Cheap Cars in USA | Why Cheap Cars Are Disappearing

Why Cheap Cars Are Disappearing?

There are about 40 different car brands in the United States, there are American brands and imports, trucks, SUVs, sedans, sports cars and of course, lots of crossovers. There are pricey cars and perhaps more affordable cars. But one kind of car that appears to be disappearing is the cheap car. Auto industry analysts say sales o fvery inexpensive cars these days, meaning any new car with a starting price somewhere below 20000 dollars are declining. In fact, the yhave fallen off a cliff. Historically, about one fifth of new vehicle sales would have transacted below 20000 dollars. But in the last few years, those have completely dried up. New cars are becoming more expensive, and it's unlikely those cheap cars will ever be back. Buyers who love them may be left out in the cold. 

Cheap Cars

The nascent years of automotive manufacturing were dominated by what we would today think of as coachbuilders, basically shops that hand assemble vehicles one at a time. This was the way horse drawn carriages or coaches were built and automotive manufacturing adopted both the assembly line and the name. As such, early cars were expensive. Industrialists such as ransom olds and Henry Ford changed all that by introducing assembly lines and interchangeable parts, dramatically reducing the price of a car. Ford's Model T was one of those early vehicles in Europe. 

There was a movement to develop inexpensive cars for the masses, which many proponents dubbed people's cars. In fact, German automaker Volks wagen'sbrand name translates to people's car making and selling. Practical, affordable and dependable cars haslong been a key goal of automakers. Affordability was a keying redient in legendary and extremely strong selling cars, such as the original Volkswagen Beetle, the Ford Mustang and countless others. Japanese automakers penetratedthe U.S. market in the latter half of the20th century, in part by selling affordable and dependable vehicles. Typically, the most affordable cars are the smaller ones that would fit into the so-called compactand subcompact categories. Some midsize vehicles can also startat prices below twenty thousand dollars in 2020. The subcompact segment in the U.S. included cars such as theHonda Fit, Hyundai Accent Aryo and Nissan Versa. Vehicles in this segment aretypically priced below twenty thousand dollars, a cutoff point for whatauto industry analysts consider the cheapest cars available. The 2020 Nissan Versa, for example, startsat a price of around fifteen thousand dollars. Cheap cars have aproblem that might seem rather obvious, they don't makea lot of money. Automakers, like any company, have certainfixed costs built into their business models. They have to build factories,keep the lights on, pay for product development and payworkers and executives. Many of these basic costs exist whetherthe product they are selling is cheap or expensive. So an automaker basically has twochoices sell a little of something pricey or a lot of something cheap. The problem for automakers is that relyingon volume to make money can be hard. Margins can be razor thin, andany challenges or missteps can eat into already slim profits. Automakers can try to protect againstthis, in part by spreading costs across a range of vehicles, a priceycar might share some parts with a cheaper one. Obvious examples of thisor the Ford Mustang, Dodge Challenger and Chevrolet Camaro, the cheapestversions of the start in the mid 20000 dollar range. But the most expensive versions, which sharea lot of the same basic parts, can cost morethan 90000 dollars. But at least in the U.S., theoverall market appears to be moving away from the cheapest price points. So who buys cheap new cars? Why do they matter? Well, the shortanswer is young people, mostly younger buyers, are usually not loaded. 

They can be people as young as teenagers,but also folks in their 20s and even 30s. Most of the consumers that arein the subtree space tend to be younger consumers andfirst time buyers. And so it's a very critical demographicfor getting new customers into the industry in general, but intoyour brand in particular. So as consumers get their first jobs,establish a career going to family and they're looking for a new car,they're in that twenty thousand dollar space. In spite of the factthat cheap cars are less profitable, automakers are still keen to lure youngerbuyers who likely have many car buying years ahead of them. Selling cheap cars creates the possibilityof building brand loyalty in a consumer over a lifetime. Even luxury makers such as BMW andMercedes have moved into the lower end of the market in recent years inthe hope of boosting volumes and getting younger buyers in their vehicles. So there's a lot of risk here inthat first time buyers now are having to wait many more years toget a new car. And so now you're kind of allowingthe risk there that these first time consumers will rely more on Uber, will liveurban life and not even need a car.

