Fleet Sales and Push Marketing
In April I wrote a column on the auto industry’s continuation of “push marketing,” despite assertions from the industry acknowledging the ills created by the practice. I wrote the column in the context of Toyota’s public relations and sales challenges. In response to a severe sales downturn, in the wake of the safety recalls and associated adverse publicity, Toyota bought back market share with huge incentives. This precipitated a similar effort by Toyota’s competitors in an effort to keep pace. This effort included the recently bankrupt GM and Chrysler, who had specifically disavowed “puh marketing” as a part of restructuring. The incentives included rebates, subvented financing, dealer “trunk money,” and optimistic lease subventions. In the case of Chrysler there have also been additional payments to consumers who use leasing or residual based financing through credit unions and other independent lenders.
Along the same lines, I am reading a new book, written by ex dealer Mark Ragsdale, entitled “Car Wreck, How You Got Rear-Ended, Run Over & Crushed by the U.S. Auto Industry.” In the book Ragsdale rails against “push marketing” practices employed by OEMs to artificially boost sales. He details how “push marketing” has contributed to the issue of “negative equity” in consumer trade ins and how this has led to increasingly longer term financing, rebates, diminished resale value, and the vicious circle that has rendered a huge percentage of consumers “un-financeable,” even those who are employed.
“Push marketing” strategies also include aggressive fleet sales. Noted automotive journalist, Jim Henry, recently provided input on the most recent June sales figures by noting that “fleet sales for the month were up 59% over the same period last year to just over 200,000 units." To be fair, last year at this time Chrysler and GM were in the throes of their bankruptcies. The Asset Backed Securities market, which had provided financing for most fleet and rental units, was barely functioning. This year the huge increase in fleet volume has been largely due to the replenishment of daily rental fleets due to an increased availability of funding and pent up demand. As I rent vehicles these days, I am no longer provided a beat up 40,000 mile “beater.” While this rental replenishment is a good thing, and indicative of renewed health in the ABS market, it should not be construed as evidence of a real retail resurgence.
There is an underlying weakness in retail demand in the automotive market at a time when real good news is desperately needed. The retail SAAR for June came in at only 8.6 million units, according to J. D. Power. This is down from May 2010. While fleet sales are much more profitable than before for the D3 due to the recent restructurings, it is retail demand that the economy and the auto industry desperately needs. GM and Chrysler are positioning for initial public stock offerings, GM as soon as the first week of July. Used car values are at historical highs, which should somewhat alleviate consumers’ negative equity positions in their trade ins. But the average trade in is a much higher mileage vehicle these days due to consumers, fleets, and rental companies having had to hold on to vehicles longer. The OEMs are able to break even or make money on lower retail sales even while paying huge incentives. The Detroit 3 no longer are required to pay UAW members to stay home and watch Oprah in the case of a plant shutdown. But consumer confidence is still weak and unemployment high. The European financial problems have shaken investors, which has been reflected by the recent drop in the Dow Jones average. This has rubbed off on consumers. Yes, the country's economic recovery is proceeding at a slower pace than expected.
As long as financing for fleet and rental sales is available we might expect to see an even higher sales rate of these subsidized sales. Under “normal” circumstances we might be complaining about how these fleet and rental sales contribute to the rapid depreciation of like model pre-owned vehicles recently purchased by consumers, contributing to their negative equity situation. But in today’s environment, aggressive short term lease subventions and aggressive daily rental recycling just may be the ticket to bolster the industry until other fundamentals have time to fall into place. In addition, the current and future pre-owned market needs the availability of additional pre-owned inventory. As always, it’s a question of balance. Will the industry know when to hit the brake pedal on fleet and rental sales?
Wards July 2010
Wednesday, June 30, 2010
Monday, June 28, 2010
How do you like your cone? – double-dip?
Part I
Where will growth come from, as the stimulus money runs out? – though the construction portion will keep being shoveled out for months to come. The dollar is weak against the Canadian dollar, the yen and the yuan, but not against the euro and has strengthened against the Mexican peso. So exports? – not likely. And exports simply aren't a big enough slice of our economy (about 10%) and are more sensitive to foreign incomes. Good for exports to China, but not otherwise. It keeps US imports low, too, but that's a reflection of bad news, not a source of good news.
What of the consumer? Unemployment remains high, and long-term unemployment is at record levels. Job losses remain high, so there's uncertainty. For the rich, who tend to save, capital gains and dividends and corporate bonuses remain low.
