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Sunday, April 20, 2014

Peak Oil is Here

Discussions I've seen of peak oil focus upon it as an issue in geology: how many years until production begins to decline [name your fossil fuel]. As an economist, however, that's irrelevant, reflecting a misperception that underlies the 1980 Simon - Ehrlich bet. In an economy, there are many margins of adjustment. As a starting point what matters is rather the time path of real prices. Since this blog focuses on the auto industry, the second margin is fuel efficiency of vehicles. I won't get to the second piece for several paragraphs, and then only briefly.

The market price of a depletable resource need not follow any particular time path – many (silicon) are abundant beyond any likely need, and so the price reflects the costs of extraction and short-run shifts in demand and installed (extractive) capacity. Over time, however, we've extracted the most readily accesible reserves of petroleum, and "scarce" or not, price will rise. (Likewise, we're seeing an increase in demand, given the success of East and Southeast Asia – and above all China – in lifting much of their populations out of the grimmest sort of poverty.

The early years of the industry saw many technical improvements in extracting petroleum and refining and transporting it as gasoline. Combined with discoveries in the Persian Gulf, prices were relatively stable (and low) from the end of World War II (1946) through the early 2000s, albeit with a spike around 1981. Indeed, in the 1990s energy prices were at their lowest in human history, as per an earlier blog post, "Are Gas Prices High?," particularly if we take into account the rise in real (US) incomes.

On impulse I looked at prices for the first time in three years. As a devil's advocate let me suggest that we are now seeing peak oil, with prices rising and (my hypothesis) not falling here on out. Here are 3 graphs. First, here are import prices of petroleum in 3 large economies. Now my first caveat is that to Germany and Japan what matters is the price in (respectively) the Euro and the Yen, but during this time frame forex rates have not swung by even two-fold. Looking at post-1949 domestic U.S. prices gives the same story; as per the first graph, I've shaded in the 1990s to emphasize that prices were below the post-WWII trend through 2000, and significantly below the post-war trend when extended through early 2014.

But as an economist peak oil is about price trends, not levels. So for the final graph I calculated the price trend over 1976-2000 and compared it with the trend over 2001-2014 (I truncated the trends berlow where they intersect). In the first period, prices fell at 6.3¢ per year; in the second, they rose at an annual 15.4¢ rate. Now many things could affect this. In the short run, the Chinese economy may see a recession. The timing of when new production comes online is potentially lumpy, and can depress prices until global growth catches up. In the longer run, high prices encourage the development of alternatives; natural gas in the next decade, solar power thereafter. In other words, this is informal analysis, and is not embedded in a model that spells out alternatives in terms of rates of change on the demand and the supply side.

For the auto industry, there are several margins of adjustment. First, there's an improvement in fuel efficiency; my '88 Chevy pickup is lucky to get 10 mpg, my Chevy Cruze gets 35 mpg running up (and down) hills to get into town, and over a 25 mil stretch of highway driving I've peaked at 50 mpg. So in the short-run I've been able to offset the rise in prices at the pump – until I need to haul a load of rock dust. But if the trend continues, then the next 3 years will see prices up by roughly a half dollar, or about 14%. As a PACE judge the technologies I see suppliers bringing to market suggest that the industry can offset that magnitude of price increases for another decade. Thereafter alternative fuels and shifting driving habits provide additional margins of adjustment – in the normal week neither my wife nor I drive more than 75 miles in a day, well within electric vehicle range. My old house sits 50 feet from the regional natural gas pipeline. While not yet fully cost competitive (and then there's the base vs peak load issue), solar power is not a depletable resource, and natural gas is depletable, further from "peak" (and potentially renewable as a biofuel).

The underlying issue is the extent to which the industry should place bets of future high petroleum prices. Public policy, particularly in Europe, has already decided that. Whether (or rather at what rate) we will buy such vehicles – and adjust our driving habits – will be a function of prices. From the industry's perspective I am however not particularly worried about our running out of oil, even while believing that we're seeing peak oil.

Econ 244: The Auto Industry

Until end-May I will blog (with students) at Economics 244 (economics of the auto industry). Follow me there! the prof

Wednesday, April 2, 2014

GM & Toyota: Of course they generate scandals!

I'm part of a discussion list on Japan [hosted by the National Bureau of Asian Research in Seattle] where comparisons of GM and Toyota naturally arise. At the time of the Toyota unintended acceleration incidents there was lots of discussion of how this reflected Japanese culture. Now we find the same in Japan for how GM reflects American culture. Balderdash and bullshit.

