My young nephew recently asked me this question, and I had to admit I didn't have a clue what the answer was, so I though I would ask the backroom.
Do any of you wise and knowledgable people know how much it costs to manufacture a typical family car? I am not talking about the costs of sales and marketing, or the amortisation of design and engineering costs across the model's product life. Just how much it costs to actually make the thing.
How big is the difference between the cost of making, say a Range Rover from a Fiesta? Is there any proportional relationship between the cost of manufacture and the retail price? Do materials or labour account for the greater part of the cost of making a car?
Thanks!!
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Conventional wisdom used to be that big cars were relatively cheaper to make than small ones, therefore more profitable. It wasn't that they cost less to make than small cars, just that they didn't cost as much more to make as the difference in new purchase price tends to suggest.
Smaller cars need to be sold in very large numbers to make decent profit. That means huge investment in machinery for making them, and big problems for the company if people don't buy them.
In this general area, it used to be said that Austin-Morris in its various disguises made a loss on Minis having done its sums wrong. I wouldn't be at all surprised. The other thing that musclebound, moribund company did was refuse to let Alec Issigonis give the thing a proper engine and separate gearbox as he wanted. So the Mini wasn't nearly as good as it ought to have been.
I get a bit hot under the collar when I think about that period of the British motor industry.
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"a loss on Minis"
That tallies with the story that Ford bought an early one, took it apart and concluded that there was no profit in it.
IIRC, there was a Dagenham employee who was accused of assembling his own Cortina out of stolen parts (in the best Johnny Cash tradition) and Ford demanded compensation for the purchase cost. He defended himself on the grounds that it hadn't cost Ford that much, and they dropped the matter rather quickly when he threatened to reveal the actual amount.
You don't hear so much about development costs these days, but I believe it can exceed £1000m for major new models, and that has to be amortised somehow. No doubt why there is so much sharing in Asia.
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"I get a bit hot under the collar when I think about that period of the British motor industry."
Indeed. The motorbike makers were even worse!
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So if one drill bit does ten cars, do you allocate one tenth of the cost to a car, or nil?
Tell him there is no answer.
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>>just that they didn't cost as much more to make as the difference in new purchase price tends to suggest.
As in, just because a 2.3 litre Astra (£18,000) goes faster than a 1.0 litre Astra, (£9,000) how much of that £9,000 more can it really cost to manufacture; the engine is just a bit heavier and the brakes just a bit heavier after all.
It costs just 3p for a Chinese-manufactured IPOD socket for the radio, yet the extra is apparently £250.
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Yes. I seem to remember that when TV sets cost a hundred quid people used to say they only cost a fiver to make.
Isn't capitalism wonderful?
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It depends where the car is built!
On a very rough figure (gathered from some other auto forums), if the car is built and sold in same country, manufacturing cost is usually 40-50% of the OTR price.
However, as I said, it is very rough figure and varies widely among countries and manufacturers.
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What was that thread about Chinese-made 4x4s available for £500 (in China, and only to UN employees, admittedly).
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Yeah, and sorry for another post... but if you have to employ 1000 workers to make a car - which you do - are you going to allow the cost of the HR department who hire, fire and pay the staff? Or the accountants? (And if you don't count them, how are you going to know the cost of the car in order to answer OP's question? So if you include them, do you include...
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A bit like 'how long's a piece of string' really. But... I happen to know: cars cost more than seven pounds to make & a piece string is 32cm long.
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I have a couple of learned friends that work for "a large motor manufacturer". I'm told there is a 1000% mark up on optional extras. I'm not sure how much a set of fancy alloy wheels cost, but I'll bet it's not £hundreds more that there steel counter parts. It's got to have wheels, alloy wheels don't cost more to bolt on....
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My particular favourite is the £1500 sat-nav options.
These devices cost no more than £70 to build, and the software is generally nothing more than a heavily-rebranded variant of an off-the-shelf package that can be bought for a tenner a licence in bulk.
Complete and utter rip-off.
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I used to work for a car manufacturer, and the parts and build cost is approx 50% of the pre-tax list price.
Don?t forget that the manufacturer is a separate company, who then sell the car to the country sales organisation, who then sell to the dealer, who then sell to you. So, roughly (and ideally) the manufacturer makes 20-30%, the importer 10-20% and the dealer 10% (all gross margins). Of course all those margins get squashed by discounts.
