Ukraine war spurs decline of the affordable car

Almost one hundred years after Henry Ford unveiled his Model T for the masses, European manufacturers did their bit to further widen the availability of affordable cars, with the introduction of the modern city vehicle in the 2000s.

The 2003 renewal of the Fiat Panda and the launch of Volkswagen’s supermini Up model a few years later – both priced at less than € 10,000 – exemplified a new line-up of cheap cars that helped those on modest incomes buy a fresh set of wheels even in the wake of the financial crisis.

Such models remain popular, accounting for roughly 7 per cent of the European market each year, and – until recently – helping to keep the price of larger second-hand cars in check too.

Now, with wages falling in real terms almost everywhere in the developed world due to persistent inflation exacerbated by the war in Ukraine, those hurt by the current economic crisis are in danger of being priced out of the new car market entirely. This time, most large manufacturers show little interest in coming to the rescue.

Affordable compact and subcompact cars were already in short supply before Russian president Vladimir Putin’s invasion of Ukraine. Faced with a chronic shortage of semiconductors due to the Covid-19 pandemic, manufacturers prioritized production of higher-end vehicles, helping the likes of Mercedes-Benz and VW post bumper profits despite selling millions fewer cars overall. Investors have taken note, pressuring car groups to abandon budget segments for good.

As a result, the number of city cars manufactured in Europe each year has dropped from 1.13mn in 2019 to 787,000 in 2021, according to analysis by LMC Automotive. Worse, this number is set to decline, to 584,000 by the middle of the decade, as brands shelve more than half of the currently available entry-level models.

Executives have increasingly made it clear that they are not focused on entry-level vehicles. Mercedes hived off its Smart brand to a joint venture with China’s Geely in 2019, while Stellantis brand Opel dropped its Karl and Adam minicars before the pandemic.

VW will not replace its Up when it reaches the end of its cycle, while Renault is discontinuing the Twingo. The French brand’s boss Luca de Meo echoed several other auto managers in citing the costs of complying with ever stricter EU engine emission rules as a drag on the already thin profits made from low-end vehicles.

Buyers turning to second-hand cars instead will find few bargains there either. The price of a used Opel Astra, for example, rose by almost € 2,000 in the 12 months to February, to € 12,322, according to data from AutoScout24, a leading European classifieds site.

Yet it is the rapid transition to electric vehicles that threatens to kill off the affordable car for good. Already, VW, which is spending € 52bn on EVs in the largest investment of its kind, has held back from producing a battery-powered model priced at € 20,000 until 2025.

The company, which is also facing fierce competition from smaller, cheaper EVs produced by Chinese rivals, has the technology, but cannot make the economics of such a car work. “We could probably be present in [the micro EV] segment, but we don’t see it as very profitable so it’s not really where we want to be, ”one VW executive told the Financial Times.

Managers at the company used to show a chart in which battery costs reduced over time, while combustion engine costs rose, leading to parity by the middle of the decade. The Ukraine war has almost certainly ruined that equation.

Typical battery costs have soared by roughly $ 7,000 per vehicle in the wake of Russia’s invasion of Ukraine, according to analysis by IHS Markit, due in part to soaring nickel, cobalt and lithium prices, which had already increased by 36 per cent, 125 per cent and 750 per cent respectively in the 12 months to January 2022.

Even China’s heavily subsidized micro EV makers are feeling the pinch, making exports to Europe less likely by the week. Eunice Lee, auto analyst at Bernstein, points out that Great Wall Motor stopped taking orders for its Ora Black Cat and Ora White Cat city cars – priced between € 8,000 and € 10,000 – in mid-February. This came after brand boss Dong Yudong revealed that the company loses Rmb10,000 ($ 1,600) per vehicle sold. “We expect some of [the micro EV brands] will exit the market, ”said Lee.

In 1909, Ford famously promised to “democratise the automobile”. Two world wars did not manage to deter him from getting close to that goal. This time round, prolonged conflict in Europe looks far more likely to force a decades-long rise in car ownership into reverse.

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