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Automobile Prices Are Skyrocketing. Don’t Blame Worker Wages.
A mid-2000s switch in business strategy pushed automotive profits and prices upwards.
By Eric Gardner, More Perfect Union
The dream of owning a new car is drifting further from reach for many Americans. The latest Ford model costs roughly the annual salary of the median U.S. worker, underscoring deepening concerns about U.S. auto market accessibility. “Affordability is an issue,” John Lawler, the CFO of Ford, told investors in yesterday’s earnings call. “Right now, it takes a consumer about 14 percent of their monthly disposable income for a vehicle.”
In August of this year, a new Ford cost about $57,000. The cause or blame for this fact is debatable. There’s been a general narrative circulated by management types that high union wages in the automotive industry push the price of cars upwards. The UAW begs to differ, pointing out that automobile prices soared 30 percent under the previous contract while wages increased just 6 percent. Earlier this fall, Wall Street analysts even wondered if prices were too high, asking executives in an earnings call if consumers could really “support such strong industry price” levels.
The debate is poised to continue, with the UAW on the verge of winning a 33% total wage increase throughout the next Ford contract. Most analysts expect General Motors and Stellantis to follow Ford, boosting worker pay across the sector. “I don’t blame them,” a former Big 3 executive told CNN about the union’s wage demands. “But unfortunately, this just adds to the inflation problem.”
Lost in the discussion about higher automobile prices is that rising prices aren’t a bug but a natural byproduct of the industry's reorientation since the Great Recession. Like many automobile manufacturers, Ford is no longer focused on selling as many cars as possible. The company is focused on profitability.
That’s a good thing for Ford’s bottom line and ensures profitable American manufacturing, but it’s helped increase prices.
For most of its history, Ford had a sprawling manufacturing footprint. In the early 2000s, the company owned nearly 90 different production and distribution facilities. The facilities cost a lot to run, and the vehicles often featured expensive-customized parts. To cover the high costs, the company essentially flooded the market with vehicles. Vehicles sat unsold on lots, forcing Ford to slash prices and offer dealer discounts to entice customers. During that era, Ford captured 20% of the U.S. market and notched annual sales of around 3.7 million cars and trucks.
These slashed prices were good for consumers. Some of these cars were real lemons, but it meant more supply and lower prices. It also posed a major problem for Ford. It was a car manufacturer that regularly lost money manufacturing vehicles. In 2006, the company’s losses exceeded $12 billion. Two years later, the losses peaked at $14 billion.
This wasn’t sustainable. In 2006, Alan Mulally, formally of Boeing, was brought to enact a new bold business strategy at the iconic company. “We’re not going to chase market share,” Mulally said in a conversation relayed in the book American Icon: Alan Mulally and the Fight to Save Ford Motor Company. “We’re not going to put out vehicles where demand is not there and then discount and make it even worse.”
Under his guidance, the company would shrink and then grow more profitably. Dubbed the “Path Forward,” Ford sold off brands like Volvo, standardized parts to save money, and stopped manufacturing less profitable models. Amid the great recession, Mulally got UAW approval to close over a dozen factories, slashing production costs by billions. From 2006 to 2012, Ford reduced its payroll by 40,000 workers. He reinforced the strategy to a Senate committee during the financial crisis. “Now we are aggressively matching production to meet customer demand.”
In practical terms, matching production to customer demand translated to less supply and soaring prices. Ford is no longer the sprawling auto conglomerate churning out a diverse range of vehicles for every pocketbook. By 2018, the company axed its entire non-SUV lineup, except the iconic and expensive Mustang. The more economically priced Ford Fiesta, Focus, and Fusion were replaced with a focus on high-margin SUVs and trucks.
Last year, Ford sold about 1.9 million automobiles in America—almost 50% less than twenty years before. Its share of the U.S. market dropped to 13%. Meanwhile, profits skyrocketed.
In the ten years from 2000 to 2009, Ford lost $17 billion. Last year, the company lost around $2 billion due to failed investments in autonomous driving, but in 2021, under the new business strategy, profit soared to $18 billion.
In the early 1900s, America’s roads were peppered with billboards proclaiming, “Even you can afford a Ford.”
Unfortunately, that’s not true today, and it has little to do with wages.