Back in 2010 NPR's Morning Edition carried an interview with several Japan experts on the topic. Let me (re)quote pieces from 3 different people:

Corporate Gulf Between Japan, West

Kenneth Grossberg, professor of marketing at Waseda University in Tokyo, blames a gulf in corporate culture between the West and Japan. "It is proper behavior not to air linen in public. It is not considered a cover-up in terms of Japanese culture, it's considered proper etiquette. You don't talk about it," Grossberg says. ... Like many other Japanese companies, it's stuck to the Japanese way.

. . . . . .

"Many Japanese managers are convinced that the economics of homogeneity, of being ethnocentric, outweigh the advantages of being a globally integrated enterprise," explains Stefan Lippert, a former management consultant with McKinsey and Company who teaches at Temple University's Tokyo campus. ... Lippert says Toyota's appointment ... of Toyoda ... shows its commitment to tradition and to the Japanese way of doing things. Now, Toyota's troubles underline the stark choice faced by Japanese businesses.

. . . . . .

Jeff Kingston, Temple University's director of Asian Studies, believes the lessons are clear. "This has to be a turning point for corporate Japan, a wake-up call. ... They need to become less insular. They need to become more international. They have to regain some of that competitive edge that they had in the 1980s that made them into world-beating companies," Kingston says.

One NBR member who lives in Japan and reads the Japanese-language press, Earl H Kinmonth, then observed that

"It [NPR], like many reports at the time, explained Toyota's response to the stuck accelerator issue in terms of either a unique and insular Toyota culture, a unique and insular Japanese culture, or both." EHK went on to ask: "I have been reading of accounts of the unfolding issue(s) with GM. Not being a specialist in Japanese or American corporate culture and with no knowledge at all of corporate culture in "the West," I am finding it very difficult to understand what is all that different about the GM case compared to Toyota other than it involves different parts of cars."

In this case EHK hits the nail on the head. Here is my argument:

We can interchange "Toyota" and "GM" in listing factors behind their recalls.

In the Toyota case, it was in part an organizational structure where the right hand did not know what the left hand was doing, no common boss for brands in North America [Toyota of America, Southwest Toyota, Southeast Toyota – a tripartite geographic split dating to Toyota's initial entry into the US, when they lacked the resources & vision to market to the entire US], model proliferation [I counted 90 inside Japan, some effectively identical vehicles but with different names in different channels], later add-ons poorly coordinated [Daihatsu, Lexus], rigid personnel policies [rotations!] and hierarchy, MBAs at the top who emphasized cost cutting. The denouement was the sacking of Toyota's executive suite in 2009, with Akio Toyoda ascending to the top in June 2009. Reorganization on various levels coming bit by bit over the last 4 years.

In the GM case, it was in part an organizational structure where the right hand did not know what the left hand was doing, no common boss for brands in North America [each marque long had their own marketing, design & engineering staffs], model proliferation [effectively identical vehicles but with different names in different channels, later add-ons poorly coordinated [such as Saab and Saturn], rigid personnel policies and hierarchy, MBAs at the top who emphasized cost cutting. The denouement was the sacking of GM's executive suite in 2009, with a new board ascending to the top in July 2009. Reorganization on various levels coming bit by bit over the last 4 years.

We can interchange "Toyota" and "GM" in listing factors behind their recalls. To put it another way, I see no analytic benefits from resorting to "japanese" or "american" culture as an explanation. Indeed, in almost all cases [outside of discussions between anthropologists] the introduction of "culture" is a denial that the situation is capable of analysis using the tools of organizational theory, economics, or any other discipline: they're unique, end of story.

Certainly GM and Toyota each have their own "culture" (as do all large organizations). My sense, however, is that the culture of Toyota differs tremendously from that at Honda or at Nissan. Ditto Ford vs Chrysler vs GM – for the latter I've heard tales of consultants who worked for one finding themselves at a loss when their next project was with another of the Detroit Three. From my end, I hear very different descriptions of OEMs when I visit suppliers – which drives suppliers batty who are not versed in the auto industry and assume if they learn how to work with one, they know how to work with all.

I can't define "japanese" or "american" and I've not heard anyone else do so. And it's not for lack of a knowledge base. I'm fluent in Japanese and English, have lived in Tokyo for 7 years and rather longer in the US, have had kids in local elementary and middle schools in Japan and the US, have taught in high school and college in Japan and been around high schools and colleges in the US, have worked in Japanese and US organizations. All this is backed by reading in anthropology and sociology and organizational behavior and business history, and not just economics. Thus I can't think of a metric for judging whether Toyota differs from GM more than it does from Honda – my hunch is that if somehow we could devise an anthropological metric, we'd conclude that Honda differs more from either GM or Toyota than GM and Toyota from each other.

