The $2,500 threat

China and India loom large and I believe that in less than five years we’ll see the beginning of a major drop in new car prices that will mirror the history of personal computers.

From the start of mass production, there have always been cheap cars. Henry Ford once sold Model T’s for $260, and as manufacturers and models proliferated someone has always built for the “entry level.”

No one however, wants to live in the basement forever and like Hyundai and the Japanese before them, progress has been about moving up market. Today, however China and India loom large and I believe that in less than five years we’ll see the beginning of a major drop in new car prices that will mirror the history of personal computers. For those of you who weren’t around then, I bought a Compaq Deskpro computer in the early Eighties for just under $3,000. Today, I could buy a much more powerful machine for under $500. As a result, there isn’t much action in repairing desktop computers anymore.

India’s Tata Motors recently launched a $2,500 new car, the Nano. It’s a basic four-passenger subcompact powered by a 600cc twin. The specs suggest that this won’t fly in Western markets, but what could they produce for $5,000? The aftermarket lives on residual value, namely the dollar value left in a used car or light truck when it’s time for a major repair. I know someone who recently spent $4,800 repowering his daughter’s Toyota. That decision was based on a chassis that was young enough and solid enough to make five grand a good investment.

But with engines often lasting a quarter of a million kilometers these days, major repairs occur at a decade or more since new. Ask your colleagues how many “reman” engines they have installed in the last few years. If we thought we were moving to a maintenance-based future, wait until sub-$7,000 new cars hit the streets. Cars that carry for $150 a month over four years won’t need residual value or a life expectancy much longer than the loan period. If the quality is there and these low cost vehicles last longer, look for sub-$100 per month leases. Now compare this to carrying a $2,500 head job at current colossal credit card rates. Your customer had better love their car.

Does this mean we’re doomed? No, for several reasons. The first is that lower cost will mean lower quality, at least initially, and warranties likely won’t be bumper-to-bumper either. Consumer expectations for these low-ball vehicles will be similarly low, so they’ll be psychologically primed for more frequent service. The vehicles will also be technically simpler, easier to trouble shoot and with new manufacturers starting with smaller dealer networks, it’s unlikely that repair information will be as closely held as it is with the majors. There may also be openings for some aftermarket operations to become dealers, much like the process that European manufacturers used in the Fifties to market their new cars. And the potential for aftermarket upgrades will be there, with aftermarket shops installing everything from seat heaters to DVD players to satisfy buyers who want a cheap car with the features of a luxury model. Of course there will still be tires, batteries and soft parts as with any car. Will we survive? Yes, but the big-dollar repair may be history.