As automakers have ramped up the content of vehicles now manufactured with more safety features, telematics, and other technology, the cost of vehicles has risen. New tariffs put in place by the Trump administration in CY2018 or under review for CY2019 may drive prices even higher. Already, tariffs on aluminum and steel sourced outside the U.S. have led analysts to predict the price of a vehicle may increase by 1%. The Center for Automotive Research predicts the expansion of North American capacity for auto assembly, parts and components manufacturing, and steel and aluminum production, and the higher labor costs in Mexico called for under the newly proposed USMCA treaty may add more than 2.5% to the cost of U.S. non-truck vehicles, and parts and components imports.
Additional tariffs of 25% on vehicles produced by European Union, Japanese and Korean automakers are still under consideration for CY2019, which the Alliance of Automobile Manufacturers estimates could mean an additional cost of $5800 per vehicle to the 44% of vehicle imports sold annually in the U.S. And, the 25% tariff on imports could also increase costs for U.S.-built vehicles by as much as $2000 per vehicle-based on foreign-made content of about 35% according to the American Automotive Policy Council. As the cost of new vehicles rises, the cost of used vehicles will also likely increase, this could lead not only to higher repair costs but also to higher total loss costs as well. While there remains a great deal of uncertainty about the final outcome of the automotive tariffs, it’s clear that higher costs across the entire automotive industry are a likely result.
According to the National Automobile Dealers Association (NADA), the average MSRP of a new vehicle sold in CY2018 increased another 2% from the year prior (see Figure 1). Higher vehicle ownership costs have increasingly become a concern not only due to its potential drag long-term on new vehicle sales but also as a key factor driving up vehicle repair and total loss costs.
Rising vehicle repair costs
Analysis of vehicle appraisal data collected by CCC on behalf of its clients shows that volume has shifted to vehicles with higher market value, or ACV during the last 10 years. As the values of the vehicles themselves have risen, the cost of replacement parts for those vehicles has also risen — driving up repair costs overall. For example, between CY2009 and CY2018, the volume of vehicles with ACV of $15,000 or less has dropped from 68.8% to 53.5%; while the volume share of vehicles with ACV of $45,000 to $60,000 has risen from 0.3% in CY2009 to 1.6% in CY2018 (see Figure 2).
As the value of the vehicle itself rises, its repair cost also rises (see Figure 3), part replacements’ share of the overall repair cost grows (see Figure 4), and the average number of parts replaced also grows (see Figure 5). A comparison of the number of replaced parts for collision and liability losses from CY2001 to CY2018 by vehicle age group reveals 15.2 parts on average were replaced on collision current model year vehicles in CY2018 versus 10.9 parts in CY2001 (see Figure 6). Vehicle complexity has grown with more electronics, safety features and complexity of materials. As parts account for a growing share of the overall repair cost, they also become a factor in why a vehicle may be totaled.
To study this further, CCC conducted an analysis of vehicle appraisals with an ACV between $45K and $60K where the total loss threshold was hit. Within this subset of appraisals, there were over 76 parts replaced on average per appraisal with an average cost of $300 per part, and parts overall accounted for 62.4% of the overall repair cost (see Figure 7).
Further analysis of the frequency of replacement of specific parts on these appraisals and their average replacement cost reveals over 80% included at least one fender replacement with an average cost of $429, and 63% included at least one headlamp replacement with an average cost of $1,371 (see Figure 8). In some cases, individual parts accounted for 0.2% of the overall value of the vehicle — which in these examples was between $45K and $60K, so not an insignificant number. A comparison of the average cost per part includes all part types by original equipment (OE) for the most frequently replaced parts across this subset of appraisals.
With each vehicle repair requiring more part replacements, at a higher cost, with more labor hours at a higher rate, it’s easy to understand why repair costs are increasing. Couple that with a continuation of the shift of the vehicle fleet to higher cost vehicles overall, and the industry will likely continue to see repair costs rise. Unfortunately, the industry will also likely see more vehicles deemed total loss as the cost and complexity of parts drives repair costs over the total loss threshold.
Susanna Gotsch (email@example.com) is director and industry analyst for CCC Information Services, Inc.