Buying Foreign Cars: Who really benefits?

When somebody buys a car with a foreign manufacturer nameplate on it, who benefits from it?  Some people say that it is unpatriotic to buy a foreign car, even ones that are made here in the United States because the profits go overseas.  I have even heard people make the claim that it is better to buy an American nameplate car that has been manufactured in Canada or Mexico than to buy a foreign nameplate car that has been built here in the USA.  I decided to look into this claim and determine who really benefits when an American citizen buys a foreign nameplate automobile.

In 2015 the Toyota Camry was named the most American made car by Cars.com because more of it was made in the USA than any other vehicle sold. Some people claim that buying these cars doesn’t benefit the American economy as much as buying cars with domestic nameplates, even though those cars are less American made. The argument they advance is that buying a foreign nameplate car profits that foreign company and therefore it doesn’t help the American economy as much as buying a car with a domestic nameplate. Let’s look at the numbers. I will warn you ahead of time that this is a fairly tricky calculation so I am going to generalize things to make it understandable. Let’s get started…

I am using the Toyota Camry LE which is a basic model. According to Autotrader.com, dealerships mark up new cars between 5-10%. That’s not a lot but they do get incentive payments from manufacturers if they sell a lot of units so that helps them keep their markup low. I am going to use a markup percentage of 7.5. According to Kelley Blue Book the Camry LE should go for roughly $22,000 in the northeast where I live. That makes the dealer markup roughly $1,500 and the price of the vehicle from the manufacturer to the dealer, $20,500. The vast percentage of these dealers are owned by U.S. citizens so that $1,500 benefits the U.S. economy, not Japan’s (where Toyota headquarters is located). In my state the sales tax is 5% so the tax collected on the sale of that Camry would be $1,100. That tax benefits a U.S. based government and represents money that it doesn’t have to take from other businesses, therefore it is a benefit to our economy. That brings the score to USA $2,600, Japan (plus other countries) zero.

Let’s look at what happens on the manufacturing end. This is where things get complicated. Most of my figures are going to be based on information gleaned from a textbook I found on the Course Hero website just so you know. Toyota makes a gross margin of 29% on the Camry making it one of its most profitable vehicles. This is gross margin meaning that it doesn’t include overhead like management, advertising, and dealer kickbacks. Gross margin is the difference between what the manufacturer sells the product to the dealer for and the direct costs of producing the vehicle. Based on a 29% margin, that means that the direct cost to manufacture a Camry is $15,900, meaning revenue to Toyota of $4,600 per vehicle. That revenue is then used to pay ALL of the overhead which is comprised of managerial costs, advertising, dealer incentives, and on and on and on and on. According to Y Charts, Toyota’s profit margin is 9% so only $1,400 of the $4,600 per vehicle revenue is actual profit. $3,200 is eaten up with overhead. That overhead is advertising, management, and dealer incentives spent here in the USA so it is a benefit to the U.S. economy. Let’s make the crazy assumption that there are no American investors in Toyota so that all of the $1,400 profits go outside of the country. That brings our current score to USA $5,800, Japan (plus other countries) $1,400.

Let’s now take a look at the $15,900 direct manufacturing cost of the Camry. Roughly $7000 of that cost is labor. That labor is being performed by Americans in Kentucky where Toyota assembles the Camry. That brings our score to USA $12,800, Japan (plus other countries) $1,400.

That leaves $8,900 for the cost of the parts that go into building the Camry. It won the “Most American Made Car” award because 80% of those parts are made in America. That means that roughly $7,100 of those parts are made in America and $1,800 are made in foreign plants. That brings our final score to…

Drum roll please…

USA $19,900, Japan (plus other countries) $3,200.

So, who really benefits by buying a Toyota Camry? By a conservative ratio of 6 to 1, Americans do. So who benefits when you buy a Ford or other domestic nameplate vehicle made in Mexico or Canada? I think you can guess the answer to that.

 


A friend of mine dubbed me “The voice of reason in a very unreasonable world” which I am flattered by because I am less than that.  Having said that, if you enjoyed my writing I invite you to scroll to the very bottom of this page where there is a button labeled “Follow”.   If you press that button you will receive a notification whenever this blog is updated with new posts.  Thank you for reading.  

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