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Cross-Border Car Shopping

The price gap puzzle Add to ...

<ORIGINALLY PUBLISHED APRIL 14, 2010>

Last week, the muscular Canadian dollar hit par with the U.S. greenback and Porsche Canada blinked.

Porsche cut prices across the board by as much as $9,000 without actually cutting prices permanently. Calling the price reductions “Canadian currency credits,” Porsche moved its Canadian pricing closer in line with prices in the United States.

“Canadian Currency Credits address the cross-border price disparity caused by a strengthening Canadian dollar,” said Joe Lawrence, Porsche Canada's president and CEO.

Porsche Canada, of course, is being careful to avoid permanently slicing prices. Lawrence was careful to point out that “Canadian Currency Credits act as an effective price adjustment during this time when the Canadian dollar is close to U.S.-dollar parity.” If the loonie goes down, away go the currency credits.

But Lawrence and everyone else in the business of selling cars should get used to parity. If you believe the experts, the economists, the gurus who read the tea leaves of currency markets and economic health, we should all get accustomed to a loonie of equal or better value versus the greenback.

“Most scenarios still point for a continued stronger Canadian dollar,” Firas Askari, head of foreign exchange trading at BMO Nesbitt Burns, said in a Reuters report. BMO Nesbitt Burns and Scotiabank are among many who believe the loonie will hover at around par for longer than it did in 2007-2008, when our dollar hit its all-time high of $1.10 in November, 2007.

Moreover, no one thinks the loon will drop anywhere near its all-time low of 61.84 cents (January, 2002) – not in the foreseeable future, not with commodity prices strengthening, Canada's stable financial sector, relatively low public debt and what now appears to be one of the few solidly growing economies in the developed world.

Unlike in 2007 and 2008, the Canadian dollar is unlikely to experience up-and-down swings in its value for some time to come. And unlike in 2007 and 2008, automobile manufacturers and distributors in Canada are better prepared to manage the stronger loonie.

In the past two years, many of them have lowered prices (to great fanfare and self-congratulation) on a reasonable number of models – particularly the most popular ones sold in Canada.

In those cases where prices have not officially come down, Canadian manufacturers and distributors continue to slap on hefty incentives that effectively lower prices wherever necessary to maintain sales.

That is not to say there are not large and dramatic discrepancies in new-vehicle pricing between the United States and Canada. And vocal critics of car pricing in Canada are quick to point out that in quite a number of cases it remains cheaper to head south and buy a new vehicle in the United States.

For instance, a 2010 BMW 7-Series 750i luxury sedan lists for $105,100 in Canada and $82,000 in the United States, about a $23,000 difference. Or take the Porsche Boxster: with the recent $4,000 currency adjustment, it lists for $55,600 in Canada and $47,600 in the United States.

Critical buyers are right to argue for a greater degree of price parity in those instances where the price gaps are oversized and tough to justify.

However, a Globe Drive analysis of the top 10 best-selling passenger cars and top 10 best-selling light trucks found the pricing gap between the U.S. and Canada exists, but it's not as wide as many might believe.

On average, the top 10 selling cars in Canada list for $425 more in Canada than in the United States. For light trucks, the gap is wider: light trucks on average are $1,558.60 cheaper in the United States. Overall, the price advantage in favour of U.S. vehicles comes to $991.90.

Of course, vehicles sold in Canada are not equipped, in all cases, exactly as they are sold in the United States. But it's pretty clear that Canadians on the whole are paying a price premium for shopping in Canada, though the gap is relatively small on average and virtually non-existent on many popular models.

That even though Canada is a more expensive place to sell and distribute vehicles. With a smaller population, greater geographical differences and unique regulatory environment, the cost of doing business in the vehicle sector is higher than in the United States with its much larger population base.

Interestingly, in some cases, Americans actually pay more. Take the Ford Focus. The basic Focus S sedan in the United States lists for $16,290, while in Canada the price is $14,999. So a Canadian buyer is looking at paying $1,291 less than an American. A basic Dodge Journey crossover in the United States lists for about $500 more than its Canadian counterpart.

Fans of Adam Smith and his Wealth of Nations argue that is this is exactly how a market economy works. Prices go up and down based on supply, demand and the “invisible hand” of the marketplace.

In short, manufacturers and their dealers in Canada and the United States price their vehicles based on competitive conditions. During most of the last decade, the Canadian dollar's volatility presented manufacturers with a situation in which pricing stability was difficult to maintain in light of the dollar's wild swings.

Car manufacturers and their distributors faced a similar but exactly opposite situation in 2002. The weak dollar at that time gave rise to concerns about the future of Canada's economy and even its future as a significant economy among the G8.

In the early 2000s, car manufacturers declined to make dramatic price increases to compensate for the weak Canadian currency. Similarly, now those same manufacturers have been careful with their pricing strategies in the wake of an appreciating loonie.

Despite the demands of critics, no one should expect to see Canadian manufacturers and distributors instantly adjust prices either up or down. Obviously the profit motive is at work here, but there is more to the story. Wild adjustments in new-vehicle pricing hold the potential to impact negatively on used-car values, upset the critical leasing market in Canada and anger owners who purchased vehicles at higher prices.

Canadian manufacturers tend to respond to an appreciating loonie by slapping on various incentives, including cash rebates and inexpensive financing and lease offers. They also frequently increase the value of the equipment content on models sold in Canada. The goal is to create something close to price parity on a monthly-payment basis. That keeps new-car shoppers mostly in Canada.

But there is no question that Canadian consumers in many cases retain the option of shopping in the United States, returning with a U.S. imported vehicle. Bringing a new vehicle into Canada is not a complicated process, but it does require a certain attention to detail – and it requires the owner understand and appreciate the implications on a new-vehicle warranty and the like.

In cases where the savings amount to thousands if not tens of thousands of dollars, cross-border shopping can be worth the effort.

 

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