Getting Cheap Cars Will Become Harder... "Tax and R&D Support Needed"

Automotive Research Institute "Carflation + Profitability Enhancement Strategy"
Consumer Real Purchasing Power ↓... Market Landscape May Change
Volkswagen, Toyota Discontinue Small Car Models
Battery Electric Vehicles Also Released Mainly at High Prices

Russia Chechen Rada Complete Vehicle Assembly Plant

[Asia Economy Reporter Choi Dae-yeol] As new car prices continue to rise steadily worldwide and consumers' real purchasing power declines, there are calls for the government to provide support through tax policies or research and development to lower the barriers to vehicle purchases. This is because the market is likely to remain supplier-dominant for the time being, and vehicle prices are expected to soar further due to environmental regulations.

According to the industry trend data released on the 11th by the Korea Automotive Technology Institute, signs of 'carflation (car + inflation)' have clearly become prolonged following Russia's invasion. The supply shortage of parts, especially vehicle semiconductors, still shows no signs of resolution. Vehicle semiconductors are controlled by a few global companies such as NXP, Infineon, and Renesas. The structure involves automakers outsourcing orders, and the supply shortage has continued since two years ago when COVID-19 first emerged. Due to the multi-variety, small-quantity production system, which is considered a low-profit market, other foundry companies are reluctant to actively enter.

Initially, the automotive industry expected some relief in semiconductor and parts supply within the year. However, the prolonged war following Russia's invasion of Ukraine has complicated the issue. Lee Ho-jung, a senior researcher at the Korea Automotive Technology Institute, explained, "There is a possibility that supply problems for parts such as Russian neon and palladium needed for semiconductor production, and Ukrainian wiring harnesses, will worsen. The rise in international oil prices due to sanctions on Russia and increased logistics costs caused by restrictions on Russian land transportation are fueling inflation across the manufacturing sector."

With many factors pushing car prices higher, global automakers are responding by reducing production or discontinuing relatively inexpensive models such as small sedans and hatchbacks. Volkswagen, Audi, Ford, and Chevrolet have decided to discontinue some of the smallest A and B segment models or not develop successor models. Toyota and Honda also discontinued B-segment models in the North American market starting in 2020. These volume models, which once accounted for each brand's sales, have been removed. As sales declined and performance dropped, there has been a clear tendency to offset this by producing and selling more expensive models.

Volkswagen Factory in Zwickau, Germany

Each company’s shift in focus toward electric vehicles is also driving up car prices. The surge in battery demand within a short period has caused raw material prices to skyrocket. Batteries are reported to still account for about 20-30% of the production cost of finished vehicles. Rather than releasing affordable electric vehicles, major companies have strategized to enhance brand image and profitability by focusing on high-priced electric vehicles. Additionally, with the Euro 7 environmental standards set to take effect in 2025, additional costs are anticipated for developing new engines or reinforcing control systems.

With the supplier-dominant situation continuing and consumers' real purchasing power declining, the institute expects significant changes in the finished car market. The researcher said, "Amid the gap between supply and demand, consumers are likely to give up or postpone new car purchases. There is a high possibility that Chinese-made finished vehicles will actively try to fill the void in the global market."

He added, "Since economic accessibility to cars as a means of livelihood may become an issue, it is necessary to review and eliminate tax items in automobile taxation that have fulfilled their era's purpose or have the potential for double taxation, and consider expanding tax relief for vulnerable groups related to cars. Furthermore, support measures should be explored for research and development that replaces scarce resources, design innovation research and development that fundamentally reduces the number of vehicle semiconductors, and consulting to improve production processes of material and parts companies."

This content was produced with the assistance of AI translation services.