Investment still faces a housing and now a commercial real estate slump. We have, at least for a couple more years, too many houses and too many strip malls and office buildings for our population and income. Manufacturing is ticking upwards, but from a very low base; car sales may be 20% above their bottom in 2008-9, but remain 30% below peak levels.
Then there's government. The city across the valley from me is likely to go into receivership, lose its charter and revert to town status. Northern Michigan, which I just left, remains depressed. The local marina, which for years provided a big boost to city income, has almost no seasonal slips rented; there used to be a waiting list. Transient rentals and fuel sales were nil on some days the past two weeks. And over everything hangs the fiscal situation of California and Illinois. State and local government continue to lay off employees, even as the Federal government has stopped hiring.
So how do you like your cone? We're an obese society; we had an obese economy. Double-dip goes without asking. But there is a triple-dip crowd. You have to beg for a single dip, and we're not doing that.
Part II
Congress seems to be (wrongly) spooked by deficit hawks, and may go into reverse mode. Ironically, by prolonging the recession(s), that will leave us in a worse fiscal position, because most of our current deficit is the result of slow growth – falling revenues – and not a burst of expenditures.
Unfortunately post-banking-bubble recoveries tend to be slow, because it is structural distortions (too many houses) that have to be unwound, and short of buying up and bulldozing new developments, there's no quick way to do that. (We also have a growing population, so we will eventually have demand, and when retiring baby boomers can sell their houses, that will spill over even into such examples of excess as Las Vegas.)
A new working paper by M. Miyazaki from the International Monetary Fund makes the (with hindsight!) obvious point that the news is worse than that: revenues tend to grow with the economy, not faster than the economy, and so are very slow to recover to earlier levels. (See In Search of Lost Revenue, which is at the non-technical end of the spectrum of IMF working papers: you don't need an economics PhD to read it.)
Now it's conceivable that we could cut expenditures to speed the process. But we seem to have a proclivity for war, and for getting older. While I'd like to see us change the former, I have a vested interest in the latter, as does everyone reading this. And demand for most of the rest of what the government does, federal, state, and local, is a function of population. The US has a small government, in international comparison, so it's hard to find ways to significantly cut expenditures. Plus the last time I looked, we could cut all non-defense, non-aging related expenditures at the Federal level and still have a deficit.
Let's not kid ourselves: if revenue doesn't recover on its own and since expenditures can't be cut, then at some point we need to enhance revenues. A lot. My preferred alternative would be a national value added tax.
But demagoguery aside, there's no urgency; interest rates remain at record lows, and not just on short-term debt. However, we can't wait a decade before doing so. Hence even if Obama does not do so – it's hard to see that happening – the next president must. It will be a disaster if the radical right trumps conservative sensibility and precludes that presidential campaign from being over how to raise taxes, not whether to raise them.
Mike Smitka
Wednesday, May 26, 2010
TV segment on dealers
Here's a segment from WDBJ Channel 7 in Roanoke feature yours truly and my spring term auto industry class:
Story and Video Clips
Note that it was a full term. We had 4 guest speakers, visits to 3 factories (the Ford Rouge F-150 truck assembly plant, a plastic injection molding factory of International Automotive Components in Strasburg VA and a TS Tech seating plant outside Columbus, OH), to Delphi World HQ, to 2 museums, attended the annual Federal Reserve Bank of Chicago auto industry conference in Detroit that included presentations by a host of speakers including Steve Rattner, Tom Stallkamp and Bob King [UAW], and had presentations by 3 people at the Center for Automotive Research in Ann Arbor and another presentation at Automotive News. We also wandered around the city of Detroit, seeing the devastation wrought by the changing geography of the industry, including a visit to the Heidelberg Project. More later...? -- Ruggles also attended one day of the Fed conference.
Story and Video Clips
Note that it was a full term. We had 4 guest speakers, visits to 3 factories (the Ford Rouge F-150 truck assembly plant, a plastic injection molding factory of International Automotive Components in Strasburg VA and a TS Tech seating plant outside Columbus, OH), to Delphi World HQ, to 2 museums, attended the annual Federal Reserve Bank of Chicago auto industry conference in Detroit that included presentations by a host of speakers including Steve Rattner, Tom Stallkamp and Bob King [UAW], and had presentations by 3 people at the Center for Automotive Research in Ann Arbor and another presentation at Automotive News. We also wandered around the city of Detroit, seeing the devastation wrought by the changing geography of the industry, including a visit to the Heidelberg Project. More later...? -- Ruggles also attended one day of the Fed conference.
