Written by Dan Luria and Alan Baum
The debate over the future of fuel efficiency policies is generating a lot of noise. But for consumers, these policies generate savings at the pump. Opponents of maintaining fuel economy regulations, however, cite affordability as a chief concern. Auto manufacturers, they say, will pass on the cost of meeting the regulations to their customers, and rising vehicle prices will prevent many middle-class Americans from purchasing new vehicles.
As Mitch Bainwol, of the Alliance of Automobile Manufacturers, said recently: “Well-meaning regulatory action risks increasing compliance costs to the point that additional safety and fuel-efficiency technologies put new vehicles out of financial reach of the average new car purchaser.”
We completely disagree; fuel economy rules are simply today’s convenient bogeyman to blame for what are really long-term trends in the American consumer marketplace.
In reality, today’s new vehicles are increasingly out of reach for many middle- and low-income Americans for reasons that have little to do with government standards. First, a shift toward trucks (including crossovers) has led to higher average prices, which for new vehicles have risen from $28,133 in 2009 to $34,230 in 2016. Second, a stronger economy has led to more robust demand, which supports higher prices. But by far the majority of the increase in prices owes to the addition of luxury features, such as comfort and entertainment.
The rise in crossover sales and more demand for luxury features are a result of growing U.S. income inequality that favors upper-middle class and upper-income buyers in the new car market. Automakers understand this trend and have modified their offerings by adding luxury features to more models and by creating more high-end versions in every segment.
And the average buyer of new vehicles, whose income is 175 percent of the median U.S. household, is clearly willing to pay for these features.
True, today’s vehicles have safety features like seat belts and airbags. But those regulation-driven items are not the source of most of the price increases. Even today’s base models include air conditioning, power locks and windows, cruise control, and 6-speaker sound systems, features unheard of for base models several decades ago when vehicle ownership was at an all-time high. Many higher-end models are also offered with more efficient powertrain packages, and many of today’s more affluent new-vehicle buyers willingly pay extra to get those packages.
The rising level of feature content is occurring across automakers’ fleets. In every segment, high-end variants have been introduced or expanded in the last few years. And sales of these “higher-trim” level models have been increasing significantly faster than overall sales. The share of these high-trim models is often more than 25 percent, as compared to less than 10 percent in the past.
If the industry were concerned with “affordability,” why did it choose to add so many features to its entire model line-up? The answer, quite obviously, is that upper-middle class and wealthy buyers wanted – indeed, insisted on – these features, and those buyers are a growing share of the market. That’s because, since 1980, and particularly after 2000, almost all of the income gains from U.S. economic growth went to higher-income families.
Opponents of government regulation of fuel economy, emissions, and safety cynically argue that such regulation threatens jobs. Strikingly, the UAW and other unions have made the opposite argument – that regulation often results in innovation, investment, and more jobs. Strong job growth at many U.S. suppliers of fuel-saving technologies – among them BorgWarner, Bosch, Continental, Eaton, Delphi, and Owens Corning, to name just a few – convinces us that the unions are right and the trade associations wrong.
Nor are dealers harmed by the market’s trend toward a richer new vehicle sales mix. True, there has been a narrowing of the gap between invoice and transaction price (which is the dealer’s “profit”), but that’s because of how automakers set invoice prices and not because of regulations. Meanwhile, buyers priced out of the new vehicle market have greatly expanded the used car and truck market, where dealers make more profit per unit sold --on average, over $300 more per vehicle on used than on new-vehicle sales.
Are today’s new cars and trucks less affordable for households at, near, and below the median income? Absolutely. But that reflects changes in the U.S. income distribution and the profit maximization strategies of the automakers, which have chosen to restrict production capacity and drive the market toward higher-margin, higher-trim level models. That strategy has resulted in record industry profits, and in substantial job growth at both automakers and suppliers. Fuel economy standards are not free, but they are hardly a primary driver of why new vehicle prices have outpaced median income.
Alan Baum is Principal of Baum & Associates, an automotive forecasting and research consultancy. Dan Luria is an independent industry analyst. Since 1990, Baum & Luria have collaborated on a respected quarterly forecast of North American vehicle, engine, and transmission sales and production.