Alfred P. Sloan, the visionary leader of General Motors for the first half of the 20th century, used to look at his brands as a “ladder of success.” The concept was, as a young person you could afford a cheap and reliable Chevrolet. Then, maybe, you had a family and worked your way up to a nice Buick. Finally, when you reach the pinnacle of your profession and probably upper management, you can get that Cadillac. No matter where you went, GM got your dollar.
Unfortunately, the bottom of the rung of the ladder has disappeared. This could be the year it comes back, but only if automakers want to risk it.
Patrick talked earlier this week about how the price of cars was getting too damn high, and that even car dealers were not happy with being unable to offer affordable cars to their customers. There are some very obvious reasons for this, mostly having to do with supply. If you only have enough microchips to build 100,000 trucks, do you build the bargain basement tiers with a 5% margin? Or do you build the big, fancy ones that net a 20% margin? It’s a no-brainer.
There are a couple of reports today that get into how this works and, specifically, how automakers could start building more affordable cars if they want to. I’m going to tie this into some profit reports and other data to evaluate whether or not that will happen.
NADA Report Shows Inventories Improving, So Build Some Cheap Cars Already
If you’ve read at least one of these Morning Dumps in the last year+ then you know that the main character in the new car market’s been scarcity. Not enough chips. Not enough delivery drivers. Not enough cars. For various macroeconomic reasons, the one thing there hasn’t been a lack of is customers.
The National Automotive Dealers Association (NADA) puts out a report twice a year that looks at the big trends in the automotive market. Not all of NADA’s data is publicly available, but Automotive News has the topline numbers and some helpful quotes.
Here’s the highlight:
New-vehicle inventory reached 1.7 million at the end of last year, up more than 50 percent from the near-historic low of 1.1 million at the start of 2022. The average number of new cars sold per dealership fell 8.5 percent to 819, down from 895 in 2021.
“Inventory was constrained and that had ripple effects throughout the whole market,” NADA Chief Economist Patrick Manzi told Automotive News. “It should be less constrained [in 2023] and we should be able to sell more cars, so it should be good for everybody across the industry.”
Cool, cool, cool. Here’s the key quote, with the key bits in bold:
Inflationary pressure throughout the supply chain and limited chip supply helped drive up new-vehicle prices, Manzi said, noting automakers in many cases chose to build higher-margin vehicles with the available chips.
“Looking ahead into this year, I think as the chip supply improves, we will see OEMs again able to build more affordable vehicles, more entry-level models, lower-trim vehicles,” he said. “Whether they do or not, that can still be up for debate, but I think the ability to do that will improve as the chip and other supply chain issues lessen throughout the year.”
So they could build more affordable cars. You can almost hear the ¯\_(ツ)_/¯ in his voice. What do I think is going to happen?
As I’ve said before: There is no single normal, instead there are now multiple abnormals. No two automakers are going to be the same because supply constraints vary greatly across automakers. From quarter-to-quarter, month-to-month, automaker-to-automaker, expect to see a lot of divergence in pricing and customer experiences.
GM has weathered the supply chain issues better than most, and I suspect it’ll continue to make more affordable vehicles to fill in that lower rung of the success ladder. A good example of this is the 2024 Chevy Trax, which is affordable and nicely spec’d out, even in lower trims.
For further reading on this, S&P Global has a nice report about how GM’s ability to make cars across a wide spectrum of segments and have inventory means customer loyalty well above Hyundai Motor Group and Ford. That’s where the top graphic comes from and I think it’s a key point, especially as GM begins to streamline its sales operations.
And the Japanese? Well…
Honda, Nissan Expecting Big Profits This Year
Toyota has had the worst experience of any large automaker present in the United States during the pandemic, in my view. It’s lost market share. It’s lost initiative. Things have been bad. I think the company will turn it around, but it’s been a bumpy two years. Honda and Nissan, as well, have suffered.
