Pricing in Australia a question of interest

Australia is a 'hot-climate' market, says Audi's local MD Uwe Hagen -- and that has some bearing on the cars the importer sells here.

Hagen (pictured), speaking with the Carsales Network during the launch of the A8 TDI models earlier this week, revealed that Australian-delivered Audis are built to a higher standard for our hotter climate. This not only delays the introduction of altogether new models by three or four months, it also pushes up the landed cost of the cars once they arrive.

While the cost of upgraded glues and plastics account for some of the price difference, tax also makes a difference, said Hagen. If the price of a car exceeds the Luxury Car Tax threshold, every dollar extra incurs 33 per cent tax. Nor does that include the additional 10 per cent GST payable across the full price of the vehicle... or the five per cent import duty.

But even that leaves a considerable difference in pricing unexplained. Why is it that cars in other markets are priced so much lower than in Australia, once the international price is converted to Aussie dollars? It's a particular sore point with consumers when the Australian dollar is currently above parity with the Greenback and is well ahead of where it was against the Euro, prior to the GFC.

"First of all, I can turn the question in the other direction," replied Hagen. "Of course you have a home market and you do the calculations always [based] on your home market. Then, no one knows -- looking into the future -- how the currency rate is going to develop. So what you do, in general, you try to secure currency exchange rates. So you [the consumer] pay extra in any case, to secure the rate. It's normal, it's not only with cars, it's with every business.

"Throughout the last month, the Australian dollar has developed quite positively. What you can't achieve in a company like this... let's say now we do a price reduction -- and then the exchange rate changes, we do a price increase. No one will accept this in this market, because we're not a stock exchange.

"But when you have a discussion on new launches, then you have discussions on [pricing]. We also raise our hand and ask for prices in the market that will make the car more competitive."

So, as is the case for other importers, Audi Australia haggles for the best possible price from the factory on the eve of the car's launch in Australia. The local Audi team go to great pains in settling on the price for a new car. Not only must it be competitive with rivals in the marketplace, it must be consonant with prices charged for the car's predecessors in the market. Hagen explained that the company has to work out the price based on a roughly seven-year life cycle for any new model.

"[In] a life cycle of seven years, your whole calculation is based on seven years -- volume [for example].

According to Hagen, constantly readjusting the prices of new cars will inevitably impact on the retained values of those cars and earlier models when they come up for sale -- not only when on-sold from the new buyer to the second owner, but also from the second to third or fourth owners.

And cars aren't like petrol, Hagen continues. An importer of cars can't buy a stock of cars and hold them in reserve for ever, to sell at a time when the acceptable retail pricing and landed costs are in alignment. By contrast, the oil industry and its local wholesalers do buy fuel in bulk lots to hold in reserve and sell at the appropriate time.

For the car companies, as history has shown, cars held in bond stores for up to 18 months or more don't cope very well. Cars are not designed to sit still for a year or two at a time. But that's not an issue of any consequence for Audi anyway, Hagen explained. What is a matter of concern is the interest payable on each car shipped here. Audi and other prestige importers borrow to pay for the cars and the interest begins mounting up from the moment each car leaves the factory. And even the cost of transporting 20 luxury cars to Australia adds a significant per-unit premium to the landed cost, over the transport costs for 1000 cars across the Atlantic.

If a period of 10 weeks passes between a $100,000 car being built and being sold in Australia, that's $800 interest per calendar month based on 10 per cent interest -- or about $2000 for the 10 weeks. Then the dealers have to pay interest as well (on their 'floorplan'). All the worst-case interest scenarios have to be built into the final price.

"Our stock, on average, is maybe 60 days [old]," said Hagen. "The longest period is just the transport period. When the car is going from the factory to the ship, we have to pay the factory for the car. We also secure [the price from that time]. Same as with the dealer... the transfer [of ownership takes place] when the car is in the country."

Interest rates in Australia are significantly higher than in other markets, currently. The current prime rate in the USA, according to Wikipedia, is 3.25 per cent - versus the 4.75 per cent official interest rate set by the Reserve Bank of Australia.

"If the interest rate is changing... going up, I can't charge a different price to the customer," Hagen added. "If I have the car, let's say three months for transport and two months staying in our stock -- that's five months and in these five months maybe the interest rate is going from three per cent to six per cent.

"It's our risk... As long as the car is on our bill... this whole system has to cover this risk because you have to have stock -- and we don't [pass the cost] on to the customer.

"What you have to see is that the cars are not [always] comparable. There are some things -- like... the hot [climate car] calculation -- it makes a car more expensive. Then there are specific packages in the car, so the spec is different -- what we call 'country setting'. Then, the interest situation is different...

"So the whole calculation platform is different, and this is causing different pricing."

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