Monday, April 2, 2012

Disposable cars

            In the argument for our future wellbeing, we are told we can rely on the market and human ingenuity to conquer our problems. We are increasingly presented with a vision of a future of electric, hybrid, bio-fuel, and even hydrogen powered cars as the way of the future, so no worries about our unsustainable path right?  Wrong!!!

            It is now proven by history that the market if left to its own, will not push for these wonder products.  Government subsidies are often needed to support the dispersal of the above mentioned technologies, and even so, they do not stand a chance against the products coming down the pipeline of the motor industry.

            Most are unaware of this, because it is not heavily advertised, but the large automakers are increasingly invested in the true “way of the future”, and it is not electric cars.  If left unguided, the market will do the same with cars as it did with furniture, shoes, stereos, televisions, vacuum cleaners, and a host of other products, which are no longer repaired when they break, but discarded and forgotten.

The demand side:

            In my book, I used shoes as an example of why it is that we are naturally predisposed to moving towards the disposable product economy as long as the market has free global reign.  Basically, the main aspect of market economics we need to understand the trend, is that for the market to operate perfectly as it does in theoretical economic models, we have to avoid market failures.  One market failure is the lack of perfect information.  For instance when I buy a pair of shoes, I have no way of knowing whether I am in fact getting my money’s worth.  I for instance purchased a pair of shoes for about $25, which lasted me only one weekend, because the synthetic material the inside lining was made from became so smelly that it was beyond tolerance.  I hardly expected those shoes to last me only a weekend. If I would have known, I would have refrained from buying them, because they we not worth 25 dollars.  It is at this point that we naturally gravitate towards the disposable economy, because we similarly have no way of knowing whether purchasing a pair of $100 shoes will make us feel we got what we paid for.  If we purchase cheap shoes however, there is always the possibility that one may be pleasantly surprised, which is also something I experienced in my quest for shoes.  I hope the example of my stinky shoes will suffice to promote a basic understanding of market failure due to our inability to function based on perfect information, which will never be available.

            When in the market for cars, currently one does expect to get a higher quality product when purchasing a Mercedes, as opposed to a Chevrolet Cavalier.  The difference is enough to claim that it is worth the extra money, not only in terms of quality and performance, but also due to the social status that comes with owning such a visible status symbol.  In my younger years, a good friend of mine purchased a Ford Mustang, which did indeed bring him attention from the opposite sex for a little while.  The car ran out of its original warranty way before he was done making payments on it however, and the status symbol had to eventually be abandoned, because just a month after the warranty ran out, the car started breaking down, and it required very pricy additional investments to keep it on the road, which my friend was not able to afford.  Given that it was a pricy purchase, there was only room to be unpleasantly surprised, while cheaper cars can either live up to their low expectations, or yield a positive surprise.  So this is one of the main reasons why there is a market for cheaper and less durable cars.

            There are also other forces at work, which I believe to be factors in making our current time, a ripe occasion for the market to be inundated with much cheaper, less durable cars.  We should remember that since about 2007, people in the US lost about $7 trillion in equity as a result of the bursting of the housing bubble.  Many also lost money as a result of the stock market.  In addition, unemployment rates are higher all over the western world, making one income families more common.  Fuel prices are also on average much higher.  Western households have to find ways to compensate for these factors in the long run, so it makes sense to expect a high level of demand for small, cheap, and fuel efficient cars.  It may even be enough to override our desire to drive in a larger car that offers the benefit of the visible status symbol, we instinctively desire to have.

The supply side:

            Some may be tempted to credit this to the magic of the market, but I believe it is a coincidence of two trends of supply and demand coming together, from different parts of the world.  It just so happens that due to the rise of Asia as a driver of the global economy, we already have a lineup of cheap affordable cars coming through the pipeline, and all indications are that they are ready to take on the western markets now, after spending a few years maturing in the Asian markets.

            Perhaps the most famous of these cheap, near disposable cars is the Nano, made by India’s Tata Motors.  It sells for under $3,000, which means that there is little room to be unpleasantly surprised by its quality and durability derived satisfaction.  To put it into perspective, my first car cost me $2,600, it had no warranty, and it broke down almost every month during the three year period I owned it.  Given the choice, I would have definitely considered purchasing a new car for roughly the same price.

            Renault-Nissan is also starting production of a new car in India, which they claim will sell at a base price of under $3,000.  Renault’s CEO Carlos Chosn made it clear that he wants to export these cars to the developed world.  They will likely cost a lot more than the $3,000 they will sell them for in India, because they have to adjust for western tastes, but if they will manage to get them on the market at a base price of $5,000, it will together with a few other like minded firms change the nature of the car industry forever.