The Japanese automakers are announcing their profit forecasts this year and the news is much rosier if you’re an investor. First up is Honda, via Reuters:
Japan’s Honda Motor Co (7267.T) on Thursday forecast a 19.1% rise in operating profit for this business year, after it missed analysts’ estimates in the fourth quarter.
Japan’s second-biggest automaker forecast full-year operating profit rising to 1.0 trillion yen ($7.40 billion) compared with a 985.62 billion yen average profit expected by 21 analysts. It said it expected higher sales volume and to benefit from a strengthening supply chain.
And what about Nissan? Again, via Reuters:
Nissan Motor Co on Thursday flagged a better-than-expected 38% rise in profit this year on stronger sales, a rosier outlook for the Japanese automaker as it retools its often difficult alliance with Renault and faces headwinds in China.
The bullish forecast, which comes as Nissan (7201.T) is pushing to turn itself around after years of turmoil, was based on expectations of almost 30% sales growth in both North America and Europe. However, in the key Chinese market the forecast was far less upbeat, at just 8%.
My guess, and this is just a guess, is that both Nissan and Honda will probably be more on the profit-side end of the market than General Motors, at least for a while. Both automakers have ground to make up and I don’t see the Japanese as hungry for market share as they’ve been in the past. If the economy stays strong into the summer, this might shift.
The Lexus GX Is Coming Back
You know what kinds of products have good margins? Premium SUVs, and Lexus has two new ones coming out this year. Related: I feel like the most popular off-roader of the last three years has not been a Jeep or a Bronco, but instead a used Lexus GX.
It’s basically a 4Runner in a business suit. People love these things:
That one is owned by filmmaker and buddy Douglas Sonders. It’s a great-looking truck and one of many out there these days. Will the new one be as popular in 20 years? No idea, but here’s a preview of it:
Uh oh, it’s raining.
Subaru Is Going To Make Four EVs By 2026
Subaru, like Toyota, has been slow to adapt to electric vehicles. They make one, sort of, that no one talks about except when the wheels literally fall off of them. From Automotive News, it seems like that’s going to change soon:
Electric-vehicle latecomer Subaru expects to have capacity to sell 400,000 electric vehicles a year from 2028 by adding a second EV line in Japan, signaling a dramatic ramp up as it tries to get 40 percent of its global sales from electrified vehicles by decade’s end.
That’s great but, uh, Japan? In this market? You’re going to build your new EVs in Japan?
Subaru may also rely on leasing for its EVs, which may make them eligible for some incentives.
Nevertheless, outgoing Subaru chief Nakamura said Subaru’s loyal customer base would not be deterred by a lack of incentives for the brand’s EVs.
“I wonder if American consumers choose their cars solely based on tax breaks,” Nakamura said. “Our U.S. customers are quality customers. We have a higher ratio of customers buying Subarus with cash, and we also have low loan and lease rates. We also keep our incentives at low levels.
“We will try not to rely only on the subsidy program.”
Shots fired! (Editor’s note: That’s real cute, Nakamura, but since our car choices are more expensive than ever and our wallets are being squeezed on every other front, we’re gonna go where the best deals are. -PG)
The Big Question
When we bought our Subaru Forester six years ago we got a “Premium” model with the cold-weather package, but no navigation and not much else in the way of fancy options. It doesn’t even have foglights. I’m a second-to-lowest tier kind of buyer.
For your most recent (or next) new car purchase, are you looking for a higher or lower trim? What’s your sweet spot?
Photos: S&P Global, GM, Honda, Subaru
Real easy to get affordable cars back into the market again. Allow vehicles under 4000 lbs and under 190 inches in length to only have to follow the federal regulations from 2005. Cars were clean enough and safe enough back then.
That won’t make automakers build them again. To the executives, building a car with 5% margin means you didn’t build the 20% margin car. To them, not building the 20% cars is akin to lighting money on fire. They don’t care that the 5% car would probably sell better.
10 cars at $20k and 5% margin is $10k
1 car at $50k and 20% margin is $10k
They shouldn’t care the $20k model is selling 10x as well as the other. Economically speaking anyway.