Mike Smitka
Rattner Revelations
Written for WARDS Dealer Business, MAY 2010
David Ruggles
David Ruggles
In mid May I had the opportunity to attend the annual Chicago Federal Reserve Bank conference on the auto industry entitled “After the Perfect Storm: Competitive Forces Shaping the Auto Industry.” The conference was held at the Federal Reserve facility in Detroit. I made the trip primarily because of one speakers was Steven Rattner, former counselor to the Secretary of Treasury and one of the 3 heads of the government’s Auto Task Force tasked with rescuing Chrysler and GM and the rest of the country’s manufacturing base. The two other heads of the government’s Auto Task Force were Steve Girsky and Ron Bloom. While Mr. Rattner is currently hawking a book he hasn’t yet finished having been severed from Quadrangle, the investment firm he founded, Girsky and Bloom hold interesting positions.
Mr. Girsky is now on the GM Board of Directors, representing the UAW’s VEBA trust. The trust owns 17.5% of GM stock. He is also a special adviser to GM CEO Ed Whitacre, reportedly picking up an extra 900K for that gig, along with the 200K for being a Director. Then there are the living expenses for travel to and from Detroit. Many believe Girsky to be the father of the dealer terminations. According to the Detroit Free Press, Mr. Girsky is also tasked with keeping Mr. Whitacre from embarrassing himself, explaining terminology like “residual value” and “throughput.” I guess there is no perceived embarrassment associated with the executive churning going on at GM, or at least Mr. Girsky wasn’t able to prevent it.
As for Ron Bloom, his official title is Senior Advisor, U.S. Treasury Department; White House Senior Counselor for Manufacturing Policy.
Rattner’s presentation included a reference to “Obama the socialist” accusations. The mention of this sent the room into a derisive chuckle. According to Rattner, the ownership stake in GM and Chrysler was taken, not out of a socialist bent, but because of the practical observation that releasing the two auto makers from bankruptcy saddled with debt would be counter productive. I expect proof of the correctness of that decision will be shown when GM stages a successful IPO. Debt or stock, the lesser of two evils. Brief government ownership or a less than viable debt structure? Or, let the industry burn down and rebuild itself over time. We’ll never know what might have happened if different decisions were made.
Rattner demonstrates a respectful deference to the intellect of Obama and Larry Summers. Despite Bloom, Girsky, and Rattner, it seems clear that Larry Summers “drove the bus” for the administration. According to Rattner it was the Bush administration that wanted to appoint a czar. This was vetoed once Obama took office.
According to Rattner, the team expected the constituent parties to come to the Task Force and ask, “What can we do to help?” Instead they were surprised to find the parties taking a hard line and making demands as if they were negotiating from a position of strength. The worst, he said, were the bondholders. The worst part was they were not able to come together so the Task Force could deal with one entity representing all of them. The lack of this and their intransigence probably led them to do worse in the final settlement than they otherwise might have.
The Task Force was made up of people with precious little auto business experience. It still isn’t clear how they were selected. The lack of auto business experience undoubtedly led to both good and bad policies. A good result might be that they had no loyalty to a particular set of industry values, values that might be some of the reason the car companies were in the predicament they were in in the first place. Some of the things the Task Force did were brilliant. Some were just mistaken.
Let’s take the dealer terminations. According to Rattner, the priority of the Task Force was to be sensitive to political perceptions. They felt it was important for the public to perceive that the various constituent parties each made sacrifices. They failed to understand that dealers were not a constituent party, but are in fact the automaker’s only customers. End user consumers are the customer of the dealer. But the Task Force set out to deliver a “haircut” to dealers as if they were a true constituent group. This seems to be entirely due to a fundamental misunderstanding of how the auto market works and a desire to satisfy perceived political considerations. In fact, it was a hugely counter productive move. It has enraged the Chrysler and GM’s dealer customers who will likely never trust them again. Pre bankruptcy, the OEM/dealer relationship was tenuous at best. It is worse now. GM CEO Ed Whitacre seems to be embracing dealer re-instatements. Why wouldn’t he? Each dealer buys vehicles and parts from the OEM. Of course, industry newcomer Whitacre hasn’t shown any consistent level of astuteness with his misstatement regarding GM’s so called “loan repayment” and his churning of executives.
I specifically asked Rattner if Steve Girsky was the driver of the dealer terminations, as is believed by many. According to Rattner, Girsky was a private citizen when the decision was made to terminate the dealers. He then launched into a Girsky like defense of why dealers were terminated, which didn't seem to convince anyone in the room, especially myself. This was after he had just explained the concern about political perceptions.
