Wednesday, November 19, 2014
Friday, November 14, 2014
Japan, as does much of the world, has long-run fiscal challenges. Its population aged faster than anticipated. No mechanism was put in place to automatically adjust pension and healthcare revenues.Note 1 In addition, the slowdown of economic growth and the late 1980s bubble and its collapse both meant that revenues plummeted, leaving the economy with a one-time buildup of debt as the aging process commenced. The result was a large initial buildup of debt, and an inexorable subsequent rise.
...right now the stars are aligned around the consumption tax...
Addressing the issue required however the proper alignment of stars. First, the political system had to be configured so as to allow decisionmaking. A long era of prime minister of the season meant that doing much of anything has been a challenge. Then there's the economic system: even deficit scaremongers recognize that raising taxes in a recession is a bad idea.Note 2 So Japan also needed to have the economic stars align. For the initial decade or so, the aftereffect of their bubble muted discussion of tax hikes. External shocks – the Asian financial crisis in 1997, worries about spillover from the end of the US dot.com bubble, then 9/11 and 3/11 [the Tohoku megaquake], and more recently the sharp recession touched off by what is known in Japan as the "Lehman Shock" provided excuses to postpone, from the perspective of politicians if not economists.
Then came Abe. He is only the second prime minister in many, many years to not face a constant risk of losing his majority support in the Diet; the political stars aligned. Likewise the economy has been recovering bit by bit from the Lehman Shock and 3/11. While the reality may be something less, weak labor markets that kept youth from launching careers, headlines trumpted the rise of GDP and diminishing deflation. The denoument was that on April 1, 2014 Japan increased the consumption tax (消費税) – its national sales tax – from 5% to 8%. That had a predictable negative impact on growth, and so it remains an open question which way Abe and his cabinet will lean for authorizing the next increase in the consumption tax, a 2 percentage point bump scheduled for October 2015. The legislation is in place, but there is still an opt out.
One metric is inflation. Unfortunately a disadvantage of a large bump – in this case 3 percentage points – is that while it will produce a correspondingly large jump in the price level, the base effect will wear off if the underlying wage and other cost dynamics (and firm pricing power) remain unchanged. So we are now at the point where inflation is trending down. The depreciation of the yen helped hide that, particularly as higher import prices have been sufficient to offset lower global energy prices. But that effect too will wear off. Global headwinds now threaten; China, not the US, is Japan's largest trading partner. (Japan's exports to China of computer chips and the like are incorporated into iPhones and similar goods that are promptly re-exported to the US and ... whoops ... Europe. No out there!) So my sense is that if the economic stars are aligned, that is temporary.
All this begs one question on the nature of the tax increase: why large jumps? Instead of raising taxes by 3 percentage points in one fell swoop, why not raise rates by 0.75 percentage points every 6 months over two years? or (given the 10% end point) raise rates in increments of 0.5 percentage points every 6 months for 5 years?
That would have multiple advantages:
- Incremental bumps would lessen the surge of big-ticket purchases just before the rate increase went into effect, and the subsequent negative rebound. Such volatility serves no good macroeconomic purpose.
- Maxi bumps make sales data hard to interpret for the private sector – how much of the March 2014 sales surge was because the economy was doing well and how much was due to consumers pulling purchases forward? Such uncertainty serves no good business purpose.
- Volatility makes macro data hard to interpret for us economists. Yes, readers are shedding crocodile tears in sympathy, but some economists do have politician's ears (such as Koichi Hamada, a friend of Abe and former University of Tokyo and Yale professor whom I've known for 30 years). If such economists are honest – Hamada is not a mere political hack – then they are surely tempering their advice.
- Frequent mini bumps would add to inflation for some time to come. Surely that would be better if the goal of policymakers is to shift expectations away from deflation.
- Mini bumps ought to be more robust politically. You can with good reason argue that, in the midst of a slowing global economy, now is not the time to bump the consumption tax to 10%. It would be harder to argue that going from 8.5% to 9.0% should be postponed.
- Mini bumps ought to be easier to extend. From a fiscal perspective, even at 10% Japan's deficit will remain large, and at 10% the consumption tax is much lower than in many OECD countries. So why stop at 10%? That's surely much easier to sell if it's a continuation of mini bumps rather than a maxi jump.
