I was discussing with my father the raw cost of making car, minus labor, and argued it shouldn’t cost more than a couple thousand dollars and that the overinflated prices reflect markups all down the manufacturing, transportation, healthcare/pension cost, and dealership line. To put it another way, what’s the cheapest one can make a car from scratch if you had access to all the machinery necessary to manufacture one?
What you call markups aren’t markups, they are costs. Healthcare and pensions are part of labor costs (conservatively, multiply annual wages by 1.5). Transportation? You’re going to Detroit or Kentucky or wherever to pick up the car?
"access to all the machinery necessary to manufacture one?"
If I had access to everything needed to manufacture a car, the only cost would be parts and the salaries of the people in India running the robotic manufacturing processes remotely. Ooops, I’d have to pay for that infrastructure too. Oh, and the electric bill. And a bunch of stuff neither you nor I have thought of.
At best you’re asking what is the manufacturer’s cost for parts for the average automobile. Keep in mind those costs include labor, which includes benefits, as well as transportation.
Are you going anywhere with this?
It is a common misconception that it doesn't cost a lot of money to manufacture an item and that folks are being shafted by the middle - men. Ergo, eliminate the middle-man and the price would go down.
Here's the problem: It is common for accountants to use "Car Door Cost" - which is the cost to manufacture an item and get it to the railroad car door at the entrance to the warehouse. This is a good way of comparing manufacturing costs, but a poor way of isolating what it truly costs to deliver a product to a customer. FYI: Typically this cost is about half what the average consumer pays at the retail level.
- BUT -
Car Door Cost only includes 3 items: Material, labor, and burden (burden being the cost to keep the factory running - electricity, gas, water, buiding maintenance, etc.) - typically, the costs are divided 1/3, 1/3, 1/3 for pretty much every product - not just cars!
Car Door Cost does NOT include the infrastructure to run the company - engineering, management, accounting, warehousing, transportation - in other words, everything else that is not included in directly manufacturing the product.
So when folks ask the accounting department for manufacturing costs, they get "Car Door Cost" - which is not a true reflection of what it costs to design, manufacture, and deliver the product.
"So when folks ask the accounting department for manufacturing costs, they get “Car Door Cost” - which is not a true reflection of what it costs to design, manufacture, and deliver the product."
But it is very useful for deciding whether to make or buy a part, and if a manufacturing change is worthwhile from a cost perspective. Controlling marginal costs is very important for any business. Once a product is designed, it is the major way to generate profit.
Perhaps a more direct answer to the OP’s question can be found in the often stated belief that Ford Motor Company made a $5,000 profit–on average–on every Ford Explorer that they sold back in the days before safety concerns about those vehicles were raised. The same sources that claimed a $5k profit on each Explorer also stated that Ford made a $10k profit on each of the pricey Lincoln versions of the Explorer.
So–if you can find the list prices for Explorers, circa late '90s, and subtract $5k, that should (in theory) tell you how approximately much it cost to build and market one of those vehicles back in those days.
Does this data bear much resemblance to today’s market conditions for the auto industry?
Quien sabe?
Due to lack of editing capability at this point, please note that the third sentence above should read as follows:
So–if you can find the list prices for Explorers, circa late '90s, and subtract $5k, that should (in theory) tell you approximately how much it cost to build and market one of those vehicles back in those days.
Just materials, rubber, plastic, leather, fabric, wire, metal, etc. about $3,000 for a $20,000 vehicle. There are so many other costs; labor, engineering, design, marketing, administration, which all add to the final costs. That’s why the more cars you make of the same model the less these “other” costs are per car.
According to a Chrysler Dealer whom years ago I knew quite well, the cost of manufacturing a car for them could be as little as 40% of the retail price or as great as 95% depending upon where in the chain you fall and the overhead you claim. The dealer bears the cost of making the car plus claim the over head for his dealership; the customer bears the cost of making the car, dealership now include licensing, maintenance and insurance etc… So you really have to define where you are in the chain and in the reality, it’s only important to the final owner.
The cost of manufacturing the car does NOT depend on “where in the chain you fall”. That’s the problem with the OP’s question.
Cost of manufacture doesn’t matter at all to the final owner.
I guess the OP thinks a loaf of bread should cost what the flour, salt, and yeast cost.
Given that several makers have lost money over the last few years, the ‘cost’ of the car is about right. Bankruptcy (GM and Chrysler) does not seem to indicate wildly overpriced cars.
As for the profits in the big SUVs, those were ofset to some degree by the losses in the small cars to meet CAFE standards.
Reminds me of a friend who decided he’d be rich making lamps for living rooms. He compared the cost of the raw materials to what he was paying for the lamps in his house, thought he had found a gold mine! Once he looked into all the costs of actually making them, he gave up. Quick.
