Wednesday, October 14, 2009

97 cents and rising

The Big Three auto manufacturers stuck it to Canadian consumers in 2007 and they’re sticking it to us again. 2007 was the last time the Canadian dollar rocketed toward par; and it was the last time the auto industry stiffed Canadian car buyers.

There is a fixed cost to manufacture a car. Car dealerships sell it for cost + their mark up. And that’s how business works. But in 2007 things changed fast. The Canadian dollar went from just under 85 cents in March to just over $1.10 in November, 8 months later. That’s 30% in 8 months!

The Canadian dollar had 30% more buying power. Or did it? Did GM reduce the Canadian dollar price of a Chevy by 30%? Not a chance! They kept the Canadian dollar price the same and pocketed the extra profit. Ford and Chrysler did it too. And if an adventurous Canadian tried to buy a car from an American dealership, he soon found it was forbidden. Toyota and Honda did the same thing. Canadian consumers did not receive the benefit from the rise in buying power of the Canuck-buck because big auto manufacturers forbad their US dealerships from selling to Canadians. The American auto business stiffed Canadian consumers in 2007.

And now that our Loonie is flying high again, we see the same outrageous profit grab! So far in 2009, the Canadian dollar has moved from 77 cents to 97 cents in 7 months – that’s 26% in 7 months. And if we check a few auto import websites, we see that we can save 10% to 30% by buying from the Americans, even after paying the extra shipping, duty, conversions etc. Why don’t we try calling a few American car dealerships and seeing if they will sell us a new car? Don’t forget to tell them you’re a Canadian. Will they refuse to sell a car to us again in 2009?

Now think back to March 2009 when the Canuck-buck was 77 cents. What other big news event was making headlines? Auto company bailouts? Canadian consumers and tax payers forked up a couple billion Canadian dollars to help these guys stay in business.

And now that the auto industry REALLY needs to sell a lot of cars, and now that Canadian consumers have picked up 26% in buying power in 7 months, you’d think they’d open the flood gates! American car companies should funnel those high priced Canadian dollars to buy new cars from American dealerships. Capitalism: it’s the American way. Isn’t that why American exporters like a lower US dollar – so their domestically manufactured products are more competitive in foreign markets? Isn’t Canada a foreign market? Isn’t this the perfect opportunity?

This is an example of how economic theory and reality don’t match: the currency exchange has moved favourably for the American auto industry and the Canadian consumer. But, somehow, American dealerships won’t sell cars to Canadian consumers. Neither is capitalizing on the big move of the Canadian dollar. And it’s the big car companies who are stopping it.

Ken Norquay, CMT
Financial Philosopher

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