The average car price is nearly $50,000, a 30% increase over the past five years. Basic automobiles are $50,000 or more. Monthly payments are also close to an all-time high. There are plenty of cars and models that are going for more than $100K. A record number of owners are underwater - paying more on their loans than their vehicles are worth. Even so, automakers have resisted making cheaper ones. Margins are slim and costs are high. Chinese cars are cheap, but those are getting slapped with tariffs. Insiders say U.S. carmakers can't depend on protectionism. They'll have to cut costs and sell cheaper. Even without government support, Chinese firms have big advantages. We tried to lay out that it's not evolutionary change, like you actually have to make quantum change to the organization, culture, and approach to be able to achieve

that. Americans are paying more for nearly everything than they were a few years ago. But car prices have outpaced even inflation. They're off pandemic-era highs, but not by a lot. What do you think about how car prices have been over the last few years? They're astronomical. But I mean, the technology keeps advancing. Technology isn't free. I shopped around quite a bit before I was driving a Toyota Highlander, and the prices had gone up a lot, and it was not all electric. And I wanted to move to something more environmentally friendly. So I went with the Tesla. Oh my goodness. I was trying to repurchase a Camry and using the prices that I had from ten years ago, and it just wasn't. Yeah, it wasn't the same. So what does the industry consider an affordable car? According to the Center for Automotive Research, it would cost about $25,000.

The average US household spends about 15% of income on transportation. That's everything car gas, maintenance, and so on. So about 51% of the population can reasonably afford a loan on a $25,000 car at 8% interest for 48 months. If you extend the term of the loan, the percentage goes up from there. The issue is there are very few cars at that price. Prior to 2018, cars that sold for less than $20,000 made up about a fifth of the market. Since then, they have all but vanished. A few models might start there, but no car sold in September 2024 had an average sticker price below $20K. Only six are below $25,000. Meanwhile, models and sales of new cars over $60,000 have soared. You're selling directly to people who want a lot of bells and whistles, and so there isn't a lot of direct

targeting of people who would want a small, cheap car. This might be a strategic mistake. Here's how they got so expensive. Factor one: the continued rise of the sport utility vehicle. They went from about 30% of sales in 2009 to over 50% in 2019. Americans just love big cars. When Ford released the now discontinued subcompact EcoSport SUV, it said the average price would be $4,500 higher than Ford would get from the Fiesta, even though the SUV and the car shared the same platform. Second factor: priorities changed. The legacy automakers in the US have been pretty explicit about we are going for profits, we are not going for volume, and so we are going to sacrifice volume if it gives us a bigger margin, and that's a different strategy than they followed in the past. GM has become known for this strategy, especially under

current CEO Mary Barra. Fiat Chrysler, now Stellantis, was very early to cutting high volume, but low profit, vehicles like sedans. In 2023, profits at GM and Ford were the highest in at least a decade, and Stellantis reported a record. Many global automakers have enjoyed similar gains. General Motors, for example, has these activist investors sitting on their board, and they don't buy back billions of dollars worth of stock. You know, Mary Barra could be out of a job. And so it forces a more short term calculation than she might want. But automakers have had to make investments in technology that they weren't certain would pay off, like EVs, software defined vehicles, advanced safety, driver assistance, and autonomous driving. That money has to come from somewhere. The one meaningful way to make that transition from a financial standpoint is to create a highly profitable

internal combustion engine business, and continue to manage those profits while you reduce the number of vehicles. And so you have to continue to make good profits. To generate the free cash flow, you need to feed the EV ever-hungry side of the business. The trouble for automakers is that the business is not that profitable compared with others. About 70% of a vehicle's price goes to the direct cost of producing it. Tough. This smart can only be called F-150. About 20% to 25% goes to marketing and everything else. That leaves a 5% to 10% profit. Third factor: the coronavirus pandemic, production shutdowns, supply chain shortages, and other constraints tightened supply. Dealers raised prices. Then automakers did. Affordability plummeted. Remember, the story has been for much of the last six months. You either cut price or you cut volume.

And they've decided they're not cutting price. But profits come at the cost of increasingly alienated customers. Automakers meet with their dealerships on a regular basis, and particularly they do this every January at one specific gathering. And the news that came out of that gathering last year was dealerships were saying, please send us more things that we can profitably sell for less. I guess that's the message they're getting from people walking in the door. So the question is, how do American automakers get those prices down? There is some wind at their backs. EVs are expected to get cheaper with time. Battery costs are falling faster than forecasted. With big drops to come. New, stronger forms of steel may allow carmakers to use less. The simple skateboard platforms EVs are built on are easily adapted to vehicles of different sizes, spreading out costs. The Chevrolet Equinox, GM's least expensive EV, is

