A top-trim diesel duallie pickup will push the $100,000 barrier today. A Cadillac Escalade or Lincoln Navigator will crack it. Stuff of fantasy a few years ago. I own a 2008 GMC Denali with everything. I still have the sticker: $48,000 and change.



Fast-forward to 2015, when I bought a new GMC Yukon XL Denali for a bit over $70,000. New Tahoes can be close to $70,000 now, Yukons even more. What is happening here? Is it just too much? Will customers revolt? What are manufacturers thinking? Truth is that pricing has been skewed to the products the public wants. Product planners have to marry two totally different portfolios: The first is a lineup that will trigger lust in the buying public. The second has to meet increasingly stringent fuel-economy regulations and electric-vehicle mandates.

EVs and hybrids, despite breathless, unrelenting media hype, are not in great demand. Every American thinks their neighbor should buy one. But sadly, these must be sold, and in sufficient quantity to satisfy the government. That means low prices, low lease rates, and, in almost all cases, losses for the manufacturer.

The big companies have also wasted enormous sums of capital on fuel-average-enabling small cars, like the Ford Fiesta and the Chevrolet Sonic and Spark. They sell below cost and, after a few years of generating losses, are left to die—if the mandates can be fulfilled without selling them in volume. Meanwhile, Impala and Taurus sedans languish on dealer lots as F-150s, Silverados, and Ram pickups fly off them.

Full-size SUVs, large crossovers, anything high and with all-wheel drive is hot. Car companies need to remain solvent, so they adapt: "If we lose money on those, we’ll compensate by pricing more on these." And the public, so far, accepts it.

American car buyers are not price sensitive; they are monthly payment sensitive, and it doesn’t matter how many years their loans go. As a result, financing periods have evolved from the old 36-month norm to 48 months, then 60 months, and recently 84 months. The car will be worn out before it’s paid off, and the customer has negative equity for almost the whole financing period.

Leasing is another way out. A lease is essentially a customer covering a vehicle’s depreciation while driving it. A vehicle that is sought after depreciates less than a wallflower. Thus, the seemingly insane situation where a slow-selling luxury sedan can have a much higher monthly lease rate than far more expensive full-size pickups or SUVs, which enjoy great demand as two-or three-year-old, off-lease vehicles.

Most manufacturers manipulate lease rates by absorbing the difference between the calculated residual value and the lower real-world one. It’s a hidden incentive called "subsidized lease," and it accounts for a lot of sales. So, "list price" isn’t really that, and "lease rates" that cover depreciation usually aren’t that, either. Loading pricing on hot vehicles while losing money on the less desirable is becoming a ubiquitous yet dangerous practice. It’s bound to continue until governments adopt fuel-economy and CO2 regulations that are less at odds with how consumers select their next ride.

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