Over the last decade, the price of a new car has not gone up — at least in terms of purchasing power.
It takes the average American family about 25 weeks of income to buy a new vehicle today, roughly the same as in the mid-1990s.
That is about to change. Prices of new vehicles are about to skyrocket.
What prevented prices from climbing up to now is competition. Every market in the world has more car companies competing in it than it did a decade ago (with the glaring exceptions of Japan and South Korea). That competition forced auto makers to wring costs and inefficiencies out of their operations and then pass those savings onto their customers.
But with commodity prices soaring for all raw materials needed to manufacture vehicles, auto makers just can't cut costs fast enough. Let me give you an example.
To make cars, you need steel. To make steel, you need iron ore. But over the last decade three suppliers have pretty much cornered the global market for iron ore. The major steelmakers pretty much have to buy from BHP of Australia, Vale of Brazil and Rio Tinto, which is headquartered in London.
Last year, those iron-ore suppliers decided it would be a nice time to raise the price of iron ore 30%. And then earlier this year, they decided it would be even better to raise prices another 70%. As a result, steel prices are soaring. A ton of scrap now sells for more than a coil of finished steel did a year ago.
Up to now, auto makers protected themselves by locking into long-term contracts with the steel producers. That's why we haven't seen the big increase in steel prices drive up the cost of new cars. But those contracts are starting to run out.
And the same sort of scenario is playing out with every other commodity. You name it — copper, zinc, aluminum, platinum, magnesium — they're all soaring in price. And because oil is skyrocketing, so too are the prices for plastics.
The timing for auto makers could not be worse. They are under the gun to boost fuel economy and cut carbon dioxide, and that's going to require expensive technology. Put the two together, soaring commodity prices along with expensive technology, and my guess is the average price of a car in the American market is going to hit $40,000 in just a few years. That's up from about $30,000 now.
Will the average household be able to keep up with that kind of price hike? No, it's going to eat up too much of their income. They're going to hold on to their old cars longer.
So all you product planners out there who are figuring out how many cars you will sell in the future, better start planning for lower volumes — thanks to higher prices.
John McElroy is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit, and Speed Channel.