Why Do Average New Car Prices Continue to Rise?

January 27, 2012

New car prices are on the increase, even in the tight economy. The major automobile companies reported this problem due to company restructuring, the increased cost of raw materials and shipping, and costs to meet the new regulatory demands.

After the U.S. bailout of the major automobile manufacturers, many of the demands from Congress were a need for these companies to restructure to achieve long-term viability, energy efficiency, lower emission requirements and a plan to repay the bailout loans.

Changes in Demands

For many years, large SUV style vehicles were in demand. These vehicles have a higher purchase price and are more expensive to maintain and insure. With the slower economy, many of these vehicles went unsold. For this reason and the increasing demand for more economical and cost-efficient cars the manufacturers have to restructure their facilities to build these models.

With the increase of fuel imports and higher prices for imported oil, there are stronger regulations for fuel economy. Besides increasing the standard fuel economy of the current models, many auto manufacturers are looking to increase vehicle types that run on alternative fuels such as electric-powered, or bio-fuels. These new technologies add expenses to the auto manufacturers in the developing vehicles to run on these alternative fuels.

Increased Cost of Materials

The increased cost of steel is another contributing factor in the purchase price of new vehicles. With the lower demand for steel and other products, the only survival approach is to raise prices of their products. The money for these increased costs cannot solely be absorbed by the automobile manufacturers; they need to be added to the sales price.

Incentives and Advertising Costs

To increase the demand for a company’s products, these need to be advertised and salesmen need an incentive to sell. To get the customers into the dealership showrooms, most auto manufacturers spend millions of dollars on ad campaigns. They also offer larger bonuses to the dealerships for the sale of these selected models.

With the increasing costs of operating a new car dealership, high competition, and the lower volume of sales, many dealerships are keeping these incentives and not passing the discounts to the customer.

Import Taxes

Many cars are actually manufactured outside the U.S.A. and need to be shipped. Also many of the components for cars that are manufactured in the states are imported. With increased shipping fees, these costs also contribute to the price of new vehicles.

Currency Fluctuations

The value of all countries' currencies vary on a daily basis. When the value of U.S. currency drops, the cost of imported products will increase. These increases cause the manufacturer to spend more for their imported products.

As mentioned above, every increase of cost to a manufacturer will affect the cost to create, ship, advertise and sell their products. These costs, plus the need to make a profit are reasons the price of new cars are increasing.

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