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Tuesday, October 7, 2014

Espresso and Pizza

The base post lies at Espresso and Pizza on October 7, 2014 on The Truth About Cars.

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.]

Photo courtesy of the author
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:
  1. Pizza Boccheno
  2. ZECC, which specializes in making “mobile retail” vehicles. Lots of photos.
  3. Pizza Ci Vediamo [note the Coleman brand tent!]
[Note: max "kei" dimensions are 3.4m x 1.48m x 2.0m with an engine of 360 cc - a Smart is too wide and has too big an engine.]

Saturday, October 4, 2014

Labor Market Update: little bad news, but no acceleration

I post below a series of graphs on the US labor market updated through September 2014. As I read it, the latest CES (Current Employment Survey) and CPS (Current Population Survey) releases from the Bureau of Labor Statistics show more of the same – job growth a bit above population growth, little bad news, but no hint of an acceleration in the economy that might soak up what I estimate to be a 7.6 million shortfall in total employment, and 8.7 million gap if we subtract the rise in those working involuntary short hours. All this is calculated correcting for demographic effects including baby boomer retirement. As the graphs indicate, there's been no drop in participation by older Americans; the brunt of our recession was born by prime-age workers and especially new school leavers.

Warren Buffet's Berkshire Hathaway buys auto retailer VT Inc.

From Slate Magazine: "Warren Buffett's Latest Deal Has Officially Made Car Dealerships Cool"

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!!!!

Ford Poised to Realize an Upturn in Margins?


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

In For The Long Haul

The original for this post is at TheTruthAboutCars.com, which in turn draws upon a post by Alexander Dawejko done for my Economics 244 course. I have added another paragraph here.

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

Does Car Racing Make Cents?

Here is a post that draws upon questions posed by students that appears on the Economics 244 Auto Industry blog. However, instead of posting it in full here, I encourage you to go to it on The Truth About Cars item Does Racing Make Cents?, in part for the occasionally thoughtful comments that appear on that site.

Mike Smitka

Wednesday, August 20, 2014

Interest rates, inflation and growth

I go through US data periodically for a weekly radio show on W3Z - WREL in Lexington, Virginia. Unfortunately they don't stream their locally-produced content, probably because most of what they broadcast is syndicated and they aren't licensed to do so.
I've talked in recent weeks about the low returns available on savings. Let me trace that logic in more detail. In the end, I'll tie this to the discussion going on in economics circles about secular stagnation. (Since this is a blog, here's a link to VoxEU, which has just released a free eBook with essays by 19 economists, arguing the empirical strengths, weaknesses and implications of "staganation.")
Long-term rates are generally down since December: 30-year bonds fell from 4.0% to 3.2% and 20-year bonds from 3.0% to 2.4%. Those are drops of 0.8 percentage points and 0.6 percentage points, respectively. (Meanwhile-year rates are flat at 1.6%.) That is not necessarily good news, as it means that the serious money crowd think that growth will be weak for years to come.
Let's look at the numbers over time and see what they imply. If you're an investor, you can buy a 1-year bond today and another 1-year bond a year from now. Or you can buy a 2-year-bond today. Since there are lots of players in this market trading minute-by-minute, those two returns ought to be comparable. Here are calculations of future rates consistent with today's bond prices. (There are other corrections, such as for risk, but I don't think that changes my results in a qualitative manner.)

Tuesday, August 19, 2014

Who is Number One?

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

Auto Finance Sub Prime Bubble?

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

Mitsubishi Motors Future: Summer Guest Post #1

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.

2014 Asian OEM Market Relative Share

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 Autonomous Car: Don't Drink the Kool-aid

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.

Sunday, June 29, 2014

Autosaurus Rex: Car Death in Japan (revised)

Iwao Corp: After the last auction

Thanks to Prof. Shioji of Kyoto University for arranging this tour in conjunction with the 22nd GERPISA Conference, June 2014

Car's don't last forever. Auctions provide one intermediate step, helping set a market in used car prices and facilitating the reselling from the original owner. But what happens after that? One place is the Mogitori Center of Iwao Corporation [リサイクルセンター有限会社イワオ] in Yawata City, Kyoto.