Rattner and the Task Force were especially surprised at the backlash associated with the forced resignation of GM CEO Rick Wagoner. The President and the Task Force couldn’t justify entrusting additional billions more of taxpayer money to a CEO with a “practically unblemished record of failure.” The losses in Wagoner’s last 4 years topped 80 billion dollars. He presided over a loss of market share of from 33% to 18%. But the “firing” further played into the groundswell of right wing media hype already trying to characterize President Obama as a socialist.
According to Rattner, the Task Force seriously entertained the idea of letting Chrysler liquidate. They couldn’t see a compelling business case for Chrysler. The company had been gutted by first Daimler and then Cerberus. It had no new product in the pipeline other than the Daimler ML series based Grand Cherokee built in Vance Alabama scheduled for the 2011 model year. It was thought that Jeep alone might survive and would be snapped up by someone. It was also considered that a Chrysler shut down would also help GM. Given the financial environment, it was less than clear what financing possibilities for a quick Jeep sale might be available. It took Sergio Marchionne and his seemingly wild scheme backed up by ZERO cash to persuade the Task Force to take a “flier” on Chrysler.
Another surprise was that consumers continued to buy vehicles from a bankrupt auto maker. The Task Force’s projections were much less optimistic in terms of sales than has actually occurred.
Rattner expressed shock and surprise at the political weight wielded by auto dealers. He greatly resents the “Rejected/Wind-Down Dealer Arbitration Bill” signed into law by the President. He did admit that a “few hundred dealers, more or less, won’t make a big difference in the big scheme of things.”
The next day I attended an economic conference in Chicago. Dealer Tammy Darvish, was on a panel and I had an opportunity to question her. Ms. Darvish has been the prime mover behind the successful dealer movement to roll back dealer terminations through arbitration. It was the legislation sponsored by her organization that the President signed and Rattner deeply resents. She has been a burr under the saddle of the Task Force and the administration. So what, I say? She’s right and they are wrong, at least on this issue.
Ms. Darvish and I might disagree on one thing. I believe that GM and Chrysler absolutely had the right under BK law to terminate dealers. I’m not sure she agrees with that, preferring to refer to the dealer terminations as “un-American.” My point is that terminating dealers was counterproductive to saving GM and Chrysler, legal or not. It has, and will, cost the 2 restructured OEMs significant sales. It has saved them no money, aided Ford, the transplants, and the imports, and alienated their remaining dealer base. I believe they did it “because they could,” not because it was productive in the big picture. But GM and Chrysler will survive this.
It is clear Tammy Darvish and Steve Rattner don’t like each other. She referred to Rattner, Girsky, and Bloom as “purely awful and mean people.”
While the bailouts aren’t complete, GM’s breakeven point has been reduced from 16.5 million SAAR to 10 million. Things are even looking brighter for Chrysler. GM and Chrysler both reported recent quarterly profits. Most of taxpayer investment, if not all, is expected to be recouped. In fact, the taxpayers could make a significant profit.
Rattner and Darvish in the same week. What more could I ask for?
Mr. Girsky is now on the GM Board of Directors, representing the UAW’s VEBA trust. The trust owns 17.5% of GM stock. He is also a special adviser to GM CEO Ed Whitacre, reportedly picking up an extra 900K for that gig, along with the 200K for being a Director. Then there are the living expenses for travel to and from Detroit. Many believe Girsky to be the father of the dealer terminations. According to the Detroit Free Press, Mr. Girsky is also tasked with keeping Mr. Whitacre from embarrassing himself, explaining terminology like “residual value” and “throughput.” I guess there is no perceived embarrassment associated with the executive churning going on at GM, or at least Mr. Girsky wasn’t able to prevent it.
As for Ron Bloom, his official title is Senior Advisor, U.S. Treasury Department; White House Senior Counselor for Manufacturing Policy.
Rattner’s presentation included a reference to “Obama the socialist” accusations. The mention of this sent the room into a derisive chuckle. According to Rattner, the ownership stake in GM and Chrysler was taken, not out of a socialist bent, but because of the practical observation that releasing the two auto makers from bankruptcy saddled with debt would be counter productive. I expect proof of the correctness of that decision will be shown when GM stages a successful IPO. Debt or stock, the lesser of two evils. Brief government ownership or a less than viable debt structure? Or, let the industry burn down and rebuild itself over time. We’ll never know what might have happened if different decisions were made.
