It is well known how the shortage of semiconductors, increased delivery times, the impact of the Russian-Ukrainian war, the rising energy prices or the economic recession have caused changes in the production and sales prices of new cars. However, the significant price increases of the last few years are explained by a number of other factors that directly or indirectly affect the cost of buying and maintaining a car today. In this article, we set out to better understand the background to these factors.
- Technological change
As part of the Fit for 55 climate package, the European Parliament recently approved new legislation to set emission reduction targets for 55% for new cars and 50% for new light commercial vehicles by 2030 compared to 2021, and 100% for both categories by 2035. In practice, this means that in 12 years no car with internal combustion engine will be allowed to be produced on the EU market. Meeting the emissions targets will require a radical shift towards pure electric vehicles, based on the current fleet average of 95 grams CO2/KM. To meet the 55% reduction by the deadline, emissions from new cars would have to be reduced to around 42 grams CO2/KM.
The intermediate target of a 15 percent reduction by 2025 remains in place, meaning manufacturers cannot delay electrification from the 2020 emissions quota date if they want to comply with the rules and avoid penalties for exceeding the limit. Car manufacturers will have to invest heavily in the production of electric vehicles, a significant part of which will be taken up by R&D, as the design and operation of e-cars is very different from that of conventional cars, and the costs are spread over a smaller and less economical final product due to the smaller production runs. This is compounded by the high cost of the lithium batteries that power electric cars, so that the overall price of e-cars will be high.
- Mandatory extras
As of 6 July 2022, only cars with new safety equipment, as defined in a regulation, can be placed on the market in the EU. The current requirement is for new models, so that existing models can continue to be sold, but from the 7th of July 2024 all new cars will have to be fitted with the required equipment. These include advanced emergency braking, fatigue monitoring, active lane-keeping and reversing assist systems. This means a number of extra features compared to the past, which contributes significantly to the increase in the price of new cars. In addition, one of the mandatory features, Intelligent Cruise Control, uses a front camera or, in the absence of, a GPS link to a digital map to collect data from speed limit signs to automatically reduce the vehicle speed to the set limit. In effect, we can expect the new cars to come with built-in GPS navigation, which will further increase production costs.
- Increasing additional costs
It’s not enough to buy a car, you also have to consider the cost of running it. Fuel prices have risen by around 30% in a year, with petrol up by more than 40% and diesel by more than 70% compared to 2020, while charging electric cars is now almost universally charged for, with energy prices rising. At the same time, the cost of associated insurance is rising, partly due to the rising cost of parts and partly due to the higher CASCO premiums for larger, newer, more expensive vehicles. Another source of uncertainty is that, in the absence of sufficient experience, insurers do not yet know whether the new mandatory safety equipment will bring about a reduction in damage that will offset the additional costs of replacing the equipment. These driving assistance systems are expensive and therefore initially CASCO premiums will increase in proportion to the additional cost of the system at the time of purchase. At the same time, the cost of spare parts and servicing will also go up, as the increasing number of extra equipment in cars makes repairing them more complex.