The car industry is facing a big affordability crisis

You know the auto industry has a giant affordability problem when a manufacturer unveils a concept car whose roof and hood are made from reinforced cardboard.

The battery-powered Oli, shown last month by Stellantis NV's Citroën brand, has a top speed of just 68 miles per hour (110 km) and weighs around 1,000 kg (2,200 lb). For once, the company's PR verbiage was spot on: "The time is right to say: enough to the trend for excess and expense, and to focus instead on creating pure, honest vehicles that are lighter, less complicated and truly affordable." 

Amen to that. Though gizmo-laden SUVs and trucks remain hugely popular, they've also become eye-wateringly expensive, especially electric versions. The average price of an electric vehicle sold in the US now exceeds $66,000; last week, Ford Motor Co. hiked the price of its hot-selling electric F-150 Lightning pickup truck for the second time in about two months, blaming rising raw material costs. 

High prices are socially regressive and imperil a recovery in auto sales following the pandemic, while undermining the energy transition. Even beneficiaries of this trend, like Tesla Inc.'s Elon Musk, acknowledge sticker prices have reached "embarrassing levels." I'd add potentially also dangerous levels for the industry. 

Infograph: TBS

With low-cost credit no longer lubricating sales and recession fears growing, automakers will need to find other ways to cut buyers some slack. Otherwise they risk being displaced by cheaper competitors or alternative modes of transport. Those able to offer consumers a no-frills vehicle at an attractive price — like Renault SA's budget brand Dacia — should benefit.

The semiconductor shortages that have bedeviled the industry lately are slowly improving, however any reprieve for car buyers has been tempered by the rising cost of financing a vehicle. 

The average interest rate on a US new-car loan hit 5.7% in the third quarter of this year, while the average monthly repayment has climbed to more than $700; one in seven consumers committed to fork out more than $1,000 each month for their vehicle, according to analysts at Edmunds.

Anyone hoping to find a cheap secondhand vehicle is likely to be disappointed: Used-car loans tend to be even more expensive and inventory levels are tightest at lower price points. 

General Motors Co. and Chrysler filed for bankruptcy in 2009 (and Ford narrowly avoided a similar fate) when soaring fuel and raw material prices caused buyers to reject Detroit's gas-guzzling trucks and SUVs and consumers turned instead to more fuel-efficient Asian sedans.

Manufacturers' finances are now in much better shape; their order books are still plump, dealer inventories are low and the SUV trend looks irreversible. Yet there are growing signs of an affordability shock.

Price Shock

Last month, used-car retailer CarMax Inc. warned that high prices, rising interest rates and low consumer confidence were all impacting used-car sales (often an indicator of what will happen to new-car sales).

So far, customers have suffered more than manufacturers. Automakers took full advantage of chip shortages by raising prices, curtailing purchase incentives and prioritizing production of their most expensive models.

Stricter emissions standards and the need to include costly entertainment and safety equipment had already dented the economic case for building small vehicles; many of these entry-level models aren't being replaced.

Large Beats Small

"Value, not volumes" has become the industry mantra, and it's done wonders for automaker profit margins. But such an approach "leaves a potential sales vacuum that Chinese competitors and low-cost brands can try to fill," Jefferies analyst Philippe Houchois told me.

That's especially true of electric vehicles because consumer brand loyalty has yet to become firmly established.

Around 5% of western European EV sales in the first seven months of this year were by Chinese carmakers, according to Schmidt Automotive Research. China's BYD Co. expanded a nascent European sales offensive last week with a 100,000-vehicle deal with German car rental firm Sixt SE. Great Wall Motor Co. is preparing to ship small EVs to Europe, despite the bloc's 10% import tariffs.

Governments can help struggling consumers by subsidizing leasing for those on low incomes or offering larger purchase incentives for the cheapest electric models. From a consumer perspective, the Biden's administration's EV tax-credit reforms are, however, a mixed blessing because domestic manufacturing and raw-material sourcing rules will make cheap Asian imports less competitive.

There's plenty the industry can do by itself to lower prices. Automakers can start by forgoing a portion of their record profit margins. Dealers can also afford to leave some money on the table — no more selling above the recommended retail price. Their slice of the financial cake may be further reduced by automakers transacting directly with consumers — the so-called agency model.

Above all, the industry needs to focus more of its efforts on cars that mainstream customers can afford. Though Tesla has yet to introduce a budget model, kudos to General Motors for slashing the price of the Chevrolet Bolt (despite very high demand) and committing to launch a battery-powered SUV in 2024 costing $30,000.

Cheap need not mean unappealing. Dacia's electric Spring, which is built in China and costs around 20,000 euros ($19,800) before incentives, picked up more than 30,000 global orders in the first half of this year. Overall, Dacia's sales rose 5.9% in that period, one of the few major brands to avoid a decline.

Stellantis, whose CEO Carlos Tavares has been outspoken about the affordability crisis, is also well-positioned in budget cars, and I'm not just talking about concepts like the Oli.

The Fiat 500 mini was western Europe's top-selling electric model in the second quarter, assisted by a slick Leonardo di Caprio marketing campaign and Tesla's China production issues.

And how about the bug-eyed Citroën Ami? With a top speed of 28 mph and just 2.4 meters (8 feet) long, the utilitarian city runabout that's manufactured in Morocco is available in the UK for just £20 ($22.50) a month, plus a £2,369 deposit. Though technically not a car (meaning it can be driven by 14-year-olds in its most popular market, France), this so-called quadricycle chalked up more than 23,000 European orders as of July.

Heavyweight SUVs and trucks often aren't the best mobility solution for crowded cities, especially not during a cost-of-living crisis. E-bikes are another increasingly attractive alternative. Carmakers must price their products at levels that ordinary consumers can afford, or risk turning them off car ownership for good.