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Cars, rising prices: from consumer goods to unaffordable luxury? What's behind the price increases

The automotive industry is in crisis, with rising prices making buying a car a luxury. In 2023, the average expenditure in Italy reached almost 29 thousand euros, a 38% increase from 2019. The causes include the shortage of microchips, the increase in the cost of raw materials, stricter environmental regulations and the introduction of advanced technologies in models. Here's what's happening in the sector as registrations continue to decline

Cars, rising prices: from consumer goods to unaffordable luxury? What's behind the price increases

Le car companies are in crisis, and one of the causes is thecar price increase, which slows down sales. This phenomenon It's not just about electric cars, whose production costs are already high, but it extends to the entire automotive sector. Over the past four years, the car price has increased dramatically, with an increase that goes well beyond average inflation. In 2023, Italians spent 46 billion euros to buy cars, with a growth of 22,3% compared to the previous year. While in 2019 the average expenditure per car was around 21.000 euros, in 2023 it rose to almost 29.000 euros, with an increase of 38%. This is a rise decidedly high, especially considering that, in the same period, inflation grew by 16,2%, according to data provided by Istat.

Le car sales have plummeted during the pandemic and have not yet returned to pre-2020 levels. And so to compensate for the decline in sales, automakers have adopted a price increase strategy, aiming to earn more on each single vehicle sold. A choice that has led to a further increase in price lists, especially for high-end models, which guarantee higher margins.

The Car: From Priority to Inaccessible Luxury

Once upon a time, the'purchasing a car was considered one of the priorities after the house. Today, however, the situation has changed radically. Despite government incentives, such as eco-bonuses for plug-in cars and those with emissions between 61-135 g/km of CO2, interest in purchasing has decreased. The lower price ranges, with popular models like the Fiat Panda, the Dacia Duster or the Renault Captur, represent the majority of registrations. But, even in these economic categories, therising prices make purchasing a burden, rather than a necessity.

For Michael Crisci, president of Unrae, “theexponential increase in technological content” has contributed to the increase in car prices. Today, models are much more advanced than 10 or 15 years ago, but the cost of these technological innovations is directly reflected in the final price to the consumer.

The evolution of models and prices

To better understand the extent of the increase, it is useful to make comparisons between the best-selling models of the past and today. A example emblematic is the Fiat Panda: in 2014, the basic model cost around 10.710 euros. In 2023, the same model, with a hybrid and light engine, reached a price of 15.900 euros, marking an increase of 48,5% in less than ten years. Likewise, the Volkswagen Golf has seen a 65% price increase between the seventh and current eighth generations. The Dacia Sandero, one of the cheapest cars, went from 7.450 euros in 2014 to 13.250 euros in 2023, almost doubling its price.

He Italian, today, they can no longer afford to buy a new car like they used to. A recent sFindomestic Observatory study highlights that 66% of the population he is not able to spend more than 20 thousand euros for a new car, while 14% have a maximum budget of 10 thousand euros. 56% of respondents said they had to postpone the purchase, mainly for economic reasons, and only 7% plan to change vehicles by 2024. It is not only the high prices that are holding back replacement projects, but also theuncertainty about the most suitable engine to current needs. As underlined Claudio Bardazzi, head of the Findomestic Observatory: “It is not only the increasing costs that are blocking replacement projects, but also the doubt about which engine is the most suitable at the moment.”

Prices have therefore increased, but what are the factors which contributed to this increase?

The Microchip Crisis and Component Shortage

One of the main factors that has pushed up car prices is the global microchip crisis, triggered by the Covid-19 pandemic. Between 2020 and 2023, the semiconductor production, needed to manufacture vehicles, has been slowed down or even stopped. The shortage of microchips has limited the production of new cars, reducing the available supply and increasing demand, thus sending prices skyrocketing.

Semiconductor manufacturing is concentrated in Asia, particularly in countries such as China, Taiwan and South Korea, and the lack of similarly large manufacturing facilities in Europe has exacerbated supply problems. This dependence on imports makes the Vulnerable car market to international crises and price fluctuations.