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Didn't MG buy City Rovers from India for about £1500 a piece and the sell them to the British public for over £6000?
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I *think* (and could be a little inaccurate) that the build cost of a Ford Ka is between £1500 and £2000, that's just for the raw materials, energy and labour that is attributed to that one unit. It doesn't take account of R&D or things like that.
Mapmaker - there is definitely an answer believe me, the major companies know the actual unit build cost down to the penny, although obviously when setting a profit margin other things need taking into account such as R&D costs which are not a part of the unit build costs.
I just wish I had a better memory as I was once told the Ka unit build cost almost to the penny(probably shouldn't have been) but now all I can do is stab at roughly what the figure was. thanks to my decaying grey matter, I'm almost approaching my mid-twenties now. :-)
Blue
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By far and away, the highest cost of a car is the R&D. Tooling used to be very expensive but not so much with modern production techniques.
All manufacturers will have a business model for each variant which will attribute a portion of pooled costs such as labour, overheads, R&D, assets, buildings, insurance, energy, strategy, advertising, management, tax, etc etc to the cost of producing a car, as well as the direct costs such as raw materials and production costs.
The indirect costs far exceed the direct production costs.
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I recently coughed up £700 for a set of really nice functional straight spoked alloys in place of the rather dull standard items (admittedly the standard items languish in the dealer's premises, I could have had them but in the garage there is already as much rubbish as will fit round Toad).
The price of anything is what you can get for it.
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"Do materials or labour account for the greater part of the cost of making a car?"
Used to be labour, but probably materials by now. Overheads will be greater than both!
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>>Mapmaker - there is definitely an answer believe me, the major
>>companies know the actual unit build cost down to the penny,
Blue you are absolutely right (I presume, anyway) that car manufacturers track every penny of expenditure. You are also absolutely right that they know how *they* calculate the cost of a car, and they know what *that* calculated cost is.
However, there are as many *ways* of costing the cost of the car as you have had hot dinners.
So there is no answer to OP's question.
Imagine you have a burger van and sell 100 burgers every night. A bun costs 20p, a burger 10p and the slop that goes in, 10p. So each morning you spend £40. You sell the burgers for a pound, so every night you end up with £100 - £60 more than you had the previous morning, all of which contributes to the cost of the van and your own beer money.
Imagine you want to make more money, so you buy and sell 101 burgers. The cost of the extra raw materials is 40p. You make an extra 60p profit. Hurrah, we have an answer to the 'cost ' of a burger, 40p.
But hang on... you want to make even more money so you decide to buy and sell 200 burgers a night. But you have to employ an assistant - whom you pay £20. So your overall profit is £40 from the second hundred, so the cost of the burgers suddenly goes up to 60p. Hang on, I thought we knew the 'cost'.
But slip in an extra burger to 201 and the extra cost drops to 40p again.
Business booms, so you do another 100, for which you have to buy a second van and employ more staff.
What is the true cost of a burger? And imagine how complicated it gets when as part of the cost of buying the third van is employing an HR outsourcing company to run your payroll. What does that burger cost?
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Mapmakers right, as an aspiring accountant I can imagine that after doing the CIMA cost accounting exams you know there are 100 and 1 definitions of cost. - However which definition of cost comes closest to what the OP is asking?
As an economics graduate the cost of something must be the retail price minus the profit per car. With car makers and some dealers in loss we could conclude the cost of manufacturing a car, developing and distributing it is near its retail price.
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Torque means nothing without RPM
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However there are as many *ways* of costing the cost of the car as you have had hot dinners. So there is no answer to OP's question.
So what you really mean is that there isn't a single answer, there's dozens of them :-)
I totally understand your example and the effects of economies and dis-economies of scale etc. I would say that the figure that I was thinking of was a relatively straightforward one based on the current average production, of course unit costs will change drastically if production were to be altered.
Blue
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Here's one answer. Possibly not what you had in mind, but it might keep your nephew occupied...
en.wikipedia.org/wiki/Locost
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Best way, JBJ to do one of those is to search eBAy for 'unfinished locost'. Get all the expensive bits on the cheap!
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Good thought, MM. Could save a lot of work!
That Toyota-engined one (on the WP link) should go nicely.
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No, but I could be tempted. Mind you, that applies to lots of things...
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Thanks everyone, especially Bill Payer & Blue for the relevent info.
I will now pass this on to my nephew and await his next tricky question.