Before resorting to "culture" we must first try other, analytic explanations. Toyota and GM are both very large, multidivisional firms long dominant in their home markets, and with my analytic models, that's sufficient. Do their cultures also vary? So what – that's irrelevant!!

PS: I own a month-old Chevy Cruze with a 1.5L engine, for which I may well receive a recall notice. BTW it's a manual transmission Eco model, chosen because it has an interior that both my wife and I can endure – we found Toyota's interiors cheap and ugly, Ford's too busy – it has seats that are comfortable, and it's a fine drive on the winding ridgeline and holler bottom roads around my home in rural western Virginia. But I expect any vehicle I might purchase to get at least one recall notice. My reading of the data is that post-2009 GM vehicles come off better on that criterion that post-2009 Toyotas.

Wednesday, March 26, 2014

Thinking globally: the US$ isn't the only currency!

The recent depreciation of China's exchange rate with the US$, to which it is pegged, garnered headlines. Until now those watching China believed that the RMB could only appreciate, leading to heightened foreign demand for Chinese assets by foreign speculators. Allowing a modest depreciation and increasing the intradaily trading band from 1% to 2% should discourage those expecting to make a quick buck by buying RMB today and selling tomorrow.
RMB trade-weighted
But how has the value of the RMB changed from a Chinese rather than a US perspective? China trades with the rest of the world and not just the US – Europe and Japan are major export markets and major sources of imports of luxury cars, machinery, semiconductors and other products – so the value of the RMB versus the Euro and the Japanese Yen also matters. Hence the concept of a trade-weighted exchange rate, conveniently provided in MS Excel format by the Bank for International Settlements in Basle, Switzerland. My graph presents their "effective exchange rate" calculation, to which I have added the bilateral RMB/US$, RMB/Euro and RMB/Yen rates, all indexed at 100 = average CY2010 value. Oh, and a higher value means a stronger RMB, and appreciation of its value, making it harder for firms in China to export and more attractive for them to import.
Because these other currencies move against the US$, there are periods when the RMB has appreciated or depreciated from the perspective of Chinese exporters and importers, even though the exchange rate was constant against the US$.

Tuesday, March 18, 2014

Automotive History II: Deciding on Layout

An article in the Economist on "tuk-tuks" - three-wheel vehicles common in a number of countries. In the rural Philippines car ownership is still only for the well-off, and taxis ... well, if you're well-off enough to afford a taxi, you can afford a car or get a ride from someone who does have one. On the other hand, tricycles are everywhere, a motorcycle with two seats beneath an awning in the back, spewing exhaust and drowning conversations, while guaranteeing that the clouds of dust never settle.

With hindsight we know why people want 4-wheelers, among other things stability at high speeds, but the idea of an inexpensive 3-wheeler persists. On the motorcycle end there's the 3-wheel "Can-Am" BRP Spyder, and the now-defunct Aptera Motors plan for a mass-market 3-wheel car. Now I've never seen an actual Aptera, though the Henry Ford [Museum] in Dearborn long had a rear-wheel drive 3-wheel vehicle from [pardon my memory] 1903 on display.

...not all niche configurations disappear...

Standard histories will note the shift from engines under the driver to the front-engine, rear-drive layout (nodding to the 1891 Systeme Panhard). But in the early post-WWII era 3-wheelers were also prominent in Japan; as late as 1960, they comprised the majority of vehicles made (and in Japan trucks dominated until 1968). Thereafter output fell, and then plummeted, but in 1963 roughly 1 million were in use. Several of today's manufacturers got their start making such vehicles, particularly Toyo Kogyo (today's Mazda), Daihatsu, and the Mizushima plant of what is now Mitsubishi Motors. Now Mitsubishi exited in 1962, shifting output to (small) 4-wheel trucks; Daihatsu made such vehicles until 1972, and Mazda until 1974.

Stability was an issue, and that became important as roads became better so that speeds rose and maneuverability less critical. (In Japan's case, licensing exemptions helped, lasting until 1965, but the industry was already dying.) Four wheels helped too as vehicles themselves became larger. But 3-wheelers persist, in forklifts and tractors. Though most have two wheels in front, they are close together to allow a short turning radius.

Ironically, at higher speeds modern electronic stability systems offset the tendency of trikes to turn over, braking selectively, and paring back the throttle. That however is for operations on standard roads. At lower speeds and off roads, stability remains problematic: farming is the most dangerous occupation in the US that employees large numbers, and one source of danger is overturning equipment. So 3-wheelers persist more widely than people realize, and their potential remains. Outside of commercial applications, however, there's no evidence that they will ever be more than recreational products: at first opportunity, most people move from smaller to larger cars, and the cost differential of using only 3 wheels surely can't offset that preference.

