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Tuesday, December 24, 2013

Used Car Prices Aren't Sensible

I don't normally link to other blogs, but here is a neat little post on a behavioral economics study of discontinuity in used car prices. There's no particular reason a car with 49,900 miles should be much different from one with 50,100 miles. But that's not what we actually observe. Pricenomics calls attention to a paper by Devin Pope, Meghan Busse, Nicola Lacetera, Jorge Silva-Risso, and Justin Sydnor (2013). "Estimating the Effect of Salience in Wholesale and Retail Car Markets." American Economic Review Papers and Proceedings (103(3): 570-74. As Pricenomies summarizes it in "How We Misprice Used Cars":

The researchers attribute the mispricing to “left-digit bias”. Buyers try to simplify the information available to them by only focusing on what they deem most relevant. And this bias represents $2.4 billion worth of mispricing.

Actually, the paper itself is quite readable. As the co-authors phrase it:

Modern economic life requires individuals to evaluate many pieces of decision-relevant information every day. A growing body of evidence shows that not all information is equally salient to consumers.1 This is the case even for large-scale purchases made in well-functioning markets such as the market for automobiles...

The short paper above draws on the following, which presents the empirical details of their statistical tests for "irrational" pricing: Nicola Lacetera, Devin G. Pope, and Justin R. Sydnor (2012). "Heuristic Thinking and Limited Attention in the Car Market." American Economic Review 102(5): 2206–2236. That longer article is very much aimed at specialists. Thus prose such as the following:

Motivated by the literature on regression discontinuity designs (see Lee and Lemieux 2010 for an overview), we employ the following regression specification:

mike smitka

Monday, December 23, 2013

The Global Industry: Honda, the US and the Taper

http://www.tapirs.org/
Go to the URL to contribute to
preserving tapirs in the wild!

...bond markets reacted to the taper with a yawn...

The "taper" in practice started with a whimper not a bang. Instead of purchasing a $1.02 trillion SAAR the Fed reduced its purchases to $0.90 trillion – that is, $900 billion. Yes, the announcement suggested additional reductions at each FOMC meetings in 2014, but cutting purchases by $10 per month in several steps means the Fed is still poised to purchase another $500 billion in bonds, while promising to keep short-term interest rates at 0% until we get substantially lower unemployment or higher inflation, which in practice means well into 2015 if not beyond. In reaction, bond markets reacted to the taper with a yawn – rates at all ends of the maturity spectrum, from 1 month to 30 years, shifted 2-4 basis points at long maturities and actually fell out to 3 years. There's no sign that the markets whose entire focus is interest rates expect any effective change in monetary policy. (Indeed, I read it as saying that bond markets don't think taper or its lack matter – while stock prices are driven by the story of the hour and not by data.)

...the US is becoming an export base...

So what's with "global" and "Honda"? First, the dollar has appreciated relative to the yen – Japanese are looking at their domestic interest rates and judge that parking their money in dollars is the better choice. But if Abenomics works, their interest rates will rise. (And if it doesn't, the decline of Japan's domestic auto market will accelerate; see an older post here on the interaction of a falling and aging population on the demand for cars.) But even if the yen stays at its current level, Honda will find it increasingly hard to recruit workers in Japan, and will find little reason to bet on the yen's exchange rate for deciding where to make global models. In that context, it is important to note that Honda has adopted English as its global language, replacing Japanese. Quietly, Honda has also reached the point where it develops market-specific products (for "market-specific" read "North America") in Ohio.

But the dollar has depreciated relative to the Euro and the Chinese RMB, and has strengthened (or at least not weakened) against the Canadian dollar and Mexico peso. The yen exchange rate is an outlier. In that context (Takanobu) Ito, Honda's CEO, notes that the company is expecting its North American operations to export 30%, up from the current 6%-7%. BMW already exports 70% of the output at its Spartanburg SC plant; I expect others to gradually shift in the same direction. Toyota noted that it will export 7,500 Corollas to the Caribbean and Latin America from Mississippi in its initial year of production there, hardly an impressive number but meaning that these vehicles won't be exported from Japan. If you Google firm by firm you'll find similar stories for Ford, Nissan and others. So the word on the street matches US International Trade Administration's analysis of Trends in Motor Vehicle Exports.

Given the lead times in building capacity and making sourcing decisions, such plans could slow if the yen remains sufficiently weak. At the same time, VW's construction of North American capacity means fewer imports from the EU. And in my visits to suppliers – I will visit 5 firms for the 2014 PACE supplier innovation award – I am hearing of plans to add engineers in Southeast Michigan and Northern Ohio.

Now to be honest this has yet to show up in the automotive sector trade deficit. Yet what I would normally expect to see in the data is that a recovery in the US would lead to a sharp upturn in imports without a corresponding shift in exports. We don't see that, either. I don't expect the US to ever turn into the export powerhouse that Japan once was; global growth means that global vehicles will be made in multiple markets. Tariffs in the BRICs reinforce that tendency. We also need to remember that productivity is up, and that manufacturing employment in the US auto and auto parts sector will therefore increase by less than output. Despite these provisos, it's clear that the US is becoming an automotive export base, and continuing to be an engineering center. It's a nice note on which to end the year.

