The Detroit Auto Show has finally given us some interesting news. Emerging markets are fueling demand for new cars and, as sales there outpace developed countries, these customers will be increasingly important to major auto companies. The most recent demand is for an ultra-low cost (~$2,500 - 4,000) vehicle.
This type of car would open the door to innumerable new drivers. Temporarily ignoring the increased congestion and adverse effects on the environment, the prospect of a new paradigm in car manufacturing is a relief.
Americans are particularly fond of their large, comfortable automobiles. Current pricing differentials on small to mid-size vehicles are not enough of an incentive to buy a smaller car. However, if the price tag dropped to $4,000 on a small vehicle, I predict many buyers will reevaluate how much space they really need. The price would create a breaking point to finally separate Americans from over sized and inefficient vehicles.
Another benefit of the $4,000 car option is greater flexibility for American consumers. The U.S. personal savings rate in November was negative 0.5%. With finances stretched to the limits, it is no wonder we are dealing with the sub-prime mortgage crisis and a looming recession. The sensitivity of American consumers is levered so tightly to home prices and interest rates, the rest of the economy falters soon after any housing disturbances.
Below are a few scenarios based on estimated car prices and basic assumptions for payment. Specifically:
- $300 Monthly Payment
- $1,500 Down Payment
My conclusion is the economy, the environment and our culture would be improved dramatically by shifting priorities away from ostentation to conservative and thrifty consumption.