Now as noted earlier this June in the post on auctions, the average life of cars was at one time extremely short, driven by the escalating costs of vehicle inspections, which included mandates for replacing items that might fail with age, at least when the system was set up in the 1950s. Until 1995 inspections were annual from the 10th year, and since they were costly (US$1,000 at a dealer, including biannual vehicle taxes), the result was that few cars were kept longer than 10 years. Indeed, through 1997 the average life of a passenger car was stable at 9¼ years. Thereafter it rose steadily to hit 10 years in 2000, 11 years in 2005 and 12 years in 2010. (The chart in the post on auctions gives a stable 4.7 year average age through 1995, then rising monotonically to 8.1 years in 2013. I do not know the source of the difference – given the context I think it is age at auction, but the underlying source does not make that clear - literally, in that the relevant footnote is too blurred to read.)

Still, cars don't live forever. Accidents happen; depreciation is inexorable. So while about a third of cars sold at auction are exported, most eventually are scrapped. That's what Iwao does.

Disassembling a car takes less time that putting one together. The key is to extract value – and stay legal. Typically the tires and wheels have been removed before Iwao receives the car; sometimes the engine and other replacement parts have already benn removed. For what they do get, they pay by weight – trucks hauling in cars get weighed before and after unloading. Once that's done, the fluids must be removed. The gas tank gets emptied, and cut open to release residual vapors and prevent an explosion. The freon (or other refrigerant) gets recovered, to prevent the release of greenhouse gases. Then the airbags are set off – once the appropriate wire harness is exposed, all that needs to be done is to run a current through it, from a safe distance. The battery's removed, oil and other fluids drained. That all takes maybe 15 minutes, at least for an older car that only has a basic battery and a driver and a passenger side airbag. (Modern cars must be more challenging, with more airbags, multiple batteries, and plastic gas tanks. But for the time being most predate that era.)

Then the fun begins. A forklift is thrust through the windows, and the car moved to the initial disassembly location. A quick flick and it's on its side, so the axles and gas tank can be cut loose with a torch, any underbody wire harnesses cut, and bolts holding the engine removed. Another couple torch cuts and the engine flops out, and is moved to another station where the various appurtenances attached to the block are pulled off, leaving a large chunk of aluminum. The exhaust system (and particularly the catalytic converters) are then cut off and put in the relevant pile, and if they're still in the vehicle, the radiator and air conditioner condensor are removed. (Of course they'll also salvage parts from recent vintage vehicles, but so few remain on the road after year 10 that Iwao makes no particular effort to resell individual pieces of older vehicles.)

Meanwhile, the body is lifted over to face the jaws of death. This tyrannosaurus rex of the automotive world punches through the roof and rips it away. The monster might shake and throw a recalcitrant car around, playing with it until can rip enough roof off. Then in a couple gulps it dispatches the instrument panel, tossing those bites aside. It then punches through what's left to grab the main wire harness: copper's valuable. Once that's done it tosses it to one side for a quick scan for any other easy-to-remove wiring. Then it's to the crusher, and the cube stacked with others awaiting its turn in the shredder. [In Japanese it's a "nibbler" crane [ニブラ重機], though the bites it takes are pretty big! – here's a YouTube link, though it's not the same facility.]

What goes on in the shredder isn't visible, but the noise and dust make it clear that violence reigns. (I didn't ask whether it is a toothed roller or hard steel balls swinging on chains.) Not everything gets shredded sufficiently; a crane picks up big pieces and stacks them for reshredding. For the remainder, a magnetic separator pulls out the steel; a "cyclone" uses air to separate out lighter components, such as the fabric and foam in the seats, carpets and headliner, that then gets compressed into burnable chunks that can be sold as an alternative to coal. Two workers in full suits and breathing units pick out rubber tubing in an enclosed shed through which what's left. Of course that's a function of the resale price of various types of scrap. At present about 20% remains as "shredder dust" headed for a landfill; potentially that could be reduced, if Iwao can find a market for additional types of material.

Back to cars as durable goods. For a given rate of depreciation, the higher the value of recycled components, the sooner a car will get scrapped, by Iwao Corp or one of 3,000 other small-scale operations. However, the advent of auto auctions facilitated more used cars being exported, driving down the number scrapped domestically. At it's peak Iwao handled 150,000 vehicles a year; it's the largest and most vertically integrated firm in the industry. But now it's down to about 70,000 per year, or 50% of peak, though most it buys already compacted; only about 10 per day start as complete vehicles. Still, the scrapping facility we visited generates about US$5 million a year in revenue, with 10 workers, 2 bookkeepers, 2 truck drivers and Mr. Iwao.

