Can cars get any cheaper?

Will changing business environment challenge importers to maintain historically low prices?

It's often said that cars have never been more affordable. Punters usually write that off as just an inducement to purchase a new car.

The truth is that new-car buying power has been steadily growing though, while prices have either stagnated or declined, if anything. Our graph here (click on picture to expand), combining Australian Bureau of Statistics data – representing average gross income per annum – and Redbook new car price data, clearly shows that for five representative models over a 20-year period, cars have truly never been cheaper.

Often left unanswered by motor vehicle traders, the question remains: will cars continue to be more affordable?

Many remember the way new car prices exploded in the mid 1980s, after the Aussie dollar was floated by the Hawke Labor government. As the local currency plummeted, the landed cost of imported new cars climbed through the roof.

Having seen the AUD reach as high as US $1.10, we're now watching as it hovers around the 95 cent mark (US $0.93 as this article is written). Are we in for a year or two of exorbitant pricing as the importers catch up with a weakening dollar?

BMW's 3 Series is presented in the chart in an up-market specification of car with the entry-level drivetrain – a popular choice for buyers. Prices have stagnated as the landed cost came down and the prestige importer packed in more kit to compensate. Around 2007 average wages had reached a point where the BMW could be paid off in one year.

Competition drove that. 3 Series became more affordable as its competitors did. BMW loaded it up with more equipment rather than reduce prices – which would have eroded resale values and enraged owners. As average wages moved higher, the 3 Series naturally became more affordable and BMW could sell more, which boosted overall profitability without raising prices.

Finding that fulcrum between profit and competitive market advantage is a science of sorts, as BMW Australia's General Manager for Corporate Communications, Lenore Fletcher, explained to motoring.com.au last week.

"Business sustainability over the long term is extremely important to BMW," she acknowledged. "Obviously in any business case there are multiple adjustments that can be made... to ensure that we still manage to present the best product offering at the best possible price."

BMW in Australia formulates its business strategy over the course of years, rather than months. Product planning is key to that; adjusting vehicle specification is one element, price is another. There are also other considerations, such as sourcing a car from a lower-cost nation – South Africa, in BMW's case. And there are hindrances too, such as ADR (Australian Design Rule) approval, an expensive certification process that can impact on a car's retail price.

Fletcher doesn't see any immediate need to restructure the company's business plan, despite some economists forecasting slower growth for Australia and a decline in revenue from the mining sector.

"From BMW's point of view, I don't think we've made any long-term forecast of what we think the market will do. I think the majority of manufacturers would probably agree that they don't see any huge risk at the moment," she observed.

There is some risk, of course, but there's enough margin built into new car pricing to hold fast for a while. Over a longer period prices could be expected to rise and models may be 'de-contented', as importers did back in the 1980s after the Australian dollar was floated.

That's something Mazda would not do, however, according to the company's Senior Manager for Public Relations, Steve Maciver.

"We're usually not in the [habit] of decontenting cars; we certainly don't think that's a way we would like to go. But also it's a case, of course, of looking [at] what the market does," Maciver told motoring.com.au.

"We have to take cues from what our competitors do as well."

That's an academic argument for the moment however, since Maciver feels the Australian economy remains a safe harbour.

"We monitor economic statistics on an on-going basis – as I'm sure most other car companies do as well. The fundamentals of the Australian economy are still sound. We believe that there is potential for further growth. We're certainly looking to grow our brand, we're certainly looking to grow our [sales] volume in the coming years.

"But we need to be prepared for fluctuations, we need to be prepared for changes in that environment, but making pricing decisions on a short-term change is not something we're in the habit of doing."

In effect, Mazda would endure some short-term pain if the economy should go drastically 'pear-shaped', because it is "much more practical, pragmatic and responsible approach to try and remain consistent on pricing policy."

But Maciver acknowledges that the importer is not a charity. Sooner or later it would adjust its pricing or specification if forced to that point.

"If there's a sustained movement in one direction or another... say for instance over a six, eight, nine-month period, it's something we'll look at and we'll certainly react to that..." he said.

For the last 20 years however, Mazda has been able to balance the books quite nicely, as exemplified by the Mazda MX-5 in the graph. While it now looks considerably more expensive than the Toyota 86 and Subaru BRZ, it remains not very much more expensive in fact than it was in 1993 – when it was considered something of a bargain. Mazda is not selling the MX-5 in huge numbers, but a new model is on the way – and will bring with it the inevitable price rise.

Locally produced cars aren't immune from currency fluctuations, since they are heavily reliant on imported parts, which would inevitably cost more to procure if the Aussie dollar loses serious ground. Holden's Commodore is one of those locally-built cars. As the chart shows, the Commodore has risen in price steadily, based on entry-level trim for a sedan with V6 and automatic transmission. At no point, however, has the price of the Commodore come close to climbing in parallel with the wage growth of the average Australian worker, even though the car is assembled by Australians. And the chart doesn't incorporate the new VF model, which has come down considerably in price, right across the range.

Toyota's Stephen Coughlan has told motoring.com.au that the locally-built Camry and Aurion are less susceptible to currency volatility.

"The majority of our vehicles are purchased in Australian dollars which protects us against fluctuations," he informed motoring.com.au. As for content, around 65 per cent of the parts for the Camry and Aurion are supplied by local firms.

In the graph, the Toyota Corolla has remained in a holding pattern over most of the period, plainly benefiting from the shift to importation in 2000 – although the price of the locally-manufactured entry-level models had been dropping for the five years prior.

Mitsubishi's diesel Pajero rose in price quickly with the introduction of the monocoque NM model in 2000, followed by the then-new direct-injection diesel engine. Yet within three to four years the Pajero was back below the annual average earnings line. Like three other cars in the chart, the Pajero can now be owned outright for less than a year's salary. It has been respecified over time and the entry-level models have variously been GLs or GLXs, but the message is the same: Pajero is a much more affordable SUV now than it was a decade ago.

What the graph shows is not just the way the local currency has fluctuated over the years – or the way our disposable income has outstripped new-car pricing. It demonstrates the effects of reducing import tariffs to five per cent for passenger cars, and it illustrates how manufacturing efficiencies have brought down the cost of the car year by year. More parts are shared between manufacturers these days, for instance, and materials technology has made huge strides over the past two decades. Add to that logistical advances and increased reliance on factory automation (including CAD/CAM to take out a lot of R&D cost that has to be amortised over a production run), and the global automotive industry is making progress in leaps and bounds to reduce the price of the new car.

So it appears that what the sales bloke at your local new car dealership is telling you is right; cars have never been cheaper. What he's not saying is that in three to four years' time, they may be significantly cheaper still.

Most people can't wait three to four years, however, if the old bus is costing more to keep on the road than it's actually worth. And since unemployment is at record low levels and many car companies and financiers are offering exceptionally low interest finance (even zero interest), this may be a golden age for new car ownership.

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Can cars get any cheaper?

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