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4 Reasons Rising Car Prices Are Good for Both Detroit and Consumers

Worth every penny...for now.
The auto supply-chain crisis brought about by the Japan earthquake and tsunami grinds on. And now it's starting to hit consumers, as prices on new cars move higher. The average is $350, but for some Japanese brands. it's closer to $500. This probably sounds terrible, but in fact it's good news. For Detroit, obviously, because carmakers there can drop out of hyper-competitive mode and book higher profits. But the hikes are also good for American consumers. Here's why:

  1. A healthier overall U.S. auto market. General Motors (GM), Ford (F), and especially Chrysler are in much better shape than they were during the dark days of 2009, when the General and the House That Walter Chrysler Built were lurching toward bankruptcy and Ford stock was trading at around the price of a carne asada taco at my favorite local taco truck. But they ain't out of the woods yet. And only one thing is going to get them fully back on track: steady quarterly profits. All three are now back in the black. But the more money they can make over the next year, the more they'll be able to support rising market valuations, get more cash on their balance sheets, and make strategic decisions about paying down -- or issuing -- more debt. A U.S. auto market that has three U.S. automakers operating in it is better than a market that doesn't.
  2. Fellow Americans going back to work. People love less expensive stuff. American also love Japanese cars. But for everyone's sake, we have to love Americans heading back to work. As U.S. carmakers start to make more money, they can anticipate making more money -- and that means increasing production, which means bringing idled workers back to the assembly lines, as well as hiring new workers. Importantly, these new workers, due to new labor contracts, will not ultimately be as costly as Detroit's older workforce.
  3. This helps the Japanese, too. So maybe this all sounds bad for Japan's carmakers. However, brands like Toyota (TM) and Honda, while weakening in terms of U.S. market share, still have millions of loyal customers who won't hesitate to pony up a few hundred extra bucks to but a car they believe is superior. The Japanese carmakers already discount less than their U.S. competition. So prices increases will help offset any bottom-line damage done by the supply chain crisis.
  4. It's not deflation! Remember last year when we were all worried about prices collapsing and the country entering a deflationary spiral that would kill the recovery and drop us into a pit of no-growth economic despair for a decade? Doesn't look like that's gonna happen. So inflation is good! And although this crisis-induced inflation isn't inflation is the true sense -- it will abate once the Japanese automakers come fully back online -- it's a signal that consumers will tolerate moderate pricing upticks. At least until they won't.
No one would want this to be come a permanent condition. But there's a lesson in that, too. A fully competitive U.S. auto market sets prices where they should be be -- which, in effect, is usually a bit lower than what automakers say they should be, before incentives are applied. A less competitive market, where useful capacity and import capability is hampered, distorts pricing and isn't good for anyone.

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Photo: GM Media
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