NEW CAR PRICES and 

How to save the Canadian Auto Industry

One of the major expenses any individual or family will have is transportation- specifically the purchase and maintenance of vehicle's. One might hope that given the importance of this topic that the bullshit alarm will not go off but son of a gun there it is clanging and whining away to beat the band. Drat! So lets take a closer look.

What follows is information which you will NOT read or hear about in the media. Why? Follow the money! The media makes billions each year from vehicle advertising and they are NOT going to kill the golden goose that pays all their bills. I on the other hand simply wish to find the truth. And slay the evil (bullshit) dragon. 

When I first wrote this page the main topic was new car prices and since then the auto industry has collapsed so I have added 11 methods that could be used to save it. But first lets consider new car prices because this topic underlines the problems with the industry and is a good place to start. 

At first it all seems so deceptively simple. 

And the New Car Babes make it look so enticing! Do they come with the car? No they don't!

You look at the the paper and note the price of the car and you decide if you should investigate further. You may do some research on the vehicle and then go down to the Dealer and look at the car or even take it out for a test ride to see if it fits your needs. If all is well you proceed to the buying stage and possibly make them an offer or otherwise negotiate your trade or the terms of the sale. In actual fact most vehicle purchases are impulse buys. Then you drive home in your new vehicle. Simple eh? 

Not. 

Have you ever considered paying $100 for a pineapple or $50 for a quart of milk or $25 for a dozen eggs? Probably not and in fact you would become agitated if you saw those sorts of prices in the store. You have a rough understanding on how much these basics are worth and you would never pay a price that is a several times multiple of the actual cost of production of the item. 

So what does it actually cost to produce a car? Any ideas? You might start by finding out how much labour went into the car and then how much the raw materials for the car cost. But lets look at the problem from the manufacturers perspective. 

It is almost impossible to accurately determine how much a specific car costs to produce. The best they can do is come up with a ballpark cost. Why? Here are some of the cost inputs:

• 1. Assembly Labour
• 2. Plant expenses fixed 
• 3. Plant expenses variable
• 4. Administrative expense, management, accounting & legal costs, clerical costs
• 5. Advertising expense
• 6. Transportation expense
• 7. Sub Assembly expense
• 8. Raw material expense
• 9. Research and Design expense
• 10. Debt carrying costs
• 11. Employee benefits, pensions
• 12 Unexpected safety recalls
• 13 Warranty costs
• 14 Theft costs
• 15 Environmental costs
• 16 Government regulatory and compliance costs

The classic case showing the difficulty of determining actual costs is the British Mini where it is reported that due to an accounting error they sold the car at less than the cost of production. The company subsequently loss money on most cars that it made and over 2 million mini's were built over the years. This is incredible but (apparently) true! When you think about it there are real difficulties in determining cost of production and hence the selling price. One factor is the production run and car companies never know for sure how many of each model will actually sell. The longer the run the more tooling and design and other costs that can be amortized across total production and the less expensive all car parts and individual cars will be to build. 

So how do you know that the manufactures suggested retail price represents a fair value for the vehicle?  Or is it just bullshit? 

Lets do some research. The bible for North American car production is the annual Harbour Report which will set you back about $700 cdn by the time you pay for shipping and the companion CD. We won't be buying that and neither will most of the media you depend on for information about the auto industry. Apparently in 2002 the Nissan plant in Smyrna Tennessee took only 15.75 hours to assemble a vehicle. This is astounding. They made an average of $2069 profit per car, while GM made $701, Chrysler made $226 and poor ole Ford screwed up big time and lost $114 per vehicle. (Dumkoff!) Other production figures I saw placed GM at 39 hours per car, Ford at 22 hours and Toyota at 29 hours. 

At first it seems that a vehicle can be assembled quite inexpensively when considering only the labour component but think again. In China the average manufacturing wage is $1 per hour. If we took these production figures and applied them to the Chinese auto factory we might expect to pay less than $50 to assemble a car which of course is completely mind boggling. The North American cost might be in the 1000 to $2000 range depending on what you included in the labour rate. So much for the level playing field and so much for our North American vehicle manufacturing jobs. 

In fact super cheap cars are now making an appearance on the world scene. Tata Motors in India have developed a $3000 car called the Nano. Fiat is shipping the 500 and Renault is shipping the Logan.

