Here’s something I’ve seen popping up across various blogs in the last few weeks:

There’s too much capacity in the Car Industry

Clearly, during a recession, the demand for new cars is going to be lower than it was – that’s true. Even when people want to buy a new car, they’re less likely to be able to finance it at reasonable terms.

At the same time, we’ve got the Car Scrappage Scheme, gifting everyone £2,000 for turning in any car for £2000 (who’s paying for the cars to be actually scrapped by the way?) which, assuming it works, turns taxpayer’s money into demand for for new cars, yes?

So I started checking out the prices of cars, to familiarise myself with the state of the industry – what products they’re offering and at what prices. I wanted to see what the market place was like. A Fiesta starts at £10k. A Corsa starts at 10k. A Punto starts at 10k (are you spotting a pattern here?). A Mazda 2 costs £10k. A Yaris starts just shy of £10k.

A Peugeot 206 starts at £8.5k but I wouldn’t recommend one of those on account of the hell my housemate suffers with hers.

The most obvious thing about all these cars is that they’re practically identical in appearance and features: Shitty, unappealing overpriced crap.

All this is, of course, highly fascinating. Except I was looking at this market about 6 months ago, in fact, because a newly qualified driver friend of mine was looking to buy a new car. Puntos and Fiestas, I’m reasonably certain, were starting in the £6-7k price range.

If that’s true, that means the advent of the Car Scrappage scheme has seen prices jump up between £3 and £4k, in order to then offer a “discount” of £2k, resulting in a total price increase of £1-£2k.

In other words, even with the stupid squandering of tax-payer’s money, cars are getting more expensive. But there’s a good economic reason for that.

The natural consequence of a recession means that people aren’t quite as willing to pay quite so much on this shitty, unappealing overpriced crap as they were. That means over the life-cycle of say the new model Fiesta, they will expect to sell significantly less than they’d hoped. Because the cost of developing a new car (including design, testing and configuring the factories) are recouped over the whole life-cycle, those costs are being spread out over a smaller number of cars. Therefore prices go up… which means demand falls… which means production needs to reduce… and so on until, inevitably, car companies begin making record losses.

Reasonably we can expect (should this continue) car manufacturers to reduce the number of lines and variants they offer. We should expect the number of manufacturers to reduce, too although it seems none of these bottom end car makers seem overly concerned with trying to compete on price.

Too much capacity in the car industry? Probably. Temporarily. But ultimately we live in a country where new cars have always been traditionally overpriced compared with other nations as it is, and now prices are going up. We are supposed to be witnessing Government support to stimulate sales of cars to ‘save’ this industry, but we all know that there’s steep financial punishments for anyone daring to drive any of these new cars (depreciation not withstanding)

For what it’s worth, I suspect paying £20 in tax on £30 of fuel might have something to do with the ‘over-capacity’ of the Car Industry, but then pricing people off the road is the modern way of circumventing demands for proper road infrastructure. Labour, at least, understand how to dodge issues that they have no solutions for – put their critics on the back foot and keep them there.