As New Auto Prices Become Unsustainable, Tata's On to a Winner

I have a single friend who is very young. He has an average job, works hard, and has no other assets (remember, he’s young). Here’s the part I don’t understand. How long will people be able to spend more than a year's wages to buy a brand new vehicle, when they don’t necessarily have the money? My friend lives in Canada and spent about $40,000 on a Dodge Ram (approximately what he spent including all extras, taxes, etc. Please realize many fully loaded trucks in Canada can cost $40k to $60k quite easily.).

I did the math on a five year loan from the bank using a 6% interest rate. Do you know what the payments are? $773.31! Then he pays almost $500 a month for insurance (young guy + new vehicle = high insurance premiums (almost criminally high, IMO)). Gas to power the beautiful Hemi under the hood is about $200 per month. I know he works about a 10 minute drive from work, and he works so many hours he doesn’t have time to do many other activities.

Now, I got thinking. If he only needs a vehicle to commute to work and back, how much per work day is this costing him? Using 20 work days per month, I calculated he spent nearly $73.69 per work day to drive to and from work. That’s a large portion of his after-tax earnings! Unless consumers are buying the truck for work (and many are), how long will consumers be able to spend $30k+ for a new vehicle? It’s no wonder the automobile industry has problems.

Yes, I realize there are many people who buy the vehicle because they can afford the monthly payments and want to live life while they’re alive. You have to sit back and enjoy some things in life. But I believe $30k+ for a brand new vehicle is expensive and ultimately unsustainable. My friend must live very frugally just to keep his truck! Obviously the truck brings him joy, and it might be worth the price to him. That’s his decision. I’m not trying to rip on my friend, Lord knows I want a brand new truck too. But WANTS always come after NEEDS. The point I’m trying to make is that many of our vehicle prices are so high, that they no longer make sense from an economic standpoint. If this recession starts to hit consumers worse, are the brand new vehicle prices sustainable? I don’t believe they are.

Dodge, General Motors (GM) and Ford (F) currently have a stranglehold on truck sales in North America, and each has a large percent of the car market (though it is quickly being eroded away by Japanese automakers). Even car prices are high. As globalization continues and competitors pop up, I think they will drive down prices. Tata Motors (TTM) may be onto something. They’ve just recently announced a $2,500 vehicle. Can you imagine that? Just $2,500! That vehicle won’t be sold in North America, but it just goes to show that a vehicle can be manufactured (maybe not here) for very cheap. Just as Wal-Mart (WMT) has been able to import foreign made goods and drive prices for consumables down in North America, expect foreign automakers to try the same. Even if regulations prevent foreign companies from importing cars, you can expect middle class Americans will increasingly vote with their wallets and choose cheaper models over expensive ones.

As the recession worsens and the middle class gets squeezed, I’d expect less brand new automobile sales in North America. Automakers need to innovate and focus on increasing the fuel efficiency… or even better - create electric vehicles and bring the new vehicle prices down. Tata certainly seems to be onto something…

Comments

[User 141119:]

Uh, excuse me but you said "as the recession worsens" That is a bunch of crap. We are NOT in a recession and whomever thinks so is either a ticker watcher, watches too much news and TV, and believes all the hype in the liberal media. For you to say this just discredits yourself even more. If the US is in such disarray, then how come I can't find a parking spot at Walmart on a Saturday morning? Recession my butt!

2008 Jan 17 07:49 AM

[Robert Nabloid:]

You can't find a parking spot at Wal-Mart because that is the only store anyone can afford to shop at anymore. Looking at Wal-Mart store parking lots is a poor way to determine if we are in a recession... Plus, Saturday mornings are typically VERY busy for retail stores since many of the M-F crowd use Saturday to get some shopping done. As the economy worsens, expect more people to shop at Wal-Mart! People still have to eat.

