Why Cheap Cars Are Disappearing

There are about 40 different car brands in the United States, there are American and imported brands, trucks, SUVs, sedans, sports

cars

and of course many crossovers. There are expensive

cars

and perhaps more affordable cars. But one type of car that seems to be

disappearing

is the

cheap

car. Auto industry analysts say that today sales of dirt-

cheap

cars, that is, any new car with a starting price of less than $20,000, are declining. In fact, they have fallen off a cliff. Historically, about a fifth of new vehicle sales would have been made under $20,000. But in recent years, they have completely dried up.

New cars are becoming more expensive and those cheap cars are unlikely to appear again. Buyers who love them may be left out. The early years of automobile manufacturing were dominated by what we would consider coach manufacturers today, basically workshops that hand-assembled vehicles one by one. This is how horse-drawn carriages or coaches were built and automobile manufacturing adopted both the assembly line and the name. As such, the first cars were expensive. Industrialists like Ransom Olds and Henry Ford changed all that by introducing assembly lines and interchangeable parts, dramatically reducing the price of a car. The Ford Model T was one of those first vehicles in Europe.

There was a movement to develop affordable cars for the masses, which many advocates called people's cars. In fact, German automaker Volkswagen's brand translates to making and selling cars for people. Practical, affordable and reliable cars have long been a key goal of automakers. Affordability was a key ingredient in legendary and extremely strong-selling cars, such as the original Volkswagen Beetle, the Ford Mustang, and many others. Japanese automakers penetrated the American market in the second half of the 20th century, in part by selling affordable and reliable vehicles. Typically, the most affordable cars are the smallest ones that would fit into the categories called compact and subcompact.

Some midsize vehicles may also start with prices below twenty thousand dollars in 2020. The subcompact segment in the US included cars like the Honda Fit, Hyundai Accent Aryo, and Nissan Versa. Vehicles in this segment are typically priced under twenty thousand dollars, a breaking point for what auto industry analysts consider the cheapest cars available. The 2020 Nissan Versa, for example, has a starting price of about fifteen thousand dollars. Cheap cars have a problem that may seem quite obvious: they don't make much money. Automakers, like any company, have certain fixed costs built into their business models. They have to build factories, keep the lights on, pay for product development, and pay workers and executives.

Many of these basic costs exist whether the product they sell is expensive or cheap. So an automaker basically has two options: sell a little of something expensive or a lot of something cheap. The problem for automakers is that relying on volume to make money can be difficult. Margins can be razor-thin and any challenges or missteps can eat into already slim profits. Automakers can try to protect against this, in part by spreading costs across a variety of vehicles: An expensive car might share some parts with a cheaper one. Obvious examples of this are the Ford Mustang, the Dodge Challenger and the Chevrolet Camaro, the cheapest versions that start in the mid-range of $20,000.

But the most expensive versions, which share many of the same basic parts, can cost more than $90,000. But at least in the United States, the overall market appears to be moving away from cheaper prices. So who buys cheap new cars? Why do they matter? Well, the short answer is that young people, mostly younger buyers, are not usually wealthy. They can be people as young as teenagers, but also people between 20 and 30 years old. The majority of consumers found in the subtree space tend to be younger consumers and first-time buyers. Therefore, it is a very critical demographic to attract new customers to the industry in general, but to your brand in particular.

So when consumers get their first job, establish a career, go home to their family, and look for a new car, they're in that twenty-thousand-dollar space. Even though cheap cars are less profitable, automakers are still interested in attracting younger buyers who likely have many years of car buying ahead of them. Selling cheap cars creates the possibility of generating brand loyalty in a consumer throughout their entire life. Even luxury manufacturers such as BMW and Mercedes have moved towards the lower end of the market in recent years in the hope of increasing volumes and attracting younger buyers to their vehicles.

Therefore, there is a big risk that first-time buyers will have to wait many more years to purchase a new car. And now the risk is being allowed that these first-time consumers will become more reliant on Uber, live an urban life, and not even need a car. Therefore, we as an industry could be taking a lot of long-term actions, with long-term implications in making first-time buyers return or opt for something more expensive. Despite the risks of selling cheap cars, they historically accounted for a considerable portion of the new car market. This seemed to be the case even in recent years, as the U.S. economy recovered from the financial crisis of 2008 and 2009.

