Parts shortage will boost new car prices

Your new car is about to get more expensive, if you can buy it at all.

Just as chaos theory suggests a butterfly’s fluttering wings may affect the weather thousands of kilometres away, a catastrophic earthquake on the far side of the globe has the ability to disrupt things right here.

One-quarter of the world’s supply of automotive electronics comes from northeast Japan, the region devastated by the March 11 earthquake and tsunami. Because auto-parts supply networks are intertwined, few major car companies may be able to escape the effects of the Japanese disaster.

Toyota, the world’s largest automaker, says there are approximately 150 parts — mainly electronic, plastic and rubber components — whose short supply is impacting its new-vehicle production.

Its manufacturing plants in Japan are currently working at 50 per cent of capacity due to parts shortages, while those in North America are operating at 30 per cent of capacity. Other Japanese makers are managing similar challenges.

“Expect the full impact of the Japan disaster to affect availability and thus pricing later this summer and fall,” warns Joel Cohen, president of the Toronto Automobile Dealers Association (TADA).

“Shop early for best availability, selection and best pricing, especially popular compacts and subcompact cars. As the price of gasoline goes up, the availability of these cars will decrease proportionately.”

Industry observers agree the old mantra — “there’s never been a better time to buy a new car” — may have finally run its course.

“The earthquake has created supply issues; many models will be in short supply in the coming months,” reiterates Mark Derry, an automobile advisor who counsels clients on new- and used-car purchases in the GTA.

“Already, I have a customer who’s been told he’ll have to wait until the fall to receive a Lexus CT 200h hybrid.”

Toyota admits in its media release that it will be November or December before normal production levels are restored.

Consumer advocate Mohamed Bouchama of CarHelpCanada.com reports that 2012 models of Canada’s favourite automobile are only trickling into Honda showrooms. Some dealers are just taking orders on the new Civic.

Basic economics dictates that when supply is constricted, the price goes up. Bouchama says that while Honda’s sticker prices remain unchanged, dealers will be reluctant to discount their small allotments of cars.

“The mark-up has gone up, not the sticker,” says Bouchama. “Civic buyers would be lucky to get a $300 or $400 discount.”

It’s not just Japanese brands that are affected by the disruption.

“A lot of parts still come out of Japan destined for North American production. Chrysler uses Japanese paint in its plants here. Computers for many Detroit Three models are sourced in Japan,” Derry points out.

Even GM’s German division, Opel, has shut assembly lines in Eisenach, Germany, and Zaragoza, Spain, due to a lack of electronic components.

The foreboding prediction is a serious setback for a new-car market that has only recently climbed out of the recession.

“Light-vehicle sales in March were up 5.5 percent from March 2010 and finished at 153,485 units, which is a new all-time sales record for the month of March,” reports industry analyst Dennis DesRosiers.

The surge was led by the three domestic automakers, all of which recorded strong sales gains last month.

“The Detroit Three, up 15.8 per cent, continued to take market share from import nameplate brands. For the year to date, the import brands have lost 2.6 points of market share to Detroit, although import brands still control 53.2 percent of the market,” says DesRosiers.

Detroit can thank the continued sales success of light trucks, which significantly outsell passenger cars: trucks now account for 57.9 percent of sales – a new historical record.

There’s a number of reasons for this, DesRosiers says, including the availability of generous incentive money on trucks, the parts shortage impacting car production more than trucks, and Detroit’s product strength favouring trucks rather than sedans.

Surprisingly, soaring trucks sales have yet to be grounded by punishing fuel prices. In March, regular gas sold for $1.20 per litre in the GTA. It remains to be seen if truck sales will succumb to gas priced at $1.35 (April’s sales numbers come out next week).

Conversely, gas-saving cars haven’t been setting any sales records, DesRosiers points out.

“Entry-level vehicle sales are up only 0.4 per cent in a market that is up by 2.1 per cent, so they are underperforming. All the difficulty is with subcompact cars, which were down 0.4 per cent on the month and are down by 8.8 per cent year to date.”