Rattner demonstrates a respectful deference to the intellect of Obama and Larry Summers. Despite Bloom, Girsky, and Rattner, it seems clear that Larry Summers “drove the bus” for the administration. According to Rattner it was the Bush administration that wanted to appoint a czar. This was vetoed once Obama took office.
According to Rattner, the team expected the constituent parties to come to the Task Force and ask, “What can we do to help?” Instead they were surprised to find the parties taking a hard line and making demands as if they were negotiating from a position of strength. The worst, he said, were the bondholders. The worst part was they were not able to come together so the Task Force could deal with one entity representing all of them. The lack of this and their intransigence probably led them to do worse in the final settlement than they otherwise might have.
The Task Force was made up of people with precious little auto business experience. It still isn’t clear how they were selected. The lack of auto business experience undoubtedly led to both good and bad policies. A good result might be that they had no loyalty to a particular set of industry values, values that might be some of the reason the car companies were in the predicament they were in in the first place. Some of the things the Task Force did were brilliant. Some were just mistaken.
Let’s take the dealer terminations. According to Rattner, the priority of the Task Force was to be sensitive to political perceptions. They felt it was important for the public to perceive that the various constituent parties each made sacrifices. They failed to understand that dealers were not a constituent party, but are in fact the automaker’s only customers. End user consumers are the customer of the dealer. But the Task Force set out to deliver a “haircut” to dealers as if they were a true constituent group. This seems to be entirely due to a fundamental misunderstanding of how the auto market works and a desire to satisfy perceived political considerations. In fact, it was a hugely counter productive move. It has enraged the Chrysler and GM’s dealer customers who will likely never trust them again. Pre bankruptcy, the OEM/dealer relationship was tenuous at best. It is worse now. GM CEO Ed Whitacre seems to be embracing dealer re-instatements. Why wouldn’t he? Each dealer buys vehicles and parts from the OEM. Of course, industry newcomer Whitacre hasn’t shown any consistent level of astuteness with his misstatement regarding GM’s so called “loan repayment” and his churning of executives.
I specifically asked Rattner if Steve Girsky was the driver of the dealer terminations, as is believed by many. According to Rattner, Girsky was a private citizen when the decision was made to terminate the dealers. He then launched into a Girsky like defense of why dealers were terminated, which didn't seem to convince anyone in the room, especially myself. This was after he had just explained the concern about political perceptions.
Rattner and the Task Force were especially surprised at the backlash associated with the forced resignation of GM CEO Rick Wagoner. The President and the Task Force couldn’t justify entrusting additional billions more of taxpayer money to a CEO with a “practically unblemished record of failure.” The losses in Wagoner’s last 4 years topped 80 billion dollars. He presided over a loss of market share of from 33% to 18%. But the “firing” further played into the groundswell of right wing media hype already trying to characterize President Obama as a socialist.
According to Rattner, the Task Force seriously entertained the idea of letting Chrysler liquidate. They couldn’t see a compelling business case for Chrysler. The company had been gutted by first Daimler and then Cerberus. It had no new product in the pipeline other than the Daimler ML series based Grand Cherokee built in Vance Alabama scheduled for the 2011 model year. It was thought that Jeep alone might survive and would be snapped up by someone. It was also considered that a Chrysler shut down would also help GM. Given the financial environment, it was less than clear what financing possibilities for a quick Jeep sale might be available. It took Sergio Marchionne and his seemingly wild scheme backed up by ZERO cash to persuade the Task Force to take a “flier” on Chrysler.
Another surprise was that consumers continued to buy vehicles from a bankrupt auto maker. The Task Force’s projections were much less optimistic in terms of sales than has actually occurred.
Rattner expressed shock and surprise at the political weight wielded by auto dealers. He greatly resents the “Rejected/Wind-Down Dealer Arbitration Bill” signed into law by the President. He did admit that a “few hundred dealers, more or less, won’t make a big difference in the big scheme of things.”
The next day I attended an economic conference in Chicago. Dealer Tammy Darvish, was on a panel and I had an opportunity to question her. Ms. Darvish has been the prime mover behind the successful dealer movement to roll back dealer terminations through arbitration. It was the legislation sponsored by her organization that the President signed and Rattner deeply resents. She has been a burr under the saddle of the Task Force and the administration. So what, I say? She’s right and they are wrong, at least on this issue.
Ms. Darvish and I might disagree on one thing. I believe that GM and Chrysler absolutely had the right under BK law to terminate dealers. I’m not sure she agrees with that, preferring to refer to the dealer terminations as “un-American.” My point is that terminating dealers was counterproductive to saving GM and Chrysler, legal or not. It has, and will, cost the 2 restructured OEMs significant sales. It has saved them no money, aided Ford, the transplants, and the imports, and alienated their remaining dealer base. I believe they did it “because they could,” not because it was productive in the big picture. But GM and Chrysler will survive this.
