THE AFFORDABILITY CRISIS.

By Peter M. DeLorenzo

Detroit. With everyday life being upended by a series of challenges, from the price of gasoline and various shortages du jour, to the burgeoning cadence of inflation, which is starting to hit everyone on a daily basis, it is no wonder that the auto industry in particular has been beset with its own series of challenges that have become part and parcel of just getting through a financial quarter.

Supply chain issues initially brought on by the Pandemic – with the industry’s go-to “just in time” production mantra having turned into a “you’ve got to be kidding me!” nightmare – are just one dimension of the industry Hell going on right now. In fact, it may be as bad now as any time in history, with the possible exception of when the automobile industry was supporting the war effort in World War II.

Every key component or raw material has to be locked-down, locked-in or bought-out in anticipation of what will be needed for the future. The silicon chip crisis has devastated the industry from top to bottom. Vehicles are being delivered without key features rather than having them pile up in storage facilities, with the promise that the chips will be retrofitted at a later date. But this just in: as I predicted months ago, the chip “thing” is going to be an ongoing crisis for this industry through next year. In fact, we may be entering a phase for this industry when there will always be a shortage of something going forward, which is, as you might imagine, a giant bowl of Not Good.

Added to all of this pressure is the monumental shift to EVs going on, which is placing a premium on sourcing precious metals and the need for propagating a completely new menu of technical materials that go into the development of batteries and battery infrastructure. Right now, auto companies are running virtual war rooms where teams of people are in constant motion tracking down raw materials all over the globe, while identifying supplier companies that can be partnered with or bought out in order to ensure supplies for the fundamental needs of producing vehicles going forward. This is serious business, and it is growing more critical by the day.

But surprisingly enough, from the industry standpoint this daily laundry list of crises has brought with it an unanticipated advantage. The shortage mentality – and reality – has completely upended the old dealer sales model in the U.S. market. The days of going down to a local dealership and wandering around the parked inventory to see what new vehicles it has in stock are over. In less than three years the retail auto industry has been forced to switch to the European way of selling cars and trucks, which means that you either place an order for a vehicle and wait, or you hope for a cancellation of an existing order that you can jump on. The result? Discounting has been severely reduced or eliminated altogether, “premiums” have become part of the deal discussions, and the gross profit-per-vehicle numbers have exploded, giving manufacturers and their dealers supercharged profits. Just one example? The Penske Automotive Group’s second quarter net income jumped 10 percent from a year earlier, while it delivered its most profitable quarter ever.

I have covered this before, but it is the most striking, fundamental change that this business has seen in many decades. This change to high-transactional pricing has also brought something else with it too: Consumers aren’t backing away from buying or leasing vehicles in the midst of these shortages and inflationary pressures. In fact, they’re powering ahead to find what they want when they want it. The average price of a new vehicle in the U.S. market is now around $45,000.00. Think about that for a moment. And it is going up. The average car payment is now well over $500 per month. And vehicle loans are now getting ridiculously long again, which history tells us is never a good sign. 

And probably the most mind-boggling development in all of this? Payments of $1,000 per month or more are becoming common in this frenzied atmosphere. It’s as if the whole world has gone frickin’ crazy.

But in the midst of all of these crises and the swirling maelstrom driving this market, there’s one more crisis that this industry has refused to take meaningful strides against, and that is the crisis of affordability. I’ve written about this often, and I will write about it many times in the future I’m sure. But the basic affordability of vehicles is slipping away and we’re watching it unfurl like a train wreck in slow motion.

I’ve mentioned this before, but one manufacturer made an attempt at delivering affordability and actually got it right. The Ford Motor Company. And no, it’s not the much-hyped Mach-E and Lightning EVs that garner this recognition, it’s the Maverick Hybrid pickup truck. To me, it’s by far the most impressive vehicle in the Ford lineup, and the True Believers in Dearborn deserve all of the credit for it.

In fact, it’s the most significant vehicle from the auto industry to come along in a long, long time. You can get a stripped down Maverick Hybrid for a little over $21,000 (with those exquisite steelies), one that’s well-equipped for around $27,000, or you can spend $30,000 (or a little more) for the full-zoot version. Either way, you’re getting a damn fine vehicle for the money.

Memo to auto manufacturers: It doesn’t matter how great your BelchFire EV is, or how much range it’s capable of or how fast it recharges - if people can’t afford it. The prices of new vehicles are creeping upward, fast. Too fast. That $45,000 average selling price? That’s a mere suggestion at this point. Realistically, the norm is more like $50-$65,000. 

And it’s just not sustainable.

I hope the other manufacturers have a plan for this affordability crisis, because it’s the one crisis that could derail all of their blue sky EV efforts.

And that’s the High-Octane Truth for this week.

(Ford Motor Company)

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