[Carflation Era] Prices Soar Overnight... Why Are Car Prices Skyrocketing?

Raw Material Costs Up... Supply Disruptions Amid Steady Demand
Specifications Adjusted Through Model Year and Facelift Changes
Price Increases Expected to Accelerate in Second Half

[Image source=AP Yonhap News]

[Asia Economy Reporter Choi Dae-yeol] The upward trend in car prices is becoming serious. With raw material prices soaring, production costs have increased, and as demand surges, automakers feel less burden in setting higher vehicle prices. Although prices have already risen significantly, the consensus is that the rate of increase will accelerate in the second half of the year.

According to the industry on the 1st, Kia has decided to price its upcoming electric sports utility vehicle (SUV) EV9, scheduled for release around April next year, between $55,000 and up to $70,000 (MSRP, Manufacturer's Suggested Retail Price). This is roughly on par with the U.S. selling price of Genesis's mid-large SUV GV80.

The domestic selling price has not yet been finalized but is expected to approach 70 to 80 million KRW. Kia's decision to price the EV9 relatively high despite not being a luxury brand is due to the sharp rise in raw material costs such as steel sheets and batteries. Typically, electric vehicle sales volumes vary greatly depending on subsidies, and manufacturers often reduce their margins to lower vehicle prices. However, at the currently considered price, there is a possibility that buyers may receive only half or no subsidies at all.

Hyundai Motor's first dedicated electric vehicle, the Ioniq 5, recently underwent a model year update, increasing battery capacity and adjusting some specifications, resulting in price hikes of 3.1 million KRW and 4.3 million KRW per trim. Additionally, depending on preferred options, prices increased by tens of thousands to hundreds of thousands of KRW, meaning actual buyers now pay about 5 to 6 million KRW more.

It's not just electric vehicles that have become more expensive. The Hyundai Grandeur, which is set for a full model change at the end of the year, saw a maximum price increase of 1.92 million KRW with its May model year update, and the recently released Sonata increased by 970,000 KRW. Kia's small SUV Seltos, popular among young professionals, saw its lower trims rise by 2.16 million KRW with the recent facelift model. Even the cheapest model now exceeds 20 million KRW. Adding various options on higher trims pushes the price beyond 35 million KRW, a price range that a few years ago would have been typical for a mid-size SUV.

Tesla frequently raises prices depending on raw material costs and vehicle supply conditions. The popular Model 3 Long Range has been increased six times this year alone, nearing 85 million KRW. Until early last year, it was priced just under 60 million KRW to qualify for subsidies. The Model Y Performance trim's base price exceeds 100 million KRW. Korean GM raised the price of its main model, the Trailblazer, by 500,000 KRW with the April model year update and recently increased it by another 500,000 KRW without any other changes.

In May, Hyundai Motor's 'The New Palisade' was unveiled at Loop Station Ikseon in Jongno-gu, Seoul. Photo by Jinhyung Kang aymsdream@

The primary reason for the price increases is the rise in raw material costs. Since the end of last year, as COVID-19 became endemic, demand for most raw materials like iron ore suddenly surged, but supply could not keep up, causing severe supply-demand imbalances. For electric vehicle batteries, raw materials constitute a large portion of production costs. Based on monthly lithium-ion battery import amounts and weights, prices appear to have risen by more than 10% compared to the end of last year.

New car demand remains strong, and production disruptions have been prolonged due to the impacts of COVID-19 and war, leading to severe delivery backlogs. The shortage of vehicle semiconductors and other parts has lasted over two years, preventing almost all automakers from producing at full capacity. If the parts shortage were limited to one or two manufacturers, consumers could choose other brands, but this production disruption affects everyone. Hyundai and Kia alone have about 1.1 million units waiting for delivery domestically.

The 'supplier's market' is likely to continue for the time being, as there is no sign that the semiconductor and parts supply shortage will ease within the year. Price increases may become even steeper. The price hikes from earlier this year are now being reflected in finished product prices. Hyundai and Kia, which posted record profits in the second quarter, recently declared in conference calls that they will reflect increased material costs in prices from the second half of the year onward.

Professor Lee Ho-geun of Daeduk University said, "It is highly likely that the parts supply shortage will not stabilize until the first half of next year," adding, "Until production increases and delivery delays are resolved, so-called 'carflation' will inevitably continue."