Tightening loopholes through strict implementation of a national tax ID system may be the most desirable step. Right now though the stars are aligned around the consumption tax.
- Money is fungible and there is no particular economic reason to run retirement programs on a stand-alone budgetary basis. Having separate retirement and healthcare accounts and taxes to match is however to my knowledge universal.
- Cutting retirement benefits would have the same net budget impact and the same short-term contractionary impact as a tax increase, though with 25+% of the population already benefitting from Japan's programs, that's politically infeasible. It's also morally objectionable, as the twenty-five-percenters paid taxes during their working lives and so fulfilled their end the social contract. Extending the retirement age is a compromise: those near retirement may be treated unfairly, paying in more and taking out less than they anticipated, but at least the ex post adjustment is muted.
Thursday, October 23, 2014
Bloomberg has an op-ed "Detroit Fights Innovation -- Again" which in fact is not about the Detroit Three of GM, Ford and Fiat Chrysler [the merger was consummated on Oct 12th] or even manufacturers, but about Michigan and (indirectly) automotive dealers. It makes the very tenuous claim that state policy that blocks Tesla from running company stores (in contravention to existing state law) is tacit protectionism that represents a step backward. Indeed, the article implies that the restriction is ultimately aimed at preventing a Chinese invasion. In fact the policy is misguided because history shows that there's no need to fear factory stores, at least as long as they're not set up by a car company so as to undermine their own existing dealers.
First, there's the red herring: China. The editors – there's no by-line, though David Shipley is listed at the bottom – ignore that GM and VW are the biggest players in China, and that purely domestic firms are in a tailspin (Warren Buffett has thrown away a pile of money on BYD [比亚迪汽车]). Two firms less successful in China, Honda and Volvo, are however already exporting. The camel's nose is well inside the tent: all of China's major players are multinationals who already have dealerships spread across all 50 states. And protecting the Detroit Three? Don't they editors realize they have but 46% of the US market?
Second, multiple automotive firms in multiple countries across multiple decades have tried and failed with factory stores. If you read carefully, you'll even find Tesla talking about defects with their distribution model. A modern dealership is comprised of six interlinked businesses: new vehicle sales, used vehicle sales, used car wholesaling (trade-ins), finance & insurance [including warranties], repair services, and parts sales, both retail and wholesale. (Some add a seventh to the mix, body shops, which in practice are a very different business from service & repairs.) So a manager must handle trade-ins, push used car sales and otherwise place a priority on things other than selling new cars in order to make a profit. On top of that, dealers are in a constant battle over what sort of physical "store" is needed, how much and what kind of advertising is necessary, and many other decisions important from a financial or strategic perspective. All this requires an ability to say "no" to the factory. No company has ever granted the manager of a factory store that level of discretion.Note
More important for potential new entrants, independent dealers provide billions in financing to a car company, because they hold inventory, not the OEM. The real estate is theirs as well. Any potential new entrant that needs a large distribution footprint -- that is, any company outside of the supercar niche -- can't afford to ignore that. If Elon Musk wasn't so good at
bilkingmilking investors, he would need that money, too.
So the Bloomberg editors are accurate that Michigan -- which is far from being in the vanguard on this issue -- should not concern itself with Tesla's retail strategy. They are however accurate for the wrong reasons: factory stores have been a bloodbath for all who have tried, and will remain so. Indeed, they're critical to a car company's financial viability. Contrary to the editorial, it's not incumbent car companies that should be concerned, or existing dealers. It's Tesla shareholders and bondholders who should worry.
Tuesday, October 7, 2014
I don’t normally post about vehicles themselves, but I am endlessly fascinated by the industry, and constantly surprised to learn of new niches. On the finance side, I’m amazed at the variety of vendors that show up at conferences such as those sponsored by Auto Finance News. One of these years I’ll make it to SEMA (the Speciality Equipment Market Association), which by reputation has both the credible and the incredible. But back to my topic: once in a while I do find products – or rather niches, I’m not a “car guy” – that intrigue.
