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Rising new vehicle prices in the US and Europe
are leaving cash-strapped consumers with limited options for cheap
cars – and the affordability gap is getting worse as premium-priced
electric vehicles enter the market. But as legacy automakers depart
the entry-segment, white space opportunity emerges for new,
lower-cost manufacturers to enter the fray.
In the past decade, it was possible to find an
entry-level new vehicle for less than $20,000. But pricing in the
US market has recently increased dramatically to where $25,000 or
even $30,000 is the lowest possible transaction price for a
“low-priced” vehicle. Similar activity is occurring in the European
market, in the A- and B-segments.
Based on S&P Global Mobility analysis of
registration data since 2017, the US market has seen a significant
decline in the share of new vehicles registered below a $30,000
price point. In just seven years, the percentage of vehicles
registered with an MSRP below $30,000 has decreased from half the
market to barely one-quarter – with vehicles in the $41,000-$60,000
band taking up nearly the entirety of that vehicle count.
For this analysis, S&P Global Mobility
classified an “affordable” vehicle in the US as one with an MSRP
below $30,000, compared to a $25,000 threshold in 2017. Even when
adjusting for inflation, comparing 2017 to 2023, the US market has
a net 16 fewer affordable models.
Notably, some vehicles that did not meet the
$25,000 threshold in 2017 are now considered affordable with the
$30,000 limit – including some trims of the Buick Encore, Chevrolet
Equinox, and Honda Accord. But that’s based on raising the pricing
bar, while consumer take-home pay has not necessarily followed suit
– which is reflected in showroom traffic. (A word about
methodology: S&P Global Mobility’s data is based on lowest
available model trim MSRP, which in this case further substantiates
the idea that vehicles have become less affordable.)
It’s more than last year’s inflationary spike
driving price hikes in the US market. Over the course of the last
decade, many OEMs who played in the lower end of the market have
simply eliminated their entry-level nameplates – examples include
the Mitsubishi Mirage, Honda Fit, Toyota Yaris, Mazda2, Hyundai
Accent, Ford Fiesta, Dodge Dart, Chrysler 200, and Chevrolet Sonic
and Spark.
Small car shortfall in
Europe
In Europe, the A- and B-segments were once
hypercompetitive hotbeds for entry-level buyers. Now those segments
are thinly populated and lightly marketed as automakers chase
growing margins in C-segment crossovers to meet growing consumer
demand. The number of A- and B-segment vehicles peaked in 2014 at
190 models, but that has since slumped to 160 in 2023 and is
predicted to decline further to 124 models in 2024 – and will
likely continue declining through 2035, according to S&P Global
Mobility forecasts.
Although many automakers cite a struggle to
make a business case with small cars, Ford had a long-time success
with its Fiesta hatchback. Despite a 47-year history, more than 20
million units sold worldwide, and – prior to the pandemic – a
perennial place among the top-selling vehicles in Europe, Ford
nonetheless deleted the Fiesta earlier this year. Other low-priced,
strong-selling vehicles departing the European scene include the
Citroen C1 and Volkswagen Up!, as well as Opel exiting the
A-segment in 2019 when it ceased production of the Adam and
Karl.
Globally, sales of A-segment vehicles have
shrunk from nearly 6.5 million units in 2010 to a predicted 5
million in 2023. S&P Global Mobility forecasts a continued
decline for the next several years – with only the South Asia
market poised for growth through 2035.
Decline of A- and B-segment cars in
Europe expected to continue
What prompted the exodus from
affordable cars?
Two years of significantly higher-than-average
nominal vehicle price growth has reduced the number of affordable
vehicle options, according to a proprietary study by S&P Global
Mobility. Price increases have been a factor of additional vehicle
content, as well as a focus on higher trim levels to maximize
profit during the low-inventory pandemic years – coupled with
regulations addressing vehicle emissions and efficiency.
Average vehicle prices began to rise above
inflation rates in 2019 as consumer demands have evolved. The
market shifted away from low-cost sedan and hatchback models toward
relatively more-expensive SUV body styles.
In the period of 2020 through 2022, supply
chain constraints pushed OEMs to prioritize higher-profit
top-trim-levels with higher content. This shifted the way OEMs
operate – including the elimination of base trim levels for
C-segment vehicles in the US – including the Ford Bronco and Honda
Civic DX (the new “base” Civic LX starts above $25,000, including
destination charges).
CAFE regulations are actually making
vehicles larger
Manufacturers began to phase out sedans as CAFE
regulations in the US became more stringent. The sleeker silhouette
of a sedan is subject to higher, more challenging targets, while
SUV-shaped crossovers – even if mounted on the same platform with
the same front-drive running gear as their sedan cousins – are
typically categorized as light trucks and thus given easier targets
to hit in fuel economy regulations.
That is a key reason sedan models such as the
Chevrolet Cruze and Ford Fusion were dropped from portfolios, while
their platform-sharing siblings Chevrolet Equinox and Ford Edge
crossovers remained.
What’s more, increasingly stringent regulations
drove rising vehicle prices as manufacturers implemented Stop/Start
or hybrid technologies to meet emissions compliance and attain CAFE
standards. Thus began the phasing out of pure ICE powertrains while
increasing the market share of more expensive hybrids and
battery-electric vehicles.
