One of the biggest issues in the Canadian automotive industry is vehicle affordability or, more precisely, lack of affordability. At a transaction price level it takes about 29 weeks of after-tax family income to buy a passenger car in Canada versus only about 23 weeks in the United States. In Canada the trend has been towards vehicles becoming less affordable, whereas in America, vehicles have become more affordable.
However, what many industry executives, most consumers and almost all politicians do not understand is that at the Manufacturers’ Suggested Retail Price (MSRP) level, vehicle prices in Canada are actually significantly lower than in the United States (adjusted for exchange rates). For this article, I did an analysis of base model MSRPs for the most popular vehicles purchased by consumers in Canada. This analysis took the top three or four selling (in most cases two import, two domestic) vehicles in each passenger car and light truck segment. Fifty-two vehicles were examined accounting for 71 per cent of Canadian sales in 1999, a very representative sample.
The average passenger car, on a sales-weighted basis, was priced $5,885 or 22 per cent lower in Canada than south of the border. But that price also reflects the fact Canadian consumers purchase smaller vehicles. On a non-sales weighted basis the difference was $3,595 lower, or 13 per cent which is still significant. The average light truck on a sales-weighted basis was priced $3,040 lower in Canada than in the United States or 10 per cent. On a non-sales weighted basis the difference was $3,072 lower or 10 per cent. Translated across the entire Canadian market of 1.5 million units, this means that Canadian consumers saved about $5 billion last year because of a very competitive market. That’s a lot of money!
Within the passenger car market there was very little difference between import ($3,199 lower) and domestic ($3,339 lower) nameplate vehicles. In addition, substantial savings were provided across all segments of the market.
• Sub-Compact__$1,401 11 per cent lower
• Compact__$2,848 16 per cent lower
• Intermediate__$3,540 15 per cent lower
• Luxury High-End__$4,150 8 per cent lower
• Luxury__$4,325 12 per cent lower
• Sport__$2,976 13 per cent lower
Within the light truck market there also was very little difference between import ($2,965 lower) and domestic ($3,158 lower) nameplate vehicles. There was more of a difference within light truck segments where the top selling minivans were priced on average 21 per cent lower in Canada ($5,849) while the top selling Luxury Sport Utility vehicles were only four per cent lower or $2,071.
• Small Van__$5,849 21 per cent lower
• Compact Sport Utility _$2,563 10 per cent lower
• Intermediate Sport Utility $3,475 10 per cent lower
• Large Sport Utility__$5,546 11 per cent lower
• Luxury Sport Utility _$2,071 4 per cent lower
• Small Pick-Up $857 5 per cent lower
• Large Pick-Up $1,334 6 per cent lower
It is difficult to get comparable prices in the two countries. I tried to adjust for as many optional equipment differences as possible, but it is impossible to adjust for regulatory differences. Nonetheless, I believe this analysis comes very close to the mark in terms of accuracy. Any errors would only amount to a few hundred dollars, not enough to significantly change the conclusions. MSRPs are significantly lower in Canada than in the United States.
The first question that needs to be addressed is why? How is it possible that automotive companies would actually set their prices so low? I do not fully understand this, but I believe the primary reason is that consumers in Canada just can’t afford to pay higher prices. The Canadian market is also super competitive amongst the vehicle companies and this leads to lower prices, but I have a hard time believing the car companies are significantly more competitive with each other in Canada than in the United States.
The primary reason must be at the consumer level in Canada and we know the Canadian consumers are very disadvantaged relative to their American counterparts. Canadians have a higher personal tax burden than American consumers. The differences are even more marked with higher-income consumers who are the prime buyers of new vehicles. Most lower-income consumers, where governments have targeted tax breaks, purchase used vehicles, not new ones.
Canadian consumers are also more conservative than Americans with their vehicle purchases. The top-selling vehicles each year in Canada are compact cars versus the intermediate sized cars sold in the United States. On a market share basis we purchase almost twice as many minivans and about half as many sport utility vehicles. So vehicle companies are forced to be more competitive in this market.
Remember, this analysis is at the MSRP level. Actual transaction prices in Canada — the price in the driveway — are closer to American transaction prices because Canadian vehicles are highly taxed. Basic GST and PST reach 15 per cent or higher in most provinces compared to under 10 per cent across most states. Canada also has a plethora of additional, and I believe ineffectual, taxes in many provinces, such as the air conditioning tax, a tire tax, a battery tax, a fuel economy tax, a luxury vehicle tax, etc.The total tax load on a vehicle in Canada could be as much as twice as high than in the United States, so most of the MSRP advantage provided by the car companies is taken by government.
Combine these higher vehicle taxes with lower take home pay, because of higher income taxes, and this translates into the difference in affordability between the two markets, These price differences lead to a discussion of a number of very serious issues.
