We have never seen new car prices climb as fast as they have over the past year. It’s leaving the door wide open for someone to rush in and claim the bottom of the market. And that “someone” could be the dozens and dozens of Chinese automakers looking for new markets to offload their excess manufacturing capacity.
I used to think that the 27.5% US import tariff on cars made in China would protect the domestic market from such imports. Not anymore, I don’t. More on that in a minute.
New car prices in the United States soared more than $6,000 last year to an average of $47,000, according to Kelley Blue Book. This is the fastest increase we have ever seen. Tight inventories caused by a shortage of chips, coupled with strong consumer demand, are behind the price spike. But in this case, knowing the cause does not solve the problem.
Historically, it took about 24 weeks of income for an average American household to buy a new car. Currently, the average household income is around $67,000. Thus, the average household would need to purchase a $31,000 vehicle. Instead, most consumers are paying higher prices for the cars they want and taking longer to pay off their loans. Have you ever wondered why 72 month or even 84 month auto loans are becoming more common? Or that the average car is 12 years old? This is your answer.
Due to rising car prices, fewer Americans can afford to buy a new car. Over the past 20 years, the automotive industry has pushed approximately 5 million households from the new car market to the used car market. And now, with very strong demand for used cars, prices are rising as fast as for new cars. Last year, used car prices jumped $6,000 to average around $28,000. And that’s too much for a lot of people.
Meanwhile, the Chinese auto market is saturated with too many automakers making too many cars. Some estimates place the level of overcapacity in China at 20 million units. In response, China is rapidly increasing its auto exports to absorb this excess capacity.
Last year, China exported 2 million vehicles, double what it did in 2020. These cars have been well received in markets such as South America, Africa and India. South East Asia. And you have to believe that, at least for some of them, the US market is next on their list.
You can buy a decent car in China for just around $14,000. This is the retail price. So even with the 27.5% US import duty applied, a Chinese car could be shipped to America and sold for less than $18,000. That’s $10,000 cheaper than an average used car. They may not appeal to everyone, but new and inexpensive cars will certainly find customers.
In the late 1960s and early 1970s, low-cost Japanese small cars gained a foothold in the American market. Detroit ignored them because they collectively held less than 5% market share and didn’t seem to pose a threat to big, powerful American cars.
General Motors, Ford and Chrysler knew their customers didn’t want these kinds of cars, and they were right. But there were other customers who did. And as a new generation (baby boomers) entered the market, Japanese automakers profited from this demographic boom for decades. In fact, they still use it. Last year, Toyota sold more cars in the United States than any other automaker.
So, could Haval, Great Wall or Chery become major players in the United States? I know it sounds absurd, but if someone had told me 40 years ago that Toyota would one day outsell GM in the US market, I would have told them they were crazy.
But it happened, and it all started when the big automakers ignored the bottom of the market.
John McElroy (photo above, left) is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.