 

All three automakers are cutting out the bullshit and providing a car that people want at a price they can afford to pay. They are all selling as many cars as they can make. Somebody saw the light that it is smarter to earn 10% of something and having factories going full tilt than earning 30% of nothing when expensive inventory sits unsold and plants are idle on one or two shifts and billions of advertising must be expended to coerce the public to buy.. If they earn even $300 or $400 profit per car they do very well indeed. All three low price automakers use cheap labor to help keep costs low and consequently there is no production in North America.

When we look at North American vehicle production we still see monster vehicles being pumped out of their factories with huge price tags that requires the purchaser to lease the vehicle or obtain long term financing. The resulting road monster gets horrible fuel economy and you constantly see these massive vehicles barreling around the highways with only one or two passengers in them. Its bullshit. The auto companies produce this product because they make a huge amount of profit on each unit sold. At least they did. 

Lets get back to the cost of a vehicle. The average North American vehicle is about 55-60% steel or around 1700 pounds of the stuff. I checked the price of steel and it looks like it is under $500 a ton so lets ballpark the cost of steel in a vehicle to be in the $500 range and we shouldn't be that far off. Naturally there are labour costs to convert this steel into car parts but a lot of that is done by high speed production machines so the labour costs should be relatively low.  The rest of the vehicle is glass, rubber copper and plastic and toss in some aluminum too. Lets just take a wild stab at it and call it another $500 of raw materials. 

soooooooooo it looks like something like this for the cost of a vehicle when raw inputs are considered:

• labour $2000

• steel parts $1000

• other components $1000

• total raw inputs costs  approx $4000

average price of a North American vehicle in 2006, cars $32,700 trucks $40,500

To express it in a fashion that will truly annoy -you likely paid more taxes on your new vehicle than the damn thing cost in raw inputs to manufacture! Sucker. 

The difference between the raw input costs and the selling price is someplace in the $28,000 to $36,000 and for a ball park figure if we just said it was $30,000 that would likely be close enough for discussion purposes. 

So is there bullshit in new car prices? Oh yes there is. But times are a changing and I think in about two or three years you will start to see some big changes as the cheaper models start making their way to North American markets. The big three automakers in North America are making improvements in production costs and the next step is to start producing well engineered platforms which offer basic transportation services and cut out all the huge overheads that the industry supports today. The industry is being turned upside down and shaken up as these changes transform it back to some semblance of reality to face today's transportation needs. In polite talk a lot of the bullshit in the industry needs to be removed. 

So I will continue to operate my  29 year old Dodge ex BC ambulance (runs like a top -bigger than a Hummer and runs on cheap environmentally friendly propane) . I bought it an an auction 15 years ago for $650.00  I have no car payments, no leasing costs, no interest and no new car stench. No green house gas comes out the exhaust pipe either.  I still look at the new car ads and...laugh! Ha! The babes are nice. And my Dodge is not what you might call a chick magnet. So that keeps costs down too.

A wonderful vehicle that has saved thousands of lives in ambulance service in BC, has a 12 foot box, corners better than a sports car, is built like a tank and is just plain fun to drive, turn the top yellow strobe on and there is no way that it will not get noticed which is a cool thing to have in a storm or at night. I have had an unbelievable amount of fun with it and will keep it forever. Makes most SUVs look tiny and because it was designed to carry a lot of equipment the suspension is super heavy duty. You can easily drive over curbs if you wish and even potholes are no problem. The fact that 29 years latter it is still working well is an indication of how well Dodge built their trucks in 1980. The Dodge C300 Chassis was converted into an ambulance by hard working employees of the BC Public Service. They did such good jobs the auto industry got worried and the BC Government closed the operation down. How smart was that? I drove it across Canada with a full load up over the mountains and she purred all the way. Not a problem. How many 29 year old trucks can do that?  You can do it too -don't buy a new car just fix the one you have!  

1. Decree that ALL government purchased vehicles in Canada for ALL levels of government be made in Canada by Auto Companies owned by Canadians and be environmentally sensitive i.e. no monster vehicles to haul around one person with no gear.

