Why a New Car Costs So Much

Why a new car costs so much is one of the worst kept secrets in the automotive industry. It ain’t the unions, it’s the management.

There have been articles in obscure or industry specific locations of the Web covering this topic. They usually title the article something like “Where the World’s Unsold Cars Go to Die.” Not exactly the type of headline topping search term lists. Basically, rather than limit production to what will actually sell or do anything which remotely resembles management, today’s auto manufacturers over produce, jack up prices, and leave new cars to rot all around the globe.

You want to know how I found out about it? I was reading version of this syndicated article in my local paper. Yes, Mr. Berko has his share or critics. He has an investment philosophy of buying dividend paying things which have a good track record of actually paying the dividend and aren’t part of an industry headed for a train wreck. A philosophy I adopted a bit too late in life.

What boggles my mind is that GM had a government bail out and this practice wasn’t stopped then. Heck, I have a friend who works for one of the major auto makers and they had never heard of this. It’s hard to argue with the photographs though. Google Maps isn’t just used by people trying to peak into Area 51! Anyone willing to spend the time can find anything which was left out in the open at the wrong time.

How many cars are you actually buying?

From time to time I turn on various business reports. I’ve heard various industry analysts talk about stocks of the various auto makers, but I have never heard about this until I read that article. One has to wonder just how many cars they are buying when they sign their life away on a shiny new ride with a $40+K price tag don’t they?

Don’t get me wrong. I’ve heard of “channel stuffing” before. This is a time honored dirty little secret used by pretty much every manufacturer at some point or another. “Channel Stuffing” is the practice of forcing excess inventory into your retail locations just before the end of a financial period. It’s a way to juice your sales to meet or beat analyst expectations. Frankly I would be shocked if anyone reading this can find a manufacturing market where the practice isn’t widely implemented.

Management has to have a bit of a Jiminy Cricket view of the world to engage in such practices though. (If you wish upon a star…) You see, channel stuffing has a major consequence. You start the next financial reporting period in the hole because most of that stuff gets shipped back to you the very next month. The little bit which doesn’t return means you reached forward into the next reporting period to grab sales so orders from your retail locations will be way down the first month while they are busy returning all of the merchandise.

These parking lots full of cars are something completely different from Channel Stuffing. This is Channel Removal. The bulk of these cars will never be sold. After a car sits outside and unused for a period of time it needs repair or reconditioning to be usable. Some of the links in this article make mention of these things, but, in case you only looked at the pictures here is a short list.

Things that go bad with parked cars

Battery – that little flashing security light indicating the factory installed vehicle anti-theft system is armed gets is power from somewhere. In a warm climate the battery will be dead. In a cold climate the dead battery will freeze and bust leaking acid all over. Having attempted to store a car in a garage over a winter I can tell you it takes less than 3 months to drain the battery.

Rubber components – This takes a lot longer. Rubber belts and hoses do not like prolonged periods of not getting up to operating temperature. They start aging rather quickly and will need replacement far sooner.

Engine – I did read in at least one of the articles about oil creeping to the bottom of the pump allowing the inside of the engine to rust. This is definitely true with regular oil. Most of today’s cars come with some form of synthetic oil which coats metal for far longer. Today’s engines have an awful lot of aluminum as well. As far as I know the piston rings are still a problem. Historically, if an engine sits unused for a number of years there is a condition commonly called “ring seizing” where the ring welds itself to the cylinder wall and the starter cannot roll the engine over. I’m not an engineer, but this has something to do with two differing types of metal reacting with each other. It takes quite a while, but it happens. When an engine is driven and a fresh coat of oil stays on the cylinder walls, it cannot happen.

Sun damage – While paint has gotten way better, car interiors exposed to years of constant sunlight without the doors ever being opened tend to get brittle and visibly age.

Field mice – Growing up and living on a farm I have to deal with this problem every winter. As the weather starts to get colder field mice start looking for a warmer place to live. They find their way into buildings or vehicles which have sat idle for a long time. Even if you don’t see visible mouse signs, there will be electrical problems and the odor of dead mouse butt to deal with. One always seems to die inside no matter where inside is.

Hail damage – We are all used to seeing “Hail Sale” commercials and advertisements after a hail storm hits an area. Rather than fix the cars dealers opt to cut a deal with the insurance companies and buyers to move the vehicles off their lot for less money. Take a good look at some of those pictures. Now imagine hail dings which cause the paint to crack and let water get against the metal. True, many cars have aluminum, plastic and fiberglass body parts these days, but anything made from steel is going to start to rust.

The list goes on and on. Ask yourself this as well. How many of you are willing to buy a brand new 4+ year old car at new car price? You can’t insure it for the full value because insurance companies will simply go by the year.

Yes, it appears GM got a new management team, but not new management. They are not alone. It looks as if most automobile manufacturers engage in this Channel Removal practice. Why new car costs so much is because you are buying many of these vehicles with each purchase you drive off in.

History

Back in 1980 my parents purchased a brand new fully loaded Caprice Classic for around $4,000. Looking at all of these brand new abandoned cars I have to ask, is that all they _should_ cost today? If manufacturers scaled production to demand would high end vehicles still cost around $4,000 today?

Here is an even better question to ask. If global new car and truck manufacturing stopped today, just how many years would it be until all of those abandoned new cars were sold? I realize the thought of a global auto industry shutdown is enough to cause a massive stock market panic, but the current trend of simply parking excess vehicles cannot continue. Besides being bad for the environment, the practice is simply unsustainable.

Automotive Future

We are at a point in time when global vehicle demand will be continually declining. Populations in major cities have risen and it is a major hassle to own a vehicle in most of them. Ride sharing services have also dramatically removed the need to own a vehicle. Much of today’s youth isn’t in love with owning a car, especially if they live where ride sharing services are plentiful. Adding insult to injury, automobiles are getting higher in quality. Certainly not all of them, but enough of them. The average age of a vehicle on the road today is roughly 11 years.

We are a long way from the era of needing a new car every couple of years. It used to be many vehicles started falling apart after 60K miles and by the time they hit 100K they were on their last legs or already scrapped. Today, certain models are well known to last north of 300K miles with regular maintenance. Given the high price of cars most insurance companies will fix a vehicle which had an accident rather than total it. When cars cost around $4,000 it didn’t take much of an accident for it to be totaled. With many vehicles north of $40,000 out the door, body shops get to fix a lot.

This is my opinion as to why your new car costs so much. What is yours?

It will be interesting to see how this growing over production crisis manifests in the financial news during 2016.

Writing this post also makes me wonder just how “Limited” those “Limited” car models are? How many of them are parked on one or more of these abandonment lots like puppies at the pound?