American brands and imports, trucks, SUVs, sedans, sports cars and of

course, lots of crossovers.

There are pricey cars and perhaps more affordable cars.

But one kind of car that appears to be disappearing is the cheap car.

Auto industry analysts say sales of very inexpensive cars these days,

meaning any new car with a starting price somewhere below 20000 dollars

are declining. In fact, they have fallen off a cliff.

Historically, about one fifth of new vehicle sales would have transacted

below 20000 dollars.

But in the last few years, those have completely dried up.

New cars are becoming more expensive, and it's unlikely those cheap cars

will ever be back.

Buyers who love them may be left out in the cold.

The nascent years of automotive manufacturing were dominated by what we

would today think of as coach builders, basically shops that hand assemble

vehicles one at a time.

This was the way horse drawn carriages or coaches were built and

automotive manufacturing adopted both the assembly line and the name.

As such, early cars were expensive.

Industrialists such as ransom olds and Henry Ford changed all that by

introducing assembly lines and interchangeable parts, dramatically

reducing the price of a car.

Ford's Model T was one of those early vehicles in Europe.

There was a movement to develop inexpensive cars for the masses, which

many proponents dubbed people's cars.

In fact, German automaker Volkswagen's brand name translates to people's

car making and selling.

Practical, affordable and dependable cars has long been a key goal of

automakers. Affordability was a key ingredient in legendary and extremely

strong selling cars, such as the original Volkswagen Beetle, the Ford

Mustang and countless others.

Japanese automakers penetrated the U.S.

market in the latter half of the 20th century, in part by selling

affordable and dependable vehicles.

Typically, the most affordable cars are the smaller ones that would fit

into the so-called compact and subcompact categories.

Some midsize vehicles can also start at prices below twenty thousand

dollars in 2020.

The subcompact segment in the U.S.

included cars such as the Honda Fit, Hyundai Accent Aryo

and Nissan Versa.

Vehicles in this segment are typically priced below twenty thousand

dollars, a cutoff point for what auto industry analysts consider the

cheapest cars available.

The 2020 Nissan Versa, for example, starts at a price of around fifteen

thousand dollars. Cheap cars have a problem that might seem rather

obvious, they don't make a lot of money.

Automakers, like any company, have certain fixed costs built into their

business models. They have to build factories, keep the lights on, pay for

product development and pay workers and executives.

Many of these basic costs exist whether the product they are selling is

cheap or expensive.

So an automaker basically has two choices sell a little of something

pricey or a lot of something cheap.

The problem for automakers is that relying on volume to make money can be

hard. Margins can be razor thin, and any challenges or missteps can eat

into already slim profits.

Automakers can try to protect against this, in part by spreading costs

across a range of vehicles, a pricey car might share some parts with a

cheaper one. Obvious examples of this or the Ford Mustang, Dodge

Challenger and Chevrolet Camaro, the cheapest versions of the start in the

mid 20000 dollar range.

But the most expensive versions, which share a lot of the same basic

parts, can cost more than 90000 dollars.

But at least in the U.S., the overall market appears to be moving away

from the cheapest price points.

So who buys cheap new cars?

Why do they matter? Well, the short answer is young people, mostly younger

buyers, are usually not loaded.

They can be people as young as teenagers, but also folks in their 20s and

even 30s. Most of the consumers that are in the subtree space tend to be

younger consumers and first time buyers.

And so it's a very critical demographic for getting new customers into the

industry in general, but into your brand in particular.

So as consumers get their first jobs, establish a career going to family

and they're looking for a new car, they're in that twenty thousand dollar

space. In spite of the fact that cheap cars are less profitable,

automakers are still keen to lure younger buyers who likely have many car

buying years ahead of them.

Selling cheap cars creates the possibility of building brand loyalty in a

consumer over a lifetime.

Even luxury makers such as BMW and Mercedes have moved into the lower end

of the market in recent years in the hope of boosting volumes and getting

younger buyers in their vehicles.

So there's a lot of risk here in that first time buyers now are having to

wait many more years to get a new car.

And so now you're kind of allowing the risk there that these first time

consumers will rely more on Uber, will live urban life and not even need a

car. So we as an industry could be making a lot of long term actions here,

long term implications from moving the first time buyers either back or

into something more expensive.

Despite the risks of selling cheap cars, they historically made up a

considerable share of the new car market.

This appeared to be the case even in recent years, as the U.S.

economy recovered from the financial crisis of 2008 and 2009.

Cheap cars made up a good sized slice of the auto market prior to 2018.

