AAA Does the Math on the Cost of Automobile Ownership

Cost of Automobile OwnershipIt’s gotten a lot more costly to own and operate an automobile in recent years. That’s the clear conclusion one can draw from an evaluation done by the American Automobile Association.

The latest AAA analysis, based on a survey of driving costs it conducts annually, has determined that the “average car” (a midsize sedan) costs nearly $9,000 each year to keep fueled, licensed, insured and maintained.

That’s $750 per month – hardly chump change.

Not surprisingly, the cost of fuel is the biggest culprit in the upward trajectory of costs. Fuel prices have risen most dramatically in the past year.

But that’s not the only source of added expense; AAA found other items that have also contributed to higher costs, rising higer than the rate of inflation though not as sharply as gasoline:

  • Fuel cost: Up ~15% over the past year
  • Replacement tires: ~4% increase
  • Automotive insurance: ~4% increase

The typical American motorist is now spending ~$1,000 per year on automotive insurance, AAA finds.

But there are wide swings in the cost per motorist based on driving records, the type and age of the vehicle, the geographic location and so forth, so some lucky souls are paying only half the average.

Another finding: Today’s more sophisticated motor vehicles make them more complicated to service – thus increasing the time it takes to repair them. Time is money – and never more so as when a car is in the service bay!

The only category where cost reductions have been observed lately is in automobile depreciation, which is lower by about 5% compared to last year.

The reason? Reduced new car sales have resulted in a relative shortage of quality used cars available for sale, thereby driving up their value.

As an interesting aside, AAA has been conducting these surveys each year since 1950. Sixty years ago, motorists typically put ~10,000 miles on their cars, and fuel cost just 27 cents per gallon.

Today, the average motorist clocks ~15,000 miles on his or her vehicle in a year’s time. And, as we know all too well, fuel costs have been bounding around between $3.50 and $4.00 per gallon.

Oh, for the good ol’ days … even just five years ago!

The Limits of Delivering “Cheaper Value”

Nano vehicle

Tata Nano car on fire
Tata Nano ... Tata "No-No"?
About a year ago, the international press was abuzz about the latest new “value” entry in the automobile business. Amid great fanfare, Tata Motors, part of India’s largest corporate conglomerate, was introducing the “Nano,” a car designed to appeal to India’s mass market.

The Nano, which can seat five people and has a surprisingly roomy interior for its size, carries a base price of only ~$2,200 — lower than any other car in the world — which proved irresistible to families of modest means whose finances had required that they make do with motorcycles or scooters before.

Some 9,000 Nano vehicles were delivered in July, but since then, sales have slowed dramatically – to just around 500 shipments to dealers in November.

How did Nano’s star fall so far, so fast – especially for a vehicle which Tata Motors thought was impressive enough that it planned to introduce it in other developing markets … then Europe … and finally to the United States?

Production delays have something to do with it. But the real problem is the performance of the car. Most alarming are reports that the vehicle can catch on fire, with one widely broadcast incident where a Nano caught on fire and was engulfed by flames on the way home from the auto showroom!

In response, Tata, while denying anything is wrong with the design of the Nano and studiously avoiding any language of “recall,” is offering to retrofit the automobile with extra safety features. It’s also extending the warranty on the car from 18 months to a solid four years.

Will these moves change the impression that the car is more of a “No-No” rather than a “Nano” and move its sales trajectory back into positive territory? Perhaps. But it’s interesting to note that sales of a rival “value” car made by Suzuki – the “Alto” – have now overtaken those of the Nano. The Alto carries a higher base price of $6,200, and yet it posted unit sales of ~30,000 in November, making it India’s best-selling car that month.

[The success of the Suzuki Alto in India is nice news for a company whose cars in the U.S. have been on a downward plunge all this year – with sales off ~42% in 2010 compared to 2009.]

The experience of the Nano and the Alto in India brings up an interesting question: Is it possible to make small, cheap version of products that are significant purchase items and win the confidence of a broad customer base?

To a degree, yes. But there are limits to “how low you can go” in value-engineering a product for performance and safety, below which customers just turn and walk away. (Or, in this case, drive away.)

Moreover, just like the experience of the Yugo or the Trabant, there’s a risk of forming a poor market image that’s impossible to shake off.

And in this particular case, the brand names don’t help at all. It’s just too easy for disgusted consumers to say “Ta-Ta” to Tata Motors and “No-No” to the Nano.