>”Economically speaking anyway”
That’s the conversation in a nutshell. The economy is seconds away from shitting its organs out because we’ve allowed huge companies to make destructive decision on the basis of “line must go up”. Selling cheap cars doesn’t make line go up, so you only sell expensive cars. You make your whole brand about expensive cars. You make sure your factories only produce the expensive cars. Line goes up because people buy your expensive cars.
Meanwhile, people can only afford expensive cars using cheap credit. Now cheap credit is going away so people can no longer buy the expensive cars. Line isn’t just going to go down, it’s going to drill into the earth’s crust.
I always like a good base model, they’re usually free of annoying add-ons and gizmos. If it has a heater and air conditioner, I don’t need heated/cooled seats or steering wheels or the like.
Agreed. Base models now are what luxury cars were twenty years ago, probably better. A/C and a manual transmission, and we’re good to go.
It will be interesting to see if more downmarket options return anytime soon from the current automakers. There’s a gaping economy-car-sized hole in the market right now and I have to think the Chinese automakers are salivating over it. It won’t surprise me one bit if the current ones juice their profits with expensive cars for the next few years, but in the process they give China a foothold here selling cheap cars.
Usually a mid-level trim for me – heated seats and moonroof are the key things and are usually available there on most cars. I like gadgets but not enough to pay for them usually. Likewise, I’m starting to think I may have gotten used to leather over the years but not enough to seek it out…unless there’s a ventilated seat option to go with.
If there are 1-2 options above the trim I would otherwise get, and it’ll be extra to equip it as such, I’d be likely to just step up to the top rather than halfway measure it in between. Trying to think of a decent example…maybe the new Prius as it came up in one of these such questions: by the time you add the glass roof and such to a mid-tier XLE, seems like a better deal to just get the Limited that already has it.
Auto makers aren’t in the business of serving the public they’re in the business of making money and serving shareholders. They have to appeal to the buying public to do that but they’re under no obligation to use resources to do anything that’s not in the interest of the greatest return.
TL-DR: MBA’s run everything today
Jack Welch doomed us all.
Cheapest trim that has the stuff we want. Or that has the ability to add it later since I try to buy and hold. Examples would be my Cruze Eco. At the time I bought it, the Eco trim was the only trim available with the turbo engine and manual transmission along with integrated Bluetooth. Our RAV4 is an XLE since it has larger brakes than the LE and integrated Bluetooth.
I’m looking at a new EV at some point. I want a vehicle, not a computer on wheels. We’ll see what is out there in the next few years.
We despise the hopelessly-hunting-for-gears automatic in our 2017 Rav4, and past cars were manuals. But since there are no new manual vehicles for everyday use, I might as well buy a 20 year old Outback and fix it up. Manual and heated seats and no rust. Everything else I could care less about. Now I just have to get one from the dry southwest to Maine.
The base WRX has a manual and but warmers. It’s not a hatch but roomy enough.
Civic Sport Touring hatch too. Or add heated seats aftermarket to a regular Civic Sport hatch. Sure it’s got a sloped “fastback” roofline, but since it is longer than most regular hatches it still has a healthy amount of cargo space (and a little more than the more-expensive Integra).
I look more at features on the car than the trims themselves, as well as how long we plan to keep the car. We have a low trim SLE Acadia with just a convenience package because it is a lease and had every option we needed. We have a top trim RAM because we bought it and plan on keeping it for 10 years. I also wanted all the trailering options and safety features for pulling our camper, as well as the air suspension.
I’ve found that if I’m buying the car, I tend to keep the car longer if it has a higher trim level. It takes me longer to feel like I’m missing things.
Right now, my must haves are heated seats and a good safety package (I have 3 teen drivers in the household). Heated steering wheels and adaptive cruise control are preferred, but are too often not available without buying a ton of other stuff.