2. Make Car Loan Interest tax deductible for all cars made in Canada by Canadian owned companies that get good mileage.

3. Set standards for a Canadian Police Car and Truck and a Canadian Taxi that ALL Canadian vehicle manufacturers would need to meet. They would include standard tires (made in Canada) standard brakes (made in Canada) standard emergency equipment (made in Canada) a standard engine for each (made in Canada), standard safety features, heavy duty construction and upholstery so the vehicle would last a minimum of 250,000 miles. During the war years Canada made over 600,000 Canadian military pattern trucks -we can do it today with cars -the idea is tested and works. By standardization and mass production the Ford Motor company got the production cost of a ww2 military jeep down to an amazing $350.00. That's a lesson learned we just don't need hundreds of models and thousands of options for basic reliable transportation. 

4. Subsidize two years of work for Canadian Engineering Graduates in Canadian vehicle plants. Our Engineers are very smart people and excellent workers and lets be sure the entire crop of them are employed building Canada. These are NOT the people we want to see underemployed flipping burgers when they have huge student loans to pay off and well trained brains that could be to good use solving our transportation problems.

5. Cap maximum loan interest rates for car loans at three times bank prime. The interest on some fly by night car lots is outrageous and essentially they are finance companies because that's where they make all their money. It's a rip off and lets stop it!

6. Cap maximum gas credit card rates at five times bank prime. Are they in business to sell gas or make money on credit cards -lets bring the business model back to basics. Lets stop them from gouging the public.

7. Sell gasoline and fuel in Imperial gallons so that people understand costs better. Nobody knows what 8Litres per 100 km means. Nobody. My 1980 Dodge 1 1/2 ton ex ambulance gets about 15 mpg and so its easy to figure out gas costs IF the gas was sold in gallons. Luckily it has been converted to propane. Most Canadians don't realize that we like our American cousins cancelled the full implementation of the metric system because it just didn't generate any net benefits. If you doubt that check out the facts at our Metric System page. 

9. Offer a $5000 rebate for Canadian Made vehicles made by a Canadian owned company for all cars and trucks taken to a recycling yard. This would remove thousands  of decrepit inefficient vehicles on their last legs off the market and make room for new production of energy efficient models. Right now a car is worth only slightly more than it costs to transport it to the wreckers yard so there is no great incentive to recycle them. They litter yards and driveways all over Canada. 

10. Set standards for a basic Canadian Car and basic Canadian Truck with 50 mpg and 30 mpg ratings that each manufacturer must produce. The vehicles would all have standardized tires, paint and components to reduce costs and be repairable without huge labor bills. Maximum hours would be set for each component removal and replacement. The manufacturers would also be free to produce other models but must produce a minimum of 30% of their vehicles according to the basic model standards. The price would be set at a rate equal to the resources inputs, a labor input and a profit input for the companies. The objective would be to bring the standard Canadian car price to $8,000 and the standard Canadian Truck price to be less than $10,000. Other models could be sold for higher prices. Allow lower speed all electrical vehicles on Canadian roads. The global warming problem IS real and we absolutely need to have vehicles which are not polluting the atmosphere and killing us all. Doubt me - check out the David Suzuki foundation. And be afraid. Be very afraid. We MUST do something to help.

11. Produce a Recyclable Car that could be returned to the factory every five years and brought back to factory specs. The car company would agree to bring the car back up to specs for a specific negotiated fee for a period of twenty years. This would give the consumer a dependable vehicle in good operating condition with lower annual maintenance costs for less than the cost of buying a new one and give the car companies a secure source of income. By standardizing parts the price of parts could be greatly reduced, supply chain jobs would be protected and by engineering in easy to repair assemblies the actual labor cost to bring the car back up to specs could be very low. After 20 years the technology will have changed so much that it would be time for a new model.  I drive a 29 year old truck so know that this is possible. We also drove a 1975 Volvo wagon that was 20 years old when we sold it and it was still working great.  A 20 year cycle is one great option for a person looking for dependable, affordable, safe transportation that is environmentally friendly too. If the Canadian standard car and truck were chosen for this project any Canadian manufacturer could make them. It's doable. I would buy one.

12. Read Marcie's Book.  This is the "...best book on business ever published in Canada" and it explains how business works. It seems that people making the laws and spending the taxpayers money simply do not understand how business works. They understand politics instead. Politics won't solve this business problem. This is a wise investment for anyone contemplating business, trying to understand how it really works, or improving the one they have. Your Very First Billion is printed in North America too keeping our workers employed. 

