Sunday, September 29, 2013

Some Chinese are willing and able to pay $485,000 for a Land Rover SUV. I gotta see how this graphs!!! So can you here... :)

Demand For Luxury SUVs Is Too High For Land Rover To Keep Up
The new Land Rover Ranger Rover and Range Rover Sport SUVs are lighter, higher-tech, and more luxurious than ever--and they're in massive demand. So much so, that even with production running full-blast around the clock, Land Rover simply can't keep up with demand, which is about 40 percent higher than the company predicted. 
 What does that mean for buyers? Right now, there's a six-month wait on new orders of the Range Rover, and a nine-month wait for the Range Rover Sport, reportsAutomotive News Europe (subscription required). 
China is the main driver behind this demand, according to the report, and buyers are willing to pay premiums of up to $80,000--on top of sticker prices that range as high as $458,000 in the Chinese market.
Considering that in the U.S., the Range Rover Sport starts from just $64,495, and the Range Rover starts from $83,545, it seems that high demand in China is a very good problem for Land Rover to have.
The Quantity Demanded for Land Rover SUV's is greater than the Quantity Supplied at Equilibrium, Point "B" in the graph below.  The market has not cleared to the point where Quantity Supplied equals Quantity Demanded at some equilibrium price, Point "A". We have a shortage of SUVS's (the difference between "Qd" and"Qs") in the worldwide market for them.

Now that we have established one point ("B") that lies to the RIGHT of "Demand*" we can assume that every other price quantity demanded combination will lie to the right of "Demand*" as well.  The market Demand for Land Rover's has shifted to the RIGHT, denoting and INCREASE in Demand:

Assuming the market responds accordingly, the price of Land Rovers will increase as a result of the shortage.  When the Price increases we now move ALONG our respective new demand curve ("Demand 1")  up and to the LEFT and ALONG our existing supply curve ("Supply*) up and to the RIGHT until we reach a new market equilibrium Price and Quantity at Point "C":
BUT where are those additional Land Rover's coming from to sell at the higher price? It was stated in article that Land Rover was at full production and working around the clock and still not meeting demand.  Any additional SUV's they produce are going to cost more than the previous ones. The cost of purchasing additional inputs and labor (overtime, extra crew) are going increase the Marginal Cost of producing those SUV's, hence they will require a higher price in return.

I contend that some of the SUV's bought at the "Pe" and the original market quantity will be resold in China either in the formal legal resale market OR in an informal (Black Market) setting. In other words, the additional Land Rovers supplied to the market between Point "A" and Point "C" on Supply* will be resales at the higher price in conjunction with any additional production Land Rover might be able to squeeze out.

One last point---$485,000 for this vehicle in China! Really?

Too much money chasing too little common sense, to coin a phrase...
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