While no automaker has explicitly mentioned manufacturing a car’s exact cost, there has been a significant curiosity about this mysterious figure. If you are one of these curious individuals, you have come to the right place!
In this article, we will provide an estimated breakdown of the various factors that influence the cost of making a car. In this way, you will finally gain some clarity regarding the question of ‘how much does it cost to manufacture a car?’
Types of costs
While the overall cost of a single model is dependent on many factors, each car incurs two types of expenses; fixed costs and variable costs.
Manufacturing any kind of model requires a significant amount of research and development. Other costs include maintaining infrastructure, facilities, prototypes, salaries of the workers, paying suppliers, and other such costs.
These expenses fall under the domain of fixed costs as they are inevitable and do not change regardless of the model of the car. Additionally, sending the decided prototype into production will increase this expense.
These essentially include all the required expenses during the production of the model. These are inclusive of the expense of raw materials, utilities in factories, maintenance of factories, labor, and other such factors that vary depending on the make, brand, and investment. This figure will be dependent on the number of units scheduled to manufacture.
Factors influencing the cost of manufacturing cars
While a rough breakdown of all the expenses provides better insight, the cost of manufacturing a car is still obscured by the auto industry. However, let’s take a look at the components contributing to the overall expenses of making a car.
Auto parts used to manufacture the final product are the most expensive part of the process of making a car. These are essential as each part contributes to the functional experience of the car. The cost of raw materials also determines the cost of the final product to some extent.
Shipping the tons of auto parts and raw materials from one manufacturer to another can make up a good chunk of the costs. Packaging the various components required for manufacturing a car can lead to hefty expenses.
Research and development
Research and development before a final model is determined is also an expensive process. Planning the structure of the car can be tedious and time-consuming, thereby demanding more investment. It is important as it helps the manufacturer decide the intricate details of the model he wishes to build.
These costs include factors such as transport of raw materials and warehouse costs. Any expense that occurs during the transportation of materials from the supplier to the factory can be considered as logistics costs.
The expenses required to run the factory efficiently, such as electricity, water, and fuel, fall under internal costs. These are essential to ensure timely work without any mechanical hindrances. The manufacture of cars involves the use of many fossil fuels such as CNG, diesel, and gasoline, the prices of which vary within a given period.
Greenhouse gas emissions cost
While this cost varies according to the regions, greenhouse gas emissions exist in allowances that are traded between different producers. There are laws in place that prevent the production of excessive greenhouse gases from these factories, and this is done through additional expenses such as fines.
The manpower required at factories for manufacturing a car is overwhelming. They essentially create the force behind the timely and meticulous production of each unit for the company. Since these workers require some technical knowledge, their cost has to be taken into consideration.
Once the manufacturing of the car is completed, advertisement becomes the next priority. Incurring this expense is important as it plays a role in deciding the success of the particular model. In turn, this increases sales and, ultimately, profits.
Manufacturers need to consider the expense of sales tax as a part of the manufacturing cost of a car. This determines if they make a profit and the amount of profit they are expected to garner. It is important to include sales tax in the production cost as it determines the final price of the vehicle in the market.
The types of expenses incurred in the process of manufacturing a car depending on the model of the vehicle and each company. Other contributing factors to the cost are dealership markups, overheads, depreciation, and other unpredictable factors.
While these factors make up most of the manufacturing expenses, the difference in price from the manufacturer to the consumer’s doorstep varies significantly. Additional factors such as loans, cost of tools, quality of auto parts, location of the factory, marketing, storage of raw materials, and many other expenses are incurred. So, how much does it cost to manufacture a car?
Calculating the cost of manufacturing a car
The closest way to finding an accurate number when it comes to calculating the cost of manufacturing a car is, dividing the cost of the car at the dealership in half. This method eliminates the additional cost incurred after the finished product is produced.
The percentage required to be subtracted from the cost at the dealership varies according to the model of the car. Additional costs post-manufacture fluctuate significantly based on the size of the car.
For example, a smaller car will have additional costs of up to 60% over the manufacturing cost. This is due to the small margin required to manufacture them, reducing the value of the car brand. A higher percentage is attached to smaller cars to cover costs and avoid losses.
Considering the additional expenses, car manufacturers receive an average profit margin of 5% for each car. This conclusion is reached by applying the formula of dividing the cost of the car received at the dealership by half.
Breakdown of the manufacturing cost of a car
The exact figure is impossible to determine; however, some studies have been conducted on specific parts of the automobile industry to introduce more clarity. A study conducted in 2012 called the Automobile Industry Retail Price Equivalent, and Indirect Cost Multipliers introduced a breakdown of the cost of manufacturing a car.
- Raw materials, which include auto parts, constitute a whopping 57% of the total price spent on making cars.
- Research and development, engineering, and ensuring the smooth functioning of facilities constitute 16% of the total cost.
- The average cost of advertising per unit sold was revealed to be $1,091, according to the study.
- The average expense added to each unit as dealership markups were $1,497.
- The estimated sales tax charged on each car is $4,984, increasing the final cost of manufacturing a car.
Similar to this study, a case study was conducted on a singular model from Ford, namely, the Ford F-150. The breakdown of this model provides a good idea of the exact elements that are responsible for increasing the cost of manufacturing a car.
Since we are looking at the Ford F-150 as an example, let’s take a look at the specific pricing on it in the United States. The sticker price of this particular model is $50,000. The presented breakdown of this price is that the average manufacturing cost of this Ford model was $27,000, allowing a profit margin of $13,000 for the company.
While this is a relatively close estimation of reality, let’s go back to the formula presented earlier. If one is to divide the sticker price by 60% to ascertain the manufacturing cost, the Ford F-150 will stand at $30,000 for making the car. 60% is taken as this model is bigger and has a higher price.
The high-profit margins presented in this case study beg the question of the overall cost of starting a new car company.
Cost of starting a car company
Building a manufacturing company from the ground-up would easily cost over 10 billion dollars. This estimation is merely for purchasing parts, setting up the foundation for the business, establishing an appropriate factory, and other basic requirements for a car company.
Additional costs, such as dealership markups, overheads, logistics, marketing, and other necessary elements require investment. However, a cheaper way of achieving a start-up is customizing old models to adhere to your niche. This could happen in the form of making a customized engine, changing the body of an old car, and several other ways.
This not only minimizes the cost of starting a company, but it also allows you to partake in the industry without a huge effort. This method would provide a good start at minimal cost as a 1 million dollar budget for this purpose is sufficient.
To sum up
The question of how much does it cost to manufacture a car varies widely depending on numerous factors. Each manufacturer incurs different costs depending on the model and design of each car. While a definitive figure cannot be ascertained, the overall expenditure of a car includes factors such as raw materials, research and development, factory expenses, and other such costs.