When asked whether or not he runs a car maker firm, the boss of Rolls Royce, Mr. Torsten Muller Otvos adamantly refused, stating that he runs a luxury goods business.
As per his sentiments, when you conduct business with Rolls Royce, you are simply not purchasing a car, rather you are purchasing a dream!
The Hype Around Luxury Cars
That’s because such cars will normally be swathed in leather, and come equipped with the latest racing-car technology.
Additionally, these cars will be quite expensive and have little to no correlation with some of the regular cars we see in the auto industry. Indeed, the likes of Italian sports car firms such as Ferrari (ran by Chairman John Elkman) are experiencing a rise in its valuation thanks to all the hype around them.
So much so that Aston Martin investors in 2007 bought a part of Ford for $1 billion with the objective of reaping great rewards.
Evidently, an IPO in the coming weeks is expected to bring the firm’s value to around $5bn. Such massive numbers clearly demonstrate how a scant similarity to a given auto manufacturer can improve mass-market distribution.
Currently, there are about six firms that are at the peak of the luxury car sector, where prices of cars begin at a whopping $200,000.
These companies, in particular, are McLaren, Lamborghini, Bentley, Rolls-Royce, Aston Martin, and Ferrari. Additionally, there are a couple of other firms that play high-end stakes, with the likes of Italy’s Pagani constructing hypercars whose prices start at $1.4 million.
Fewer Production Numbers, Higher Prices
According to data released by JATO Dynamics, such high-end luxury firms made sales of about 29,600 cars last year, in comparison to 86 million of sales made by regular carmakers the same year.
With the likes of fine watches and superyachts, high-end vehicles have experienced a massive surge in sales as a result of an increase in wealth, especially among millennials.
That being said, annual growth is set to be at 10% for the next coming years in the car luxury industry, as compared to the 3% expected for the automotive industry as a whole.
Which begs the question; why are luxury cars so expensive? The popular belief is that these luxury cars cost more because of their expensive production materials, better options, and superior parts.
However, this is partly true…
For example, let’s take a look at leather seats. Even though the typical leather seat costs two to three times more than the regular cloth or vinyl, it is not enough to warrant such an extraordinary cost difference!
High Prices for Luxury Cars
The main reason as to the inflated prices in the luxury cars industry is primarily due to production volume. Indeed, such cars are incredibly expensive to develop and rare to find. Automakers could spend massive hours and hundreds of millions of dollars building these vehicles from the ground up.
Moreover, apart from the massive development costs, the company also has to look at factors such as the robotics that handle the assembly process, training and paying the assembly line workers, and last but not least, configuring and tooling the manufacturing plant.
For example, Toyota spent about $2 billion manufacturing the Tundra.
Breaking down the Numbers
Now, such a massive cost has got to be distributed evenly across every car that is sold. Which affirms that a limited production vehicle needs to have a steep price to cover all the costs that were accrued during the manufacturing of the vehicle.
Which means that if you pumped about a billion dollars in production costs for a car model that sells an average of 20,000 units a year. Then you’ll need to sell each unit at $20,000 for the next 5 years to begin to see a healthy break even.
Indeed, you will also have to factor in that the company will have to purchase all the spare parts and assemble them at a factory. Conclusively, the math becomes pretty simple once these facts are outlined.
Individual car models normally cost hundreds of millions of dollars to develop, and not considering the costs of setting up a manufacturing plant, it’s crystal clear why some of these luxury car brands sell their vehicles at such exorbitant prices.
Last but not least, most of these companies bank on having an impressive name through aggressive marketing and advertising strategies. With such remarkable hype around them, it only makes sense that they dictate such high prices.