How to make new cars affordable again
The automotive industry is currently facing a significant crisis, and a key question is whether manufacturers bear the responsibility. A recent study conducted in France sheds light on this issue, indicating that the market for new vehicles is shrinking. The study attributes this contraction to substantial price increases, which are primarily being implemented by original equipment manufacturers (OEMs). The French study goes beyond simply identifying the problem; it also proposes potential solutions to address the challenges facing the automotive market. The core of the issue, according to the study, is that OEMs are raising prices so significantly that consumers are less willing or able to purchase new vehicles, leading to the market's decline. Therefore, the study not only highlights the role of manufacturers in the crisis but also attempts to offer constructive pathways forward.
Between 2020 and 2024, new car prices in France shot up by €6,800, a 24% increase, to about €35,000 (incl. VAT). That price surge is giving consumers pause when they think about buying a new car. As a result, new car sales in France have fallen from 2.21 million in 2019 to 1.72 million in 2024, a 22% drop.
Europe-wide trend
What has caused the spike in new car prices? That’s the topic of a study by the Institut Mobilités en Transition and the consultancy C-Ways. While both the figures and those institutions are French, the price increase is a Europe-wide trend, which means their study will have some bearing upon the situation in Europe as a whole.
As the study points out, rising car prices have strained the ability of the lower and middle classes to afford new cars. As a result, consumer vehicle renewals are delayed, which results in an ageing vehicle stock. Or to put it more bluntly: new cars have become too expensive.
The study breaks down the 24% price surge into three key components:
6% is ‘unavoidable’, due to the rising cost of raw materials, energy, and wages.
12% is ‘chosen’, as manufacturers shift their vehicle ranges upmarket, in order to generate higher profit margins.
6% is ‘hybrid’, due to the electrification strategies necessary to meet the EU’s vehicle emission standards.
Strategic choices
That means that, contrary to popular belief, EU regulations pushing for electrification are not the major driver of price increases. PHEVs and BEVs contributed only 1% and 2% respectively to the price rise, according to the study. However, this price difference was amplified by the fact that EVs where introduced primarily in the higher price segments.
Fully half of the price increase is due to the strategic choices of the manufacturers themselves. For example, small city cars have lost market share to SUVs, which are larger, heavier, and costlier to manufacture, but more profitable. The study estimates that reverting to the sales mix of about a decade ago would lower average vehicle prices by about €2,000.
The study cites consultancy EY, which found that automotive manufacturers’ profits doubled between 2015-19 and 2021-24. That would corroborate the suggestion that the recent average vehicle price increase was largely OEM-driven.
Kei cars
How to solve the inflationary car price spiral? The study offers some suggestions:
Create tax incentives and targeted public procurement policies to stimulate the smaller car segments (including smaller EVs).
Create a regulatory framework that favours ultra-affordable vehicles (such as Japan’s so-called ‘kei cars’ – pictured: the Honda N-BOX).
Support Europe’s industrial base, especially when it comes to stimulating local battery production.
The study concludes that, as recent vehicle price increases were the result of (corporate) choice rather than (regulatory) necessity, continued increases are not inevitable. In fact, the trend must be reversed, for it is endangering the energy transition – EVs are struggling to get above 25% market share, due in large part to their high price. The way to solve this issue is to make new cars affordable again. But that strategic pivot to rebalance the market will require some important political choices.
Latest
