Fun With Currency Conversion

With the Ford Motor Company bringing over most of their European small car lineup to the US in 2010 (or sooner, if the bailout money seems right and it'll help them revamp their plants, they don't really need the money), we should start hearing more and more about these incoming new models soon. Fortunately for Ford, they're all pretty universally hailed in Europe as top of their respective classes (we'll only be seeing the Fiesta and Focus from that list, at least for now), so we should hear nothing but praises for the quality of the cars, which will do wonders for Ford's image and just might get people excited about Ford again.

Unfortunately, there will probably one consistent wet blanket thrown over all of this enthusiasm for these cars, the pricing. You'll read that the base Fiesta with the Zetec 1.6L engine (probably the US base model) costs £12,331 to start, and that's about $18,400 US, far more than the current class-leading Honda Fit's $14,550. The Focus will have this same "problem" with regards to the Honda Civic, and the article in question will probably end with the same "Sure, it's a great car, but will Americans pay European prices for cars?" question, in keeping with the current trend of relentlessly pessimistic coverage of the American auto industry.

It seems to be a pretty damning point. Sure, it may be great, but an extra four or five grand over the top of what's already a pretty decent car? At that price, it'd better come with heated leather massage seats and a stereo system that can accurately reproduce a symphony orchestra instrument-by-instrument. However, as is so common these days when it comes to news coverage of the automotive industry, the media has and will probably continue to miss an important point: car prices don't directly follow currency conversion. Very little actually does, but when it comes to car prices, the difference becomes really obvious.

Just to pick an example, let's take another look at the pricing differences. Different engine specs make finding a direct comparison somewhat difficult, but the new Volkswagen Jetta 2.0L TDI diesel is sold in both the US and the UK. Prices start at £17,988 in the UK, which is $26,854. The cost in the US though, is $21,990, almost five thousand dollars less. This makes sense, as the price of something as expensive as a car should change with the value of the good itself relative to the local market. Just looking at currency conversion rates completely ignores big factors like transportation costs, materials and labor cost differences between production plants, demand, economies of scale for each country...there's a whole bunch of factors that effect the price of a car, only one of which is currency rates. In reality, prices between everything but six-figure supercars convert almost straight across between dollars and pounds, with only two or three thousand dollars tacked on when you move over from Europe, and vise versa. What does all this mean? That when Ford finally brings over the Fiesta at the end of next year, they're going to be in prime position to take the fight to Honda and their Fit, and I, for one, can't wait for the good press for Ford.