And talk to any good independent owner operator trucker about costs per mile and how long his truck will last. They will know. They can tell you their costs per mile. To the penny. Vehicles wear out at very predictable rates and sending them back to the factory for rebuilding and refurbishing is one excellent way of recycling and reducing your transportation costs too. Everyone is happy. The Car company has that business coming back to them -the workers are employed and the drivers have a car that works and that is safe and economicical. How smart is that! 

These steps would inject several billion dollars into the Canadian Auto industry, save jobs, provide better value to consumers, help save the planet and establish a healthy sustaining industry base for Canada consisting of auto companies owned by Canadians.

In other words these steps would solve the main problem that is facing the car industry in Canada -demand for their products. In some cases the products themselves need to change but the big problem is that the world financial meltdown has reduced demand and that is NOT the fault of the car companies. A good example of needed change is the fact that a Chinese car company has developed a roomy SUV that is totally electric, has a range of 267 miles, regains 50% of it's charge in ten minutes on household current and our auto companies are still not ready to launch the GM "Volt" with a range of only 40 miles. Something is wrong here too. 

We all need to push for changes. If you know anybody that can help please send them these ideas. The more people we get thinking this way the sooner we will fix the problem. Add your own ideas because I am sure that with over 33 million people we have the answers to fix this problem. And it needs to be fixed because the industry has been getting worse for decades now and we are now at a point where major companies are going to fail with a resulting horrendous impact on jobs and the economy. 

November 25th -08 Update    Like millions of others I watched the spectacle of the three big auto companies come to the US congress with cap in hand for some assistance. The US Senators an extremely well spoken bunch ripped them to shreds. Unfortunately my bullshit alarm went off. I knew there was something wrong here.  Essentially what they were saying was that if you want us to help you with taxpayers money then you must give us a plan of how you will mend your ways and make your companies profitable again. 

Here is the problem. The car company execs should have gotten up and left. They should have said "call us back when you come to your senses". But they didn't they caved in and played the game. They wimped out. There was a flash of passion from the GM CEO (who was later forced to resign) but just a flash. There were a couple of flashes from the chief Union dude but again just a couple. 

Here is the problem in logic. The Government is making more in taxes on the cars than the car companies are making producing them. Not only is there sales tax on the cars but there is also taxes paid on income to buy the cars. There are hidden taxes built in to the prices for car parts. So one could argue that the government is taking too much out of the pie and the car companies have not enough left for themselves. They have been supporting the north American economy for too many years. And now when times are tough the government is making them dance to their tune before they offer any help. It's time for them to give the government a wake up call. If they want a depression then simple -let the car companies sink. That will certainly generate a depression. 

The US Senators earn their living by talking and sounding good. The Car Company CEOs make their money by producing cars. Big difference. In my opinion the US Senators made a huge mistake in judgment by doing what they did to the Car CEOs. And our Canadian politicians watched them intently and simply did the same thing. 

When the muck gets tossed around for people to blame for the economic meltdown the US Senate is standing in that line. They failed to ensure that the US Financial system was adequately regulated. They dropped the ball by allowing the sub prime mortgages and wild derivative investments in the first place. In short these very intelligent and exquisitely well spoken individuals -although gifted in many ways -are living in a glass house right now. They have a very tough job to recover from this one. But baiting the Auto Execs and making fun of them is not the way to go. They need to concentrate on making an infrastructure where the auto and other companies can exist and prosper. They are one of the hardest working and most productive sections of our entire economy. 

The government needs to ask the question why can GM make money in Russia and China and not in the USA or in Canada. That is where the problem lies. Why is Fiat producing it's fastest selling model in Poland? Why is Tata Motors doing so well in India. Its not all the fault of the car companies. Even the venerable Japanese auto makers are having problems in this financial environment.  This is a demand side problem and we need to take steps to place consumers in a position to visit auto showrooms again. 

