I've been quoted several times this past week. See for example the following May 7 Bloomberg story but note I'm unsure how long the link will work. A nearly identical version appears here on the (Bloomberg) Business Week site.
Mike Smitka
Tuesday, February 9, 2010
Monday, February 8, 2010
The Revolution in Japanese Retailing
I don't just do autos, I also do research on Japan and teach to earn my keep, lately intro macroeconomics ("Principles"), a course on the Chinese economy (which I've been doing for a quarter century) and come this spring an intensive four-week course on the auto industry.
Here's a link to an article I wrote for the February 2010 edition of TOE (The Oriental Economist report at http://www.orientaleconomist.com), part of a book project on the transformation of the Japanese economy since the bubble. I enjoyed working with Rick Katz, the editor, to get it to size, filling the available space, no more, no less. But I don't have anything on Japanese auto dealerships, nor does my co-blogger David Ruggles, who is also knowledgeable in that area. Soon...?
Here's a link to an article I wrote for the February 2010 edition of TOE (The Oriental Economist report at http://www.orientaleconomist.com), part of a book project on the transformation of the Japanese economy since the bubble. I enjoyed working with Rick Katz, the editor, to get it to size, filling the available space, no more, no less. But I don't have anything on Japanese auto dealerships, nor does my co-blogger David Ruggles, who is also knowledgeable in that area. Soon...?
Changing retail, changing lifestyles: From mom & pop to mallsThe link now works -- enough snow shoveled to get to campus and upload it. But more snow due tomorrow and again over the weekend....
Mike Smitka
Why Throttle-by-Wire not Cable?
I've seen many comments in discussion forums bemoaning the move from cable to electronic throttles. Here are a number of reasons why that's necessary. Part of this stems from a visit in January to a supplier that developed the vehicle stability system for the BRP Spyder three-wheel motorcycle. Though I'm not an engineer, I've sat through enough engineering presentations to give a sense of the "why."
First, e-throttles improve fuel efficiency; even a skilled driver will give too much or too little gas as they change speed, climb a hill, etc -- an electronic throttle acting through fuel injectors can adjust 50 times a second, probably faster... That's even more important if you have a turbocharger as it can take a while for them to adjust to a change in speed. And of course the output signal can also be used by the transmission to adjust the shift point if, for example, it senses a hard acceleration.
Second, e-throttles also allow emissions to be cut: add in not just throttle and wheel speed but also the oxygen sensor and an electronic throttle lets the engine adjust to reflect a host of other parameters, something impossible with a cable.
Third, you need it for traction control and stability control, as the car must be able to automatically ease off the throttle if it senses the wheels slipping.
Fourth, in a hybrid you have to coordinate the electric power with the engine power, there is no way for a person to process the data needed to do that, much less process the data and drive at the same time.
Fifth, you need it for fast stop/start where easing off on the gas or braking turns off the engine, and then turns the engine on again, all so fast that you don't notice it. That boosts fuel efficiency immensely, esp in city driving.
Sixth, cables are probably worse than an electronic throttle in terms of intrinsic quality, you have to keep dirt and moisture from getting in yet allow the cable to move in and out, you have to get the physical connection right in assembly, kinks or excessive vibration and you can have friction in one spot until it seizes. And you still need springs, and you can still get the pedal stuck on carpet or get your shoe jammed under it or. I've had to replace the gear shift cable, on a car but not a throttle cable that I can recall. Experienced boaters know to check their cables periodically -- I had a cousin killed when a steering cable failed and threw him from a boat.
Seventh, a cable is physically bigger than wires, weighs more, and costs more than a pedal sensor plus wires.
In short, the combination of consumer and regulatory constraints on a modern vehicle mandate an electronic throttle.
First, e-throttles improve fuel efficiency; even a skilled driver will give too much or too little gas as they change speed, climb a hill, etc -- an electronic throttle acting through fuel injectors can adjust 50 times a second, probably faster... That's even more important if you have a turbocharger as it can take a while for them to adjust to a change in speed. And of course the output signal can also be used by the transmission to adjust the shift point if, for example, it senses a hard acceleration.
Second, e-throttles also allow emissions to be cut: add in not just throttle and wheel speed but also the oxygen sensor and an electronic throttle lets the engine adjust to reflect a host of other parameters, something impossible with a cable.
Third, you need it for traction control and stability control, as the car must be able to automatically ease off the throttle if it senses the wheels slipping.
Fourth, in a hybrid you have to coordinate the electric power with the engine power, there is no way for a person to process the data needed to do that, much less process the data and drive at the same time.