I have fond memories of the local Good Humor trucks, which once made the rounds of Detroit. Then there was the lunch truck at the Chrysler Mack Stamping plant, where I worked some decades ago. Perhaps they’re still in business, but of late I see few such. Yes, the funnel cake van is a fixture at community festivals here in rural Virginia, and at least one of the local BBQs sell their pulled pork from a truck. The vendors of sausages and gyros unload everything from a trailer to set up under a tent, while the Ruritans sell hot dogs and burgers from a modified trailer. Other than the huge step vans on Constitution Avenue in DC, today I seldom see truck-based vendors, and the ones I do see are very utilitarian in their setup.
In Japan the historic model is the pushcart vendor (yatai 屋台). Going back to the 1800s, the Tokyo (Edo-mae) variety of sushi started out that way, a snack food sold on the streets, low not high cuisine. Into the 1970s (but now largely vanished) you could find yatai in the evening outside train stations, selling noodles or yaki-imo (sweet potatoes kept in hot gravel) or tako-yaki (octopus “donut holes”). It was in Tokyo that the phrase “chestnuts roasting on an open fire” first took on meaning for me, because that was another staple of street food. Such are not unknown in the US; you still find pushcarts in Central Park and elsewhere in New York [by which I of course mean Manhattan]. When I worked on Wall Street (well, actually Pine Street) I was fond of hot pretzels. But in Japan the modern version of the pushcart vendor is likewise relegated to the grounds of the local shrine during community festivals (matsuri).
Then I spent a year in suburban Japan. There you encounter a modern version of the yatai of old, imaginative and entrepreneurial. These are (often) young couples in “kei” trucks (mini minivans) fitted out to be one or another sort of mobile restaurant. You encounter them in suburban parks and other places families frequent, or in urban plazas. [In most of Japan parking along the street is not an option. In the areas I frequented the police made no exception in the late evening, when streets were only occupied by the occasional taxi and by drunk sarariman tipsying towards their train home.]
|Here and below are photos by Smitka|
Entrepreneurial, imaginative. First, the imaginative. To be practical, imagination must be constrained, not given free rein. Keeping things small(er) is one such constraint, pushing creativity in much of the world in directions irrelevant to the US environment. In Japan you find many adaptations to narrow streets and small lots. There are the local restaurant delivery services. At one time that would have been a Chinese restaurant or sushi shop, but tastes have changed and now that niche is dominated by contemporary sorts of foods. In the US delivery is done by employees in their own car. Not so in Japan – it’s by company scooter. In Chiba (a city of 900,000 just east of Tokyo) that might be the local Pizza Hut franchise. [I was never tempted to sample their fare...] Similarly, the backhoe that as I write is digging a trench to improve my driveway’s drainage is small, but it’s a monster compared to the construction equipment at sites in urban Japan.
So I should not have been surprised at vendors in their “kei” minivans, laid out to take advantage of every cubic centimeter. I unfortunately don’t have a photo of my favorite, a “kei” that a couple fitted with a wood-burning oven appropriate for two small pizzas. Not a viable business? Actually, it was about right – they didn’t have much workspace to toss the dough and lay on the toppings, and with the very thin crust they used – something I’ve seen in Milan and Tokyo but not the US – a “pie” didn’t take long to bake. The wait wasn’t bad. Theirs was a one-off, a personal project, but it looked something like this:
My most recent encounter was with a mobile coffee shop. I had a chance to chat with the owner/barrista in between customers. He had designed the layout himself, and helped do the fitting. Water, propane for heat, a grinder, an espresso machine, a sink, a fridge … the whole works, and he roasted his own beans [his logo proclaims that: 自家焙煎]. He wasn’t however in the suburbs but instead near Tokyo Station, taking advantage of real estate laws that set fairly restrictive floor-area ratios forcing newer office buildings to include an off-street plaza. He had a rotating schedule of such locations where he’d negotiated access (presumably for a fee). While he had an awning and some seating, most of his business was take-out. That sultry summer day he was busy enough, though he’s inclined to take the day off in truly inclement weather. Here is the van, with the “master” at work. (Click to enlarge!)