Chris Travell, vice-president of Maritz Research – Automotive Research Group, suggests trucks are selling because businesses are renewing their fleets. He says the price of fuel is bound to impact model selection, with small cars and compact crossovers sure to be hot sellers soon.

Other trends Travell is predicting will be popular this year include: “greener,” eco-friendly auto features; greater connectivity between a customer’s smart phone and their automobile; and more passive and active safety equipment.

“One challenge we see is that as vehicles become more complex, older drivers may be intimidated by their new car — especially if they haven’t bought one in seven or eight years,” says Travell.

“For this reason, we recommend dealers host a ‘second delivery’ night, when customers are invited back to the showroom to re-orient them to their cars’ technological features.”

Beyond feature content, Travell says the automakers are introducing very stylish vehicles, a trend that used to be largely confined to luxury and sports models. He cites the Hyundai Elantra and Ford Fiesta as examples of high style infiltrating the economy-car segment.

“The concept vehicles we’d see in the auto shows are actually showing up on the road intact,” says Travell.

Affordability remains exceptional, thanks to the tremendous competition in the industry, especially in the GTA, which continues to be over-served by too many dealerships despite the cutbacks that saw many closed.

Mark Derry stops short of calling the cash deals the best ever, but he’s adamant that there’s never been a better time to long-term finance a new vehicle.

“The 84-month car loan is becoming the norm, which reduces the monthly payment to resemble a car lease, and it’s spilled over into the import brands now,” says Derry. “It’s very good value for the consumer.”

Derry busts the old myth that buyers who finance are resigned to pay the full sticker price.

“There’s no cost to the dealership by offering a great loan rate — it’s often provided by the manufacturer — so buyers have just as much room to negotiate whether you pay cash or finance the purchase,” he says.

Leasing is coming back — General Motors has found a new financial-services partner — and the rates are so low that the practice makes better sense than it used to.

“Dealers love leasing because it guarantees the customer is coming back in three or four years at lease end to do something with their vehicle. Financing deals take the customer out of the market much longer, and they may never return,” Derry says.

The deals are so good, fewer consumers are contemplating buying their new car in the United States. Despite a Canadian dollar that has long since overtaken the American greenback, Canucks are largely shopping at home.

“I get maybe one call out of 10 asking about U.S. car prices these days,” says Bouchama, who hosts CP24’s Auto Shop program.

“The manufacturers have addressed the disparity for most models — unless you’re shopping for a vehicle that costs $40,000 or more — and the incentives are better here,” he says.

U.S. sales are only available to those who can pay cash anyway, he adds.

Both Bouchama and Derry reiterate that the market is about to take a strange turn with the imminent parts shortage.

“I’m advising people that prices and rates are as good as you’re going to see,” says Derry. “It stands to reason that things will be more expensive as supply shrinks. It will be difficult to negotiate a better deal.”

Instead of rushing in, Bouchama advises consumers to take stock of their needs.

“You’ve really got to think hard about your purchase: do you risk paying more now for certain models, or continue driving what you have for a few more months until inventories improve?”

NEW-CAR BUYING CAVEATS

  • Should you change your mind, dealers can keep your deposit for “liquidated damages” — the hourly cost of writing your sales contract — so leave the smallest deposit you can.
  • Always put your sales conditions in writing on the contract — there’s space provided for comments — and never be content with a verbal promise.
  • Never pay freight on a demonstrator model or any vehicle that’s logged 1,000 km or more. You’re buying a used car and you should not be paying the delivery fee.
  • Stay out of the dreaded Business Office, where salespeople take their clients to extract more money for high-profit but questionable rustproofing, extended warranties and “protection packages.”
  • Window etching is never mandatory – cars don’t leave the factory that way. If you don’t want it, refuse or take your business elsewhere.
  • Join a consumer group like CarHelpCanada.com or APA.ca to receive helpful advice and no-hassle pricing from designated dealers that can save you $1,000 to $2,000 or more.
  • Always get two or three estimates for the value of your trade-in vehicle; you could easily pick up an extra $1,000 this way.

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April 28, 2011

Mark Toljagic

The Toronto Star