Fifth, you need it for fast stop/start where easing off on the gas or braking turns off the engine, and then turns the engine on again, all so fast that you don't notice it. That boosts fuel efficiency immensely, esp in city driving.
Sixth, cables are probably worse than an electronic throttle in terms of intrinsic quality, you have to keep dirt and moisture from getting in yet allow the cable to move in and out, you have to get the physical connection right in assembly, kinks or excessive vibration and you can have friction in one spot until it seizes. And you still need springs, and you can still get the pedal stuck on carpet or get your shoe jammed under it or. I've had to replace the gear shift cable, on a car but not a throttle cable that I can recall. Experienced boaters know to check their cables periodically -- I had a cousin killed when a steering cable failed and threw him from a boat.
Seventh, a cable is physically bigger than wires, weighs more, and costs more than a pedal sensor plus wires.
In short, the combination of consumer and regulatory constraints on a modern vehicle mandate an electronic throttle.
Mike Smitka
Thursday, February 4, 2010
Room for Debate: Toyota
For pieces aimed to stimulate debate by yours truly among others, see the February 4, 2010 NYTimes Opinion page "Room for Debate."
Mike Smitka
Wednesday, January 27, 2010
Unemployment
I've been tracking various subcomponents of unemployment for the past year, and just updated things before my "Principles of Macroeconomics" class devoted to what unemployment is and how it's measured. In the process, I found I'd not included recent data on the decline in labor force participation. The numbers are disheartening: the good months during 2004-2008 had 66.2% of the working age population in the labor force; that's now down to 64.6%, a change of 1.6 percentage points. Since the relevant target group is some 237 million people, that comes out to 3.7 million individuals who've "dropped out" on top of those 15.3 million unemployed. And note that the base may skew things: 10 years ago, 67% of people were in the labor force.
Mike Smitka
Thursday, January 7, 2010
It’s Unanimous!
Pre-Owned values will continue to rise as supply shrinks.
Early 2010 pronouncements by industry experts bear out what economists close to the industry have been predicting since the fall of 2008. With consumers keeping their present vehicles longer, and fleets and rentals putting off or reducing purchases, there are fewer vehicles coming back into the pre-owned market. In addition, the lack of leasing in the last 18 – 24 months means there are thousands fewer lease returns available. Add it all up, and the industry is looking at an extreme pre-owned shortage.
Edmunds.com analysts project that “the used-vehicle price strength of 2009 — caused largely by low inventory levels and healthy demand — will likely continue into 2010 thanks to "tight" supply and sustained demand.”
According to NADA, “about 8 million fewer used cars and trucks entered the U.S. market over the past two years, resulting in higher used-vehicle prices every month in 2009.” NADA is alone in expecting the pre-owned shortage to ease somewhat in 2010, predicting an additional 1 million vehicles traded in to dealerships in 2010 because of higher new vehicle volume. In my mind, this increase is not enough to make up for the loss of Cash for Clunker vehicles and the absence of tens of thousands of “off lease” and rental vehicles. If financing becomes available and fleet and daily rental companies replace large numbers of vehicles, there could be additional pre-owned inventory available. However, these will be much higher mileage units than ever before for each category due to the fact they have been kept in service so much longer than in previous years.
OpenLane predicts strong demand will drive wholesale market throughout 2010. “Reduction in trade-ins and overall sluggish new-vehicle market will be the primary wholesale demand drivers.”
ADESA's Tom Kontos has indicated that wholesale prices should continue to show "stable-to-firming" trends in the near future, saying that "although auction inventories are rising a bit — mostly from returns of off-rental units that normally occur earlier in the fall — supplies remain tight." Kontos’ conclusion? "Coupled with improving vehicle demand, this should keep wholesale prices in a stable-to-firming pattern through year-end and into 2010."
Ricky Beggs, Vice President and Managing Editor of Black Book, says, “Used vehicle values in 2009 showed mostly strength, and when looking at year-over-year levels showed some huge gains, even when the vehicles had significantly more miles on them.
Some of the same circumstances that helped used vehicles maintain their strength in values are still present and are part of the equation for 2010 and beyond. Due to much lower levels of new vehicle sales for the past two years, the number of used cars in the market place is greatly reduced. Daily rental units being turned in are also at lower levels, and are expected to be similar to the 2009 numbers.”
