When Jeff Plauche recently bought a Honda Accord, his first new car in years, what mattered most wasn’t its smooth styling, zippy performance or safety features.
“I wanted a good car for $350 a month,” said Plauche, 36, who works in commercial real estate in Dallas. “That was all.”
If the monthly payment had been $375 or $400, Plauche said, he would have balked. “I just would have said I could do without some of the options” though he wanted the car, could have afforded the extra amount and was dealing with his car-salesman brother.
“Cars are just a tool with me,” said Plauche, who is married and has three children. “There are other things I would rather spend money on.”
Automakers are hearing that more and more. At a time when sales growth is expected to be minimal and competition among automakers is pitched, new cars have slipped in priority and status in many consumer surveys.
So, prices for new vehicles are under intense pressure and likely to remain more or less flat for a while, some auto industry authorities say.
“Let’s put it like this: The consumer will benefit from rather stable pricing over the next few years, and it will be paid for by cost-cutting and better business practices,” said Ray Windecker, a veteran Detroit marketing analyst who runs a research firm called American Autodatum. “The manufacturers have no choice.”
For decades, consumers consistently spent about 11 percent of their disposable income on transportation, according to federal statistics. But in the last two years, that has dropped to 8 percent spurred in part by new vehicles’ declining status and increased competition from other products for consumers’ dollars, some analysts say.
The industry is getting the message. After a decade in which new-vehicle prices rose an average of 5.4 percent a year, the price of the typical 1998 vehicle will remain unchanged or increase only slightly, manufacturers say.
Ford’s average new-vehicle price isn’t being raised, Chrysler’s is going up 0.6 percent and General Motors’ is rising an average of 1.3 percent.
By some measurements, new vehicles are more affordable than they’ve been in 16 years, consumer grumbles notwithstanding. In the second quarter of 1997, the cost of a new car was the equivalent of 21.8 weeks of average income, the lowest since 1981, when it was 20.7 weeks.
That number probably will continue to drop, analysts say. But no one expects a stampede to the showrooms.
“It’s a changing environment,” said Ross Roberts, a Ford Motor Co. vice president. “In America today, the average family has so many different things to spend money on–home computers, which weren’t a factor five years ago; vacations; college expenses. We just can’t count on their spending a little more every few years on a new car.”
Buyers have long grumbled about the cost of new cars and trucks, and automakers periodically have held some prices flat from one model year to the next. In 1991, for example, prices rose an average of 0.9 percent after miserable sales in the Persian Gulf War.
But current changes in the marketplace are different and “hugely significant,” said Jeremy Anwyl, president of Marketec Systems, a California research concern.
About 40 makes of vehicles are competing in the U.S., including a half-dozen strong-selling Japanese and European brands. A third Korean manufacturer, Daewoo, will join Hyundai and Kia here soon.
By the end of the decade, worldwide vehicle production capacity will hit 80 million, but industry specialists figure there will be only about 60 million buyers annually. The anticipated excess capacity should keep prices flat or falling for years, analysts and automakers say.
“Price restraints in the past were driven by boom-and-bust cycles,” Windecker said. “Price restraints in the future will come from a continuing oversupply of production capacity and a manufacturer’s ability to keep his costs down.”
Theoretically, cars could go the way of the portable computer, said Sanford Block, a spokesman for the Dohring Co., a market research firm in Glendale, Calif. “They will keep getting better, but their real cost will continue to drop,” he said.
A large factor is the economy. Though inflation and unemployment are low, so are most employees’ raises. So, some buyers won’t tolerate a 5 or 6 percent increase in car prices when they’re receiving 3 percent annual raises.
“When we had that inflationary psychology a decade or two ago, people were willing to accept price increases,” said Richard Curtin, director of the University of Michigan’s consumer surveys. “Manufacturers could just pass through any cost increases and didn’t have to worry about cost savings.
“Now, what the manufacturers realize is if they want to increase their profit margins, they have to become more efficient; they have to find cost savings,” Curtin said. “This is the ultimate discipline for manufacturers and sellers.”
One projected result is no real growth in automobile sales, meaning a battle among manufacturers for market share. This year, for instance, the Japanese and Europeans are expected to increase their shares of total business almost wholly at the expense of the Big Three.
Through the first half, GM’s market share was down 6 percent, Chrysler’s dropped 4 percent and Ford’s was up 1 percent.
Yet almost everyone seems to be making money, particularly GM and Ford, thanks to new efficiencies and cost reductions.
One example: At the GM Arlington, Texas, plant, the company has cut the work force in half in the last 15 years but is earning more in net profits from the plant’s production of high-end pickup trucks and sport-utility vehicles, analysts say.
The challenge for all automakers will be finding ways to continue cutting costs, particularly if new-vehicle prices remain more or less flat.
Those that succeed will “rake in gobs of money,” said Windecker, the veteran industry analyst. Most, however, will do well to maintain their current earnings.
The Japanese are more likely than domestic manufacturers to prosper in the expected lean environment of 2000 and beyond because they’re more efficient producers, he said.
“The domestics are in a struggle,” Windecker said. “Logic dictates that they can still be profitable, but they will have to increase their rate of improvement each year just to maintain their current profit levels. And how easy is that going to be?”
Anwyl of Marketec Systems thinks it is going to be tough for everyone. He estimates that 90 percent of the current price flatness is attributable to too much production capacity, and that capacity is expected to increase.
“In a rational industry, you would close the plants you don’t need,” he said. “But with some countries, these plants are tied to their social and political structure. They are going to remain open, producing cars, whether they are selling or not.”
By the end of this decade, he predicts, the auto industry will be “a profitless business.”
That’s overly pessimistic, Windecker said. But the business environment probably will be dramatically different than it was a decade ago, he said.
“The battle will be to become the most efficient just so you can make money.”