Cheap cars made up a sizable portion of the automotive market before 2018. The segment accounted for about 20 percent of the industry. fairly consistently and so on. In the retail sector, we are talking about more than two million annual sales in this segment, just under 20,000. But something strange happened in 2018. Sales of about 20,000 cars seem to suddenly plummet. And a closer look at the sales figures shows that cheaper cars were

disappearing

faster and earlier than it seemed during some of the post-recession years. Two of the cars that accounted for a considerable portion of sales under $20,000 were the Toyota Camry and the Honda Accord.

Neither the Camry nor the Accord are compact or subcompact cars. They are a little larger and are usually grouped in the mid-size car category. They typically sell for $20,000 or more, but both were sold at very low prices for several years due to incentives offered by dealers. It's worth noting that the Toyota Camry and Honda Accord are two of the most popular cars in America and are among the most popular of all time. In 2017, both manufacturers planned to launch new versions of the sedans, and when they did, prices for each car soared beyond $20,000, causing sales figures in this sub-$20,000 category to drop to half.

So the reality is that the tier of cheaper cars had already been shrinking for years in the wake of the recession, even though sales appeared to be a steady fifth of the total new car market. But why were sales of these cars declining? Why were dealers offering big incentives for these virtually iconic, best-selling Camry and Accord models? The very familiar answer is in three letters SUV. Sport utility vehicles have taken over the United States automobile market, as well as a growing share of the global market. SUVs went from twenty-nine point nine percent of sales in 2009 to fifty-one point five percent in 2019.

They are found in practically all segments, sizes and configurations. Consumers seem to love them, but so do automakers. Smaller SUVs sell at higher prices than comparable cars, even cars built on the same platforms as more expensive SUVs. For example, four years ago Ford sold the subcompact car called Fiesta in the United States. When Ford launched its subcompact Green Sport SUV, the brand's smallest utility vehicle, the automaker said average U.S. transaction prices for the Green Sport were $4,500 higher than what Ford would get for the Fiesta, despite that the SUV and the car share the same basic platform.

So now we have consumers who want SUVs, automakers making almost for the first time the cheapest SUVs we've ever seen, merging at the same time so we saw consumers lose that 20, about 20 thousand dollars, but then very quickly they have them. SUV there for the first time. I mean, that subcompact space, which used to be in the range of around two percent today, is well over eight percent and outselling the midsize car and the compact car. Individually, consumers are willing to pay higher prices for SUVs, primarily because they feel they are getting more with their taller shape and more spacious cabins.

SUVs are considered more flexible. Many of them have slightly more ground clearance, making them a little better for off-road driving and therefore recreational use. But SUVs aren't the only reason auto industry analysts believe car prices are rising. Another key piece of the puzzle is technology. Today's cars are packed with it and customers want more when they leave the dealership. This includes safety features and driver-assistance technology, such as cameras and blind-spot monitoring systems. But it also includes robust infotainment systems compatible with Android Auto and Apple Car Play, voice-activated commands, and conveniences like heated and cooled seats. Today's consumers, even young ones, don't seem to want to wait for those features.

There's not as much appetite for an entry-level vehicle. For many reasons, I think if you look at the general attitude of a younger buyer, whether you're looking at a Gen Y millennial in that space, there's more impatience and expectation of being able to have all the technology now and being able to have whatever they want. Now, the expectation is that I want Bluetooth in my car. I want Apple to complain that there's no reason it shouldn't have it. There's no reason you shouldn't have it, but there's also no reason you shouldn't expect to pay for it.

You have a push on the younger side of the market, of people who are willing to pay for the features they want. And then on the other hand, in the older demographic, there are people who are willing to pay for features because they feel like they've earned it. The problem is that consumers are paying more for these cars. Loan terms have increased in duration by twenty twenty. The share of loans spanning seventy-two to eighty-four months has risen sharply from decades ago, and some consumers are increasingly faced with fewer options at the lower end, more likely to shell out more for a new car or resort to to a used one. automobile market.

The US market is huge. At their peak, new car sales reached around seventeen point five million units in 2015, but the used car market is more than twice that size, at approximately 40 million units per year. The good news for buyers is that cars last longer than ever before, so buying used often doesn't come with the risks it might have in the past. And it means that consumers who shell out more than ever for a new car can at least keep it for a while longer.