It is clear Tammy Darvish and Steve Rattner don’t like each other. She referred to Rattner, Girsky, and Bloom as “purely awful and mean people.”
While the bailouts aren’t complete, GM’s breakeven point has been reduced from 16.5 million SAAR to 10 million. Things are even looking brighter for Chrysler. GM and Chrysler both reported recent quarterly profits. Most of taxpayer investment, if not all, is expected to be recouped. In fact, the taxpayers could make a significant profit.
Rattner and Darvish in the same week. What more could I ask for?
Monday, May 10, 2010
from Detroit
By chance both David Ruggles and Mike Smitka were in Detroit today for the annual Chicago Fed auto industry conference. Speakers included both the Auto Task Force's head, Steve Rattner (back in private life) and Tom Stallkamp (of Chrysler and then DaimlerChrysler, now at Ripplewood). We're not journalists so won't try to attribute comments to any individual speaker. (For that matter, we probably won't read each other's posts in advance.)
GM seems to be recovering (see widely reported comments by Rattner that "reading the signals given to Wall Street" in his eyes implies a "we're profitable" announcement in the very near future). Fixed costs at the Detroit 3 are down; ditto recurring costs. One speaker even forecast that the two-tier wage & benefit structure will given a labor cost advantage to them, relative to the Japanese, while the latest Harbour study suggests they've achieved parity in productivity. The big hitch may be capacity constraints, not at the OEMs themselves but at suppliers who have maxed out their much-reduced credit lines but who typically are paid only 60 days after the fact by their customers. It's not clear that credit conditions have normalized enough for them to borrow so that they can rehire workers.
Others talked of cultural change, though 3 different economists in the group (mea culpa) queried components of that story. Was it culture or sensible (though possibly short-sighted) adaptations to their environment? Can such change be accomplished only through crisis, in which case the new culture will soon be out of synch as well. But the Detroit Three are now much slimmer, and maybe that will lessen the weight of culture. A firm the size of Toyota simply has too many people for them to communicate directly amongst themselves, and so the organization keeps waiting for one more piece of data before moving on quality or any other issue. That may be a sensible engineering reflex, but Toyota is now too big to succeed merely because of better production engineering and cost controls. With its big and therefore politicized bureaucratic structure, no one wants to stick their neck out, either. So wait for more information on safety issues, on the US truck market, on excess capacity inside Japan. For culture to be useful it has to be shared, but then you're locked into place.
So the bet becomes whether the industry is stable enough for any particular culture to work long enough to keep firms out of trouble. That's tomorrow's topic.
All of this is hard to pin down, culture is slippery even among anthropologists. However, I don't think it's about whether bad old habits persist, but whether the need for understood habits and ways of doing things won't continue to torment the efforts of major industry players to be more responsive amidst an unstable environment.
There was no unanimity on this. Nevertheless, I think there was a mild consensus that GM at least is able to make decisions more rapidly and then to implement them, rather than making a decision but then running it past another committee or three over the following six months just to be safe. Chrysler, in contrast, is now in its fourth corporate incarnation since 1999 (Chrysler, Daimler-Chrysler, Cerberus-Chrysler, and now "Newco[pany] Chrysler"). GM may have been slow, but no decisions were being made at Chrysler. Change there is now frenetic, but it remains unclear who will provide the money needed to develop new vehicles. The US government won't; Fiat hasn't. Crunch time will come next year.
GM seems to be recovering (see widely reported comments by Rattner that "reading the signals given to Wall Street" in his eyes implies a "we're profitable" announcement in the very near future). Fixed costs at the Detroit 3 are down; ditto recurring costs. One speaker even forecast that the two-tier wage & benefit structure will given a labor cost advantage to them, relative to the Japanese, while the latest Harbour study suggests they've achieved parity in productivity. The big hitch may be capacity constraints, not at the OEMs themselves but at suppliers who have maxed out their much-reduced credit lines but who typically are paid only 60 days after the fact by their customers. It's not clear that credit conditions have normalized enough for them to borrow so that they can rehire workers.
