Why Cars Are Cheaper Than You Think

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(Bloomberg) -- In December, the sticker price on the average U.S. automobile hit $38,616, a level not seen since “Tesla” evoked the image of an electrical engineer. Come summer, carmakers will probably break that price record again. It’s true, there are still plenty of cheap wheels to be had in the reasonably priced basement. It’s just that the top of the market is speeding away.

Perhaps the greatest engineering feat in the auto industry this century isn’t mechanical but financial: getting people to spend luxury money on milquetoast vehicles—turning Ford and Chevy hamburgers into steak. The swankier brands have been torquing top prices quite a bit as well. Now Detroit wants a taste, too.

Consider the Dodge Challenger, known in some circles as the poor man’s Ferrari. At the moment, 15 Challengers are on offer, from the $27,200 base model to a mind-blowing $85,500 “SRT Demon,” a Mad Max fever dream at Porsche prices. It’s not alone: Choose virtually any mainstream, mass-market vehicle and you can find similar, gold-plated price-tag tuning.

Of all the vehicles sold in the U.S. at the moment, the least expensive iterations average $46,000, while the most expensive versions of the same models settle around $63,000, according to analysis from Edmunds.com. The gap between those two levels—the no-frills machines and the fully loaded ones—is more than double what it was in 2000.

Vehicles, by and large, aren’t getting more expensive, but some of them are—and drastically so. “Because that’s where the profit is,” explained Truecar.com Analyst Eric Lyman. The Ford Focus RS, in particular, gives him a chuckle. At $41,200, the starting sum for the souped-up hatchback is more than double the lowest, “get-in” price of a plain, baseline Focus.

Why the swelling stickers? For one thing, there’s more stuff. Back in the 1990s, a car was an equation of fashion and power. Cloth seats or leather? V6 or V8? Perhaps you’d like to spring for velour, power windows or floor mats?

Today, there’s a third, more powerful variable: automobile as personal electronic device. Tire-kickers can agonize over the size of the in-dash screen, the number and type of USB ports, Wi-Fi, wireless charging and—if they stray into Mercedes territory—what scent is “atomized” into the cockpit—an option that used to be outsourced to little trees hanging on the gas station cashier’s rack.

Autonomous driving systems and active-safety features tack on a few more levers for dealers to pull in their price machinations—from blind-spot warnings and emergency braking to adaptive cruise control and a fleet of little robots to parallel-park on command.

What’s more, all this gear can be had for a price, part of what carmakers sacrificed when they outsourced huge chunks of their supply chain to third-party parts-makers. In short, a spartan Chevy can be spiffed up as sweetly as an Audi—often with some of the exact same stuff. “It all sort of democratizes itself down into lower lineups,” said Lyman at Truecar. “There’s a certain ubiquity to features and technology in the industry right now.”

Buyers are on to all this parts-sharing, so individual brands have naturally lost some clout. A loaded Mazda, for example, looks pretty appealing, compared with a bare-bones Benz—even though it costs more. 

Along the way, automakers refined pricing strategies to better grapple with the growing pile of extras and options. A la carte ordering was largely scrapped in favor of a range of vehicles with prescribed packages of goodies—or, in dealer-speak, “trims.” If automakers still packaged vehicles the way they did 30 years ago, “buying a car, let alone comparing one to another, would be a nightmare,” said Ivan Drury, senior manager of data strategy at Edmunds.com.

Trim packages make it far easier to manage a supply chain; assembly lines can simply bang together one of four or five packages, rather than diligently adding individual features like a tailor working up a bespoke suit. “The more build complexity you have, the more you expose yourself to risk-of-quality issues,” said Lyman. 

Packages are also handy for grouping customers by willingness to pay. When he shopped for a new Honda CR-V recently, Scott Peterman was happy with the second-cheapest configuration, the so-called EV trim. But he really wanted a power lift-gate and leather seats, which pushed him up the ladder, by $2,400, to the next-highest trim.

“It’s like looking at a restaurant menu—but you can’t order off-menu,” Peterman said. The upside for the consumer: Trim levels make it easier to price-shop among competing dealers. Ultimately, Peterman paid $3,000 less than the sticker price for his car, because he knew exactly what he wanted—and even got a bevy of Pittsburgh dealers to bid on his business via e-mail.

Though, it’s never been easier to blow a year’s salary on a vanilla sedan with a monster engine, once adjusted for inflation, window stickers have stayed remarkably stable, despite all the additional goodies. “Your bang for your buck is so much greater today,” Drury said.

In fact, when income is considered—including both wage gains and stock market winnings—vehicles in the U.S. have actually become slightly more affordable in recent years. Annual disposable income per person in the U.S. passed the average vehicle sticker price in 2006 and has stayed in front. Of course, those are just average figures; that income pile isn’t evenly distributed. Somebody has to buy that $85,000 Dodge.

©2018 Bloomberg L.P.

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