Eric Ibara, Director of Residual Value Consulting for Kelly Blue Book says, “While tightening supply will undoubtedly impact used car prices over the next few years, its effect will not be uniform or consistent throughout all segments and at all times. Some segments will benefit more from the reduction in daily rental volume. Obviously, manufacturers scaled back on fleet and lease volume to varying degrees, and the impact on their models will be in proportion to their actions. Late-model used car prices are also subject to new-vehicle transaction prices, but with the downturn in auto sales, many manufacturers took out production capacity, sometimes on a permanent basis. To this end, there should be less downward pressure coming from high new-car incentives, but again, the effect will vary from segment to segment and by brand.”
RVI Group predicts a “4 year pre-owned price climb.” For those who don’t know, RVI stands for Residual Value Insurance. These folks put their money where their mouth is as they guarantee virtually all insured residual values in the country. According to Rene Abdalah, Vice President of RVI Group, "We expect the year-over-year upswing in used prices to reach a peak of 13-percent in 2012 before starting to stabilize.”
What does all this mean? The sky is not the limit on pre-owned values. The MSRP and transaction price of a like model new vehicle places somewhat of a cap on pre-owned values. Lower OEM rebates and incentives could provide room for pre-owned prices to move even higher. The higher values caused by the shortage might somewhat improve consumers’ equity or negative equity positions in their current vehicles. But the biggest issue is supply.
I’m with RVI on this one. The shortage won’t be over in a matter of months. It will be years before we reach stability. Even if there is a supply of available pre-owned vehicles, the quantity with reasonable miles will be few. What can a dealer do?
If the dealer is a Ford Lincoln Mercury dealer, the OEM is helping out. The recent 27 month leases offered means dealers will have a supply of lease returns coming soon. If ever the market needed “Half-a-Car” and short- term principles it is now if only to supply pre-owned vehicles through lease returns. Eustace Wolfington, where are you? Wolfington and “Half-a-Car” proved the short-term theory back in the late 1980s and into the 90’s in an era where there was no pre-owned inventory shortage. If anything, this era was marked by over production of new vehicles and over saturation of rental and other program units by the OEMs, something they have vowed to eschew this time around.
Dealers who don’t have access to short-term residual based financing through their OEM should look to local credit unions. There are hundreds of credit unions across the country offering residual based financing and/or leasing.
Savvy dealers understand that the monthly payment drops $35. - $50. per month for every thousand dollars of trade equity or money down on a short-term lease or balloon. This means using the rebate or dealer incentive on a short-term lease or balloon, in lieu of a subvented long-term interest rate offers, can offer a surprisingly low monthly payment. If the consumer has additional down payment and/or trade equity, the payment/profit balance gets even better. Everybody wins and the dealer has a shot at the off lease vehicle at the end of term, as well as the opportunity to do business with the buyer again.
The pre-owned inventory shortage will be with us for a while. Why not take some measures to mitigate its impact on your business?
by David Ruggles
Written for Auto Finance News, January 2010
Early 2010 pronouncements by industry experts bear out what economists close to the industry have been predicting since the fall of 2008. With consumers keeping their present vehicles longer, and fleets and rentals putting off or reducing purchases, there are fewer vehicles coming back into the pre-owned market. In addition, the lack of leasing in the last 18 – 24 months means there are thousands fewer lease returns available. Add it all up, and the industry is looking at an extreme pre-owned shortage.
Edmunds.com analysts project that “the used-vehicle price strength of 2009 — caused largely by low inventory levels and healthy demand — will likely continue into 2010 thanks to "tight" supply and sustained demand.”
According to NADA, “about 8 million fewer used cars and trucks entered the U.S. market over the past two years, resulting in higher used-vehicle prices every month in 2009.” NADA is alone in expecting the pre-owned shortage to ease somewhat in 2010, predicting an additional 1 million vehicles traded in to dealerships in 2010 because of higher new vehicle volume. In my mind, this increase is not enough to make up for the loss of Cash for Clunker vehicles and the absence of tens of thousands of “off lease” and rental vehicles. If financing becomes available and fleet and daily rental companies replace large numbers of vehicles, there could be additional pre-owned inventory available. However, these will be much higher mileage units than ever before for each category due to the fact they have been kept in service so much longer than in previous years.
OpenLane predicts strong demand will drive wholesale market throughout 2010. “Reduction in trade-ins and overall sluggish new-vehicle market will be the primary wholesale demand drivers.”
ADESA's Tom Kontos has indicated that wholesale prices should continue to show "stable-to-firming" trends in the near future, saying that "although auction inventories are rising a bit — mostly from returns of off-rental units that normally occur earlier in the fall — supplies remain tight." Kontos’ conclusion? "Coupled with improving vehicle demand, this should keep wholesale prices in a stable-to-firming pattern through year-end and into 2010."
