In the business world, the rearview mirror is always clearer than the windshield. –Warren Buffett
If anyone can be said to understand business, it would be billionaire Warren Buffett. His statement is apt, especially when discussing the reasons for car prices over the years not really falling as would be assumed in an industry with economies of scale, an ever growing demand, and decades of experience. Those three reasons alone should tell the average businessman that over time, the cost to produce a product should decrease, and the cost for the consumer should fall as well. However, in the automotive industry, that is not really the case.
When you look back to the Model-T being sold in 1908, the cost was $850, and when that is adjusted for inflation, the cost today would come to about $22,000. Over the course of 12 years, the Model-T fell to an overall price of $260 by 1920, which when adjusted for inflation would cost around $3,500 in today’s dollars. Now an average low-cost vehicle nowadays will generally run anywhere from $16,000 – $22,000, however, that asking price has been at that level for many years, with no real sign of change. Conversely, there are vehicles for sale under $3,500, the Tata Nano sells for $1,800 new in India. But these cars are very few and far in between, and are certainly not common in America. So why then, over the course of a century, are we paying nearly the same price for new vehicles?
Associated Costs for Production
Back in 1908, Ford only had a handful of things to worry about, mainly that being to make an automobile. Sure you could have it in any color you want, so long as it’s black. But what would the color matter if you were one of only a handful of people that owned one. Ford originally didn’t have to worry about much about their automobiles being unique, innovative, or stylish because they were really the only manufacturers in America. Their costs, due to this, were drastically less. However, they were trailblazers, and it always takes more effort, energy, and time when you’re the one creating the trail rather than following it. As such, their costs reduced drastically over the course of 12 years because they no longer had to forge ahead, but merely follow the path they created.
But since then, the numbers of costs have grown as well as the associated costs. Nowadys you have to consider labor unions, the multitude of materials required, the design phase, the countless funds that go into research and development, additional features to be offered, marketing, manufacturing plants, transportation, and the list goes on. All of this costs money, and those costs have to transfer into a vehicles asking price otherwise no money could be made. Imagine if the original Ford Model-T had color options, interior material choices, different engines, sun roofs, fancy rims, and anything else your mind could imagine. The cost would be drastically higher than it originally was, and that is because what was being offered was, with no insults intended, basic.
In order for all the add-ons and bonus features we have optional for new vehicles we purchase nowadays, there are a lot of costs associated with that. And the costs are not simply for the material, time to install, etc. Many of the vehicles produced never get sold, or in the least, take a long time to finally sell. Once a vehicle has a sun roof and leather interior installed, that car has a sunroof and leather interior. This means that in order for it to sell, there needs to be a person who wants exactly that, and is willing to pay a little bit more to get it. When you produce a lot of one thing, you have to hope that people are going to want that one thing; otherwise you have just wasted a whole lot of money. As insurance against this, as car manufacturers know not every car will be sold for their asking price, they need to bump the price a bit on all of them up to cover the gamble they are taking. Sometimes they win big, and other times, they lose the house.
Finally, we have to consider the number of competitors in the market. In the time when the first Model-T rolled off the line, there were very few other automobiles in the world. They quite literally had a very tight grasp on their market. Now generally, competition drives prices down because a lower cost usually drives more sales so long as everything else is equal for a product. However, competition in the automotive industry does nothing more than increase the total number of costs, as this is based on those few listed above, as well as many others.
With competition, options are now required to drive attention toward your product to differentiate it from everyone else. There are certainly manufacturers whose business model is to keep their automobiles cheaper, but even those have competitors and generally, car sales in this area don’t do so great. Though the number of them have been increasing over the year. Hyundai, Scion, and many others now compete in the affordable automobile market, and are making traction. But how long until the price of those go up as well?
These questions won’t be known until the future has occurred. But one thing is for certain, the overall cost of an automobile may not have decreased, comparatively, over the last 100 years. But the value of what is offered has increased more than any measurable amount. Before you got a steel carriage, 4 wheels, a seat and an engine. Nowadays… well, let’s just say we have cars that can drive themselves. So the cost may have indeed not gone down, but we’re sure getting a lot more bang for our buck.
- License: Royalty Free or iStock source: http://www.sxc.hu/photo/1382400
The author of this article is Damien S. Wilhelmi. If you enjoyed this piece you can follow me on Twitter @CustParadigm. If you are in need of a Transmission Repair and live in Colorado, please be sure to check out AAMCOColorado.com for available locations.