We’ve never seen new-car prices jump as fast as they have in the past year. That’s leaving the door wide open for someone to swoop in and claim the bottom end of the market. And that “someone” could be the dozens and dozens of Chinese automakers looking for new markets to unload their excess manufacturing capacity.
I used to think the 27.5% U.S. import tariff on Chinese-made cars would protect the domestic market from those kinds of imports. Not anymore, I don’t. More on that in a minute.
New-car prices in the U.S. soared more than $6,000 last year to an average of $47,000, according to Kelley Blue Book. It’s the fastest increase we’ve ever seen. Tight inventory caused by a chip shortage, coupled with strong consumer demand, are what caused the price jump. But in this case, knowing the cause doesn’t fix the problem.
Historically it took about 24 weeks of income for the average American household to buy a new car. Right now, the average household income is about $67,000. So, the average household should be shopping for a $31,000 vehicle. Instead, most consumers are paying higher prices for the cars they want and are taking longer to pay off their loans. Ever wonder why 72-month or even 84-month car loans are becoming more common? Or that the average car is 12 years old? There’s your answer.
Because of rising car prices, fewer Americans can afford to buy a new car. Over the past 20 years the auto industry has pushed about 5 million households out of the new-car market and into the used-car market. And now, with extra-heavy demand for used cars, prices for them are going up just as fast as with new cars. Used-car prices last year jumped $6,000 to an average of about $28,000. And that is too much for a lot of people.
Meanwhile, the Chinese car market is saturated with too many car companies making too many cars. Some estimates put the overcapacity level in China at 20 million units. In response, China is rapidly ramping up its automotive exports to soak up that excess capacity.
Last year, China exported 2 million vehicles, double what it did in 2020. Those cars have been well received in markets such as South America, Africa and Southeast Asia. And you’ve got to believe that, at least for some of them, the U.S. market is next on their list.
You can buy a decent car in China for only about $14,000. That’s the retail price. So even with the U.S. 27.5% import tariff applied, a Chinese car could be shipped to America and sold for less than $18,000. That’s 10 grand cheaper than the average used car. They may not appeal to everybody, but inexpensive, brand-new cars are sure to find customers.
In the late 1960s and early 1970s, low-cost little Japanese cars found a foothold in the American market. Detroit ignored them because they collectively had less than 5% market share and didn’t seem to pose any threat to big, powerful American cars.
General Motors, Ford and Chrysler knew their customers didn’t want those kinds of cars, and they were right. But there were other customers who did. And as a new generation (baby boomers) came into the market, Japanese automakers rode that demographic boom for decades. In fact, they’re still riding it. Last year Toyota sold more cars in the U.S. than any other automaker.
So, could Haval, Great Wall or Chery become major players in the U.S.? I know that sounds preposterous, but if anyone had told me 40 years ago that Toyota would one day outsell GM in the American market, I would have told them they were crazy.
But happen it did, and it all began when the big automakers ignored the bottom end of the market.
John McElroy (pictured above, left) is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.