The larger story remains that the variety of potential vehicle configurations is large, and most have been produced at one or another time. Some persist in niches – 3 wheelers, rear- and mid-engine vehicles. Not all niche configurations disappear: today front-wheel drive accounts for most vehicles around the world.

Friday, March 7, 2014

The Consumer Financial Protection Bureau (CFPB) threatens Small Business

Ruggles/Banks 14 Feb 2014
AFSA 2014 Working Paper

The CFPB, created as a part of the sweeping Dodd - Frank Act, recently entered into a “consent agreement” with ALLY Bank. Penalty and restitution amounts to $98 million, plus ongoing costs mandated by the CFPB to ensure continued compliance with the “agreement.” According to the CFPB’s “methodology,” it was alleged that ALLY Bank was guilty of facilitating discriminatory lending practices that led to marginally higher interest rate markups by car dealers to certain “protected classes.”

Don’t assume that the CFPB has any direct method to identify who is a member of a “protected class.” The “methodology” used by the CFPB to determine who is and isn’t a member of a “protected class,” which is a narrow legal definition, is discussed later in this article. To call their methodology “imaginative” is an understatement. The CFPB finds fault in ALLY’s business practice of charging dealers a “Wholesale Interest Rate” and allowing them to mark it up on a case by case basis based on what can be negotiated with each borrower. This is common practice in the auto industry and lenders are referred to as a "finance source-assignees". According to the CFPB, this creates a system that imposes a “disparate impact” on certain protected classes even though there is absolutely no demonstrable intent to discriminate.

...The CFPB affects auto finance in ways hard to predict...

Tuesday, March 4, 2014

Automotive History I: Setting Standards

This is the first of a series of posts tracing the history of the automotive industry from an economics perspective. I'm a member of the Business History Conference, the Society of Automotive Historians and the Industry Studies Association [at least when I remember to pay my dues].

The early history of the industry offers many lessons for – or at least reveals common dynamics of – start-ups in an era of uncertainty about technology, vehicle use, customer base, distribution channels and revenue streams. In the background are common analytic issues: the setting of standards, the entry/exit process, and the eventual coalescence – not finalized until the 1920s – around organizational structures that dominate the industry today. We are again at a point of rapid technological change; will we see a similar upheaval? I argue no, because most pieces of the industry will not be affect. It will however take several posts to reach a point where I can make that case on the basis of evidence and models.

Early Entry: The Plaything Era

Early entry reflected uncertainty about what sort of power plant might be practical.

Tuesday, February 25, 2014

Slowing Down

With US dealership inventories at 88 days on February 1st – 60 days is healthy – we are seeing a possible mismatch of sales relative to production. Yes, there's been bad weather across much of the US, and that kept shoppers away. This past week, though, I visited a half-dozen dealers while car shopping and used that as an opportunity to listen to them. What I heard suggests this is not a temporary blip.

...deals are on the way: if I could put off buying a car, I would...

First, the factory is hiking dealers' sales targets, and getting pushback: late 2013 is as good as it's going to get, and no, we aren't likely to do better. Of course every dealer wants a lower target, and they rightly fear the "ratchet effect" of overperforming leading to higher targets, even if their success was a result of idiosyncratic factors, such as hiccups at a local competitor or a sales blitz that worked in volume terms but not in profitability so won't be repeated. Still, my reading is that dealers aren't seeing the same sort of foot traffic, and they don't think it's just the weather. Furthermore, that is consistent with other macroeconomic indicators such as wage growth, interest rates and housing. Growth is anemic.

Friday, February 21, 2014

Federal Agency Should Stop Playing Guessing Games

David Ruggles

Here I'm posting a few points I made in "Federal Agency Should Stop Playing Guessing Games" published February 21st in WardsAuto.com. You can read the full article on Wards.

The Consumer Financial Protection Bureau has socked Ally Bank with $98 million in penalties and restitution requirements as part of a consent agreement stemming from unintended discrimination involving dealer-assisted car loans.

Ally facilitated discrimination, according to a CFPB analysis using “proxy methodology” that presumes to determine who is and isn’t a member of a government-designated “protected class” by means of a borrower’s first name, last name, zip code and other variables.


Thursday, February 20, 2014

Talking Macro: WREL show February 20, 2014

Here are notes from my weekly radio show on WREL Lexington, Virginia. The actual show seldom covers all of the topics I prepare, as what I discuss depends in part on questions from the host, Jim Bresnahan. What follows is thus expands on what I said or prepared to say.