Others talked of cultural change, though 3 different economists in the group (mea culpa) queried components of that story. Was it culture or sensible (though possibly short-sighted) adaptations to their environment? Can such change be accomplished only through crisis, in which case the new culture will soon be out of synch as well. But the Detroit Three are now much slimmer, and maybe that will lessen the weight of culture. A firm the size of Toyota simply has too many people for them to communicate directly amongst themselves, and so the organization keeps waiting for one more piece of data before moving on quality or any other issue. That may be a sensible engineering reflex, but Toyota is now too big to succeed merely because of better production engineering and cost controls. With its big and therefore politicized bureaucratic structure, no one wants to stick their neck out, either. So wait for more information on safety issues, on the US truck market, on excess capacity inside Japan. For culture to be useful it has to be shared, but then you're locked into place.
So the bet becomes whether the industry is stable enough for any particular culture to work long enough to keep firms out of trouble. That's tomorrow's topic.
All of this is hard to pin down, culture is slippery even among anthropologists. However, I don't think it's about whether bad old habits persist, but whether the need for understood habits and ways of doing things won't continue to torment the efforts of major industry players to be more responsive amidst an unstable environment.
There was no unanimity on this. Nevertheless, I think there was a mild consensus that GM at least is able to make decisions more rapidly and then to implement them, rather than making a decision but then running it past another committee or three over the following six months just to be safe. Chrysler, in contrast, is now in its fourth corporate incarnation since 1999 (Chrysler, Daimler-Chrysler, Cerberus-Chrysler, and now "Newco[pany] Chrysler"). GM may have been slow, but no decisions were being made at Chrysler. Change there is now frenetic, but it remains unclear who will provide the money needed to develop new vehicles. The US government won't; Fiat hasn't. Crunch time will come next year.
mike smitka
Friday, April 30, 2010
Friday, April 16, 2010
Conspiracy Theory and Push Marketing
After the taxpayers took ownership in General Motors and Chrysler there have been a couple of interesting conspiracy theories take arise. The first was the assertion that the Democratic administration singled out Republican dealers for termination. I haven’t heard much about that one recently. It might have been because it was determined that the majority of auto dealers self identified as Republicans in the first place. The second was the assertion that the government had sat on information that Toyota had experienced a raft of sudden acceleration occurrences and had only brought it to light recently to give the domestic manufacturers, including the two owned by taxpayers, the opportunity to gain ground on the industry leader. Talk show host Michael Savage seems to be the only one talking about that these days.
Toyota hasn’t taken their problems lying down and has launched the most aggressive incentives in their history in an effort to stem their recent loss of market share and volume. Their sales results were up 41% from March 2009. Toyota’s incentives, valued by Edmunds.com, averaged $2,256 per vehicle. This represents a record high for Toyota.
In an effort to keep pace the other OEMs, including the Detroit 3, have also launched aggressive incentives of their own. These “push marketing” strategies include some dramatically sub vented leases which include residuals that most likely won’t “come true” at lease end. This practice allows an OEM to avoid a large up front rebate that immediately comes off the corporate books in its entirety, in exchange for a real number dictated by whatever the market dictates at lease termination down the road. While OEMs may set up some reserves in anticipation of future losses, it is quite likely the end result is that current quarterly results will look better than they should.
As GM is aiming for an Initial Public Offering this year to buy out the taxpayers, there may be some additional motivation to shape current quarterly results.
In the case of Ford, the UAW is selling a large block of Ford stock to fund it’s VEBA (Voluntary Employee Beneficiary Association). Ford intends to sell additional stock this year to produce cash to reduce their debt load. This dilution of Ford stock could reduce it’s stock price, which is considered to be fully valued in the range of $12.00 to $13.00 per share. Showing healthy profits now, while gambling on a minimal loss down the road in an attempt to maintain the current stock price, might also be a part of Ford’s strategy. Ford is promoting extremely aggressive short term leases, in particular on select Lincoln models.
In the meantime, Chrysler is just trying to maintain whatever market share they can until they can bring new products to market.
The industry was up 24% over March 2009. Before the exultation begins, let’s recall how horrible March 2009 was. But the news from March 2010 was mostly favorable. But the bottom line is the results were largely incentive driven. Are we back to full bore “push marketing?” The upshot? Downward pressure on the value of late model pre-owned vehicles which impacts consumers who own them, rental car companies, and fleets. Brand image suffers. And it becomes increasingly likely that the projected residuals will fall short of projections.
“Push marketing” sells new vehicles, produces lots of tax revenue, and creates jobs. OEMs might add over time to their schedules, put on additional shifts, and/or call back laid off workers. If GM and Chrysler launch even more aggressive incentives it might spur the other OEMs, especially the ones who manufacture in the U.S., to follow suit. There might even be a reopening of shuttered assembly plants. The impact would ripple through the supplier base. States and municipalities would welcome the additional sales tax revenue. And the administration could show a decrease in that bothersome unemployment statistic in an election year. That's my conspiracy theory.