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You would be better off explaining to him that there is no simple answer to his question.
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And that, while manufacturers may well have a very precise idea of what it costs them to make a given car, they won't give the figure out even if you torture them to death.
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Ive worked for a few car companies in my time
It is certainly true that the cost to build a base model of a car type is only marginally less than the cost to build the top of the range model in the same range, while the price to consumer is often very much larger, the buyer of the top of the range model is typically subsidising the buyer of the cheapest model in the range
I remember a maker shipping some built cars with two sets of badges, the same car depending on the badge stuck on at the dealer was a 20 K price difference, strange but true, people really were paying for the badge
You will not be surprised to hear that building an identical engine with a few mm extra on the bore doesnt really cost any more, and that auto gearbox is often cheaper to make than the manual (but more expensive in the UK to end consumer)
All very complex, you build as cheaply as you can, but sell for as much as you can get
UK market is also swayed heavily by company car bulk buying, which leads to car purchasing styles not seen when the end punters pay for more of their own cars
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It can only be calculated at the end of the production run by dividing the number of cars made into the cost of the capital investment of the production line plus the parts and labour costs.
It's a bit like working out how much your car costs to run per mile. You only really know the capital [or 'wasting asset'] cost after you've sold it by dividing the difference between what you paid and what you got for it by the number of miles.
E.g. our second hand Passat cost £13,000 and was traded in for £140. It did 242,000 minus the 9,000 or so already on the clock. That's 1,286,000p divided by 233,000miles = 5.5p per mile.
We had it for about 11yrs so depreciation was just over £1000 per annum.
Moral of tale - buy well, make it last - and don't let petrol consumption worry you too much!
PS - wish I'd bought a new E Type and kept it! What should one buy now?
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re "wish I'd bought a new E Type and kept it! What should one buy now?" early mint scoobys will be worth a fortune in 20 years time, problem is same as E type though - keeping it for 20 years without it getting nicked
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A few years ago I remember reading that a Mondeo that retailed at £15k, cost £3k to manufacture.
Guess that is the incremental cost, doesn't include design, tooling, sales and marketing, taxes etc.
MVP
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I'm not an accountant (and neither do I want to be one) but to me this isn't or shouldn't be that difficult to work out. Here is my logic:
1. A manufacturer will know from its audited accounts how much the whole company has spent in the last year. Right from engineers' salaries, building rents/leases, depreciation, components bought in to loo roll in the toilets.
2. They will also know how many vehicles they have made.
Isn't the answer therefore 1 divided by 2 ????
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not this simple
especially when companies like general motors and ford are seen by the accountants as "large pension companies, and medical insurance providers, which just happen to make cars as a sideline"
like BT in telcos, the pension fund has become so big and financially significant in some car companies that making money is less to do with making cars and more to do with running the pension fund to maximise profit
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especially when companies like general motors and ford are seen by the accountants as "large pension companies and medical insurance providers which just happen to make cars as a sideline"
But still, that's all part of the bottom line and if those companies want to be as inefficient as possible that's their choice.
It's not as if Toyota don't have to pay for staff pension facilities and medical requirements is it?
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"I'm not an accountant"
Me neither, but I was thinking along the same lines, except that I thought that Sales less pre-tax Profit might be an easier way to arrive at costs. Of course, that will only give you an average figure for a range of vehicles, but it would still be an interesting exercise. No doubt the accountants will have arranged it to make the cost appear higher than it really is, though.
The OP's nephew (if he hasn't fallen asleep yet) will need to be told about Car Tax, VAT, dealer's markup and hidden extras, of course...
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I used to sell a certain make of East European car. In 1987/8 the base model sold for £3K. Out of that it was just possible to make a £1000 profit made up as £300 in the car, £300 target sales bonus, £300 finance commission and £100 for a PX banger sold to the local Gypsy trader!
Not all the time, of course. Come the 90s recession I was glad to sell one for £50 profit and another burden off my stocking plan!
I think the cars were landing at the UK import centre for well under £1000, as the distributors had at least a 3 hr. PDI + loads of electrical rectification even before release to their dealers. Most of ours required another 3 hours PDI before sale, too!
--
Roger. (Costa del Sol, España)
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In the late 80's I sold new BMW's.At that time the price difference beetween a316i and a 318i was £1000. Identical vehicles apart from the engine bore or stroke.Good profit for a sligtlly larger hole/piston or longer con rod.
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