Korva is a scroll of the internet’s best ideas.
The pandemic ended the cheap new car
Why small cars lost out
Small cars have never been all that profitable, but someone was always willing to sell them. What they lost in margins, they gained in volume. Then supply chains seized up in 2020, and automakers realized they could not possibly meet demand, so they put their limited factory capacity into their most profitable models. Picture the math: a Corolla generates $2,000 in profit, while a Silverado generates, say, $8,000.
Everyone left at once
By the time assembly lines caught up with demand, companies had learned they didn't really need to cater to anyone except the wealthy, and that restricting their focus could be far more lucrative. Had only one carmaker left the low end, its buyers would have flowed to a competitor, with would-be Nissan Versa buyers picking a Mitsubishi Mirage. Because every company retreated at once, buyers had no choice: a new car now means a more expensive model.
The models that vanished
By 2022, Ford had discontinued every vehicle except the Mustang that wasn't an SUV, truck, or crossover. The Honda Fit, once available for $17,000 and well liked for its fuel efficiency, reliability, and surprising cargo space, was discontinued in 2020. The Ford Fiesta went too, along with the Chevy Spark, Nissan Versa, Ford Focus, Dodge Dart, and many others.
Why do small cars earn so little profit?
Every new car needs an engine, safety systems, electronics, and hours of assembly, and many of those costs shrink only a little as the car gets smaller. A small car's price falls by more than its cost does, which squeezes the gap between the two. Automakers also spread development and tooling costs over each model's sales, so a low-priced car needs high volume to pay off. Federal crash and emissions rules apply to small cars just as they do to large ones.
How did the chip shortage choke car production?
When lockdowns began in spring 2020, many automakers cut their semiconductor orders, expecting weak sales. Chipmakers shifted that capacity to producers of laptops, phones, and game consoles, whose demand surged. When car demand rebounded, automakers found themselves at the back of the line, and a modern vehicle can contain hundreds of chips. The consulting firm AlixPartners estimated that the shortage cost the global auto industry about 7.7 million vehicles of production in 2021.
Why did used car prices spike in 2021?
With few new cars arriving, shoppers turned to used ones, and demand outran supply. Rental companies, which normally supply many late-model used cars, had sold off fleets in 2020 and were buying cars back. Cox Automotive's Manheim Used Vehicle Value Index recorded some of its steepest gains on record that year. Higher used prices also raised what dealers paid for trade-ins.
More from PolyMatter