It’s not just cars. I’ve found in general that if I buy the level of something I want in the first place I’m not itching to replace it within 6 months like I often am if I buy the bottom-tier version. I also find that I rarely think about how much I paid for something, but if there’s a feature missing from it then I think about it every time I wish I had it.
Obviously you have to be able to afford the higher trim to begin with, but if you can’t then there’s not much of a decision to be made anyway.
That’s interesting. Higher trim cars tend to have more tech, and tech gets stale/slow/outmoded much faster than the rest of the car. As you get a new phone or two over the ownership of your high trim car, you’re reminded every day there’s newer and shinier stuff now. Your digital gauges look grainy compared to your phone. The entertainment UI feels laggy compared to your wife’s gaming laptop.
In a shitbox, there’s no tech. The analog gauges and basic head unit don’t look worse in comparison because there aren’t really analogues outside of the car to remind you of the passage of time.
Nothing these days is truly analog though, and anything old enough to be lacking a screen is also most likely lacking important things like bluetooth, which is a must-have for me these days.
I’m also not someone who replaces tech just to have the newest and shiniest. I replace things when they stop doing the job I need them to. I tend to keep cell phones until their batteries can’t make it through a day. I’m still running a 15-year-old Garmin because it still gets map updates and gets me where I want to go (although that one is so old it has a garbage resistive touchscreen, so if I used it more than a handful of times per year I’d probably replace it).
What’s needed if people are just going to have to make their cars last longer is a massive, massive cutback in the amount of road salt used in snow-belt states. I say this as someone who just found the first speck of rust on my 3 year old car that’s been washed at least every 2 weeks (goal being weekly) from new.
“We bought all this salt; we’re gonna use it.”
Probably more like: “We bought all this salt and if we don’t use it they’ll cut our budget next year”.
I live in a city that is open about trying to reduce its salt usage for environmental reasons. Their “solution” is to refuse to ever salt most of the residential streets regardless of conditions while continuing to dump way too much salt stupidly on main thoroughfares.
This winter I watched trucks out salting the main road while the pavement was still above freezing and snow was falling rapidly and melting. Seems like a total waste. Meanwhile, when we get freezing rain and my street is hazardous at any speed, nothing.
A lot of people are saying “Just Buy Used”. That was a mistake to talk about even before the pandemic – it should be like Fight Club, the first rule needs to be not to talk about it.
That advice crept out of enthusiast and finance-geek circles and into a general mindset, add in 3 years of supply shortages leading to mfrs pushing the high-end high-margin stuff and you get things like Honda Fits as far back as 2017 being worth more than their new-car MSRP was.
We won’t be looking for a while but generally go with lower trim, we like cloth seats, generally those are manual. I usually upgrade the stereo myself though with newer ones that’s not really a thing, less stuff to break, etc. Our next one might be a Wrangler that still can have the roll up windows so that level we’re fine with. Heated seats are nice though, maybe we’re getting to the age we might entertain massaging ones even.
Are there enough expensive cars to fill the used car market when there are no cheap new cars entering the pool of used cars? There are lots of people that would buy new if they could but there is nothing in their price range.
We have bought bottom middle and hight trim vehicles. Depending on what we are shopping for and how much we can afford at the time. Often is seems strange to spend nearly 2x as much money for nothing mechanical but feel good luxury stuff that is mostly for looks.
The last new car we bought had almost all of the options on the top trim level. The one before that had every option available. So yeah for daily drivers I’m an all of the options all of the time. Now when we are talking about trucks then I’m a pretty much base model person.
I am a big sweaty guy, and as a big sweaty guy, I know a lot of other big sweaty guys. What do we want?- it sure the F isn’t seat heaters, I’ve now owned 4 vehicles with them and used them maybe a dozen times between the 4 cars total. What I have used is seat coolers- Butt AC.
There is a demographic shift in the US, most people live in places it just doesn’t get cold (or if it does it’s for a few days max). Florida- 25 million, Texas 30 Million, CA 40 million- And what are the fastest growing Citys? Dallas, Houston, Phoenix, Las Vegas.
