Sunday, January 13, 2008

Competition Breeds Competence and Lower Prices

The 2008 North American International Auto Show (NAIAS) started today in Detroit. From the NAIAS website:

More than 6,700 journalists from 62 countries and 42 United States attended the NAIAS 2007 Press Days. Almost 30% of media attendees were from outside the U.S. In addition to Europe and Asia, many media came from a wide variety of countries from all over the globe including Azerbaijan, Argentina, Chile, Croatia, Egypt, Ecuador, Jamaica, India, Latvia, Moldavo, Peru, Rwanda, Turkey, Venezuela and Yugoslavia, to name just a few.

And one of the main things that draws these journalists is the sheer number of vehicle debuts showcased at the NAIAS. The NAIAS has hosted 1,049 North American and worldwide vehicle introductions – which is a fancy way of saying that these vehicles were seen for the first time in the world or in the U.S. at the NAIAS. Media know that if they want to capture a photo of a vehicle the first time it is debuted, their best bet is the NAIAS (see picture above from this year's show).

The positive news about the 2008 NAIAS is a real "breath of fresh air" for Michigan. We hear a lot in Michigan about the loss of manufacturing and UAW jobs here, the decline of the automobile industry in Michigan, losses and declining market share for Ford and GM, the highest unemployment rate in the country (7.4%), etc.

One of the most under-appreciated, unreported and unrecognized facts about the automobile industry is captured in the chart above (click to enlarge), showing the Consumer Price Index (CPI) for All Items from the BLS, vs. the CPI for New Cars from 1995-2007.

Notice that since 1995, consumer prices have increased by 40%, an annual rate of 2.6% for consumer prices on average. However, new car prices have FALLEN by about 2% over the last 13 years, meaning that new cars are much more affordable today than in 1995. If new car prices had increased at the same rate as the average product in the CPI, new car prices today would be 40% higher than they are today! Keep in mind that wages and income have increased at a rate equal to, or higher than, the CPI, meaning that cars are about 42% MORE AFFORDABLE today, relative to income and average prices, THAN IN 1995!

Despite the financial troubles for the UAW and the Big Three, American consumers have benefited tremendously from the intense foreign competition in the auto industry. Except for electronic goods, what other consumer products are actually cheaper today than in 1995? Not too many.

Bottom Line: Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer. Without the significant discipline of foreign competition, we'd probably be paying 40% more for our American cars today.

8 Comments:

At 1/14/2008 6:06 PM, Blogger Walt G. said...

I agree that competition has driven vehicle prices down and quality up. Arrogant companies and unions have to cater to their customers nowadays. That’s the way it should be.

It’s too bad that the other ownership costs associated with vehicle ownership have skyrocketed in the last few years. When I bought my diesel-powered truck in 2004, fuel prices were $1.54 per gallon and diesel fuel was cheaper than gasoline. Today, just over three years later, the best price I could find was $3.27 and diesel fuel is more than gasoline—a historical phenomenon. They must have seen me coming!

In addition to fuel costs, although I reached the magical age where insurance rates are at their lowest (50+), my insurance rates have increased 40% even though my driving and accident record is clear and my truck has depreciated 50%.

Even though fuel and insurance prices are high, I feel fortunate that we live in the best of times. We have many problems, but when viewed in context, never before have so many people had so many luxuries. We really do tend to take those luxuries for granted. We need to appreciate what we have while we are striving to make things better for the future.

 
At 1/15/2008 6:25 AM, Blogger juandos said...

Hey Walt, your comment: "I agree that competition has driven vehicle prices down and quality up" is valid but hasn't the government we freely elected intruded so much into vehicle design that the price is far higher than necessary?

I've yet to see something that was as cheap and easy to use as my '65 Ford F100 was...

 
At 1/15/2008 7:35 AM, Blogger Walt G. said...

Juandos,

I don't know. How do you define necessary?