|Home Roasted Beans||Master at Work||Service Counter|
In my experience restauranteurs are quite finicky about their setup. This entrepreneur may have been willing and able to take a hand in finishing off his creation (see his 大月珈琲店 Facebook page for photos). However, welding and fitting are not part of the typical Japanese skill set, where “do-it-yourself” does not include even the most basic of household repairs. So with a little bit of digging I found several companies that specialize in such, including ZECC, Maku, Aian Cook ["Iron Cook"], and (winner of the best name) Mobil Cafe Mom’s: Production of Customized Car. The used car page on GooNet lists 104 “mobile retail” vehicles for sale, with prices from around $12,500 for a used truck to $25,000 for a brand new one, albeit none of these have appliances. An example from carsensor.net lists one with already equipped with sinks, plumbing and exhaust fan at $17,000. Yahoo Auctions Japan likewise lists numerous vehicles, so it appears to be an active segment. (I didn’t check Rakuten; in Japan eBay botched its initial entry and is not a player.)
Now I’m sure there are similar specialized firms in the US, and maybe on the West Coast mobile vending remains a lively business model. Yes, there are unusual promotional vehicles, such as the Oscar Mayer Wienermobile – there’s one on permanent display at the Henry Ford Museum in Dearborn. But I’ve not seen such whimsical “mobile kitchens” outside of Japan.Links to (Japanese) pages with photographs:
- Pizza Boccheno
- ZECC, which specializes in making “mobile retail” vehicles. Lots of photos.
- Pizza Ci Vediamo [note the Coleman brand tent!]
Saturday, October 4, 2014
I don't think so. I have a LOT more to write on this as someone who has spent a career life in the retail auto business AND worked in the van Tuyl organization. This time, Warren might have bit off more than he can chew
This is a REALLY BIG DEAL!!!!
A good piece from Seeking Alpha on Ford, instructive in the importance of margins, or as we call it in the retail auto business, "Gross Profit," what consumers hate to pay. "Success for any company begins with gross margins as this tells you how much it costs a company to make whatever it's selling. This is a pure look into a business' ability to show pricing power with its suppliers and demand from its customers."
Friday, October 3, 2014
ZF Friedrichshafen is buying TRW; JCI sold its automotive business to Gentex and Visteon. Are we in a new era of supplier M&A activity? The previous wave didn’t work out well – Dana, Tower, Dura, Lear and others ended up in Chapter 11.
So how about Federal-Mogul? They too went on an acquisition binge in the late 1990s, including the British firm T&N. In the process they took on debt, with a $2.75 billion package just for the T&N purchase. As with others, they bit off more than they could chew. Federal-Mogul’s downfall however wasn’t operational issues but one T&N factory that had used asbestos. The accompanying $1 billion-plus in costs tipped them into Chapter 11, and it took until 2007 – 6 years – for them to emerge. So where are they heading?
Now back in 1999 Carl Icahn, a corporate raider, started buying shares in Federal-Mogul. The value of his initial holdings vanished in Chapter 11, but he also bought Federal-Mogul debt, a lot of it, and in 2007 emerged as the dominant shareholder in the new firm. Icahn’s modus operandi had been to acquire a majority stake in a company – the list includes Viacom, Marvel Comics, Blockbuster and Time-Warner – and then replace management with his own associates. They then would dismember the company in search of cash, with Icahn unloading his holdings as soon as practical, to make way for the next target.
Obviously 2008 was not a good time to unload anything automotive, and overall profits have since been spotty. But by 2012 profits were looking up, and Icahn split the firm into two pieces, separating powertrains (a $4.2 billion business) from aftermarket ($3.1 billion). This made sense only as a prelude to Icahn’s selling one or both of pieces. Consistent with preparing for a sale, he appointed an associate, Daniel Ninivaggia, as co-CEO of the aftermarket portion. [See a Sept 3rd Automotive News story.]
In a visit to a Federal-Mogul R&D center in Plymouth, Michigan we [Dawejko and the rest of the class] saw how focused their people were on designing and manufacturing new products. Most of the class had never heard of the test equipment we saw. Unlike the tribology labs, some of the products under development were self-explanatory, such as the corona discharge spark plug about which TTAC reported in 2011. What became clear is that Federal-Mogul is in fact a high-tech operation that spends 5% of revenue on R&D. They have been a PACE supplier innovation finalist 32 times, and an award winner 11 times. In the context of the automotive product cycle, however, technology is not a route to quick profits.
