Monday, February 18, 2008

Toyota drops Canadian prices - but not enough?

Toyota Canada lowers prices on five models.

It has become well documented that it is significantly cheaper to buy a car in the United States than to buy a similar car in Canada. And Canadians will typically demand pricing north of the border to better match those found south of the border. After all, we have free trade, right? And the cars are not travelling any further to sell in Canada as they are to sell in America, right?

Whether it's prices on books, or food, or clothes, Canadians love to cross the border and shop till we drop, especially if we can get to a state like Pennsylvania where there is no sales tax.

Problem is, it's not quite possible to expect similar pricing in these two separate and distinct countries, once we think about it.

As long as I've been alive, Canada has been a country with a weaker dollar in comparison to the United States. In my lifetime we've had a dollar worth as little as 60 cents US. We, as a country, have developed into a producer nation who exports its goods, and the relatively cheap dollar means we can move our goods. Wonderful. In short, Canada tends to be a seller, and a low dollar makes selling easier. Canada is on the supply side. With our lower value dollar, buying is more difficult. Since it is expensive to buy, we tend not to be on the demand side (this is a generalization. In order to supply, we still must demand raw materials, tools, machines,
etc., in order to process our supply, granted).

On the other hand, the United States is a demand economy. Americans buy. With 10x Canada's population, they consume more than we do, and their market size and willingness to buy gives them negotiating power with sellers who want their business. America's buying power gives them leverage on prices, which is what makes things cheaper in the US. As seller nations compete for America's patronage, they compete on price, and Americans can get raw materials more cheaply than other countries. America then, has maintained a higher dollar to increase their buying power, which is what allows them to provide their citizens with affordable goods (again, a generalization: in order to buy, one must have money, which requires selling
something to generate buying power, granted).

Prices negotiated also include side deals, kick backs, trade agreements. If I will buy x tons of your cars, you will sell them to me at this price, and we will promise to buy x tons of some other stuff you sell. Canada can't negotiate pricing with same leverage and clout that the US can, so our items will always be more expensive. We don't come to the table with as big a bag of money as the Americans, and we can't demand as much product from sellers since we are 10x smaller, so there's less incentive for some seller to drop prices for sale to Canada, and less opportunity for them to recoup any discount with sales of other goods. Volume creates leverage. We don't have the volume, or the money to spend, so how can we expect the discounts?

There's another nation out there well known for a high value currency. Yep, the UK loves having a pound that fetches more than CAD $2. But, the UK has also been known as NOT a producer (when's the last time you bought something "made in UK"?) and a nation of high unemployment (of course, they're not building anything, so who's working?) America is headed in that direction. To maintain a high value dollar is to make it more difficult to sell, which means layoffs, which means more people with less money, which means less demand, which means less power to negotiate pricing - this is part of the reason we're today seeing the American dollar at historic lows.

America is a foreign country, a sovereign nation. It's not just another Canadian province. What they do to get their pricing, they do. If we want their pricing, we have to do what they do to get it. And we can't. We don't have enough people to create demand leverage, and the people we do have are employed producing supply of natural resources (mining, lumber, water, etc...) which we have to sell, and a high dollar will impede our ability to sell until we shift our focus away from price and onto quality (provided we can convince buyers that our nickel and water and wood are better than the next guy's). If we can't, and price remains king, we will only see comparative pricing with America as America itself lets its dollar value erode.

Think about this: as cold as it is in Canada, there are 0.6 cars on the road for every person with a valid driver's license. In the US, there are 1.0 cars on the road for each valid DL out there. In other words, even at a per capita measure, Americans buy almost twice as many cars as do Canadians. Now multiply that by the sheer number of Americans there are more than Canadians, and we begin to appreciate that their consumer footprint is exponentially bigger than ours.

In the meantime, if you are in the market for a new car, investigate whether buying state-side works for you. It has been documented plenty that, even after tariffs, taxes and conversion costs are factored, it's still cheaper to buy in the US.

What about Canada's need for tax revenue? They'll get it from the import tariffs and taxes on conversion services, they'll lose it on the personal income tax revenues as Canadian sellers sell less. It might stimulate the Canadian economy if displaced former auto sellers are forced to seek employment elsewhere...but I digress...

Bottom line - two separate and distinct countries, with two very different trade profiles results in two very different positions in the trade medium of price - it shouldn't be expected to be the same.

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