April 14, 2006
View from Silicon Valley- "Investing" in cars
(c) copyright View from Silicon Valley, 2006. All rights
reserved.
As the debate over a housing bubble rages on, there
is an unreported bubble in automobiles -especially hybrid engines. When you stop to think about it, the parallels
are kind of eerie!
We always look at a car as an "investment." Not due
to appreciation but but because we expect to drive the car for long time. When you spend time every day in your
car, you make sure it's comfortable, safe, doesn't require a lot of repairs and will hold up in value. Crunching the
numbers, especially given the tax code, you can make a financial case for buying a nice car once every six or eight years or
buying a cheaper one every two or three. (Now substitute "house" for "car" and read it again...)
First to go was our 1996 model car. Repairs were sucking
up cash faster than a gardener running a banned leaf vacuum in Los Altos. As often happens, if we had sold
it a few months earlier, we would have dodged a couple stiff repair bills. However, we bought it used
and drove it eight years. Only during the last couple months did our "investment" not "work."
Since this was my wife's car, it was her "job" to figure
out what she wanted to drive for the next several years. We planned to pay cash, unless the discount for financing
exceeded the cost of money. (It used to be the criteria for financing a house was the same. It's only the
last couple years, when everyone agreed the value of real estate "always" goes up, it was thought better
to finance houses on a different basis than a car.) Her research and choices took some "interesting" turns:
First stop was the local Toyota dealer to look at a Prius.
(An earlier rental experience with a Camry found she didn't like to the look or feel of the car.) Previous test
drives found Prius "cool," in addition to reasonably-priced. While we did see a $30K sticker on a Prius driving
next to us a few months ago, we also heard the car was now available from inventory. We inferred
a Pirus available from stock would, by definition, then "fix" the price-premium issue. (Again, think or real
estate pricing vs. inventory. Except now there is real estate inventory!)
The salesman informed us we could put down a deposit
and then wait months to get one. Sorry --NEXT!
Next was Honda, where we drove an Accord. The base
model seemed reasonable in the low-$20K's. However, the better engine was ~$28K and the hybrid version was ~$31K.
Just like Toyota, Honda wanted ~$10K to save ~$10 per week in gas. Even our long-horizon view on cars doesn't involve
1,000 weeks of ownership...
Apparently high-end Honda's are also flying off the lot since, once
it became clear we weren't jumping up and down to buy a car on the spot, the salesman ditched us for an "appointment."
Third try on Saturday afternoon was a Ford Escape hybrid.
Driving a gasoline-engine Escape rental over Christmas, 2003 convinced us it wasn't "too big" and the hybrid sticker
was under $30K. ("Only" ~$8K above a gasoline-only version.) The model we saw was marked down $3K so we sat
down to discuss a deal. After a couple rounds of the "let me talk to my manager" then cooling our heels
game, we stalemated on pricing. At this point the sales manager, wearing a heavy black trench coat
indoors on a 60-degree day, swept in.
He started out by increasing their price $500 if we paid
cash (effectively rescinding their previous offer). He ignored our inquiry if this was really their "best price"
and instead demanded we give him a number we would pay. "It's your turn," he insisted.
Being in sales myself, this is the "fun" part! "Sorry, but
I'm the customer. I don't 'have to' do anything. You are the expert here so give me your best offer."
When he refused, we walked away. Somewhat to our surprise,
they let us walk. They never called to follow-up. Either Ford hired a bunch of salesmen (they were all male)
willing to take "no" for an answer or Escape Hybrids are selling themselves.
Last stop for the day was Volkswagen where she drove a Passat.
No hybrid premium, no Japanese premium. We liked the car, they had plenty of inventory and so we sat down for the
second time that day to discuss pricing. (We were a little antsy here since our VW research was minimal at that point
but we were tired and wanted to just finish.)
This dealer skipped us straight to a guy with a "manager" title
who threw out what seemed like a price solidly below sticker ($24.5K). When he went to write it up, their
price increased above their earlier offer and they were giving a low-ball on our trade-in. We were tired
and so settled for getting the original Passat price back and about half of the "under" on the trade-in after he loudly insisted
they would never be able to go higher.
We shook hands on the deal and they started showing my wife the
features of her new car while I filled out paperwork. For some reason, they kept us waiting another 15 -20 minutes
after all this was finished. During this time, one of the service guys had come in and logged onto the PC on the salesman's
desk. He left it "on" and, suddenly with internet access and time to kill, I double-check the trade-in value of our
car. When I discovered I under-estimated it's value, I told VW we changed our mind and would not buy the car.
"But you shook hands on the deal!" they complained.
Having been on the "other end" a time or ten, I had no compulsion
pointing out we reserve the right to change our minds when we learn new info, not to mention we never signed anything.
(I understand the "point of no return" in California law is only when you actually "take delivery" and
drive the car off the lot.) VW immediately raised their offer on the trade-in but we recognized our fatigue could
be making us miss something else and walked away. We never heard from VW again, either.
When we got home, we discovered VW reliability is not that
good and decided not to pursue this car any further.
That was
enough for one day, so the next Saturday, we changed tactics. (If you didn't find this too boring it will be a future
missive.)
In review, we felt the dealers made several "mistakes:"
+"accidentally" raised the written price above the verbal
+customers used to internet-time will not willing sit and
wait
+no follow-up
(Of course, dealers may not view the first two as
actual "mistakes."-- Maybe not the third one either?)
We also made several mistakes, including:
+persisting after
we knew we were tired
+not fully(!) researching trade-in value, and
+not fully researching every(!) car before we looked at it in-person
or drove it.
Conclusion:
The premium to buy a hybrid far exceeds the potential savings.
By the classic definition, hybrid pricing is in a bubble. Judging by inventory, or lack thereof, car
dealers are selling a lot of all kinds of cars but especially a lot of hybrids. Given their attitudes, dealers are
clearly used to closing deals at, or very close to, initial offers.
With jobs flat for five years and the stock market flat the
last 12 -18 months, where is the money to buy all these cars coming from? If you can explain why it's not
housing equity, let us know...
ps, there are dozens of auto-related web sites but we got especially
good use out of a couple:
1) Kelly Blue Book: used car pricing low, so the dealers
like to use it when offering a price on a trade-in.
To counter this, also know KBB's retail price/used (another option on
the same site, once you specify the car)
2) Edmunds gives the same info but the used car prices are higher
3) Cars Direct is useful to make sure you know the actual invoice
price:
