GBP depreciation vs future VW Cali Price

[VW Cali]

With cable (GBP/USD) now below 1.30 a natural question is what happens to both used and new Cali prices.

Actually of course for UK residents it is the EUR/GBP exchange rate that matters.

Now one would hope - wishfully - that the worst of the exchange rate depreciation has come but that is not how currency markets operate. They do not operate linearly either, but overall there is significant potential for a much lower GBP in the next 12 months or so.

Against this are the serious economic problems in Europe, so two bad currencies competing may mean GBP does not do as badly against EUR as vs USD.

Now question is what will German car makers do with UK prices if GBP depreciates further. I know that they usually hedge with FX Forwards out to 1 year at least but with delivery of currency delayed out to 3 years. This would mean that they can likely hold prices for a year if they wanted. Some manufacturers buy options with delayed delivery, or in some case cases compound options with delayed delivery (options on options).

All these mean that prices need not be raised immediately.

Of course raising prices is not independent of the domestic market you sell in. If the domestic market is in recession it is not sensible to raise sticker prices. Now this would affect car makers as a whole across their whole range of models. Will GBP consumers see higher newer car prices due to significant reduction in exchange rate? My view is that it won't be so for 12 months or so especially if the economy is in recession. Indeed, there may even be better deals on offer. And probably are.....

Regarding VW Cali alone, I suspect given its limited numbers and very high profit margins for both dealers and VW, I doubt its new price will be reduced due to an economic downturn. On the other side, it may be held rather than increased even if exchange rate heads further south. However I would expect used values to become even firmer.

In general, after every economic downturn, the differential between new and used narrows. Calis are already the tightest such differentials I have ever seen, but most likely due to limited supply. If new Cali prices go up due to exchange rates, I exoect used Cali prices to respond.

This whole thing is kind of an interesting issue when one factors in relative economic perfornances of countries and regions, non trivial movements in exchange rates, how manufacturers hedge their exchange rate exposure, and domestic demand for a particular type of vehicle.

I also do not think staycations will have much of an effect on Camu prices. First, I do not expect staycations to increase by much because of exchange rates alone. These would increase only because of job insecurity in the UK (a palpable risk), or perhaps the general security situation abroad. But I don't see a direct impact on Cali demand domestically.

Overall, I feel that for the Cali on its own prices are going to stay firm, both new and used, for a while yet.

 

[Stoneybroke]

Gosh, a bit early for all that economics stuff
But yes, I tend to agree that high desirability and demand will bouy up Cali prices - both new and used.
One other question is will the BoE base rate drop lead to a lowering of VW finance offerings? I doubt it!

 

[Loz]

One other question is will the BoE base rate drop lead to a lowering of VW finance offerings? I doubt it!

Just what I was wondering, it might be the case that we go with VWF initially, then arrange cheaper finance once it filters through to the market and pay it off.

 

[VW Cali]

Gosh, a bit early for all that economics stuff
But yes, I tend to agree that high desirability and demand will bouy up Cali prices - both new and used.
One other question is will the BoE base rate drop lead to a lowering of VW finance offerings? I doubt it!

Oh, I don't bother with economics and economists (apologies to any of such profession here).

Not too early though. Always fun to think early than an "oops" later.

Btw, your user name suggests you could be Rentech...

 

[VW Cali]

Just what I was wondering, it might be the case that we go with VWF initially, then arrange cheaper finance once it filters through to the market and pay it off.

In my view the base rate means nothing at these levels. I mean what room do they have to play with? At any rate, very blunt and inadequate instrument especially as it hardly filters down to consumer level (unless explicitly linked contractually as in tracker mortgages).

But your overall point is correct. Best to get VW finance, then pay it off with cheaper financing if you can find it. Not sure what banks are charging these days though. Another point is that if still on VW finance they will likely treat you better for servicing etc as car technically still belongs to them.

The cheap funding cost arbitrage has been open to large firms since QE back in 2008. Over valued stock market as companions borrow super cheap to buy back own stock and pay taxes off shore jurisdictions.

Funded by us ultimately....through taxes, financing of consumer goods, VAT etc.

Anyway, all off topic. Kind of anyway. If you can get better than VW finance do let me know.

 

[Victor]

Cali is NOT high margin for dealers, they would rather sell a Transporter over a Cali hence why most dealers have little interest in selling them.

 

[VW Cali]

Cali is NOT high margin for dealers, they would rather sell a Transporter over a Cali hence why most dealers have little interest in selling them.

Thanks Victor.

I was just going by what VW Van dealing in Calis told me. In his own words "In England because of high prices, sell 2 a month and dealers can take rest of month off."

It sort of made sense to me for following reasons:

1. High base price compared to other VW Vans.
2. Specialist vehicle with low turnover compared to other VW Vans.
3. Relatively price insensitive customers compared to other VW Vans.

Taken together, 1, 2, and 3 above suggest is a low volume, high margin vehicle (per unit sold). In contrast other vans fit more the high volume, lower margin desciption (per unit).

I would have bet my bottom dollar that is the case but your very definitive statement on above intrigues me.
Perhaps you elaborate further, and I shall understand better.

Rgds.

 

[X28art]

When we were looking for a brand new Cali we called arounds loads of dealers and most never bothered to return our calls. It always felt like you were creating hassle for them, when we finally did buy our cali from Guy at Preston he did say the margins are very tight on the Cali. However recently I needed a T6 Transporter Panel van for work and all the dealers were biting my hand off - totally different experience to buying the Cali.

 

[VW Cali]

When we were looking for a brand new Cali we called arounds loads of dealers and most never bothered to return our calls. It always felt like you were creating hassle for them, when we finally did buy our cali from Guy at Preston he did say the margins are very tight on the Cali. However recently I needed a T6 Transporter Panel van for work and all the dealers were biting my hand off - totally different experience to buying the Cali.

Thanks.

That is indeed interesting. Does it mean that margins on Calis per unit are lower than margins on vans?

There are other factors to consider. The ease of selling, the wait, number of production units etc, plus actually sales incentives. I am not a car principal, but I would suppose if I were ever one I would inventivise my sales staff to focus on readily available bread and butter rather than occasional Beluga caviar. This wouldn't mean that profit margins on caviar lower per unit than bread and better - in fact rather the reverse.

Rather it is to do with overall annual profitability, which is simply profitability per unit multiplied by units sold.

If a sales person lost sight of this fact and concentrated on rare high margin product I woukd not be happy.

Conceptually, for me, my points 1,2 and 3 above still stand. So it still makes sense to me that it is a rare high margin product.

In fact, this is a common phenomenon with all high end products. An Audi R8 V10+ at 150,000 GBP has much higher margin than an Audi A3 1.6 diesel. Rarer too plus with less price sensitive customers.

Could it be that there is a psychological disposition to believing that VW are not charging too much profit for the product. But why would they want to sell a rare high end product for little profit for themselves and dealer?

I can't get my head round that.

But open to all explanations (rather than definitive statements).

Cheers.

 

[Rich20]

OMG, fascinating stuff but I was more worried about what I was going to have for tea.

 

[Amarillo]

Guy at Preston he did say the margins are very tight on the Cali

I would not expect a dealer to say anything else! A suck through the teeth, and a "perhaps I could push it to 0.25% to match the Bank of England - very tight margins y'know" might be what I would expect when asking for a discount.

 

[VW Cali]

OMG, fascinating stuff but I was more worried about what I was going to have for tea.

Depends on whether you want a digestive biscuit with your PG tips tea, or scones at Claridges or the Ritz!

 

[GrannyJen]

OMG, fascinating stuff but I was more worried about what I was going to have for tea.

A rich tea biscuit?

 

[VW Cali]

A rich tea biscuit?

Half of one, unless you own a 4 Motion.

 

[DavidofHook]

When we were looking for a brand new Cali we called arounds loads of dealers and most never bothered to return our calls. It always felt like you were creating hassle for them, when we finally did buy our cali from Guy at Preston he did say the margins are very tight on the Cali. However recently I needed a T6 Transporter Panel van for work and all the dealers were biting my hand off - totally different experience to buying the Cali.

Could it be that the Cali is 'complicated' compared with a Transporter? "All those batteries, all that roof going up, then you have the straps if the roof fails, those tables and the chairs in the back, that means that i have got to LEARN all about that stuff. Much easier to leave those vehicles to some one else and concentrate on the simple stuff like the vans"?
Or am I just being cynical?

 

[VW Cali]

Could it be that the Cali is 'complicated' compared with a Transporter? "All those batteries, all that roof going up, then you have the straps if the roof fails, those tables and the chairs in the back, that means that i have got to LEARN all about that stuff. Much easier to leave those vehicles to some one else and concentrate on the simple stuff like the vans"?
Or am I just being cynical?

There is no doubt it is more complicated.

But that is just one side of the equation. The question is whether the extra complexity is reflected by the actual difference in price.

This is simply not my experience of more complex high end products. The higher price tends to represent not just greater sophistication but greater profit margins per unit.

Kind of the way the world works as I know it. Does not mean I am correct. What does surprise me is the degree of definitive confidence in some of the posts that it is not so.

 

[DavidofHook]

There is no doubt it is more complicated.

But that is just one side of the equation. The question is whether the extra complexity is reflected by the actual difference in price.

This is simply not my experience of more complex high end products. The higher price tends to represent not just greater sophistication but greater profit margins per unit.

Kind of the way the world works as I know it. Does not mean I am correct. What does surprise me is the degree of definitive confidence in some of the posts that it is not so.

I'm sure that you are right but consider this.
When we bought our Cali in 2012 an equivalent Bilbo machine cost much the same. Two entirely different processes to build with perhaps VW's being cheaper to construct but much the same price in the end.
So what happens to the profit margin there?
Or is it just the market which pulls down the price giving a profit margin that VW are telling us is low? Which I would find surprising.

 

[VW Cali]

I'm sure that you are right but consider this.
When we bought our Cali in 2012 an equivalent Bilbo machine cost much the same. Two entirely different processes to build with perhaps VW's being cheaper to construct but much the same price in the end.
So what happens to the profit margin there?
Or is it just the market which pulls down the price giving a profit margin that VW are telling us is low? Which I would find surprising.

Some thought provoking questions there...

My view still is that profit margins are higher on high end low volume products. Customers are less price sensitive too, and lead times are longer.

To my mind as simple as that. Sticking to cars only a Ferrari 458 is not 10 times an Audi A3 as a car even though the price can be.

In fact I cannot think of a single counter example from any category of product. Automotive, culinary, financial, electronic, and even in service industries.

Can anyone think of such a counter example? It would be very illuminating for me.

What is interesting is the psychological decision to go with one explanation or other. I have a suspicion most of us, including myself, choose explanations that are more comforting rather than more logical. Why would we not want to believe that the additional price of a Cali over a Transporter is almost entirely due to higher tech and complex manufacturing rather than increased profit margin? Our psychological predisposition is to want to believe that it is solely due to sophistication of product. Natural and understandable bias too.

So for this very reason even the straightforward explanation by a friendly Cali dealer to me, "margins on Calis in UK are so high that if you sell 2 a month sales can take the rest of the month off" has either been discounted or denied.

Finally, the UK consumer has always paid higher margin for lower quality products compared to consumers elsewhere. Even for train tickets, and water utilities, the French and German holding companies charge much higher profit margins for UK consumers than in their other markets. While at the same time spending less on infrastructure improvement in UK compared to their other markets. This is a fact, but often lost in the general acclaim of economic liberalisation that started under Margaret Thatcher.

So I think this compounds the effect too. We are not culturally disposed to questioning or understanding why the price is what it is, even though Napoleon memorably once described us as a "nation of small shopkeepers."

 

[larrylamb]

I think dealers like Guy at Preston give the best discounts and accept lower margins to achieve far higher sales figures. So many people on the forum from all over the country seem to get several prices then finish off buying one through Guy at Preston. A quiet Cali salesman with higher margins may be very happy with 2 sales per month. One thing is for sure, better to buy your Cali from someone who knows the product well.

 

[Geezso]

There is no dealer profit margin from new vehicles. Its commercial sales, all about numbers hence discounts.
I repeat, no profit from the sale.
And for resale value, who cares, unless you want to sell it, if you do, don't buy it.

 

[Stoneybroke]

Oh, I don't bother with economics and economists (apologies to any of such profession here).

Not too early though. Always fun to think early than an "oops" later.

Btw, your user name suggests you could be Rentech...

Rentech - who? Certainly not me.
I'm not an economist either (though I do have an O-level in it!)

 

[Geezso]

Rentech - who? Certainly not me.
I'm not an economist either (though I do have an O-level in it!)

Home economics is different

 

[Amarillo]

Can anyone think of such a counter example?

High end low volume products under development are often low margin or even at loss.

I'm thinking here in particular of Siemens building of the Pudong Airport MagLev which hurls passengers 30 Km in 7 minutes 20 seconds, thanks to soft loans from the German government.

But one offs do not disprove your point. I would not expect a low volume high end product with few competitors to be low margin.

 

[Stoneybroke]

Home economics is different

What, at a boy's grammar school - never!

 

[VW Cali]

High end low volume products under development are often low margin or even at loss.

I'm thinking here in particular of Siemens building of the Pudong Airport MagLev which hurls passengers 30 Km in 7 minutes 20 seconds, thanks to soft loans from the German government.

But one offs do not disprove your point. I would not expect a low volume high end product with few competitors to be low margin.

Tom, yes, exactly.

High end products based on R&D as you mention are rarely cheap as you say. As with Siemens' example of the Maglev train there are significant costs during the development cycle. Within the VW group the Bugatti is an example because of the R&D it involved.

If I remember correctly, the VW CEO even once claimed that each Bugatti was sold at a serious loss. They retailed at EUR 1 million each, and he claimed the cost was EUR 5 million each.

But this takes us to how large companies do accounting too. Accounting is not a unique science and costs are often moved around.

At any rate, I doubt that Cali is that high tech when small companies were modifying and selling camper vans adapted from VW vans. So there were clearly margins and all extra cost not necessarily reflected by increased technical complexity. Add to that economies of scale of large scale manufacturing snd likely cheaper for VW to produce in house than for after market companies to adapt on basic van design.

Having said that, I am very intrigued by Geezko's comment that there are no profits on the VW Cali because these are commercial vans.

This statement is very definitive. He has not explained it, nor has referenced either the dealer comment I referred to nor the above discussion.

But there it is: a definitive black and white statement without explanation. So if he explains it maybe I can start to understand. I am not there yet.