In Europe environmentalists have seen that OEMs face mandates that cars be made capable of recycling. Despite high prices for steel scrap, copper and aluminum the labor involved means that only some can actually be profitably culled. Of course if the workers know the layout and composition of each and every model they face in their dirty, noisy shops – but these are not the sort of jobs to attract those with analytic skills and an attention to detail. Watching this operation suggests less may become recycled, because the mix of materials – aluminum bodies, magnesium liftgates, and a wide array of plastics – will be harder to sort through.

Mike Smitka

Saturday, June 14, 2014

Janet Yellen's Dashboard

Once a quarter, Federal Reserve Chair Janet Yellen and her colleagues on the Federal Open Market Committee take a thorough look at where the U.S. economy has been and then make projections for where they think it’s going. The next batch of those predictions—for unemployment, inflation, growth and interest rates—will be released on June 18. Ms. Yellen will discuss them at her quarterly press conference. (Brookings link)

David Ruggles

Monday, June 9, 2014

Auto Auctions, Japanese Style

Here're just a few notes on a visit to the Kinki branch of Toyota Auto Auction on a day when they were offering 1,700 vehicles (of which 10% or so might not hit the reserve price). This was arranged by Prof. Shioji of Kyoto University who helped host the first meeting in Japan of GERPISA, an international consortium of (mainly social science) researchers on the global auto industry. Now I've yet to see a Manheim or an Adesa auction so I can't compare and contrast. Perhaps later this summer I can rectify that...

At the Kinki site there's a massive multi-floor garage; land's too valuable close to Osaka for a massive open-air parking lot. We watched one of their evaluators go through a vehicle with a long checklist, from spots of corrosion to paint that suggests a repaired ding, including pulling away the fascia in a couple places. Most purchasers don't look at the actual vehicle but rely instead on the (target) 7 minutes that an inspector spends on a car.

Indeed, when we moved inside it was apparent that many purchasers are remote. While there is a large room of people bidding, many others are at computer screens elsewhere, while those at the Kinki site are watching simultaneous auctions held at other TAA sites. For that matter, Kinki TAA itself runs two lanes simultaneously; each computer in their bidding room has a red button on the left, a blue on the right. So first the screen updates as pre-bids are sorted out, and then the live bidding begins as those sitting in the auditorium or elsewhere click the bid ¥1,000 higher. The screen changes color once the reserve is hit – most of the cars are from trade-ins at Toyota dealers – and sellers can negotiate with the highest bidder when the reserve isn't hit. (I will check my notes later, but recall the no-sale rate is about 10% or, to put it the other way, the conversion rate is 90%.)

Now several larger trends in the Japanese market and in used cars showed up in our discussions. One is the role of cars as durable goods. Japan raised its consumption tax from 5% to 8% on April 1st and given that processing paperwork for a new car purchase takes several days (you have to file proof of a parking spot, which must be vetted by the relevant local government), sales plummeted in late March and are only now starting to recover. The result was a short-run dearth of vehicles coming to auction, and a modest bump in prices. Now at one time cars were kept but a few years, typically being scrapped before vehicle inspections became annual in year 10. That in turn meant low prices for used cars in year 8 ... so the prospect of even a minor repair could lead to a vehicle being scrapped. However, in the early 1990s the vehicle inspection system was relaxed, with less frequent inspections, fewer mandatory parts replacements (reflecting the abominable quality of Japanese cars in the 1960s, brake lines were one mandatory item), and allowing non-dealers to do the inspections. As a result the average age of vehicles is higher, and with a more vigorous resale market, well, that's when TAA switched from a way for Toyota to help dealers by buying trade-ins at an artificially high price as a quiet, off-books subsidy to a real entity. Of course the fact that one friend drives a 13-year-old vehicle that he's in no hurry to replace is not necessarily good news for those selling new cars. Even so, the market remains thin at older ages, where roughly one-third of cars are bought by foreign traders (many in evidence at TAA that day) for export to Russia, Pakistan and West Africa.

The group also visited a shredding operation; more on that later. The key link to TAA is that their business is down by about 50% as vehicles are on the road longer and more are exported (including some apparently exported to be scrapped). As noted in earlier posts on this blog (The Decline of the Japanese Auto Industry), it's going to be really interesting to see how all of the loss of a large domestic market interacts with the product mix of Japanese car companies and particularly the survival of Japanese parts makers.