Want a New Car in a Few Years? Dig Deep

New fuel efficiency standards and auto industry woes will drive price tags skyward.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

May 28, 2009

One product price that's sure to climb sharply into the next decade: autos. With sales likely to remain in the tank at well below 16 million annually in coming years, the high volume, low margin sales model employed by carmakers will bite the dust.

Instead, U.S.-based automakers and foreign car companies will slap much higher sticker prices on cars and trucks starting in 2011 or so, once the economy is in full swing again. Automakers will have little choice because the environmental and energy policies squeeze production of big SUVs and sedans plus pickup trucks, which accounted for the majority of new vehicle sales in most of this decade.

Automakers won't flinch from passing along higher costs because they recognize their long-time business model is busted. They no longer can emulate the supermarket model that depends on high-volume sales to make up for razor-thin profits. Annual sales won't reach 16 million vehicles again for perhaps another five years and projections that auto companies would soon sell nearly 18 million now are dismissed as a pipe dream.

"SUVs and trucks often carried a $10,000 profit margin, much higher than for smaller vehicles, but even if the market had remained static, automakers are facing huge new costs," says Aaron Bragman, an auto analyst with IHS Global Insight, a business consultancy.

The biggest hikes will affect smaller cars. The average cost of compacts, such as Honda Civic, Chevy Aveo, Ford Focus and Toyota Corolla, will climb from about $18,000 today to $25,000 by mid-decade. Less eye-popping hikes will hit larger vehicles. Those price hikes will average 10% to 20% when they're fully realized, around the same time as the price hikes on compacts hit.

The ongoing reorganizations of General Motors, Chrysler and Ford will help drive all makers' new vehicle prices upwards. The substantial reduction in dealerships of the three Detroit based companies will make it less likely that buyers can get bargain prices. And the surviving dealerships will be more profitable and less likely to do a desperation deal. Foreign-brand dealers will probably follow suit. They need heftier profit margins to offset lower sales.

Car makers also are under the gun to boost average fuel efficiency of their fleets around one-third by 2016. "That will squeeze profits and make all vehicles more expensive since automakers will have to build more hybrids and use turbochargers and direct injection to increase cars' miles per gallon," says Bragman. On average, the needed tech upgrades will increase each vehicle's manufacturing cost by up to $1,500.

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