about $300,000 less than the Cadillac Celestiq, GM's priciest. But they use the same platform. New manufacturing methods can help, too. Tesla said its proposed but not yet implemented unboxing method can cut costs in half and factory size by nearly that much. Automakers might also partner and consolidate. Two companies can share production lines and make similar cars with different brands. One can contract with another to build vehicles. For a country where the first has no presence. It could be a bid setting up shop in Mexico, having a partnership with one of the US carmakers or brands, and then they sell vehicles here with the appropriate sharing of the final assembly costs. On the policy side, helper says regulatory certainty is another necessary condition for cheaper EVs stability and predictability around incentives, subsidies, and public-private partnerships. US rules change frequently, which makes it harder for

companies to plan. In contrast, when China went forward on EVs, it stuck with the policy. The country has even benefited from unstable policies in the US. The cheap lithium iron phosphate batteries that contributed to China's dominance were actually created in the US by a company with a Department of Energy grant. But then gas was really cheap. Policies were not consistently applied. They went bankrupt. They were bought very, very cheaply by the Chinese. I mean, not to take away from the Chinese. They figured out how to scale it up, but they got a leg up, you know, based on American taxpayer research. The Alliance for American Manufacturing, a group formed by domestic manufacturers and the United Steelworkers union, is in favor of tariffs and subsidies and incentives to boost the domestic industry. The group wants to keep many of the current policies in place. We're trying to gradually make a transition to new types of

energy-run vehicles, whether it's electric, hybrid, or other sorts of technologies as well, and we're trying to offset some of the capital costs that are involved with that. And there's a long tradition of doing that in the United States. Policies can only help so much. At the end of the day, it's demand that dictates the business. It's the marketplace that makes the calls, as we all know. And so you can have some amount of demand-side subsidies, like you get $7,500 off if you buy this EV with a certain mix up to a certain point. But these things cost a lot of taxpayer dollars, as we all know. This is the challenge Chinese competition poses. Critics say Chinese cars are cheap because they are heavily subsidized by the government. There are other factors. Wages are really low. There's a fair amount of evidence of forced labor in

part of the battery supply chain. There's also a lot less attention to environmental considerations in terms of cleaning up and having a clean battery operation, which uses a lot of nasty chemicals. That said, the best of the Chinese EV startups have a 30% cost advantage over legacy automakers, even without subsidies or government help. Mark Wakefield, a managing director for Alixpartners, says to compete with that, automakers have to completely change the way they operate. From an automaker's perspective, you can't count on that protectionism. You have to get ready to fight. This is the hard part. First, Chinese companies are software-oriented. Established automakers elsewhere produce cars made with very limited software embedded in parts. Truly software-defined vehicles, in contrast, are ones where hardware and software can be updated independently, more like computers. It's a fundamentally different way of developing a vehicle.

Chinese firms are also fast. They develop things quickly. They scale things quickly, which attracts attention from government, suppliers, or other stakeholders. They take out a lot of time in the strategic phase. They're much more willing to just go. They don't have the same sort of battles about what to do and what to make. Chinese firms rely heavily on methods like virtual testing, rather than the physical tests favored by others. This cuts months off schedules and hundreds of millions of dollars from budgets. They have a shorter time to market. Non-Chinese brands take about 5.4 years to develop a new model. Legacy Chinese brands 3.5. New energy vehicle brands like BYD 1.6. Deadlines are hard, even if that means releasing a subpar vehicle. These companies have an intense overtime culture. Most of them do not allow this drift that Western companies do, and they're willing to put a bad vehicle out there.

and suffer the consequences because they consider the alternative to be a guaranteed loss. If I take 40 months to make the vehicle, I can't make a competitive vehicle. They're also willing to endure large losses early as they get to scale. There are two benefits: higher volumes which help spread costs, but also a lot of learning in that painful early period. This desire for short-term profits by American investors, these activist investors, makes that strategy hard. China has taken large losses for a long time, and this is their playbook. They do this in industry after industry. There's very little forgiveness for a CEO today who says they make losses on a vehicle or a vehicle line or a whole new propulsion technology. And so they're questioned every quarter. And so they're thinking of it every day. And so it's in that sense where if you now move from a $60,000 vehicle or a $70,000 vehicle or a $40,000 vehicle

to now suddenly announcing affordable vehicles at $25,000, you get doubly questioned because you're going to be making even more of a loss per vehicle. They also take a first-principles approach, a willingness to question some of the most basic assumptions or practices. Tesla has been known for this in the US market, for example, allowing over-the-air updates to the core safety and powertrain systems on the vehicle, things like brakes and motors. For they did that, and even probably seven years after they did it, no other auto company in the world would. Vertical integration--doing a lot of work in-house rather than outsourcing to suppliers also seems to be a key advantage for companies like Chinese BYD and American Tesla. The United States is also investing in a local EV supply chain. In terms of money spent, it's gone from trailing China to surpassing it. Implementing these changes may be hard.

China's regulatory environment and customer base are totally different from the United States, but closing that 30% cost gap might require a total revamp. It feels like you can't do these in small little bits and pieces and evolution, and you can't do it by just telling people, Hey, behave differently. You know, you need the systems, you need the organizational structure and the incentives, and you need different power centers and what keystone's people are going to consider to be sacrosanct versus changeable.

Why American Cars Are So Expensive

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