The segment was about 20 percent of the industry pretty consistently and so

on. On the retail side, we're talking in excess of about two million sales

annually in the space, just below 20000.

But something strange happened in 2018.

Sales of some 20000 cars seem to suddenly plummet.

And a closer look at sales numbers shows that cheaper cars were

disappearing faster and earlier than it seemed for some of those years

following the recession.

Two of the cars that made up a considerable portion of sales transacting

below 20000 dollars were the Toyota Camry and the Honda Accord.

Neither the Camry nor the Accord are compact or subcompact cars.

They are slightly larger and are usually grouped in the mid-sized car

category. They typically sell at or above 20000 dollars, but both were

selling at very low prices for several years due to incentives dealers

were offering on them.

It is worth noting that the Toyota Camry and Honda Accord are two of the

most popular cars in America and among the most popular of all time.

In 2017, both manufacturers were scheduled to release new versions of the

sedans, and when they did, the prices of each car shot up past the 20000

dollar mark, causing sales numbers in these sub 20000 category to cut in

half. So the reality is that the cheapest tier of cars had already been

shrinking for years in the wake of the recession, even though it looked

like sales were a steady fifth of the total new car market.

But why were sales of these cars shrinking?

Why were dealers offering steep incentives on these strong selling and

practically iconic Camry and Accord nameplates?

The all too familiar answer is in three letters SUV.

Sport utility vehicles have taken over the auto market in the United

States, as well as a growing share of the global market.

SUVs went from twenty nine point nine percent of sales in 2009 to fifty

one point five percent in 2019.

They are found in practically every segment, size and configuration.

Consumers appear to love them, but so do automakers.

The smallest SUVs sell for higher prices than comparable cars, even cars

built on the same platforms as the pricier SUVs.

For example, four years Ford sold the subcompact car called the Fiesta in

the United States. When Ford released its subcompact eco sport SUV, the

brand's smallest utility, the carmaker, said U.S.

average transaction prices for eco sport were 4500 dollars higher than

Ford would get from the Fiesta, even though the SUV and the car share the

same basic platform.

So now you have consumers wanting SUVs, automakers making almost for the

first time the cheapest SUVs you've ever seen, coalescing at the same

moment so that we saw consumers lose that 20, some 20 thousand dollar

vehicle, but then very quickly have that SUV there for the first time.

I mean, that subcompact space, which used to be somewhere in the range of

about two percent today is is well over eight percent and outsells both

mid car and compact car.

Individually, consumers are willing to pay higher prices for SUVs,

primarily because they feel they are getting more with their taller shape

and more spacious cabins.

SUVs are seen as more flexible.

Many of them have slightly higher ground clearance, making them a bit

better to drive off road and thus use recreationally.

But the SUV is not the only reason auto industry analysts think car prices

are rising. Another key piece of the puzzle is technology.

Today's cars are packed with it and customers want more of it when they

drive off the lot. This includes safety features and driver assistance

technology, like cameras and blind spot monitoring systems.

But it also includes robust infotainment systems compatible with Android

Auto and Apple car play, voice activated commands and comforts such as

heated and cooling seats.

Consumers today, even young ones, don't seem to want to wait for those

features. There isn't as much appetite for a base level vehicle.

Why, lots of reasons, I think that if you look at a general attitude of

of a of a younger buyer, whether you're looking at a Gen Y millennial in

that space, there there's more impatience and there's an expectation of

being able to have all of the technology now and being able to have

whatever it is that they want.

Now, the expectations that is I want Bluetooth in my car.

I want Apple complain that there's no reason why I shouldn't have it.

There is not a reason you shouldn't have it, but there is no reason you

should not expect to pay for it.

You've got a push on the younger side of the market of people being

willing to pay for features that they want.

And then on the on the flip side, in the older demographic, you've got

people who are willing to pay for features because they feel like they've

earned it. The trouble is that consumers are paying more for these cars.

Loan terms have grown in length in twenty twenty.

The share of loans spanning seventy two to eighty four months has grown

considerably from where they were decades ago, and some consumers are

increasingly faced with fewer options at the lower end, more likely to

shell out more for a new car or turn to the used car market.

The U.S. market is massive.

At their peak, new car sales reached about seventeen point five million

units in 2015, but the used car market is more than twice the size of that

at about 40 million units per year.

The good news for buyers is that cars last longer than they used to, so

buying used often does not come with the risks it might have in the past.

And it means that consumers shelling out more than they ever have for a

new car may at least get to hold on to it for a while longer.