If you have looked at new cars lately, you’ve seen that their prices have increased significantly in the last few years. According to reliable data (see References), the average new car sold for more than $36,000 in February 2018, up 29 percent from the same month in 2009. Used-car prices, which are roughly correlated to new-car prices, have moved up right alongside their new-vehicle counterparts, increasing by an impressive 36 percent to $24,499 in 2018 from $17,980 in 2009. Both increased rates are higher than the general rate of inflation, of course. Further, car loans now average about six years (with many at seven) in contrast to the traditional three-to-five-year period (Table 1).
I am normally very skeptical of using “averages” for assessing trends, as this simple statistical calculation can easily obscure important details; in this case it’s probably a reasonable marker. Also, although I tend to ignore most trend-related stories since they are based on anecdotes, estimates, guesswork, and erratic surveys, I make an exception for numbers related to cars. The reason is that most data related to cars is fairly solid, as nearly everything related to the car technology, sales, and financing is formally reported and made public, and there’s detailed data available through registrations, while any gaps are fully researched by the many research firms that analyze the auto industry.
What accounts for this dramatic rise in car pricing? It’s more than just updated appearance (Figure 1) or increased manufacturer margins (if that is even the case). Although it would be nice to point to one primary cause, it’s not that simple (it rarely is, despite what some pundits like to say).
First, cars have gotten much better with respect to both initial quality and long-term reliability. For example, you don’t see many “rust buckets” out there due to improvements in metals, processes, and finishes, nor do you see as many cars broken down on the road. This is not just anecdotal; for example, the aggregate data from tens of thousands of cars as reported by readers of publications such as Consumer Reports provides solid evidence. (The late, much-missed Bob Pease kept a log of which cars he saw broken down on the road. In his last years the list got shorter and shorter, he remarked in one of his columns, which I can’t locate now.)
Also, there are emission-control mandates and safety features such as rear-view cameras, tire-pressure sensors, and more; you can make your own extensive list. There’s more on the way, too, as there’s regulatory activity and a preliminary agreement to outfit cars with some sort of scheme to detect if a child has been left in the back seat (the nature of this system is still unclear, as is whether it will have the same basic form across all cars). Many of these features are lumped under the term ADAS (advanced driver assistance systems).
Finally, there are many convenience, comfort, and connectivity features that owners and passengers have come to expect and demand, such as power windows, doors, and seats; air conditioning; entertainment apps; connectivity; and more—again, you can make your own list. Call it feature creep: enhancements such as power windows were only available on higher-end or fully loaded mid-range cars just 20 years ago, but now they are pretty much standard.
Whether you regard these many enhancements as worthwhile due to the safety considerations, or nice to have or even must have, isn’t the point. It’s that adding all of these, whatever the reason, does add to cost. Even though electronics have gotten less expense per function, the cost curve is bending up, partially because so many of these are being added.
Further, there’s an aspect that’s not obvious to those who only think of declining cost/digital function. Yes, prices of digital gates and ICs have dropped dramatically due to process improvements, smaller feature size, and larger wafers. But many of these car-related enhancements are also heavily dependent on sensors and analog circuitry, and those—especially the sensors and transducers – haven’t scaled down in cost as quickly as digital-only ICs have. Plus, actuators and motors (a typical new car has several dozen) don’t follow Moore’s “law” and their support circuitry (power supplies, gate drivers, MOSFETs, and protection circuitry) also bring added costs.
Despite the sharp increase in new-car and used-car pricing, there’s some associated good news which may, in fact, be partially due to the increased initial cost. The average age of a car on the road—termed VIO for vehicle in operation by the industry—has also gone up identically, to 11.8 years in 2019 from 8.5 years in 2005. This is apparently due to the improved reliability and the longer loans. Again, averages can lead to simplistic results, as there are plenty of people who “trade-in” after 4 to 5 years, and many who keep their car going until it falls apart.
A fascinating and depressing article in The Wall Street Journal looked at people who purchase new cars before they have paid off the loan on their existing one, “rolling over” their outstanding balance into the new car’s loan so they may owe $40-$50K in aggregate or more on a $25-$35K car. This doesn’t end well, of course, as the new car is repossessed, and they often have to declare bankruptcy as well.
What’s your view? Are we adding so much electronics-related “good stuff,” whether mandated by well-intentioned safety and pollution regulations or simply for comfort and convenience, that we are setting the industry up for a major fall when things get a little tougher out there? Or are these enhancements worth it as cars last longer, so the cost of ownership per year is actually more tolerable? Is there a place for a basic reliable vehicle without all these add-ons, or is the nature of the consumer and vendor business model such that it’s just not viable, except perhaps for a very small segment of buyers? Are there other significant factors driving car pricing beyond the electronics?
- IHS Markit, “Average Age of Cars and Light Trucks in U.S. Rises Again in 2019 to 11.8 Years, IHS Markit Says”
- Edmunds, “New Vehicle Prices Climb to All-Time High in December”
- Edmunds, Insights and Press Releases
- The Wall Street Journal, “A $45,000 Loan for a $27,000 Ride: More Borrowers Are Going Underwater on Car Loans”
- U.S. Department of Transportation, Bureau of Transportation Statistics, “Average Age of Automobiles and Trucks in Operation in the United States”