Renault Boss Says ‘The Era of the Cheap Car Is Over.’ I Say It Doesn’t Have To Be
Renault President says cheap cars are over, “it has to be.” But what if we could avoid sky-high MSRPs?
The average new car in the United States cost $46,259 in August, according to J.D. Power, a new record-high price. The previous record high was set in July 2022, which replaced the record set in June 2022, which replaced the record set in May 2022. Most industry analysts don't think prices are dropping soon, either, so these new highs may remain the new normal for the foreseeable future. Industry leaders are now beginning to agree: Renault's president Luca De Meo said in an interview with Autocar, “The era of the cheap car is over: it has to be.”
And for Renault itself, he's likely right. The company, whose traditional sales leader has been the affordable entry-level three-door Clio for years on end, faced hefty losses for two straight years before returning to the black in 2021. De Meo credited the profitable year to a focus on "value over volumes," which has become an official strategy for the company in the years since. Renault's "value over volumes" plan features a focus on "profitability, cash generation and investment effectiveness" instead of its traditional focus on market share and overall sales. This means lower discounts for buyers, an increased focus on larger, more profitable vehicles and higher trim levels, and up to 20% fewer overall cars sold. All of this is not good news for buyers in a year with ongoing vehicle shortages, but thus far has been good news for Renault's shareholders.
But this isn't unique to Renault, by any means. De Meo is simply acknowledging market trends that nearly all car manufacturers—and car buyers—have found themselves contending with in the post-COVID, high-inflation world we live in today. Low-volume luxury brands have continually posted record profits since the pandemic began and dealers are doubling their margins. This is all happening despite fewer car sales stemming from ongoing supply chain issues and chip shortages. Where COVID disruptions once looked to be a temporary speed bump to production, it's now becoming more obvious that more and more auto companies are increasingly okay with selling fewer cars at higher prices, because it simply makes them more money. This, of course, pairs with an environment where raw material costs have skyrocketed, and actually getting a car to its destination is more expensive—and more difficult—than ever before. With rising costs and short supplies, companies still need to make money, and consumers have been left to make up the balance.
But amid a backdrop of rising inflation and virtually stagnant wages, this poses a problem to average buyers, who increasingly find themselves priced out of the used-car market as well. The ongoing shift to electric cars, which are now retailing for an average price of over $66,000 in the States, has the potential to help the environment but it promises to squeeze buyers even more fiercely. The profit motive of all companies is converging on a world where less-affluent buyers simply cannot afford anything other than a 20-year-old Ford Ranger, and even that's seeming less attainable as of late. In a vacuum, De Meo is right, and cheap cars will likely vanish.
But there could be solutions, and governmental policy could allow us to reach them. The U.S. federal government got closer to a potential solution with the recently-passed Inflation Reduction Act, which offers incentives for EVs under threshold MSRPs ($55K for cars, $80K for trucks) and, in theory, entices automakers to produce more affordable electric cars by increasing the demand for them. Unfortunately, the incentives still come in the forms of buyer tax credits, which generally exclude the lowest-income buyers and offer a much less compelling case to shoppers than, say, cash on the hood of a new-car sale. Additionally, since the incentives in the act only apply to cars partially produced within America, up to 70% of EVs currently on the market could be completely ineligible, which will likely slow the impact on buyers who've already been squeezed for years by rising new car prices.
Further steps—such as broader eligibility for more cars and direct pressure on automakers to build affordable vehicles—would likely do a lot. There is one major economy where the central government has applied direct pressure to automakers to build more affordable EVs (and issued significant subsidies to buyers who purchase them): China. There, the average price of an electric car has halved in the past eight years (compared to a roughly 50% increase in the same period in Western Europe and the U.S.). As a result, over a quarter of new-vehicle sales are now electric, which has helped the country towards meeting its CO2 emissions goals while also tripling the number of cars registered in the country over the past decade. It's not come at the expense of profitability, either, with major Chinese automaker BYD reporting strong earnings this year despite a switch to selling solely hybrid and electric vehicles, with no ICE models.
For a Western-world example, there's Norway, which has used a similar approach to EV pricing by giving electric car owners massive financial benefits in the form of waived vehicle fees and easy access to some of the cheapest, cleanest electricity in the world to fuel them. However, without direct pressure on the automakers themselves, Norwegian average car prices have still climbed into the mid-40,000-Euro territory (and climbing) and present the same affordability problem that the US has.
A similar dual-pronged strategy that applies direct pressure on manufacturers and incentivizes buyers could work in the States, to the benefit of both manufacturers and buyers. Crucially, if cheap cars continue to disappear and a stopgap is needed until widespread EV adoption becomes more feasible domestically, the same game plan can be applied to hybrids or even ICE cars. It's not unprecedented in the U.S., either: what I'm describing is something similar to the long-established CAFE standards or NHTSA FMVSS safety requirements, but with price rather than mileage or crash-test results as the focus. Such incentives would help push the market towards a new profit model, where "value over volumes" is no longer the only winning strategy. A future without cheap cars could be coming, but it definitely doesn't have to be inevitable.
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