Ricky Beggs, Vice President and Managing Editor of Black Book, says, “Used vehicle values in 2009 showed mostly strength, and when looking at year-over-year levels showed some huge gains, even when the vehicles had significantly more miles on them.
Some of the same circumstances that helped used vehicles maintain their strength in values are still present and are part of the equation for 2010 and beyond. Due to much lower levels of new vehicle sales for the past two years, the number of used cars in the market place is greatly reduced. Daily rental units being turned in are also at lower levels, and are expected to be similar to the 2009 numbers.”
Eric Ibara, Director of Residual Value Consulting for Kelly Blue Book says, “While tightening supply will undoubtedly impact used car prices over the next few years, its effect will not be uniform or consistent throughout all segments and at all times. Some segments will benefit more from the reduction in daily rental volume. Obviously, manufacturers scaled back on fleet and lease volume to varying degrees, and the impact on their models will be in proportion to their actions. Late-model used car prices are also subject to new-vehicle transaction prices, but with the downturn in auto sales, many manufacturers took out production capacity, sometimes on a permanent basis. To this end, there should be less downward pressure coming from high new-car incentives, but again, the effect will vary from segment to segment and by brand.”
RVI Group predicts a “4 year pre-owned price climb.” For those who don’t know, RVI stands for Residual Value Insurance. These folks put their money where their mouth is as they guarantee virtually all insured residual values in the country. According to Rene Abdalah, Vice President of RVI Group, "We expect the year-over-year upswing in used prices to reach a peak of 13-percent in 2012 before starting to stabilize.”
What does all this mean? The sky is not the limit on pre-owned values. The MSRP and transaction price of a like model new vehicle places somewhat of a cap on pre-owned values. Lower OEM rebates and incentives could provide room for pre-owned prices to move even higher. The higher values caused by the shortage might somewhat improve consumers’ equity or negative equity positions in their current vehicles. But the biggest issue is supply.
I’m with RVI on this one. The shortage won’t be over in a matter of months. It will be years before we reach stability. Even if there is a supply of available pre-owned vehicles, the quantity with reasonable miles will be few. What can a dealer do?
If the dealer is a Ford Lincoln Mercury dealer, the OEM is helping out. The recent 27 month leases offered means dealers will have a supply of lease returns coming soon. If ever the market needed “Half-a-Car” and short- term principles it is now if only to supply pre-owned vehicles through lease returns. Eustace Wolfington, where are you? Wolfington and “Half-a-Car” proved the short-term theory back in the late 1980s and into the 90’s in an era where there was no pre-owned inventory shortage. If anything, this era was marked by over production of new vehicles and over saturation of rental and other program units by the OEMs, something they have vowed to eschew this time around.
Dealers who don’t have access to short-term residual based financing through their OEM should look to local credit unions. There are hundreds of credit unions across the country offering residual based financing and/or leasing.
Savvy dealers understand that the monthly payment drops $35. - $50. per month for every thousand dollars of trade equity or money down on a short-term lease or balloon. This means using the rebate or dealer incentive on a short-term lease or balloon, in lieu of a subvented long-term interest rate offers, can offer a surprisingly low monthly payment. If the consumer has additional down payment and/or trade equity, the payment/profit balance gets even better. Everybody wins and the dealer has a shot at the off lease vehicle at the end of term, as well as the opportunity to do business with the buyer again.
The pre-owned inventory shortage will be with us for a while. Why not take some measures to mitigate its impact on your business?
by David Ruggles
Written for Auto Finance News, January 2010
Saturday, December 19, 2009
What’s Really Going On
J. D. Power recently released the results of their study on owner retention. According to the study Mercedes Benz showed a significant increase in owner loyalty from 2008 at 67%, the highest score since J. D. Power has been measuring retention, and finished in the top spot. Honda, Toyota, Subaru, and Lexus complete the top 5. As I read the results of this study I thought of conversations I’ve had recently with Dealers who own multiple franchises including both Imports and Domestics. Some of these Dealers have had Chrysler and/or GM franchises terminated or have been told their franchise agreements will not be renewed.
It seems there are quite a few lessees bringing their GM or Chrysler vehicles back at termination of a lease that was put on the books 36 - 48 months ago through GMAC or Chrysler Credit. The way this is supposed to work is the lessee returns to the Dealer to turn in their previous lease vehicle and drives away in a same brand comparable vehicle, classic owner retention. Because of GMAC’s many issues, including having to service both Chrysler and GM dealers and their new commitment to “realistic” residuals, lessees who might prefer to stay in a GM or Chrysler vehicle are faced with a radical increase in monthly lease payment. This “lease payment shock” situation has not been happening at Dealers of the top 5 Manufacturers on the J. D. Power retention list, as their OEM captive finance arms have continued to provide consistent lease support of their products.