 So we as an industry could bemaking a lot of long term actions here, long term implications from moving thefirst time buyers either back or into something more expensive. Despite the risks of selling cheapcars, they historically made up a considerable share of thenew car market. This appeared to be the case evenin recent years, as the U.S. economy recovered from the financialcrisis of 2008 and 2009. Cheap cars made up a good sized sliceof the auto market prior to 2018. The segment was about 20 percent ofthe industry pretty consistently and so on. On the retail side, we're talkingin excess of about two million sales annually in the space,just below 20000. But something strangehappened in 2018. Sales of some 20000 carsseem to suddenly plummet. And a closer look at salesnumbers shows that cheaper cars were disappearing faster and earlier than itseemed for some of those years following the recession. Two of the cars that made upa considerable portion of sales transacting below 20000 dollars were the ToyotaCamry and the Honda Accord. Neither the Camry nor the Accordare compact or subcompact cars. They are slightly larger and areusually grouped in the mid-sized car category. They typically sell at orabove 20000 dollars, but both were selling at very low prices forseveral years due to incentives dealers were offering on them. It is worth noting that the Toyota Camryand Honda Accord are two of the most popular cars in America and amongthe most popular of all time. In 2017, both manufacturers were scheduledto release new versions of the sedans, and when they did, the prices ofeach car shot up past the 20000 dollar mark, causing sales numbers in thesesub 20000 category to cut in half. So the reality is that thecheapest tier of cars had already been shrinking for years in the wake ofthe recession, even though it looked like sales were a steady fifthof the total new car market. But why were salesof these cars shrinking? Why were dealers offering steep incentiveson these strong selling and practically iconic Camryand Accord nameplates? The all too familiar answeris in three letters SUV. Sport utility vehicles have taken overthe auto market in the United States, as well as a growingshare of the global market. SUVs went from twenty nine point ninepercent of sales in 2009 to fifty one point five percent in 2019. They are found in practicallyevery segment, size and configuration. Consumers appear to love them,but so do automakers. 

The smallest SUVs sell for higherprices than comparable cars, even cars built on the same platformsas the pricier SUVs. For example, four years Ford sold thesubcompact car called the Fiesta in the United States. When Ford releasedits subcompact eco sport SUV, the brand's smallest utility, thecarmaker, said U.S. average transaction prices for eco sportwere 4500 dollars higher than Ford would get from the Fiesta, even thoughthe SUV and the car share the same basic platform. So now you have consumers wantingSUVs, automakers making almost for the first time the cheapest SUVs you'veever seen, coalescing at the same moment so that we saw consumers losethat 20, some 20 thousand dollar vehicle, but then very quickly have thatSUV there for the first time. I mean, that subcompact space, which usedto be somewhere in the range of about two percent today is is wellover eight percent and outsells both mid car and compact car. Individually, consumers are willing topay higher prices for SUVs, primarily because they feel they aregetting more with their taller shape and more spacious cabins. SUVs are seen as more flexible. Many of them have slightly higherground clearance, making them a bit better to drive off roadand thus use recreationally. But the SUV is not the onlyreason auto industry analysts think car prices are rising. Another key pieceof the puzzle is technology. Today's cars are packed with it andcustomers want more of it when they drive off the lot. This includessafety features and driver assistance technology, like cameras andblind spot monitoring systems. But it also includes robustinfotainment systems compatible with Android Auto and Apple car play, voiceactivated commands and comforts such as heated and cooling seats. Consumers today, even young ones, don't seemto want to wait for those features. There isn't as much appetitefor a base level vehicle. Why, lots of reasons, I think that ifyou look at a general attitude of of a of a younger buyer, whether you'relooking at a Gen Y millennial in that space, there there's more impatienceand there's an expectation of being able to have all of thetechnology now and being able to have whatever it is that they want. Now, the expectations that is Iwant Bluetooth in my car. I want Apple complain that there's noreason why I shouldn't have it. 

There is not a reason you shouldn't haveit, but there is no reason you should not expect to pay for it. You've got a push on the youngerside of the market of people being willing to pay forfeatures that they want. And then on the on the flipside, in the older demographic, you've got people who are willing to pay forfeatures because they feel like they've earned it. The trouble is that consumersare paying more for these cars. Loan terms have grown inlength in twenty twenty. The share of loans spanning seventy twoto eighty four months has grown considerably from where they were decadesago, and some consumers are increasingly faced with fewer options atthe lower end, more likely to shell out more for a new caror turn to the used car market. The U.S. market is massive. At their peak, new car salesreached about seventeen point five million units in 2015, but the used car marketis more than twice the size of that at about 40 million units per year. The good news for buyers is that carslast longer than they used to, so buying used often does not come with therisks it might have in the past. And it means that consumers shelling outmore than they ever have for a new car may at least get to holdon to it for a while longer.