The D3 has shed enough cost through the Chapter 11 bankruptcies, and subsequent concessions to Ford, that they can actually make money at aggressive rates of incentives.
The long term incentive situation is further fueled by the fact that OEMs, in particular the ones partially owned by taxpayers, have made a major commitment to smaller more fuel efficient vehicles. The near term CAFÉ requirements will mean aggressive incentives on those vehicles if consumers don’t buy them in large numbers in the face of steady fuel prices.
We have mostly been on the incentive drugs since Joe Garagiola hooked us in 1975. Given the fact that the government could, in theory, "encourage" GM and Chrysler to return to even more aggressive “push marketing,” what are the chances?
Or will the Toyota recall situation, which fueled the current round of aggressive incentives, die down and allow the industry to let normal demand dictate production and sales, protecting the value of consumer’s vehicles?
written by David Ruggles for Auto Finance News
Toyota hasn’t taken their problems lying down and has launched the most aggressive incentives in their history in an effort to stem their recent loss of market share and volume. Their sales results were up 41% from March 2009. Toyota’s incentives, valued by Edmunds.com, averaged $2,256 per vehicle. This represents a record high for Toyota.
In an effort to keep pace the other OEMs, including the Detroit 3, have also launched aggressive incentives of their own. These “push marketing” strategies include some dramatically sub vented leases which include residuals that most likely won’t “come true” at lease end. This practice allows an OEM to avoid a large up front rebate that immediately comes off the corporate books in its entirety, in exchange for a real number dictated by whatever the market dictates at lease termination down the road. While OEMs may set up some reserves in anticipation of future losses, it is quite likely the end result is that current quarterly results will look better than they should.
As GM is aiming for an Initial Public Offering this year to buy out the taxpayers, there may be some additional motivation to shape current quarterly results.
In the case of Ford, the UAW is selling a large block of Ford stock to fund it’s VEBA (Voluntary Employee Beneficiary Association). Ford intends to sell additional stock this year to produce cash to reduce their debt load. This dilution of Ford stock could reduce it’s stock price, which is considered to be fully valued in the range of $12.00 to $13.00 per share. Showing healthy profits now, while gambling on a minimal loss down the road in an attempt to maintain the current stock price, might also be a part of Ford’s strategy. Ford is promoting extremely aggressive short term leases, in particular on select Lincoln models.
In the meantime, Chrysler is just trying to maintain whatever market share they can until they can bring new products to market.
The industry was up 24% over March 2009. Before the exultation begins, let’s recall how horrible March 2009 was. But the news from March 2010 was mostly favorable. But the bottom line is the results were largely incentive driven. Are we back to full bore “push marketing?” The upshot? Downward pressure on the value of late model pre-owned vehicles which impacts consumers who own them, rental car companies, and fleets. Brand image suffers. And it becomes increasingly likely that the projected residuals will fall short of projections.
“Push marketing” sells new vehicles, produces lots of tax revenue, and creates jobs. OEMs might add over time to their schedules, put on additional shifts, and/or call back laid off workers. If GM and Chrysler launch even more aggressive incentives it might spur the other OEMs, especially the ones who manufacture in the U.S., to follow suit. There might even be a reopening of shuttered assembly plants. The impact would ripple through the supplier base. States and municipalities would welcome the additional sales tax revenue. And the administration could show a decrease in that bothersome unemployment statistic in an election year. That's my conspiracy theory.
The D3 has shed enough cost through the Chapter 11 bankruptcies, and subsequent concessions to Ford, that they can actually make money at aggressive rates of incentives.
The long term incentive situation is further fueled by the fact that OEMs, in particular the ones partially owned by taxpayers, have made a major commitment to smaller more fuel efficient vehicles. The near term CAFÉ requirements will mean aggressive incentives on those vehicles if consumers don’t buy them in large numbers in the face of steady fuel prices.
We have mostly been on the incentive drugs since Joe Garagiola hooked us in 1975. Given the fact that the government could, in theory, "encourage" GM and Chrysler to return to even more aggressive “push marketing,” what are the chances?
Or will the Toyota recall situation, which fueled the current round of aggressive incentives, die down and allow the industry to let normal demand dictate production and sales, protecting the value of consumer’s vehicles?
written by David Ruggles for Auto Finance News
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