Feb 17/2009 update

We just completed a road trip across Canada from our Victoria location to our North Bay HQ. One thing learned was that Canadian winter driving conditions require a good safe vehicle with good ground clearance. The imported compacts and sub compacts are death traps out in the open Canadian winter roads. Our big North American trucks and full sized SUV's are the best vehicles to tackle this weather. And we make them right here in Canada. What is better -50 mpg and death in an accident or 25 mpg and life? You decide.  We converted our story into a book The Canadian Winter Driver's Handbook

We hope that you have found some of the ideas here to be thought provoking and useful. We all need to put our heads together to solve this problem as too many of us depend on this industry for our jobs and standard of living. The point here is that a political approach will not work. One needs to understand the problem before implementing a solution. What our government is doing now is somewhat like ordering the crew of the Titanic to start chipping paint and cleaning the windows when they should have been manning the lifeboats and plugging the leaks!  We now have our best people working on these problems so lets hope we can come up with a solution. I am convinced that a political solution to this financial crisis simply will not work and in fact could make the situation worse. This is not the fault of the auto companies or the union and the workers and people need to understand this. The Auto companies are on the supply side and this financial crisis is clearly a demand side problem. That's what needs to be solved first. Then we can move on and get things working again!

Update May 14/2009 Chrysler is bankrupt, GM is preparing the papers. A 44 year old truck plant producing high quality GM trucks was just shut down so that trucks will be made in the USA. Canada has been left high and dry by the failure of American car companies. With 33 million people and a large market for vehicles we are big enough to have our own Canadian owned car companies. Now is the time to do it. Now is also the time to pick up some production facilities for pennies on the dollar. What we need is real leadership instead of these latte sucking wimps who seem to run Canada today. Call up the folks at Magna and ask them if they can do it. I can tell you right now they would have no problems at all producing a truly Canadian vehicle.  Our government has had years to see this coming and have stood idly by while an entire industry flounders and dies. Fire Tony Clement and Harper - they are total jokes. 

Update May 27/2009 Apparently Canadian tax payers will be spending over 9 Billion dollars to prop up the American car industry and their assembly plants in Canada. We could just as easily diverted that much money to building a new Canadian auto industry and using some of the 11 points here we could have ensured that the industry would be not only successful but also a world leader in how to run a home grown auto industry. There is a total lack of  understanding and leadership from the Canadian government who are desperate to maintain as much of the status qou as possible when in fact the entire situation has changed and the American car industry is bankrupt. 

Imagine for a moment if we had a real leader in Ottawa. He would call the leaders of each political party and the CAW leader and invite them over to 24 Sussex Drive. He would personally pour them all a drink. He would sit down with them and say something like:

 " The situation in this industry has reached a crisis level and the American bail out approach will not work. Here is what I propose to do. First of all I need your help. I would like to appoint one member from each of your parties to sit on a board that will build a new Canadian vehicle design and manufacturing facility. I want to start tomorrow at 0900. I am prepared to divert the ten billion we had earmarked for the bailout. I want this done on an emergency footing and I want it done fast. I want people working on this project on a war footing. If it means buying an entire factory for an existing model then lets do it. I want the first cars to be rolling off the line in ten months.  At this point he would stand up and then pour everyone a second drink. This is going to be a no bullshit project with no politics we are just going to do a job that needs to be done for Canada. Any comments? "

That would be leadership and that is what would never happen with the existing crew in Ottawa. We need a Lord Beaverbrook type. We need someone that can get the job done. 

December 2, 2009 Update Its been quite a few weeks since my last update so we can now take a look at where the auto industry is. In a word it is in the toilet. Yesterday Fritz Henderson the CEO of General Motors got fired by his Board of Directors. Sales have not picked up to the point where the auto companies are safe. In fact the same reason that caused the problem in the first place - the meltdown of the economy- is still causing the low sales today. Unemployment in the USA is now over 10.2% the highest it has been in recent memory. We checked out the offerings at the GM new car lot and they are no different than before the economic crash. There are no vehicles that offer basic inexpensive transportation that is easy to maintain and repair. Not one vehicle fits that description. They still don't get it. Chrysler has no new vehicles but continues to build a good truck. It remains to be seen how quickly Fiat can inject their technology into the Chrysler brand but getting a new model up and for sale is a multi year procedure. Ford continues to muddle on but Toyota is still taking market share away from the big three. Even Hyundai and Kia are taking the big three market share. Not good. In short I have no sense that the situation is "getting better" for the big three. I wish I had a happier conclusion here but if I am correct then we can see further disasters in the North American Auto industry in 2010.