The Economy

The Fed released its January minutes that suggests a pragmatic approach to policy targets.

Monday, February 10, 2014

Toyota's Profits, Nissan's Lack

One year ago – 2012Q4 that is – Toyota lost money in North America, and made only modest amounts of money in Japan. Today is much different, in contrast to Nissan. Bloomberg nails the source: the yen boom.

Yes, the Japanese economy and the US economy are both doing better, and so therefore should Toyota. But others were profitable in the US in late 2012, and Toyota has not gained market share. My scan of Toyota's financial statements (with glances at those of Ford and GM) suggest the entire gain is due to a more favorable exchange rate. (I have yet to look at the reports of stock analysts to see their take.)

From Toyota's perspective this should be a cautionary tale. They now are rolling in profits, and have the opportunity to continue a restructuring pushed by Akio Toyoda, the firm's near-eponymous chairman. But it does suggest two big problems.

Interest Rates and Employment: The Taper's Well Camouflaged

Protect Tapirs: http://www.tapirs.org

Tapirs are well-camouflaged. So's the taper: you have to look for it. That should not be surprising to anyone who lets their view of the world be affected by data, rather than the pop version of a simplistic model.

...the taper's well-camouflaged...

First, the data; I present 1 month, and 1-, 5-, 10- and 30-year interest rates, pulled from the Treasury's Daily Yield Curve web page. Interest rates are certainly up over the nadir of 2012, but casual reading of the graph suggests at best a modest impact (see the Wikipedia entry on the three US rounds of "quantitative easing", or the analysis of economist's such as that of James Bullard at the St. Louis Fed). In the background of course is the continued slow growth of the economy, which at its current pace of job creation will take until 2019 to bring us back to normal. Meanwhile, there are no signs of an uptick in inflation (and in Europe, a few whiffs of deflation).

Monday, February 3, 2014

Mitsubishi Motors: Going, going ... gone?

Mitsubishi Motors Corporation (MMC) is trumpeting record profits. I'm not convinced things are so rosy: they've also just restructured debt, with its four main creditors – and largest shareholders – taking an average 25% haircut on their preferred shares, to the tune of ¥95 billion (US$950 million), something made clear only in its Japanese-language filings. Perhaps they want a tax writeoff and figure their last bailout won't be recouped. But it also provides MMC with a clean ownership structure that would make a sale easier. Whether anyone would want to buy them is less clear: the company has a stormy history that includes 2 failed sales and an unenviable strategic position. They aren't unique in this; many other small firms have failed or changed hands in the past half dozen years. But they're more likely to be a Saab story than any of the other Japanese bit players.

...they're more likely to be a Saab story than other Japanese bit players...

Mitsubishi Motors' origins saddled it with an inefficient structure. During World War II Mitsubishi Heavy Industries (MHI) made munitions ranging from warships to the Zero fighter. After 1945 the US Occupation split up the firm into 3 pieces, each of which made different sorts of motor vehicles – three-wheeled cars, scooters, commercial trucks – as they struggled to find things to sell in the grim 1940s and early 1950s. After the Occupation ended MHI's former pieces merged. The end result was the Mizushima plant in western Japan producing minicars ("kei" cars), Okazaki in central Japan making passenger cars, and Maruko in Tokyo (eastern Japan) making trucks, all within the larger MHI with its industrial machinery, shipbuilding and heavy equipment operations.

Friday, January 31, 2014


While I prepare a post on Mitsubishi Motors (I began going through financial statements a couple weeks back) let me point to a post by Jared Bernstein on ironies with the labor movement today. His contention is that we see pro-business, government-shouldn't-constrain us conservatives trying to constrain the ability of VW to invite in the union. Consistency is apparently for small minds. Behind the Veil

Saturday, January 18, 2014

Two Further LF Graphs

While I continue to work on a blog post on Mitsubishi Motors, let me put up two further graphs on employment by age bracket, broken into (i) older workers and (ii) younger workers with January 2007 as a base. (I won't post details, but using a different base does not change things.)

First, since the share of older workers in each age bracket rises, the drop in LF participation is not due to a larger share of workers taking early retirement. Indeed, the data show just the opposite, that older workers are more likely to stay in the labor force than before the recession. (This is not a recent shift. Age breakdowns are available starting in 1994; older worker participation was rising by the late 1990s, but without a longer time series, I can't preclude that change having started earlier. Nor can I get a breakdown by gender on the BLS web site, though the BLS can likely generate those numbers.) Oh, and for a nice analysis of survey data on why people were not in the labor force, see Ellyn Terry's post on the Atlanta Fed macroblog, "What Accounts for the Decrease in the Labor Force Participation Rate?"