- The Washington Times - Friday, September 26, 2008

Just as certain as death and taxes — and a new season of reality TV — prices for small cars are going to increase. What’s not certain is how much they will go up.

Bob Lutz, GM vice chairman and product development leader, who is not afraid to speak his mind, says the days of the $15,000 econo-box are over. He says we’ll be driving smaller vehicles for fuel economy sure, but we’ll pay lots more for them because they’ll be fancier.

Why will prices climb? Simple economics. As reported in a recent Motor Matters FreeWheeling column, material costs — steel, aluminum, plastics — have all soared. Suppliers and automakers can’t absorb these price increases forever. Costs are going to be passed on to the consumer.

Not everyone, however, thinks the “cheapos” will disappear. Bob Schnorbus, chief economist for J.D. Power says, “As we migrate to higher mpg vehicles there’s going to be a demand for vehicles as cheap as you can make them.”

“I think the average cost will be $2,500 to $5,000 for new materials and technology,” says Schnorbus. “That can be more than 20 percent on a $20,000 car. There’s a pretty crude rule of thumb that says for every 1 percent increase in cost there’s a 1 percent decrease in sales. If the cost increase is 20 percent, that’s huge.”

Remember, too, that the government demands average fuel economy of 35.7 mpg by 2015, and that all cars and trucks meet that number by 2020. This means expensive light materials and expensive engine technologies.

The old profitable ends of the market, — especially for Detroit — pickups and big SUVs are fading. Small cars are expected to sell better. The carmakers have to make money on something. So they will upgrade the small cars and charge more. That’s the theory.

“As people migrate to smaller cars, they are going to want to bring as many of the accessories along with them as they can. They will demand CD players, leather seats and other accessories they are used to and that will add to the price of the vehicle,” says Schnorbus.

Think of the new BMW 1 Series coupe. It’s 3 inches shorter than the compact Ford Focus, but expect to pay $35,000 or more for one. The Focus runs around $20,000.

“Europeans are willing to pay premium prices for smaller cars,” says Joe Phillippi of Auto Trends Consulting, “but it’s going to be difficult for Detroit to push up the level of content. They are already being squeezed by the run-up in commodity costs they can’t pass along. Consumers are willing to pay a premium for smaller European cars because they have a reputation of delivering on their promises. It may take the launch of completely new models in the U.S.”

My cousin in California recently paid $32,000 for a fully loaded Toyota Prius. She loves it. So people will pay more when they see value and can afford it.

Joanna Bateman, who lives in upstate New York, is looking for a car. “If fuel economy wasn’t an issue, I’d probably go back to driving a Suburban. I had three of them and they were wonderful, reliable vehicles. I look at the Mini Clubman as a Suburban in miniature and that would be my realistic choice.” But she figures she might have to go for a used one because of today’s prices.

Mark Calisi, owner of Eagle Chevrolet in Riverhead, N.Y. seems unconcerned about the future of his business. “Chevrolet is going to be on a level playing field with all manufacturers with regard to price. You will see more competitive price points at GM as compared to other manufacturers,” says Calisi.

A couple things to think about: If small car prices climb, don’t compact or middle size car prices have to climb, too? Who would pay as much for a Honda Fit as a Honda Accord?

Will the total business shrink? The law of economics says higher prices mean lower sales.

We used to handle higher prices by stretching out the payment cycle and leasing. Well, we’re already up to 72- and 84-month payment schedules. That can’t stretch further, and leasing is being squeezed out right now.

Sales had been pushing near 17 million cars and trucks for years. This year they are on track to fewer than 15 million. If you figure higher prices will knock sales, and the reduction in leasing will knock sales, and the big profit trucks and SUVs are fading, you understand why automakers say prices must climb. Convincing the buyers is something else.

Detroit companies are losing money now, and even foreign carmakers are seeing profits drop. It’s going to cost as Lutz says, but most of that cost is going to come out of manufacturers profitability. “Market pressure is going to keep these prices down,” says Schnorbus. “It’s going to kill profitability.”

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