these days in order to get higher profit margins. As a business owner, I do get that up to a point. We’re talking about a product that is a necessity for most Americans. You can’t live without a car in the majority of the United States.

We have the pandemic to partially thank for that shift in the mentality of the auto makers, because it’s very different from the approach they’ve taken in the past. They just didn’t have the cars to sell.

So they had to maximize their profits on the units they did sell in order to stay in business. Same with their dealers. And it worked. Guess what? It totally worked. In 2023, the big three posted the highest profits in over a decade and their franchise dealers were also making money hand over fist.

Even before the pandemic, the automakers were already starting to phase out their less profitable cars, like the small sedans and hatchback, in favor of the SUVs that they can make more money on. Part of that profit over volume pressure also comes from their investors, who have been pushing them to buy back their stocks like crazy. Stock buybacks reduce the number of stocks that are out there in the market, which drives up the value of the remaining stocks.

It also increases the dividends that they can pay out to their investors. So the bottom line is their investors want cash now and are pressuring the automakers to make the types of decisions that generate dividends instead of longer term strategies for investing in their own product. Granted that focus on profitability also helps their own internal cash flow. They are desperate to offset their higher expenses

due to supply chain issues, the very heavy investments they have made in EV and safety and autonomous driving technology, as well as higher labor costs. So they have been choosing not to make affordable cars because they’re prioritizing their own profits. And it’s us consumers who are truly paying the price.

I believe and a lot of economists agree with me that this is a very short term strategy that’s very likely going to come back and bite him in the ass Because it’s just not sustainable long term. It’s alienating us as consumers, but it’s also putting the U.S. automakers at a competitive disadvantage with other automakers, especially the Chinese. So could we make cheap cars if we really wanted to? What does it even take to make a

cheap car these days? In order to answer that question, we’re going to need to look at the economics of automobile manufacturing. About 70% of the price of a vehicle, that MSRP, goes to the direct cost of producing it. It’s what we call cost of goods sold. Then about 20 to 25% goes to marketing and overhead. That leaves about a 5 to 10% profit margin. It’s not bad, but the cheaper the car,

the lower that margin. That’s why the small cheap cars have very, very low profit margins, whereas your bigger, more expensive cars have a little bit higher margins. Fortunately, electric vehicle technology is getting cheaper and should continue to do so just the way any type of technology does.

And specifically, the cost of the EV batteries is going down. And if GM’s partnerships with the Chinese and Japanese companies to produce lower cost batteries really work out while avoiding all the tariffs, we can see some significant progress in reducing the cost of electric vehicles over the next several years because the battery costs will go down.

The platforms that electric vehicles are built on are called skateboard platforms. And they’re much, much simpler to build than the platforms for internal combustion engine vehicles. And that spreads out the cost of developing and manufacturing those platforms, which gives the manufacturers what’s called economies of scale. They’re so much easier to adapt to different types of vehicles, different size vehicles, so they can design and build this one platform

and then use it for almost everything that they make. That can’t be done as easily with the platforms for internal combustion engine cars. Ultimately though, to build cheap cars, so to speak, we need very different manufacturing methods than we have today and much faster research and development timeframes. Tesla’s developed this really interesting new manufacturing technique that they’re calling the unboxed process.

They plan to use this to build their new fleet of robo taxis, which yes, I will cover in another podcast. The traditional method for manufacturing cars, the entire vehicle just moves down the assembly line. It’s a linear process that means that only one part of the car is being built at any one time.

Tesla’s new process would essentially split the vehicle into different sections, and each of those sections would be built simultaneously by different teams, and then all those completed sections would then be brought together for a final assembly. This would allow them to cut their production time by about four times. It is that much faster to do it.

and they can do it in a smaller manufacturing space. So they don’t need as big of factories or they can get more production out of the existing factories that they have. It would allow Tesla to make $25,000 electric vehicles, very affordable cars. And they originally said they were going to do this. Unfortunately, they canned that project in favor of rolling out the robo-taxis, but they have filed a patent on this modular manufacturing process.

I guess they’re done sharing technology with everybody else. But hopefully that will influence other automakers to rethink how they build cars and develop their own modular processes that’ll streamline everyone’s manufacturing costs and allowing them to make cheaper cars. Some of the manufacturers, especially the Japanese automakers, are already trying to streamline their manufacturing by partnering with each other.

