The Knowledge: New car prices rise by 6.6% since January 2021

Dacia has raised prices three times this year alone, Xavier Martinet, head of sales and marketing for Dacia, said during a Renault earnings call. Despite this, Martinet said he had seen “no significant impact on order trend”, due to renewed interest in the brand from customers priced out of traditional mainstream brands.

“Having an everyday low-price brand in the portfolio is clearly becoming even more an asset for us than it has been in the past,” Thierry Pieton, chief financial officer for Dacia owner Renault, said during the presentation.

Renault has seen a “significant” increase in raw material costs, particularly steel, which represents half its raw material spend, Pieton said.

Like many other car makers, Renault is adopting a strategy where “raw material and input cost increases will be covered by productivity and pricing,” Pieton said. In other words, it will drive down the costs of making the vehicles while also increasing pricing, not just on individual models but also by moving out of its traditional small car specialism into bigger, more profitable cars. “The margin is double on C-segment [compared to] B-segment,” Pieton said.

This is a trend visible across the industry as auto makers axe small cars, starting with city cars (home to a long list of axed models) and moving to superminis.

The reason Dacia’s pricing increases are more visible than other brands' is due to their lack of discounting. Tesla is another one who doesn’t discount, leaving it unable to hide price increases by ending the cash rebates common to nearly every other car maker and their dealers.

Tesla claims it is increasing prices to anticipate higher raw material costs, including those for the batteries, further into the year. “It may seem like we’re being unreasonable about increasing the prices of our vehicles, given that we had record profitability this quarter, but the wait list for our vehicles is quite long,” Tesla CEO Elon Musk said in the Q1 earnings call in April. “So, that’s why we have the price increases today because the car ordered today will arrive, in some cases, a year from now.”

Tesla isn’t alone in making money off the price rises. The Volkswagen Group had such a good year last year that CEO Herbert Diess was paid a whopping €5.3 million (£4.5m) performance-related bonus after the group posted a 451% increase in profits for 2021.

Of those car makers long known for their discounting tactics to boost sales, many are now showing lower average price increases. Seat’s prices have climbed only 1.5%, Citroën’s by 1.7% and Ford’s by 2.8%. Removing discounts has the happy side-effect for them of masking price rises.

Slashing discounts is industry-wide. In April, the average What Car? cash Target Price discount fell to its lowest ever level, at £1522 per car, half what it was at the same period 12 months ago.

While the overall effect of dumping discounting might only show up a little on list prices, it’ll show up a lot on finance deals. Some are trying to mask it, for example, by extending the average lease/PCP period from two or three years to four, which means monthly payments don’t rise by quite so much. But some increases are so sizeable that it’s impossible to achieve.

When Rich Henson, an energy trader living in south-west London, went back to Renault earlier this year to replace his leased family Renault Zoe, he found the deal that cost him £7000 over two years had now risen to £17,000 stretched over four years.

Personal leasing has grown over the past decade as an easy and cost-effective way to get into a new car but is now eye-wateringly expensive in some cases (see below). “People who have been into leasing for a long time and coming out of existing deals are noticing it, because they are used to some exceptional rates,” an executive in the leasing industry said, on condition of anonymity. Henson certainly did and decided to buy his new Zoe outright instead.

Car makers have tried to claim that higher residual values will offset the price rises by lowering monthly figures, but right now, even in a period of record used car price rises, that’s not happening.

The rise in new car prices has been positioned by Stellantis CEO Carlos Tavares as a political issue that could even destabilise societies. He has long warned about the threat to “freedom of movement” for the middle classes, who are being priced out of new cars, especially EVs. “It's very important not only for the car companies, but also for the social stability of the Western societies in which we operate,” he said in February.

It's unlikely the cost of new cars will become a flashpoint in same way rising energy bills will be, but unless car makers can sort out supply-chain bottlenecks, improve productivity and focus on electric cars that aren’t just expensive halo models, car buying as we’ve come to enjoy it is over.

Case study

“Skoda doesn’t really want your business.” That was the response given to me by an apologetic Skoda salesman by way of explanation for the “astronomical” lease price he was about to quote me to replace a two-year-old Octavia estate. Like many, I got pulled into personal leasing around seven years ago when hidden discounts made it highly cost effective to essentially rent a car.

The Skoda Octavia is perfect for our family and the last two models have been an estate in 1.5-litre SE Technology trim. The payments have crept up. The first one in 2018 (after a very cheap Superb) cost us £5605 over two years. The current one is the new fourth-gen model and will have cost us £7031 over the same time frame, following a list price rise and the addition of a couple of options.