Cars, as anyone can plainly see, are nicer than ever these days (on the inside, at least). So many features! Power everything, technological wizardry, crazy-long warranties, the works. But the prices are also climbing — the average transaction price is over $36,000. The average family can’t afford a new one nowadays, so who’s buying them? What makes them so pricey to begin with? Is it just going to get worse? With the help of Matt DeLorenzo, senior managing editor at Kelley Blue Book, we’re engineering some answers.
How come cars keep getting more expensive?
Two separate things are happening at the same time, according to DeLorenzo. One is that people are buying larger vehicles: trucks and crossover SUVs are super popular these days. They cost more not only because they’re bigger, but they also have a lot of features on them (all-wheel drive, etc.) that you won’t find on a Honda Civic.
The other factor, he says, is all the driver-assist features that are being unveiled. “Cars are getting incredibly complicated because of that,” DeLorenzo says. Have you stepped into a new car lately? Many have things like adaptive cruise control, blind spot warnings, lane keeping assist and emergency braking — each of these systems is intricate and requires a ton of sensors around the vehicle. As you can imagine, cars are also becoming more expensive to repair because of all these systems.
Why do manufacturers load cars up with these things?
Simply, because car manufacturers think people will pay for them. They also want to make cars safer, which entails things like adding lots of airbags, which will increase the cost of a car, as well as the research into redesigning crumple zones and strengthening the frame. Five-star safety ratings are really important to a brand, because they’re important to consumers (let’s not forget, a safer car also means a lower insurance payment). Hence the technological arms race, and the R&D for all that — a bunch of sunk costs — are eventually passed on to the consumer.
But aside from these safety features, cars are getting more technological all the time. Many economy cars have things like touch screens and electronic displays that you didn’t see anywhere even five years ago. These are all more costly than analog gauges.
Does anybody actually use all that stuff, really?
Funny you should ask: The CEO of Ford, Jim Hackett, is interested in getting rid of some features in order to lower the price. For example, most cars still have CD players (hi, Boomers!), and he says almost nobody uses the built-in programmable garage door openers, based on their research, just to name a couple items.
Aside from add-on tech, what makes a car so expensive?
The two biggest costs, according to DeLorenzo, are no surprise at all: Labor and materials.
Right, but in a car itself, what’s the biggest cost?
It depends on the vehicle type, but for a regular old gas-powered car with an automatic transmission and average features — which isn’t an expensive car to build, according to DeLorenzo — it’d be the engine and transmission. Diesel-engine vehicles get expensive because of all the things they have to do to them to meet emissions standards. Hybrids are typically more expensive because they have two power trains inside them, and then with electric vehicles, it’s the battery. The Hyundai Kona is a good example of this, according to DeLorenzo: The electric version costs $10,000 more than the standard version! “A lot of that can be attributed to the cost of the batteries,” he says.
Also, anyone buying a gas-powered car nowadays is paying for the electric cars of the future. “The money that manufacturers are pouring into EV [electric vehicle] technology right now far outstrips any they’re getting from the sales of current EVs,” DeLorenzo says. “So if you’re buying a conventional vehicle, you in fact are subsidizing EV research at this point.”
Are cars lasting longer now, at least?
Yep, and that’s a factor, too. Hyundai and Kia have 100,000-mile powertrain warranties, which wouldn’t have been possible 25 years ago, DeLorenzo says. A lot of components are just far more bulletproof nowadays, with much lower failure rates. DeLorenzo points out an interesting relationship between durability and price. “Back in the day, I remember you had to get your chassis lubed, or you had bearings go out, and you’d get a tune-up once a year. Now, things like spark plugs last 100,000 miles and bearings and U-joints aren’t an issue,” he says. “They’ve done a lot of learning to make cars last longer than what they had. And they have to because they cost more!”
How long does a car last now?
The average age of a vehicle in a consumer’s hands right now is about 10 or 11 years. This has codified the market a bit: Because vehicles are evolving so quickly, it means that people who want the latest and greatest tech and vehicles will increasingly lease a car. A few years down the line, a second consumer, who’d like to have a car they can keep awhile, can purchase it for a lot cheaper after the original owner’s lease term ends (typically after 36 months) with, say, 30,000 miles on it. Then again, customers can also buy a new car and expect to hold onto it for a while now, since they’re more reliable.
How can any normal person even afford a new car, anyway?
Creative financing! More people than ever just want a low monthly payment, whatever that entails, and lenders are happy to oblige in ever-increasing ways with their loans and lease options. In fact, easily available money is another reason prices have climbed, just as a matter of economic principle (we commonly refer to it as “inflation”).
What about regulations?
Designing the ever more powerful engines that consumers want, and which conform to ever-tightening emissions and efficiency regulations, will add to the cost of a car, yes.
Why doesn’t anyone make a super cheap car anymore?
Like with roll-up windows, an FM-AM tuner and no AC? Yeah, those are probably gone for now. The reason is that the scale for power technology (power locks, power windows, power liftgate, power seats, heated steering wheel, etc.) has brought the price down so much that, for an entry-level car, why not put in power windows? It could easily be cheaper and easier to install now than the manual kind. Overall, there’s a level of luxury in compact cars now (ahhh, leather!) that would have been unthinkable 10 years ago, DeLorenzo says. Consequently, buyers’ expectations change.
There’s a possibility in the future, DeLorenzo says, of somewhere like China coming out with a bare-bones car, but when a consumer can either buy that or get a name-brand used car (that’ll still last a while) with power everything for cheap, which do you think they’ll choose?
What else drives up the cost?
Marketing costs a lot! Not only TV ads, but another marketing expense you may not think of: the incentives. Incentives are those promotions that car companies seasonally offer to decrease the cost of the car — usually rebates or lease specials. Often, incentives cover about 10 percent of the MSRP of a car nowadays, according to DeLorenzo. It’s generally a cost that’s built into the vehicle itself.
Okay, so there’s a lot of costs that go into manufacturing a car, I think that’s a given. But come on, what are the margins like?
They’re a lot tighter than you probably think! Segments are different: Compact cars have tight margins, while trucks have bigger ones. DeLorenzo says the average car has a margin of just two to five percent. The dealer markup at full MSRP is typically 17 percent, but that goes down a lot when you factor in discounts and the competitive marketplace.
So ultimately, cars remain expensive just because people will still pay the price for them, right?
Yes — otherwise, prices would come down! There’s something to be said for consumers’ desire for increasing power, luxury, safety, reliability and fuel economy, but there’s also the fact that there are now so many ways to lease, own and finance a car. Look at it this way: It’s pretty damn safe to say cars will never be cheap, but at least you’re getting a much better product in return.
Adam Elder
Adam Elder is a writer in San Diego. He's also written for Esquire and WIRED magazines, VICE, The New York Times, The Wall Street Journal, The Guardian, newyorker.com and elsewhere.