            There are also other efforts worth mentioning of trying to move towards the disposable car market.  A Chinese company named Great Wall Motors will assemble cars in Bulgaria starting this year, which they want to sell for $11,000, which is just outside the magic range.  Renault tried already a few years back to do the same by producing the Dacia Logan in Romania, but they failed to keep the price at the magic 5,000 euro level (about $8,000), because the cheapest base model available for sale is 5,900 Euros ($9,500).  Cars made in these two poor EU countries are not at the disposable point just yet, but we are getting very close.

Economic and environmental effects:

            It goes without saying that cars that will retail in the $3-10,000 range will not be built in Western Europe, or North America.  At the most, they will be assembled here, out of exclusively imported finished components.  The cars that will still be built here, will face downward price pressures as well, because they will not only have to compete in sales with these new cars, but the re-sale value will drop, because when new cars will be sold in the above mentioned price range, old used cars will automatically fall out of favor.  The only alternative will be to actually improve on durability, and offer more generous warranty.  That of course means that they will have to cut back on wages and benefits for their employees drastically, in order to be able to still earn a profit. 

            For such a low price, the cars will be built to last about half as long on the roads as the current fleet does, and as such, warranty will still be offered, but it will be more limited in terms of duration and mileage.  Under these circumstances, people will be reluctant to fix the cars once the warranty runs out.  A car that sells for $5,000 brand new, will not have much value left five years later, so if the fix is pricy, it will not get done.  People will opt to buy new ones instead.  This means that the mechanic will go the way of the TV and vacuum cleaner repair people.  The only mechanic shops which will survive will be the dealership shops, which will also deal with warranty claims.

            Tire retailers and a host of other specialty services, geared towards car upkeep will also go bust, because these cars will likely never have to have their tires changed for the duration of their time on the road, nor will other intervention be worth it, especially after a few years of owning such a vehicle.  Used cars lots will disappear, or specialize in selling the new cheap cars.

            Overall, the only field which might see an increase in employment will be car salespeople, who will work for increasingly pathetic commissions.  The overall effect will be disastrous for the western world, because the wage gap is just too high to be able to compete in manufacturing these cheap vehicles.  The loss of countless businesses and employment opportunities in the local shops will be felt throughout society.

            The effect on sustainability will be a net loss to our efforts to achieve a sustainable path.  On one hand, the cars will be smaller and more fuel efficient.  On the other hand, supply and demand laws dictate that as the price of a product drops, demand will rise, because many more people, throughout the world will be priced into the market, who up to recently were priced out.  So even though many of these cars will have similar fuel efficiency as the average hybrid or even better, the overall effect will be one of increased demand for transport fuels.

            The increased rate of production stemming from an increase in car ownership demand, as well as the increase due to the lower durability of the cars will have the effect of adding to the strain on our resources and environment.  Some components will likely end up being recycled, but recycling car parts can be very energy and labor intensive, so there is the possibility that we may just end up abandoning the carcass after the car is no longer roadworthy. 

            The availability of cheap affordable cars will have one positive economic effect, which is that many families will have an opportunity to cut their transport costs, helping with the deleveraging process that the western consumer needs to undergo to regain some health.  In the process of this deleveraging, it is more than likely that we will see the middle class eroded even further.  The massive loss of jobs in the manufacturing, repair and parts retail car sector will play a big role in that impoverishment.

            Unless a global mechanism meant to provide an incentive for the durable economy to be resurrected will be implemented very soon, this is the future we are looking at, as far as the car as well as many other industries are concerned.  It is not the future envisioned by people on the right, who want to make us believe that we will continue driving in large SUV’s and Trucks, while they make sure that gas stays cheap.  Reality is that they cannot provide cheap gas anymore, no matter how much they drill.  Those days are gone; it is just that it is so darn hard to accept it for some, that they prefer to buy into these cheap gimmicks.  Our future is equally unlikely to be the one being dreamt of by the left.  We will not be driving around in hybrid, electric and hydrogen cars.  We will be driving cheap, fuel efficient cars, made in the developing world.  There will be a many fold increase of motor vehicles worldwide, due to the cheap price.  The world will also get trashed because of the low durability of these cars, which will require an increase in the intensity of our exploitation of resources.  This trend cannot be stopped by grants in R & D, or by subsidies for electric vehicles, because the market in the current environment it operates in, is much stronger than the effect of these incentives.  That is why I continue to insist that we have to change the environment the market operates in.

            I will continue to insist for this change, as long as people are willing to listen.  I am pleasantly surprised by the size of the audience my articles have attracted so far, since I started writing at the beginning of the year.  I want to thank the readers for their interest.  I will do my best to continue to make it worthwhile for people to continue to visit.   


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