Whether it realizes it or not, the auto industry is opening the door for new competitors to steal the bottom end of the market.
As automakers move further upscale to chase higher profits, they’re leaving millions of customers behind. These are people who definitely can’t afford new cars and can barely afford used ones.
We saw this happen over 100 years ago. Henry Ford’s investors wanted him to make expensive cars for the rich. But he had other plans.
Thanks to Henry’s relentless pursuit of cutting costs and chopping prices, his Model T took over the market. Ford literally “opened the highways to all mankind” because so many people could afford his car.
That’s not happening today. Car prices are going up faster than household income. In the U.S., the average transaction price for a new car is now over $40,000. A decade ago, it was $30,000. By the end of this decade, it will be $50,000.
As a result, a smaller percentage of the American population can afford a new car. The all-time record was set in 1978, when 6.9% of Americans bought a new car. It’s been dropping ever since.
In 2019, before the COVID pandemic hurt sales, it was down to 5.1%. If the same percentage of people bought a new car in 2019 as they did in 1978, the SAAR would not have been 17 million. It would have been over 22 million.
The industry has priced millions of households out of the new car market. In fact, the only thing that’s propping up car sales is population growth. On average, the U.S. population grows by about 2.5 million people a year. If that growth ever slows, car sales will start to drop immediately.
Automakers say the solution to an expensive new car is a cheaper used car. But the average transaction price of a used car is now $22,000.
Worse, with more people in the market for used cars, those prices are going up faster than those of new cars. Moreover, in a few years we’re going to see those expensive, upscale new cars move into the used car market, meaning used car prices will go up even more.
All this is pushing millions of people into public transportation. There’s nothing wrong with that, but it means you run on their schedule and go where they take you. The beauty of personal transportation is that you can go wherever you want, whenever you want.
Hailing a cab isn’t much of an alternative, either. Taxis and Ubers are too expensive for everyday use for many people. Perhaps robotaxis will solve that, but they’re not here yet.
Maybe the solution is something like Wuling’s little EV, the Hong Guang (below). I’m intrigued by this little 4-seat electric car with a base price of only $4,500.
It’s a masterpiece of low-cost engineering that’s taking the Chinese EV segment by storm. No, it will never get a 5-star crash rating, and by all accounts it rides rather rough. But it’s outselling every other EV in China by a wide margin because it’s so affordable.
By the way, on an inflation-adjusted basis, the Hong Guang costs about the same as a 1921 Model T.
No doubt entrepreneurs will figure out other ways to bring low-cost personal transportation to the masses.
One thing is for sure: There is a massive global market for it. Someone will crack the code. And then they’re going to set their sights upstream and figure out how to steal more of the market from traditional automakers.
John McElroy (pictured above, left) is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.