[In autos] technology is not a route to quick profits
Back to Icahn. The new co-CEO of the aftermarket half of Federal-Mogul may be an Icahn executive, but unlike the people Icahn installed on the board, Ninivaggia previously spent 6 years at Lear. He is an industry person, and not just an M&A specialist. In the same vein, Rajesh Shah, named CFO in 2013, has a long career working for auto suppliers, and came from another supplier rather than from Wall Street. Looking forward Ninivaggi noted, “There’s been a significant consolidation in the industry and as our customers have become very large companies, we need to do the same thing; we need to grow fast, improve our capabilities and expand our product lines”. It will take some years to show that the newly autonomous aftermarket operations are firmly profitable.
M&A may be a useful tool as major suppliers work to adjust their portfolio to match their global footprints, selling pieces that don’t fit to erstwhile rivals and buying similar operations from their competitors. Federal-Mogul is itself an assemblage of such pieces, cobbled together over the past 20 years. (An aside: one engineer the prof knows worked for five different firms, while never changing his desk at what is now a Federal-Mogul facility just outside Ann Arbor.) At the Plymouth tech center we were presented with their R&D roadmap, shared with their customers. They’re looking a decade down the road, 3 product cycles, for what future drivetrains will require. If they get that right, they will be one of 2-3 global players left in each of their product segments, with profits to match.
Pension fund managers operate on a 60 day cycle; the customers of hedge and restructuring funds take longer to get restive. Neither is compatible with the auto industry. History suggests that buying and selling automotive firms is not a quick route to riches for anyone but the lawyers and investment bankers who participate on a fee basis. Wittingly or not, Icahn is in this one for the long haul.
...there's irony when corporate raiders turn into stable shareholders...
Icahn isn’t alone in holding onto things; Wilbur L Ross with International Automotive Components has been “in” for a long while as well. Is there not irony when corporate raiders turn into stable, major shareholders, so that these firms look more like privately held firms investing across the business cycle than ones whose strategy is driven by the stock price of the moment?
By Alexander Dawejko ’17 and Michael Smitka, Economics Department, Washington & Lee University
Thursday, August 28, 2014
Wednesday, August 20, 2014
Tuesday, August 19, 2014
Auto sales are not the only measure to assess an auto OEM's relative health. This piece from the Detroit Bureau lays it out:
- GM slid to third when it comes to units sold for the first half of 2014. And focusing on just the most recent quarter, the Detroit maker fell to fourth when it comes to gross revenues.
- GM reported gross sales of $39 billion for the April to June quarter, noted Autoline: Detroit Editor John McElroy, putting it well behind Germany’s multi-brand Volkswagen AG, at $68 billion. That was well ahead of even the industry’s leader from a unit sales standpoint, Toyota, which managed a still-hefty $62 billion in revenues.
- The big surprise was Daimler AG, which managed to nudge past GM with $42 billion in second-quarter revenues. GM, in turn, managed to squeak past the Euro-Asian Renault-Nissan Alliance by just $100 million.
- Ford Motor Co. delivered $37 million in revenue, with fast-growing Korean siblings, Hyundai-Kia reporting $33 billion. The newly merged Fiat Chrysler had combined revenues of $31 billion. Rounding out the list of major global plays, Honda revenues came in at $29 billion, with BMW in the industry’s 10th spot at $26 billion.
Thursday, August 7, 2014
I don't think so. For some reason, the New York times jumped on an Equifax report, cherry picked data to suit a sensationalistic agenda, and published the piece on Dealbook (link). Many have weighed in since, including myself – see below! Other examples are Marketwatch and a NYT Op-Ed
Written for Auto Finance News
By David Ruggles
A recent report from Equifax Inc., which noted that originations and total outstanding balances for subprime auto loans have hit recent highs, triggered an alarmist article on subprime lending in The New York Times. In the July 19 piece, authors Jessica Silver-Greenburg and Michael Corkery cited anecdotes that leave the impression that fraudulent practices are widespread. They castigate the “high” interest rates on subprime loans without mentioning the high rate and expense of default and repossession. Repos can reach a third of originations, and collection practices ― which are expensive to begin with ― are a challenge on these loans.
