Where have all the cheap cars gone?

COMMENT

Today’s average new motor car is a truly wonderous creation of modern engineering, and a rolling testament to the skillsets of a variety of industries.

From the complex construction of a modern tyre to the intricate machine work required to form a single-piece roof panel, through to the hundreds of metres of wiring that make a plethora of sensors, lidar and radar units communicate with each other (not to mention the powertrain and chassis), it’s almost impossible to believe they can be built at any price.

Then there are the amazing plants which churn them out at up to 1000 units per shift, with more and more being powered by renewable energy sources that act as a beacon of inspiration to the entire manufacturing sector.

Combine 12,000 to 15,000 intricately designed and built parts, the new-age factories and the complex distribution chains required to deliver a car to any address in Australia, and a $30,000 car suddenly looks a lot less expensive.

But being who they are, consumers want ‘affordable’ (read: cheap) everything – and cars are no different.

The advent of the cheap car is a reasonably late development in the commercial world; until 50 years ago, cars were a luxury item and were priced accordingly.

Even in the early days of Japanese brands like Honda and Nissan (nee Datsun), pricing was commensurate with local car-makers like Holden, Ford and Chrysler.

The arrival of upstart Korean brand Hyundai in the late 1980s arguably marked the start of the cheap and cheerful revolution in the automotive space.

Vast marketing budgets spruiked ‘drive away no more to pay’ offers that were up to half as expensive as other vehicles in-market at the time, and the movement served to democratise the purchase of a new car.

But are those days behind us?

Never mind that a new Mercedes-Benz C-Class will now set you back more than $80,000 to put on the road, or that the new Honda HR-V small SUV now starts at $36,700, as both brands institute ‘agency’ sales models that focus on high-spec models.

While the global supply chain crisis – which started with the semi-conductor shortage and other pandemic-induced production delays, and now includes exploding material and shipping costs – is affecting all car-makers, at the bottom end of the market the sub-$20,000 new car is now an endangered species, with only about a handful remaining on the market.

Once bargain-basement models with a circa-$15K starting price, light-cars like the Mazda2, Suzuki Swift and Toyota Yaris now start at closer to the $25,000 – before on-road costs.

Likewise, the similarly-sized Volkswagen Polo hatch comes with five-star ANCAP safety and a brace of tech features not even dreamed about when the Hyundai Excel ruled the forecourt – but by the same token, the newly upgraded model has copped a near-$6000 uptick at base level (now $25,250 plus ORCs) and the little Polo GTI hot hatch now starts at a big $38,750.

Volkswagen Australia’s brand director for passenger vehicles, Michal Szaniecki, called the rises a move away from the “sticker-driven rat race”, but the reality is that VW had no choice.

Hard costs abound in the car-building process and those costs are inexorably rising. Cold-rolled steel, for example, is 25 per cent more expensive per tonne now than it was this time in 2020, and almost 100 per cent more than it was in January 2021.

The microchip shortage, too, has crunched manufacturing numbers across the board, which in turn ignites the old ‘supply v demand’ equation and its negative affect on affordability.

Ever-tightening emissions regulations also force OEMs to shave weight via more expensive materials and design more intricate engines to meet them, while safety tech requirements continue to ramp up and extend down the price chain.

And all these factors mean that the base price of the car must rise.

Of course, there are some brands that are holding the line when it comes to value; it can be argued that MG, for example, now owns that ‘cheap and cheerful’ space that other OEMs like Hyundai and Kia have walked away from.

But those same considerations – safety, emissions and raw material costs – will eventually come home to roost. The immense bulk of MG’s Chinese parent company, SAIC Motor, has helped to buffer the brand against the first tsunami of pricing pressures, but the honeymoon can’t last forever.

However, the success of that brand in the marketplace (the $18,490 drive-away MG3 light hatch by itself puts MG in fourth place for all passenger cars sales) points to a genuine desire for affordable cars.

It’s also an interesting study in what’s important for new-car buyers in the real world. While ANCAP rankings are an important barometer of a car-maker’s safety credentials, customers don’t buy cars with that in mind… otherwise the ANCAP-unrated MG3 would languish on the docks, not in almost 1600 new driveways every month.

But when the ageing price leader retires… what replaces it? For most, it’s still a simple question of mathematics; what someone can afford to pay for a car week to week or month to month.

In an era of stagnant wage growth and the prospect of more expensive finance coming down the track, vehicle affordability will become a bigger issue in the back half of the 2020s.

New brands like Cupra and establishing players like GWM won’t focus on affordability, while the potential arrival of Dacia – Renault’s definition of cheap and cheerful in Europe – appears to have stalled.

And while most auto brands have access to more affordable vehicles (read: lower specced, less efficient and with fewer safety features) from other markets, it’s unlikely that the maths stacks up to bring them to Australia.

By the time all is said and done, the risk versus reward ratio doesn’t balance out, and a de-contented version of, say, a Nissan X-TRAIL wouldn’t actually be cheap enough to snag genuine sales volume nor equipped enough to pique an Aussie buyer’s interest.

And let’s not even start on the burgeoning used car sector…

Arguably, it’s very unlikely that Australian new-car buyers will be able to purchase a vehicle under $23,000 by the halfway point of this decade, and that could jump to under $30,000 by 2030.

That’s a genuine issue for people whose circumstances don’t allow for such a stretch, but it’s pretty unlikely that new-car prices will come down ever again.

Related: Your questions answered: When will car prices stabilise?

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