The cost of raw materials

The increase in car prices is also due to theincrease in raw material costsAccording to JP Morgan, nearly half of the increase in new vehicle prices can be attributed to rising production costs.steel, aluminum, copper and plastics have reached price peaks in 2022, aggravating production costs. Added to these are inflation, rising energy costs and logistics, which have further pushed up final prices.

Environmental regulations are increasingly stringent

Then there are the European environmental regulations which are significantly impacting the production costs of cars. The rules to reduce CO2 emissions require manufacturers to invest significant resources to develop increasingly efficient engines, advanced technologies and emission control systems. For example, the planned 2035 halt to the sale of cars with internal combustion engines is pushing manufacturers to invest billions of euros in the transition to electric cars, with the construction of expensive gigafactories for the production of batteries.

Technological innovations and safety: ever-increasing costs

In addition to the environmental aspect, modern cars are equipped with advanced technological devices that come at a significant cost. Even basic models are now equipped with infotainment displays and digital connections, which were once reserved for high-end cars. In addition, the European Commission has made a series of safety systems mandatory (ADAS), such as automatic emergency braking and driver fatigue detection, which contribute to the increase in costsThe increasingly stringent criteria for obtaining the 5-star rating in Euro NCAP crash tests require advanced safety components, which further influence final prices.

The end of city cars

It is also worth mentioning the almost disappearance of the market for small and economical cars. City cars, once sold for less than 9.000 euros, are now almost non-existent. The pandemic, the microchip crisis and the war in Ukraine have had a devastating impact on the car market, causing a drastic reduction in supply. In addition, rising production costs and inflation have made it impossible for car manufacturers to keep these models affordable

Gian Primo Quagliano, Chairman of the Promoter Studies Center, highlights the near disappearance of small cars, due to a "strategy of European car manufacturers". The increase in the average price of cars - explains Quagliano - driven by the expansion of electric cars, has reached about 25%, creating confusion among consumers. Today, in fact, only about ten city cars are available, compared to almost 30 in 2012, while SUVs dominate the market and battery-powered models are "rejected" without significant incentives.

And registrations continue to fall, even Tesla slows down

In all this situation, the Italian car market continues to slow down. After i bad results in August (in the wake of a negative 2024) a sharp drop in registrations was also recorded in September. In September 2024 the car registrations have dropped to 121.666 units, showing a decrease of 10,7% compared to 136.316 units in September 2023. In the first nine months of 2024, cumulative growth stands at 2,1%, with a total of 1.202.122 new license plates.

Analyzing the body types, a decline is observed in sedans and city cars, while SUVs continue to gain market share. In terms of Power supplies, petrol cars saw a 3,9% drop, maintaining 25,4% of the market, while diesel cars fell to 12,7%. On the other hand, LPG cars grew (+9,3%) and hybrids reached 43,9% of the share, showing a growth of 4,4%. Green sign for electric cars, which after the incentive boom in June, are back to growing with an increase of 29%, bringing their share to 5,2%.

Stellantis continues to be the market leader with 29.489 registrations, despite a 33,9% drop. Volkswagen ranks first with 9.742 cars sold, followed by Toyota with 9.704. Fiat suffers a sharp contraction, falling to third place with 9.078 registrations, a drop of 43,74%. The Renault group grows, as rumors of a merger with Stellantis gain traction, which recorded a growth of 16,25%, totaling 15.340 units.

Globally too Tesla suffers from the sector crisisElon Musk's company delivered 462.890 vehicles in the third quarter, but the results are below expectations (deliveries were 463.310). Growing competition, particularly from Chinese companies such as BYD and Geely, is putting pressure on the American company, which saw its stock fall more than 4,5% in pre-market yesterday. Although no specific guidance was given for 2024 deliveries, executives expect a lower growth rate than previous year, despite the introduction of the new Cybertruck.

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