Through April, 2.6 million subprime loans were originated, representing 32% of all auto loan originations, according to Equifax. The outstanding balance of those subprime loans totaled $46.2 billion, an eight-year high. Equifax defines “subprime” as loans to customers with credit scores of 640 or below. As a matter of record, though, in some circles, a loan is deemed subprime when the credit score drops to 580.
The American Financial Services Association and other industry professionals have since weighed in on the NYT article, noting that it enflames already-riled regulators. And Derek Kreindler, managing editor of TheTruthAboutCars.com blog, writes: “Don’t expect that 32% figure to let up anytime soon. The glut of credit available for auto financing ― driven by securitized subprime auto loans being sold as investment-grade instruments ― is going to keep the auto financing business alive and kicking for the foreseeable future.”
Saturday, July 26, 2014
This post was written May 12, 2014 by Anton Reed '14 for Economics 244. The Prof edited it and appended comments by others in the class.
I will revise and reblog the best posts of my students over the coming weeks.
In April, when they released their FY2013 annual results, MMC (Mitsubishi Motors Corp) reported record profits. Don't get too excited.
Mitsubishi Motors' North American operations are struggling; MMC sells far less than any other Asian car company in North America. The next smallest, Mazda, sold almost three and a half times as many vehicles in April 2014. Only six firms sold fewer cars, and of those only Volvo is not a niche luxury marque. (The other five, in decline order of sales, are Jaguar/Land-Rover, Porsche, Tesla, Maserati and Ferrari.)
There are positive signs, with April sales up 46.6% over 2013 and year to date sales up 29%. Only Maserati had a larger increase, but they sold 753 vehicles last year, so that shift represents only a few additional cars. On the other hand, among manufacturers building cars for mainstream customers, Mitsubishi sells the least, so its percentage increase likewise represents only a modest absolute change. Nevertheless Mitsubishi has been improving its North American operation, with net sales up 53% from 2012 to 2013.
Friday, July 11, 2014
Google's senior executives are busily touting the wonders of autonomous vehicles. There's the technological marvel, at least in the eyes of Silicon Valley. There are the economic benefits - no more congestion, no more accidents. Wonder of wonders! – and great for the Google empire, and for its stock price.
The PR machine is a marvel to behold, and the gullibility of the audience – well, it's Google! Is their part in this really that much of a marvel? Will economic benefits be as great as they claim? Will they even be a player in future vehicle technologies? Their PR machine is not paid to probe such issues, much less point out that alternative technologies may bring almost all of these benefits more quickly and at a very modest cost.
First, the core innovations necessary for an autonomous vehicle are already on the road, the result of decades-long engineering efforts alongside which Google's investment and expertise pale in comparison. Blindspot detection, lane departure warnings, backup "assist" (outside the US that is surely called a safety feature) and adaptive cruise control are all necessary for an autonomous car. Now some of these aren't cheap, but they're falling in price. So we don't have to await an entirely new generation of vehicles to begin reaping the benefits. Crucial to Google's vision is that these are all partial solutions. However, I am not at all convinced that what Google offers will be a sufficiently big increment to offset the additional costs of full autonomy. Nor is it at all obvious that Google will have any role short of autonomy – their presence is not needed for these existing tools.
Second, Google's is not the only approach. In particular, connected vehicle technologies promise most of the benefits at a far lower price point and with a faster rollout. Such systems are inexpensive because they can use the copious computing power already in car, while the hardware consists of inexpensive RFID transponders (though not as inexpensive as the tags retailers use to deter shoplifting). The pieces of such systems are now being tested on the road, with a large test facility – the Michigan Mobility Transformation Center – an artificial cityscape – under construction in Ann Arbor, adjacent to the University of Michigan Transportation Research Institute. Such systems don't require the panoply of sensorts of an autonomous vehicle. Indeed the core components could be sold as an aftermarket item, albeit with lower functionality. Such connectivity could be rolled out in the course of years.