U.S. Auto Industry Faces Affordability Crisis, Say General Motors CEO and Experts

Strategic Insights -

As the National Auto Dealers Association convention in Dallas wrapped up, General Motors Corp. CEO John Smith sounded the alarm on the growing issue of affordability in the U.S. auto industry. Smith, speaking amidst rising vehicle prices, expressed concerns that the industry's high costs are pushing car prices beyond the reach of many buyers. According to Tom Webb, chief economist for the NADA, the average cost of buying a new vehicle in the United States is projected to top $20,000 in 1995, a significant increase from $18,200 in 1993.

Key Takeaways:

  • General Motors CEO John Smith acknowledged an "affordability problem" in the U.S. auto industry, contradicting recent claims by Ford Motor Co. and Chrysler Corp. that cars and trucks remain affordable.
  • Smith cited high costs of adding new safety and air pollution control equipment, changing consumer tastes, and the industry's high cost structure as driving factors behind rising prices.
  • The net result is that car prices are increasing faster than income, posing a significant challenge for the industry.
  • GM plans to use the affordability issue as a bargaining chip during labor contract talks with the United Auto Workers union next year.
  • Stripping equipment off cars to lower prices is seen as a "dangerous game" because consumers have come to expect certain items as standard, such as dual air bags.
  • GM may have to increase rebates on some of its cars and trucks this year to remain competitive.
  • Leasing is viewed as a way around the affordability issue, with GM planning to mount a broader push into leasing in the next few months.
  • About 27% of all cars and trucks in 1994 were leased, and the total could reach 40% in the next four years.

Statistics:

  • Average cost of buying a new vehicle in the U.S. projected to top $20,000 in 1995. (Source: Tom Webb, NADA chief economist)
  • Average cost of buying a new vehicle in the U.S. was $19,200 in 1994 and $18,200 in 1993.
  • High costs of adding new safety and air pollution control equipment are driving factors behind rising prices.
  • Industry's high cost structure makes it difficult to produce low-priced cars.

Sources:

  • "NADA Chief Economist Predicts Spike in New Vehicle Prices." Reuters.
  • Byline: DAVID LAWDER Reuters News Agency DALLAS.