They are producing very similar cars on the same platforms, in the same plants, sometimes even on the same production line. They’re just branding them differently. We’ve seen this with the relationship between Subaru and Mazda and Toyota. For Subaru and Mazda, they’re not gonna spend the money to develop all their own hybrid EV technology. They’re gonna partner with Toyota.

Honda’s doing it with their partnership with GM on the EV technology. That’s just why the Honda Prologue is basically a Chevy Blazer underneath. Our government also has to get its collective shit together, pardon my French.

and have some consistency on things like incentives and subsidies and tariffs. The rules change every time a new administration comes in. There’s this push and pull and it’s yo-yo effect with our priorities and our regulations and our policies. And that makes it really difficult for any company, especially automakers,

to do any sort of long-term planning. And it makes it substantially more risky for them to invest in new technologies. This is the big reason why we are having such a hard time keeping up with China and competing with China, especially in the automotive industry. Their government…

due to its nature is just more static. They don’t have things like elections and things changing. It just doesn’t happen because they’re not a democracy. So when they make a policy decision, it is set in stone. They stick with it. And they’ve even taken advantage of the instability in US policies to advance their own technology. For example, the cheap lithium ion phosphate batteries that are used in everything from cell phones to

portable power tools to electric vehicles were actually developed by an American company using grants from the US Department of Energy. But then the winds changed in Washington, policies changed, the renewable energy grants were canceled, and that company went bankrupt, leading China to come in and buy them out. Dirt freaking cheap, along with all their technology, and then they were able to run with it, scale it up very fast.

That’s what gave them their dominance in the battery field. So how can we compete with China when they have so many advantages?

It will take a lot more than just consistent policies for US automakers to keep up with China and successfully compete with them in the EV market and even in the internal combustion engine car market. Could we have Chinese cars in the US? Of course we could, but there’s 100 % tariffs that are keeping them out of the market in order to protect our manufacturers and give them the more time they need to develop these technologies and be able to scale them up.

Because China just has so many advantages even beyond these stable policies. The Chinese automakers are subsidized to a certain extent by their government, but that’s not their biggest advantage when it comes to making cars for less. They have cheap labor. And when I say cheap, I mean cheap. According to Reuters, autoworkers in China make around $2 to $4 an hour. Some Chinese companies have even been found to be using

forced labor. Yep, that’s the fancy word for slavery, folks. Some of the German automakers actually got in trouble because they were found by a US Senate inquiry to be using parts made by some of those Chinese companies. And that’s against our sanction laws because we do not sanction slave labor. That’s also why the EV tax credits are limited to certain vehicles that do not source parts from places like China where they’re using forced labor to produce them.

China also doesn’t care as much about the environment. They don’t have the same protections and regulations that other parts of the world do. And producing the batteries and other components for the automotive industry uses a lot of really nasty chemicals. And they don’t worry about it. They don’t worry about storing them. They don’t necessarily worry about protecting their labor force from using them. And they don’t care about how they dispose of them.

To give them a little credit, are working to reduce the hazards in their manufacturing processes. They are implementing more regulations and manufacturers have been encouraged to manage the hazardous substances throughout their supply chain. But enforcement has not been a high priority.

It just gives them a lot more flexibility in reducing their costs than we have. And one of the biggest advantages they have is they have a really short R &D time, which gets them to market and seeing a return on their investment so much faster than the legacy automakers. How did they do that? Chinese automakers are very technology focused. They’re really technology companies that happen to make cars.

But it’s a focus on the technology first. The whole vehicle is looked at as one big piece of software. Whereas legacy automakers build cars that happen to contain a lot of software, but it’s a fundamentally different way of designing and developing a vehicle. And it’s one that allows them to develop and scale much more quickly. Investors love that.

Suppliers love that. Heck, everybody makes money so much faster and that gives them an advantage. The US and European brands take an average of five and a half years to get a new vehicle from conception to market. And it used to be longer than that, so they’re making progress. But the Chinese automakers do it in three and a half years. And the newer Chinese EV startups like BYD, which is taking the world EV market by storm, they’ve done it in 19 months.

One the ways they can develop so quickly is that they make decisions faster. There’s less debate, there’s less discussion about what to do and how to do it, and that is just a cultural difference. The deadlines are also hard. They’re non-negotiable. Even if it means releasing a product that is very glitchy, has a lot of bugs and defects, just like computer software. They prioritize that speed to market over the initial quality.