EV affordability an issue
As the global market electrifies, finding
inexpensive EVs remains a challenge. Most OEMs are building
premium-priced EVs to better amortize costs before aiming for
economies of scale. Fully-electric offerings only have three
affordable options (under $30,000 before incentives) currently in
the US market – the Chevrolet Bolt EV and Bolt EUV, and Nissan Leaf
S. And while the BEV market still represents a small fraction of
overall registrations, the lion’s share of BEV registrations
resides in the $41,000-$60,000 MSRP range – with few registered
below $40,000.
Consumers are already pushing back on the
affordability of electric vehicles. A recent S&P Global
Mobility survey of 8,000 EV owners and intenders worldwide
showed “affordability” to be the No. 1 reason against purchasing an
EV – more so than concerns about range anxiety and the charging
network.
Opening the door to mainland Chinese
automakers
This exiting of the entry segment by legacy
OEMs could open the door for low-price models to enter the US and
European markets via non-traditional channels. In the US market,
those vehicles could be designed by mainland Chinese automakers,
but built in and imported from Mexico – thereby exempting them from
the 25% tariff levied on vehicles assembled in China.
The same applies to the market situation in
Europe – not only with affordable, internal-combustion vehicles,
but also in the nascent affordable electric vehicle niche. While
European automakers scramble to find profitable ways to build
affordable EVs, mainland Chinese OEMs have already started
penetrating the market.
So far, low-cost EV offerings are limited –
which could open the door in the EV space to brands such as NIO
(from mainland China), VinFast (from Vietnam), and others planning
on entering the US market. Some Chinese EV brands have already made
inroads in Europe – including the familiar MG brand that SAIC
acquired in 2007 and since leveraged.
That scenario may soon change, however, as
legacy automakers deliver entries such as the Kia EV3 and
reimagined BEV Renault Twingo – the latter coming in below
€20,000.
Despite the temptations of the US market,
mainland Chinese OEMs may prefer easier markets to penetrate with
affordable cars, said Caroline Hu,
consulting principal for the APAC region for S&P Global
Mobility.
“Political issues and IRA regulations are not
beneficial to foreign brands. Also, the hot overseas areas (for
mainland Chinese automakers) are the European, Southeast Asian, and
Mexican markets,” Hu said.
S&P Global Mobility research of the ASEAN
market currently shows same-model prices in Thailand and Indonesia
are 1.8 to 2.2 times that of the selling price in mainland China,
because it includes import taxes and logistics fees. The same
applies to the European market. But as mainland Chinese brands
start building factories in overseas markets, vehicle prices will
decrease accordingly.
“Chinese brands are trying to build a brand
image for intelligent, high-quality, high-performance vehicles –
not just cheaper,” Hu said.
A quick comeback?
Forecasts aside, the A- and B-segments in
Europe tend to be relatively cyclical, and there could be a slight
sales rebound for opportunistic players, said Calum MacRae,
director of research and analysis for S&P Global Mobility
Automotive Supply Chain and Technology.
For example, Renault had refreshed its Clio
supermini as a more-expensive, hybrid-only hatchback earlier this
year. But citing cost-of-living pressures of its demographic
target, in October Renault announced a gas-only version priced at
£17,795 in the UK, a £3,500 price cut from the hybrid model (prices
for the gas model vary on the Continent, from €21,950 in Germany to
€23,400 in France, but still represent a substantial price cut from
the hybrid).
“Renault won’t be alone in recognizing the
opportunity presented by the current dearth of affordable small
cars in the market,” MacRae said. “Others may follow, not just
because of a market share opportunity, but it also fits the
narrative of helping entry buyers in a cost-of-living crisis.
However, in a segment where margins are consistently razor thin,
the opportunity to do this profitably may quickly pass if others
jump in.”
Affordability is more than
price
Of course, the vehicle transaction price is
only one part of affordability, as consumers also need to consider
incentives, trade-in value, taxes, fuel economy, and loan rates.
But at its core, average annual car payments as a percent of income
began to rise in 2021 and have continued to climb through 2023.
Multiple factors contributed to the increase, including:
-
Slower income growth rates beginning in
2022; -
Steady growth in vehicle prices;
-
Significantly lower purchase incentives;
-
Elevated vehicle loan rates prompted by Fed
funds rate hikes.
Looking ahead, US income growth and incentives
are expected to marginally increase. Average vehicle pricing will
remain a factor of body style and powertrain system mix. One silver
lining: As OEMs begin attaining economies of scale in electric
vehicle production, the consumer should benefit from lower vehicle
prices.
Then there is leasing, often seen as the
entryway for those households with Maserati tastes but Mazda
budgets. But leasing of vehicles sits at less than 19% of total
transactions year-to-date in 2023, compared to 30% in 2019. Leasing
has been less attractive for these affordable models – especially
considering incentives have instead prioritized the leasing of
electric vehicles as inventories and model choice improve.
“EV leasing has jumped since April, as a
potential relief valve on some of these constraints once production
levels improve,” said Peter Nagle,
associate director of research and analysis for S&P Global
Mobility. Also, BEV inventories are rising, prompting the
possibility of aggressive incentives from legacy OEMs to match
several rounds of price cuts by Tesla. There also will be the
benefit of cash incentives (rather than tax breaks) directly from
the US government starting in 2024, Nagle added.
“Incentives have been moving higher, and
inventory levels are returning to traditional levels,” Nagle said.
“Some very attractive financing terms are returning for outgoing
models that have elevated inventories.”
That said, affordability concerns are expected
to linger as interest rates and prices remain elevated.
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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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