Blog: Dave LeggettLaws of economics

Dave Leggett | 8 April 2004

If the price of a good goes down, demand for it goes up, yes? With the exception of certain luxury goods, that's one of those basic laws of economics that I learnt at school when I was seventeen years old studying A-level economics. New car prices in the UK have fallen by around 15% over the past four years, so new car demand has consequentially gone up. Not only have new car transaction prices plummetted, but interest rates have fallen, finance packages have got more competitive, equipment coming as standard on new cars has improved and there are more models on the market.

Indeed, the UK new car market appears to have undergone a structural step-up to a new higher level. But there are signs that it may be peaking. Prices have firmed up lately. Interest rates look to be heading up. SMMT Chief Chris Macgowan popped up on the BBC TV news last night to say that it is hard to imagine the car market growth of recent years continuing. I'd agree with that.

But I'm often left wondering about the underlying economics of the way this industry works. If final prices come down the way they have, what does that say about costs and margins? We know that cost-cutting pressures are being felt all along the supply chain and that cars are cheaper to make now than five years ago, so improvement can constantly be made, the cost-saving and productivity envelope pushed out yet further (- is it diminishing, given current technology? - is there really a limit?). It's a phenomenal performance when you come to think of it and what's even more phenomenal is that - for all the complaints about poor profitability  and thin margins - there haven't been any big OEM casualties over the past few years, or even anything in Europe that could really count as major restructuring.

Take Fiat. Last year, Fiat Auto was in an ostensibly very precarious state, but this year, the company has more money, a revitalised model range and everything is rosy again. Or is it? The media loves to get its angle and run with it of course and the Fiat-in-recovery story is favoured right now. But there are still underlying problems of course - like having too high a cost base in Italy. Mark Bursa is going to be investigating Fiat Auto for us over the next few weeks (I spoke with him yesterday) - should make an interesting piece.

Mr Bursa also mentioned that he'd just received his annual Renault chocolate Easter Egg. It sounded impressive - he seems to be on all the best lists. Inside is a model of a Renault range car, but he'll have to wait to find out what it is. Yesterday he maintained that he would be putting the egg to one side until Sunday - as is traditional - before tucking in. But I've seen Mark in the presence of chocolate before and I wonder whether he really has the will power.


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