Unsustainable Vehicle Prices? Is Tata Onto Something?

January 16th, 2008

I have a single friend who is very young. He has an average job, works hard and has no other assets (remember, he’s young). Here’s the part I don’t understand. How long will people be able to spend more than a years wages to buy a brand new vehicle, when they don’t necessarily have the money? My friend lives in Canada and spent about $40,000 on a Dodge Ram (approximately what he spend including all extras, taxes, etc. - Please realize many fully loaded trucks in Canada can cost $40k to $60k quite easily.).

I did the math on a five year loan from the bank using a 6% interest rate. Do you know what the payments are? $773.31! Then he pays almost $500 a month for insurance (young guy + new vehicle = high insurance premiums (almost criminally high, IMO)). Gas to power the beautiful Hemi under the hood is about $200 per month. I know he works about a 10 minute drive from work and he works so many hours he doesn’t do have time to do many other activities.

Now, I got thinking, if he only needs a vehicle to commute to work and back - how much per work day is this costing him? Using 20 work days per month, I calculated he spent nearly $73.69 per work day to drive to and from work. That’s a large portion of his after tax earnings! Unless consumers are buying the truck for work (and many are), how long will consumers be able to spend $30k+ for a new vehicle? It’s no wonder the automobile industry has problems.

Yes, I realize there are many people who buy the vehicle because they can afford the monthly payments and want to live life while they’re alive. You have to sit back and enjoy some things in life. But I believe $30k+ for a brand new vehicle is expensive and ultimately unsustainable. My friend must live very frugally just to keep his truck! Obviously the truck brings him joy, and it might be worth the price to him. That’s his decision. I’m not trying to rip on my friend, Lord knows I want a brand new truck too. But WANTS always come after NEEDS. The point I’m trying to make is that many of our vehicle prices are so high that they no longer make sense from an economic standpoint. If this recession starts to hit consumers worse, are the brand new vehicle prices sustainable? I don’t believe they are.

Dodge, General Motors and Ford currently have a stranglehold on truck sales in North America, and each has a large percent of the car market (though it is quickly being eroded away by Japanese automakers). Even car prices are high. As globalization continues and competitors pop up, I think they will drive down prices. Tata Motors may be onto something. They’ve just recently announced a $2,500 vehicle. Can you imagine that? Just $2,500! That vehicle won’t be sold in North America, but it just goes to show that a vehicle can be manufactured (maybe not here) for very cheap. Just as Wal-Mart has been able to import foreign made goods and drive prices for consumables down in North America, expect foreign automakers to try the same. Even if regulations prevent foreign companies from importing cars, you can expect middle class Americans will increasingly vote with their wallets and choose cheaper models over expensive ones.

As the recession worsens and the middle class gets squeezed, I’d expect less brand new automobile sales in North America. Automakers need to innovate and focus on increasing the fuel efficiency… or even better - create electric vehicles and bring the new vehicle prices down. Tata certainly seems to be onto something…

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