Auto thinking


James Kwak of Baseline Scenario asks an important basic question concerning the statement that ‘big cars are inherently more profitable for car companies, so smaller is bad for profits’, and comes up with this part answer: because we think they do in America, so we can charge more. Anything else you can think of after reading his piece and reviewing his six hypotheses? Not CAFE standards?

Update…The first is that SUVs offer a better ratio of perceived value to production cost. That is, there’s an amount of stuff you need to build a functioning car; once you’ve done that, it doesn’t cost twice as much to make it twice as big, because you’re just adding raw materials. (I’m simplifying, obviously.) But people, being not that bright, think something is worth twice as much if it is twice as big. I still think competition should eliminate this larger profit margin, but see the second argument . . .

which is that SUVs and pickup trucks have been less exposed to foreign competition, so instead of having twelve or so viable competitors in the small-car segment, you mainly had three for SUVs.( Some commenters did not agree with this, pointing out that Toyota and Honda have been building pickup trucks for a long time.) With fewer suppliers, you can charge higher prices.

I should clarify that I don’t think there is anything wrong with the hypotheses I listed above; my point was that hypotheses 2-4 do not depend on SUVs/pickups being bigger, but on other characteristics of them. So there is no fundamental reason why, in the future, the profit margin on big things should be bigger than the profit margin on small things. Similarly, if the advantage is due to less foreign competition, then I think that would have gone away in any case, since just about everyone makes an SUV now (every major Japanese or Korean manufacturer, Volvo, Mercedes, BMW, VW, etc.) – though maybe not a pickup.

If the answer is the perceived value/production cost advantage, then that is arguably fundamental to big things as opposed to small things.