1• THE WTO DECISION ON THE AUTOPACT: The Autopact is currently being challenged before the WTO. The argument of the importers is that higher tariffs have put them at a competitive disadvantage in a very tight market.This has lead to calls to eliminate the tariff on new vehicles for the benefit of consumers. The theory is that since there is a 6.1 per cent tariff on some imported vehicles, Autopact members can ‘price to the tariff.” This MSRP analysis calls into question that theory. If vehicle prices are already four to as much as 21 per cent lower in Canada, depending on the market segment, it is hard to believe that eliminating the tariff would lead to even lower prices for consumers.The vehicle companies almost certainly must be selling many vehicles at or near production cost. A more logical response to a lower tariff would be a restoration of importers’ profit margins rather than significantly lower prices for consumers.
2• DEALER PROFIT MARGINS: Dealers are constantly telling consumers that their new vehicle margins are being squeezed by their vehicle companies. But with these price levels the manufacturers’ profit margins must also be squeezed as much, if not more. Quite frankly, the car companies just do not have the ability to provide better dealer margins.This is market driven, not some sort of corporate conspiracy against the dealer body, you can’t share what’s not there.
3• VEHICLE ALLOCATIONS: One of the hidden jobs of each vehicle company president is to fight with head office for vehicle allocation for Canada. Hot vehicles are very difficult to get at any time, but I believe this is more so in Canada than in the United States. Here the problem extends across the whole range of products. Given these MSRPs, most vehicles in Canada would yield $2,000 to $4,000 less in marginal profit than in the States.Then why sell them here? The vehicle companies have to support their brand identity, their dealers and their market positions in Canada, so they have to continue to participate in this market but they do it at a very high cost. This is not well understood by most dealers and consumers.
4• GREY MARKETING OF NEW VEHICLES: We constantly hear stories of dealers who are accused of selling new vehicles to the United States in violation of their franchise agreements. Indeed, every car manufacturer has strict rules against this practice since it causes severe problems with warranty and vehicle recalls, as well as government regulations protecting consumers. Why do some dealers still try to do this? Well, as can be seen in our pricing analysis, the economic incentive is very significant. There are vehicles in Canada that would yield $7,000 to $8,000 in additional profit if sold to an American consumer through an American dealer instead of to a Canadian consumer. That’s an incentive that many can’t resist.
5• USED VEHICLE PRICES / EXPORTS: Canadian dealers complain about Americans coming to Canadian auctions and outbidding local dealers for prime used vehicles. Well, if new vehicle prices are so much lower then it follows that used vehicle prices also must be much lower since they are substitute goods in the eyes of many consumers. Again, there is a significant economic advantage to exporting our used vehicles south of the border.
6• HIGH VEHICLE TAXES IN CANADA: As mentioned earlier, almost all of the MSRP advantage in Canada is gobbled up by higher taxes. One in seven jobs in Canada is related directly or indirectly to the automotive sector.The jobs are totally dependent on consumers buying and owning vehicles. Does the government not understand that higher vehicle taxes result in fewer vehicle purchases and less ownership and are therefore a serious detriment to the economy? Canada was the only market in the entire world (over 60 countries analyzed) where consumers purchased fewer vehicles in the 1990s than in the 1980s. The primary reason was higher taxes. Canadian politicians can thank American consumers for buying Canadian-built vehicles and keeping thousands of Canadians at work. It sure wasn’t Canadian consumers who kept those auto workers employed. But we can’t count on the American market forever. We need lower taxes on vehicles in this country.
7• CONSUMER PERCEPTIONS OF DEALER PROFITS: Most Canadian consumers are highly influenced by American media and trends south of the border. For instance, they read that thousands of dollars can be saved by buying a vehicle via the Internet. But most of these stories are American examples and in the United States, prices are much higher than in Canada, which allows for more discounting. Consumers believe similar savings are available in Canada but this analysis indicates that may not be possible. We know that one of the most popular Web sites visited by Canadian consumers is Kelley Blue Book (kbb.com) which provides both MSRP and dealer invoice pricing. But this is an American Web site with all prices in American — not Canadian — dollars. Consumers need to understand that they can’t just take an American price and multiply by the exchange rate.This does not work.
8• AFFORDABILITY OF CANADA-SPECIFIC VEHICLES: In the past there were a number of m vehicles made only for the Canadian market. Examples would be the Mazda MX3 and Precidia, the Nissan Miera, Toyota Tercel, etc. With these lower MSRPs there is just no profit in such cars unless the car companies can also sell them in the United States as well. Lower MSRPs ultimately mean the demise of made-for-Canada vehicles.
I started out by discussing affordability issues facing consumers.This analysis leads me to believe that we should start to look at affordability in a different light. Clearly, consumers and other critics of the auto sector who believe the affordability problem rests with the vehicle companies are wrong. The current problem rests with Canadian taxes not the vehicle companies.
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