The U.S. is in the beginning stages of a recession... It will get worse. I don't pay any attention to the Liberal media... I just watch as the USD becomes worth less and less each passing day (worth about the same as the "Canadian Pesso", as we used to call it). I just watch as emergency funds are injected into the market to keep it afloat. I just watch as the U.S. government runs around the world looking for several billion dollars a day to keep the empire afloat. I just watch as the Fed goes around the world to other central banks and asks them to work together to help stabilize the situation in the U.S. - Now the Bank of Canada is lowering interest rates because the Canadian dollar got too strong against the USD - Even though they have rampant inflation in the west due to a major economic BOOM and were recently considering INCREASING interest rates. I just watch as Citibank and others go overseas in search of new investors (almost begging) to sell parts of their companies in order to get cash injections - Selling portions of major American banks to Asian countries is becoming common. I just watch the banks rolling out their write-downs of $18 B a piece. I just watch the bankruptcy numbers continue to increase... I just watch the number of FOR SALE signs hanging in front lawns. I just watch the number of homes in foreclosure. I don't get my news from the mainstream media - each of those can be had right through direct press releases from the respective government departments or company websites... You're the one listening to Liberal media if you think the problems are a temporary setback and that the U.S. economy will quickly be back on track to allow the stock tickers to continue their infinite ascent (much of which is due to inflation anyways, but meh).

PS> If you think shopping at Wal-Mart contributes to the sustainability of the economy and that proof of others shopping their in droves is proof the economy is good - You're in for a rude awakening! Of course people are going to shop at the cheapest store when their discretionary incomes begin to decline.

I'd actually tend to think that your thinking is quite Liberal. I'm just an ultra-conservative who believes fiat currency is inherently flawed and that economies that are financed completely with debt are on a dangerous path. You can't print or borrow your way out of a recession forever. They should have allowed a small recession several years ago. Now, everyone has borrowed so much money in the past few years and that is what fueled the boom - But now that so many people are burdened with 25 year mortgages on $500+k houses, they will have to pay for them over a 25 year period - Those people won't be buying ANOTHER $500k home anytime soon... When such a large number of people buy/build homes that are $500k+ a piece, the economy is going to see a massive boom - Normally not everyone would buy all at once, but the Fed lowered the interest rates and created a housing boom - at the same time banks lowered their lending requirements and were giving money out to people WITHOUT proof of income or assets! So, almost everyone bought.

Let's hope things get back on track - but as long as so many people believe the Liberal media's idea that the market should always be a bull and things are fine the way they are with everyone getting further into debt - we will have problems. How about this: If times are so good, why is everyone so far in debt? If times were truly good, we'd have more savings in this country. Instead we are selling the infrastructure right from beneath our feet! Go look at how Cintras (linked to Spanish King) is buying highways (already built/paid for by government) and putting up toll booths. Go look at how Cintras is building a major super-highway from Mexico to Canada (it's already in Texas) - Go look at how the legislation for that highway states that no other highway can "compete" with it. Now we'll have legislated highway monopolies? For crying out loud, what do they mean no other road can compete with it? Its a road! It's a basic peice of infrastructure that a government is supposed to provide for - and now it can't have "competition"? C'mon, the more infrastructure a country has, the better... How's this all happen? People aren't paying attention because they all get their news from the Liberal media that either never mentions it, or briefly does and then moves onto the latest news on Britney.

America is so deep in debt, it's selling itself! That is the scary part. You won't notice the recession for a while - they will just crank up the printing press and start printing them dollars so quickly that inflation will ramp up. Let's hope we work our way out of this mess we've created - but its real hard to start working your way out of a mess when you have so many that don't believe we're in one! Arghh. Yes, there are fallacies with my argument/examples - go ahead point them out - I don't care. If you can't see the basic jist of the situation we are now in, it's your problem.

User 141119, Yes, I'm sure you're correct - the economy is honky-dory, it's a damn good day, and it's a perfect time to go borrow some more money to buy stuff at Wal-Mart like everyone else. Everyone else is doing it. //end

2008 Jan 18 12:14 AM

[Bob Wilson:]

Tata's cheap car will not be exported to this country because it fails to meet U,S. (or Canadian) safety standards. The car gives new meaning to the words "unsafe at any speed." -- at least "unsafe" as those words have come to be defined in our market. The car should serve India well, however, at least in the near term as the Indian auto industry developes.

2008 Jan 18 08:16 AM

[Robert Nabloid:]

Yes, I know it won't meet U.S./Canadian standards - but it show manufacturer's that its at least possible to make vehicles cheaper than they are now.

And, as you mention, it will serve India and some other markets quite well. Tata is positioned well to have a good future in the developing world.

2008 Jan 21 11:04 PM