So what is a returning lease customer to do when faced with a multi hundred dollar increase in their monthly lease payment? Some consumers might just leave with a bad taste in their mouth and go to another Manufacturer’s dealership. At a multi franchise Dealer, someone returning a Suburban, Yukon, Escalade, etc. might find happiness in a new Mercedes Benz, BMW, or Audi SUV at a dealership of the same owner. Someone returning a Cadillac STS might be thrilled to lease a new Lincoln MKS or a new Benz E Class. In my years of watching the Dealer leasing business I have often encountered these “lease payment shock” situations with domestics OEMs but rarely with the Japanese and European imports. It’s easy to see where GM and Chrysler’s market penetration is going. Firing executives can’t make up for a lack of competitive and consistent lease support.
Dealers who hold multiple franchises do so to keep from being totally dependent on a single OEM. This is also the type of Dealer that was targeted for termination by GM and Chrysler. They must want their Dealers to be so dependent on them that they become totally vulnerable to whatever their single OEM’s products and programs happen to be at any point in time. It seems they would prefer their Dealers not to have options when it comes to retaining a consumer who is looking for a replacement lease vehicle.
According to their logic, they want their Dealers to spend more on their facility, at a time when consumers more and more regard their computer monitor as the showroom. A savvy Dealer, or any business person, for that matter, will want to reserve as many options for themselves as possible. If GM and Chrysler can’t support their own products, why should they mind if a Dealer who puts the customer in a brand from another OEM? Perhaps GM and Chrysler think consumers are so loyal to their brand they will opt for a much higher lease payment than before, for a new like brand similar vehicle. Or maybe they know they are “behind the eight ball” but want their Dealers to suffer along with them?
At the very least, it becomes apparent that Manufacturers who manage their business in such a way that facilitates repeat business are far more likely to achieve it than those who don’t.
It seems there are quite a few lessees bringing their GM or Chrysler vehicles back at termination of a lease that was put on the books 36 - 48 months ago through GMAC or Chrysler Credit. The way this is supposed to work is the lessee returns to the Dealer to turn in their previous lease vehicle and drives away in a same brand comparable vehicle, classic owner retention. Because of GMAC’s many issues, including having to service both Chrysler and GM dealers and their new commitment to “realistic” residuals, lessees who might prefer to stay in a GM or Chrysler vehicle are faced with a radical increase in monthly lease payment. This “lease payment shock” situation has not been happening at Dealers of the top 5 Manufacturers on the J. D. Power retention list, as their OEM captive finance arms have continued to provide consistent lease support of their products.
So what is a returning lease customer to do when faced with a multi hundred dollar increase in their monthly lease payment? Some consumers might just leave with a bad taste in their mouth and go to another Manufacturer’s dealership. At a multi franchise Dealer, someone returning a Suburban, Yukon, Escalade, etc. might find happiness in a new Mercedes Benz, BMW, or Audi SUV at a dealership of the same owner. Someone returning a Cadillac STS might be thrilled to lease a new Lincoln MKS or a new Benz E Class. In my years of watching the Dealer leasing business I have often encountered these “lease payment shock” situations with domestics OEMs but rarely with the Japanese and European imports. It’s easy to see where GM and Chrysler’s market penetration is going. Firing executives can’t make up for a lack of competitive and consistent lease support.
Dealers who hold multiple franchises do so to keep from being totally dependent on a single OEM. This is also the type of Dealer that was targeted for termination by GM and Chrysler. They must want their Dealers to be so dependent on them that they become totally vulnerable to whatever their single OEM’s products and programs happen to be at any point in time. It seems they would prefer their Dealers not to have options when it comes to retaining a consumer who is looking for a replacement lease vehicle.
According to their logic, they want their Dealers to spend more on their facility, at a time when consumers more and more regard their computer monitor as the showroom. A savvy Dealer, or any business person, for that matter, will want to reserve as many options for themselves as possible. If GM and Chrysler can’t support their own products, why should they mind if a Dealer who puts the customer in a brand from another OEM? Perhaps GM and Chrysler think consumers are so loyal to their brand they will opt for a much higher lease payment than before, for a new like brand similar vehicle. Or maybe they know they are “behind the eight ball” but want their Dealers to suffer along with them?
At the very least, it becomes apparent that Manufacturers who manage their business in such a way that facilitates repeat business are far more likely to achieve it than those who don’t.
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