I like improvement in safety and reliability. I can still remember traveling 700 miles to Arkansas every year when I was a kid with the windows down on the car and sweating our butts off from the summer heat; we had to shout to one another to be heard over the road noise and wind. Now most cars have A/C as standard equipment. Dad had to buy new tires every year before we left because they wore out in just a few thousand miles. Since cars were worn out at 100,000 miles, now tires last longer than cars did then. It’s the same with spark plugs and fan belt(s).

I work where they make car and truck hoods. It used to be they were made strong without safety in mind. Now they are made to collapse in a front-end collision before coming through the windshield like a guillotine. I think I like that safety mandate. Air bags sound pretty good to me, too. I’ve been accused of having a hard head, but I don’t think I could survive a crash into the steering wheel or windshield with my head.

Sure, some things have gotten more complicated and maybe even unnecessarily expensive. Although I like nostalgia, do you think your 1965 Ford could pull my 14,000 fifth-wheel out West like my 2004 Chevy Duramax/Allison? I’ll take my crew cab with rear DVD, A/C, leather reclining seats, and cruise control any day, and still get 10 to 12 miles-per-gallon, too. I might stop at some car shows and look at some vintage cars and trucks parked on the grass for old-times sake, but I sincerely doubt I will have many traveling the road with me. Undeniably, vehicles have never been made better, safer, or been a better value as they are today.

 
At 1/15/2008 6:07 PM, Blogger juandos said...

Hey Walt G:

Well your '2004 Chevy Duramax/Allison' is not exactly a half ton truck as the Ford F100 was...

Yet I did pull a fifth wheel trailer with as many as 20 head of cattle with it from Laredo to San Antonio in 110 degree heat with regularity and NO mechanical problems...

I agree with you that there are some nice bells & whistles with newer vehicles and yes I do consider soft dashboards, padded steering wheels, airbags, and air conditioning a waste of money...

It seems to me but I really don't know this for a fact but as many people are getting killed on the road today as there were back in '67...

 
At 1/15/2008 7:05 PM, Blogger Walt G. said...

Juandos,

Might be a coincidence, but we've got a lot of believers in air bags where I work. I gotta believe if more people are dying in car wrecks now, a bunch more miles are being driven. There’s a ton of safety designed into these vehicles now that was not even thought of in the 70s. It’s amazing some of the wrecks people are living through.

To each his or her own ride; I like my comfort when I’m traveling. If I want air in my face, I’ll ride my Harley (:).

 
At 1/15/2008 11:27 PM, Anonymous cdquarles said...

juandos,

You are wrong about highway deaths. There were more than 50,000 highway deaths in 1967. The peak year was 1972 with slightly more than 56,000. Highway deaths have hovered around 42,000 per year since the mid 1990s. Considering the much smaller population of people and the much smaller population of cars back in the 60s and 70s, the roads and cars are much safer now.

The unknowable question is whether government safety mandates have made any difference (in either direction).

 
At 1/16/2008 7:04 AM, Blogger Walt G. said...

cdquarles said:

"The unknowable question is whether government safety mandates have made any difference (in either direction)."

Doesn't it almost have to be? I only see three possible factors to explain any decrease in fatalities: 1) Road design, signage . . . , 2) Car design, and 3) Drivers’ improvement.

The first two are government regulated, and by my casual observation over the last 36 years as a driver, it's most definitely not the third.

 
At 1/19/2008 7:34 AM, Blogger juandos said...

"You are wrong about highway deaths. There were more than 50,000 highway deaths in 1967. The peak year was 1972 with slightly more than 56,000. Highway deaths have hovered around 42,000 per year since the mid 1990s"...

Thanks for this info cdquarles, much appreciated...

"The unknowable question is whether government safety mandates have made any difference (in either direction)."...

Exactly!

Yet walt g notes what should be obvious even to me: "There’s a ton of safety designed into these vehicles now that was not even thought of in the 70s. It’s amazing some of the wrecks people are living through"...

So maybe walt g's desire for all the safety items mandated by the nanny state are accomplishing something but its still social engineering being foisted off on one and all...

The only real improvement I would get IF safety upgrades were ala carte items instead of how they are being forced on consumers now would be ABS brakes...

I do believe this might be a bit more complicated for the auto manufacturer though to have these supposed saftey items as optional extras...

 

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