And they can get away with it. They don’t have the strict safety regulations to meet and the tests that we have to pass here in the US. They can rely very heavily on virtual testing. They use computer simulations to test the safety of the vehicles, whereas we actually have to build real cars and do real world tests. Being able to do virtual testing cuts months off their development time and millions out of their budgets.

It also means that they release cars that are less safe. But they’re not afraid of putting a defective product out there because they don’t have to worry about lawsuits. That’s just not a thing in China like it is here. And you know, if a few people get hurt because their product sucks, you know, it’s not a big deal. It’s just part of the learning curve. There’s very little accountability because they have lots of people and it’s just not as much of a priority.

It’s also why Chinese companies have a very intense, what’s called an overtime culture. They have way more people than they do jobs. So the companies can get away with not only paying their workers a pittance, but they also can work them to death because the employees won’t quit. They need the jobs and they do it very consistently. Chinese automakers are known for having 60, 80, 100 hour work weeks. It just doesn’t matter. They can get away with it. The people aren’t going to quit because they desperately need the jobs.

The Chinese companies are also willing to take heavy losses early on while they work through those glitches to get it right. And then once they do, they can scale up very quickly. It’s a long-term profit strategy and it works because their CEOs don’t have to answer to investors every quarter. Why are the profits not higher? Why are the profits not higher? They just don’t have that. That also frees them up to

think outside the box and challenge the way things have been done in the past, how we always do it this way. That’s what Tesla has done in the US and why they have been so successful. They’ve taken a much more Chinese approach to building cars. Some of those approaches have been amazing. The focus on building a computer with four wheels and allowing them to fix the cars and give upgrades and even add features to cars that are already out there on the roads.

through over-the-air software updates is just truly remarkable. They can even make changes to things like the brakes, the motors, simply through over-the-air software updates. A lot of times, you don’t even have to take your car into one of their service centers. They can literally email your car with the update. It’s crazy. But not all of their approaches have been quite so awesome. Successful, but you kind of have to question the ethics.

Tesla is infamous for their toxic and downright dangerous work culture. Between their intense overtime culture, racial harassment, sexual abuse, and on-the-job injuries, Tesla continues to have legal battle after legal battle, which they are losing, and they’re paying more fines than they do taxes. Tesla has received more OSHA violations than its top 10 competitors in the automotive industry come

bind. They average two serious on-the-job injuries every single day. And that’s just what they report because they have been busted for failing to report or miscategorizing a lot of serious injuries on their legally mandated reports. This is according to state and federal investigators. So their success has come and is continuing to come at a high human price. Other U.S. automakers

hopefully will be able to find some different and more ethical methods of improving efficiency and lowering their costs. And they’re going to have to if they’re going to make more affordable cars. I know I’ve focused a lot about the EVs when talking about why we don’t have cheap cars and what we need to do in order to produce cheap cars.

But that’s because that’s where the industry is focused. That’s where the market is focused. And the automakers have invested so heavily in the EV technology that they’re kind of committed to it. They have to in order to get returns on those investments. But ultimately, EVs will theoretically be cheaper to produce and to own. And as much as this girl loves a good internal combustion engine, if

we’re going to have cheap cars going forward. It’s going to be in the electric realm. China’s playing the long game and it works for them and they have a radically different mindset and strategy than we have in the US along with less constraints. US automakers and the American public, and that includes consumers and our policymakers, are going to have to make fundamental and cultural changes if we’re going to keep up.

And hopefully we’re going to be able to figure out ways to do that without sacrificing quality and the safety and wellbeing of both their employees and the consumers. Thank you for joining me for what has turned into yet another economics lesson. I promise I did not reboot this podcast to make it be an online course in economics, but you know, Hey, this is where we are. That’s what it takes to explain why we don’t have cheap cars and why we’re probably not going to have cheap cars anytime in the near future.

It’s going to take some serious, serious change. So if you need a cheap car, you’re going to have to probably buy used. Fortunately, I cover how to buy a cheap used car in my online car buying course. So you can check that out

at my website, TheCarChick.com or directly at CarBuyingCourse.com Please subscribe to the show if you haven’t done so and share it with your community. I hope everybody has a great upcoming week. Drive safely, folks. I’m out of here.