Good analogy texases. But it's worth noting that what are considered the raw materials of bread are also finished goods that have lots of costs built into them. We don't harvest flour for example. Even if we did, someone had to do that work and pay for all the equipment required to do so. Completely separating the labor content out of any finished good would be an exhausting and useless effort.
The lamp guy probably never thought about the hidden costs of selling the finished goods either. Liability insurance is something everyone must have because if you manufacture and sell something, sooner or later you'll be sued and lose no matter if you deserve it or not.
I think the best way to estimate the cost of the materials for building a car is to price kit cars (unbuilt, as a kit, not the finished product). I tried doing a quick search, but I don’t have the time to do thorough research right now.
GTRUPP; you are approaching this the wrong way. Manufacturing anything requires materials, labor, infrastructure, energy inputs, taxes to be paid, etc. ALL are COSTS!!!
Your best bet is to go to your local library and take out a book on Accounting 101. That will give you some idea where those costs belong.
Having said that, the average manufacturing cost, including all the items Iisted is apout 1/3 of the final manufacturer’s suggested list price. That does not include after sales costs, such as warranties, advertising, public relations expenses, and other “non-manufacturing” costs. So the barebones manufacturing cost for a $21,000 car is about $7000.
The dealer pays the manufacturing cost plus all the manufacturers’ non- manufacturing" costs plus profit for the carmaker. The dealer “discount” from the list price varies form about 15% for small cars, to as much as 35% for luxo boats. So dealers push big and expensive cars, and manufacturers here push big vehicles, since they make more money on them. Both Ford and GM lost money on every small car built in the US, as much as $1400 on each Escort. The new Fiesta will be built in Mexico. GM builds the Cruze in Lordstown, Ohio, with their new reduced wages. Hope they can make na profit on it!
The Big Three have had ongoing difficulty making a profit on small cars, which are the bread and butter of foreign carmakers. Honda and Toyota make money on all small cars they sell, since their manufacturing structure is much more efficient.
Foreign car makers also are able to make money on lower volumes, and don’t easily run ito the red when buiseness is down.
So, the next ime you discuss these “obscene profits” in the car business with your dad, keep in mind that, as other point out, everything is a COST, and the Big Three would be out of business without large vehicles since they can’t make much money on mid size and small cars.
That $20 sport shirt you just bought cost probably $2 to make in China or India, and the rest is transportaion, advertising, warehousing, marketing, sales, and the overhead of Walmart or Sears. Nothing immoral about any of this. The exception would be a well known female fashion retailer who uses slave labor in third world countries to make the product.
Some products are almost all advertising; those oil additives pushed by racers cost maybe $0.50 per can to make and sell for $5.95.
What you’re really asking here is "So, uh, if everything were free, how much would it cost to make a car?"
Everything isn’t free. People need to get paid. Machines need to be bought. Setting up the question as “don’t count wages or the cost of the machines in the equation” is pointless. We might as well ask how hard it would be to avoid a heart attack if we removed someone’s heart.
Another example - a neighbor of mine ran a restaurant, told me the menue price had to be at least 3X the cost of the ingredients, otherwise he’d be out of business. Lots of other costs involved.
With automobiles the problem is even more complicated than the the extremely complicated scenerios presented in the other posts. There are also the costs of “manufacturer’s incentives” to the dealers, warranty costs, interest on operating capital loans, taxes, and countless other expenses.
There’s another variable. GM’s management practice prior to their bankruptcy was to continue building to a level that maintained their efficiency levels in the factories and then sell unsold inventory by discounting. Clearly that didn’t work when the market nosedived (nosedove?).
I don’t see why everyone is in such a huff over this question. If you want a custom motorcycle, you can go out, buy the parts, and assemble it yourself. You can also paint it yourself if you don’t want to send it out to have it painted. If the OP were to do the same with a car, how much would the parts cost him? Why get your undies in a wad over such a simple question?
Interesting comment Whitey! A number of years ago one of the car magazines thought they would buy all the parts and build themselves a car from it. Not counting the labor, the total price of the parts for a $10,000 car came to $25,000! That was not counting the basic body/frame, which they got from a wrecker for a few hundred dollars.
Car manufacturing is actually very efficient. But there is much more to it than that. Keeping a sales and service organization in place requires huhge amounts of capital and support staff.
Equipment manufacturers typically make 50% of thir profit from parts, which represent 10-20% of the sales volume. That is, if they sell all the parts needed over the life of the machine. In the case of cars, many parts, such as brakes, electrical, cooling system, become “after market” items made and sold by third parties.
lest we forget the countless millions of dollars associated with crash research.
"Cost of manufacture doesn’t matter at all to the final owner."
Huh ? Where does that logic come from ?