All of this comes together in a couple of ways- For most of country, seat heaters are useless. Automakers force us to take Leather, or leatherette seats if we want any options, and along with those seat heaters…… So we sweat, and those of us who can buy the King Ranch, or the Executive trim levels can wallow in the luxury of ventilated, cooled seats.
My point is seat heaters are now available on mid range Jeeps. A Wrangler with goddamn seat heaters. To the MFGs who are stuck in the cold ass rust belt. Look at who you’re selling to, and where people are moving, or at least know the world ain’t getting colder. Make options packages with AC seats, put them in the the lower end models and for gods sake stop making me buy seat heaters in TX.
Seat heaters are also very good for back pain. I’ve had AC on full blast and seat heaters at top strength in a summer day before.
Hells yeah brother. I hear you on that one. It really sucks getting old, doesn’t it?
Yup, on my truck I can turn on only the back heat. After crawling around on my hands and knees all day doing plumbing work at the cabin, it was nice to make the 5 hour drive home with a little back heat and AC. It made a big difference in me being able to get out of bed the next morning. Getting old certainly does suck, especially the part where my body can’t keep up with what my mind wants to get done
Hey, getting old sucks but it beats not getting old
Hell, I’m up in Portland and would take a seat AC. Only need it for a couple months, but it’s not like I’d ever use the seat heater at all.
We make all kinds of transportation decisions for the few people that live in rural areas why not have seat heaters for the people that live in cold places. It is often -20 or colder here. my wife’s car auto turns on the stering wheel and seat heat when the outside temp hits freezing. She will not buy a car without heated stearing wheel becasue of her arthritis.
I live in the Northeast and have never understood the desire for seat heaters. I’ve used them to try them and don’t like them. Cars warm up in minutes and most of the wusses have remote start, anyway. It’s not like my ass is the cold part of my body, though maybe forcing people into garbage leather is the problem in the first place. I can get swamp ass for free and have a nicer manual cloth seat, but a seat cooler would be something I’d probably pay for.
Back pain loves heated seats.
Options in a new car? What’s that? In new-ish cars that I have, I bought the base models for both and am slowly adding the options from higher trims as I get the time and money. Heated seats in the base Mirage? Check. Upgraded suspension? Check. Oem cruise control is next. And my VW has base tier everything for the least weight possible.
Also, in used cars, every additional gadget is something more to break. I’d rather look at a panel with 3 empty buttons than have 15 flashing warning lights from all the unnecessary BS that isn’t working. And unless you have a garage, the sunroof WILL leak eventually. Especially if it’s european.
For me living in New England, the cheapest tier with heated seats is where I wanna be. Was pretty easy for our Subaru, but I’m looking at the new Colorado and man Chevy makes you tack on so much crap just to get there.
Give me that sweet, sweet one trim above base. Usually that how you unlock the most important stuff.
I typically would prefer the equipment level of an actual base model, but automakers usually try the strip the car of any joy or personality with that decision. No real exterior paint colors. Glaringly poor integration of smaller infotainment screens. The sort of stuff that makes you feel like you cheaped out.
Maybe this isn’t applicable to all segments but my opinion has always been to buy the special one, the one that enthusiasts crave. Beyond just being more fun to drive they’ll almost always maintain value better than the commodity versions of any given car. I’m talking things like a golf r, grolla, fiesta st, raptor, etc. For more general commodity vehicles I think second tier from the top is usually the sweet spot.
Literally purchased a car yesterday. Base Kia Soul with as few options as I could get away with. Paid a bit over $21K out the door. It feels like a spaceship compared to my old truck.
The Soul is a really good buy right now. My Dad just got one and it’s a surprisingly efficient, surprisingly spacious, surprisingly high tech car for a surprisingly small amount of money. Surprising, really. 😉
While it has it’s shortcomings, we couldn’t find anything that had anywhere near the space for anywhere near the price. And it has cool colors that don’t cost extra like bright red and metallic orange. The Niro, which is sort of a hybrid Soul, but not really, started at like $7K more.
I can’t imagine what my next purchase will be—hoping to get at least another decade out of my ’19 AllTrack—but when I was looking 4 years ago, the must-haves were heated seats, sunroof, stick shift, a color on the outside and not-black on the inside.
I will say that, now that I have it, Apple CarPlay is also a must-have.
Let’s hear it for “a color on the outside and not black on the inside”!!!!
Of course manufacturers could design more affordable cars, but why would they?
Let’s assume that their profit margins are the same across their range (They’re not, of course. Margins are better on the bigger more expensive models). Would you want to earn 10% of a $15k econobox hatchback or 10% of a $50k urban assault vehicle SUV?
And what’s in it for the consumer? Putting oneself in the shoes of an average car buyer (not one of us — we’re a bunch of weirdos) and assume that there are plenty of vehicles available at the low end of the market. Let’s say the buyer has a $15k budget. He looks at the options available to him and sees a base model new econobox or a decently equipped midsize lightly used car for the same price. You could get more “bang for your buck” going used with minimal downsides. If this were twenty years ago, sure, the new econobox would be more appealing because build quality was more questionable, cars didn’t last as long, and a new car warranty would provide valuable peace of mind toward knowing that your car wouldn’t let you down. But cars last a long time now. You’re no longer driving on borrowed time as you approach 100k miles. It’s become a cliche, but new cars at the low end aren’t just competing against each other — they’re competing against used cars that are a class ahead, and that’s become a tough competition.
To some degree, the lowest price new cars have always competed against used cars. I recall reading a review of the Geo Metro in the mid ’90s that concluded a similarly priced used car is a better purchase for most buyers. The cheap new vs nicer used debate isn’t new.
The improved quality has changed things, though. Most buyers are replacing their car out of preference rather than necessity. They might use mileage as an excuse, but a modern vehicle with 100,000+ miles is often more reliable than a new car in the ’90s or earlier. New cars may no longer be affordable for those with limited budgets, but a reliable transportation appliance is probably as affordable today (maybe even more affordable?) than in the past.
With used cars being so good, do we even need cheap new cars??
Slightly crackpot theory: Toyota’s long domination of worldwide market share kind of killed the drive to claim the crown and now most car companies (is VW the only exception?) simply don’t care any more.
Yeah, companies (and investors) have always cared about profits, but they used to also care about bragging rights. How many pieces of automotive history were driven not by pure profit motive but by wanting to be able to stake a claim to most, biggest, fastest? Certainly, throughout the ’90s, the battle for biggest-selling car drove constant moves from Ford, Honda, and Toyota, while GM fought a long, losing battle to maintain its status as dominant seller in the US. Rebates, fleet sales, brand engineering—these were all ways of squeezing every last sale out of the market, even if the General cannibalized as many Century sales with the Ciera as it gained.
Now? F-150 will sell the most vehicles of any model, GM will sell fewer cars every year, Toyota will sell the most vehicles in the world, and the only thing that really matters is margins. 30 years ago, nobody was leaving potential buyers locked out, but now nobody wants a buyer who’ll only make them 5% profit (OK, with a giant asterisk on EVs, but that’s about future-proofing).
> Toyota’s […] claim the crown
I see what you did there
Cheapest trim with a heated steering wheel.
A lot of higher-level stuff consists of stuff I don’t really care about – and on some models, makes things worse, because it takes buttons and knobs away to add a bigger screen (Ram 1500 for example) – but a heated wheel is a must.
I want the highest trim with all the options. I want my steering wheel heated and cooled. I want a heads up display. I want my liftgate to open when I daintily yet proudly present my foot to the rear of the vehicle. I want it all.
Yes. The last thing I want is a bunch of blank buttons staring at me for the 15 years I’ll be driving my car reminding me that I could have had that feature if I just paid a couple of extra dollars.