For background, compare US Treasury Yields and European Bond Rates. When the EU begins growing properly – which as with the US may require several years – then interest rates should rise relative to those in the US and make Euro assets more attractive relative to US dollar assets. I thus expect that over time the Euro will appreciate / the dollar depreciate. However, the timing is sufficiently uncertain that investing on this basis is not likely to pay. If it would, then big money would already be doing so and the Euro would already have appreciated ... whatever the weaknesses of the efficient market hypothesis, there is plenty of evidence that such predictable movements get arbitraged away, leaving markets sufficiently unpredictable as to not offer consistently prfitable strategies.

US$-Mexican PesoUS$-Chinese Yuan
US$-Japanese YenUS$-EU Euro
Auto Sector Imports & Exports, 1965-dateAuto Sector Imports, Exports and Sectoral Trade Balance, 1980-date

Thursday, December 19, 2013

The Best Car Ever

Guest post by Blake Grady, edited by the prof with comments from Econ 244 participants. Original was from May 17, 2013.
This is one I had in draft form but apparently forgot to publish last spring – my apologies to Blake and commenters

Tesla Model S

Consumer Reports recently gave the Tesla Model S a score of 99 out of 100, and other media outlets immediately began proclaiming that the car could be the best vehicle ever made. A small number of journalists responded by arguing that the entire idea of a "best car" simply doesn't make any sense.

...the entire [ratings] concept ... makes no sense

Tuesday, December 10, 2013

Auto Recovery, yes ... but as for the rest


by mike smitka

The US recovery continues at a snail's pace; the auto industry is doing better. The rise in the SAAR [seasonally adjusted annual rate of sales] puts us below the bubble-inflated peak of 2005-6, but given subsequent population growth is at a more sustainable level. Other auto-related indicators show marked improvement, but suggest we still have a ways to go. First, the share of the auto industry (retail and manufacturing) was at 2.3% of the labor force in the late 1990s; it then fell steadily to 2.0% before falling off a cliff in 2008. The nadir was 1.6%; today we're back to 1.8%. That is only about halfway, assuming that other structural changes in the US (the continued growth of healthcare) makes it possible to return to the days of yore.

...automotive employment's only about halfway back...

Saturday, December 7, 2013

Beanie Babies for Billionaires

As Mainstreet.com phrases it, "kids love collecting." Think Beanie Babies and Cabbage Patch Dolls. Adults, of course are the ones actually doing the buying of would-be collectible toys. Left to themselves, we – guys, anyway – lean towards baseball cards, comic books and hand tools. Among the monied class the list includes wine, cars and mechanical watches. For them BitCoins are the latest fad. There's a bit of mystique, because the technology behind them is complex, so it appeals to technophiles. There's good marketing, with claims that Bitcoins will be secure, anonymous, and free of any government hand. Ideal for that arms shipment? And above all, there are limited numbers, a function of the mathematics of the system.

There's also a whole make-believe world to go along with them. Markets work perfectly. Ah, maybe not so perfectly - you've got a chance for monopoly! There's a romantic storyline, celebrity twins in the Vinkelvoss brothers and Austrian intrigue over monetary systems in a story that's sufficiently convoluted to permit wild flights of fancy.

...BitCoins are virtually harmless...

Thursday, December 5, 2013

China: The Domestic and the Global Industry

In October 2013 sales in China reached 1.92 million units – see the China Auto Industry Association statistics page for details. That's just shy of a 24 million unit rate, and is surely the largest number of vehicles ever sold in a single market in a month. For GM, sales were 282,000 units – 25% more than US sales that month. Everyone is in the market, or preparing to enter there. The Korean neighbors (Kia and Hyundai, but also Daewoo as part of GM), Japan (or at least the Japan Three of Toyota, Honda and Nissan, and Mazda and Suzuki), Germany (BMW, Mercedes, VW), the Detroit Three and now the French, both PSA and Renault. A host of local firms continue, though most as paper entities. Still, Great Wall, Chery, Geely, BYD, Changan and others.

This raises a host of questions. I focus on two: geography and profitability. I frame my brief analysis using the perspective of the OEMs. Since more and more value added lies with suppliers, that may lead to inappropriate conclusions, but for now I will accept the status quo terms of debate.

...the geography of China's automotive industry makes no economic sense...

Friday, November 29, 2013

Energy Futures

The challenge of "green" is aggregating small amounts of energy – ultimately days of sunlight per surface[1] – into amounts useable in quantity and continuity. Plants convert some of that energy continuously in daylight hours, but aggregating is the challenge. Currently we rely almost entirely upon a fossil fuel process that takes eons and is not sustainable – even if the amounts of recoverable fuels remains large, the environmental side effects are rising, not falling. Global economic growth has almost immeasurable benefits – hundreds of millions of Chinese no longer face hunger daily. Only recently has the government sufficiently overcome the fear of famine to eliminate the mandate that farmers grow grain. In China point- and regional-source pollution is now sufficiently bad to generate local political action, as it was first in California and then in the US as a whole in the 1960s. But no local government, and most national governments, are uninterested in denying access to electricity (air conditioning, refrigeration, lighting) or mobility (cars). Desirable or not, I don't think it's realistic to expect that governments will do much to repress energy demand. Supply-side developments are thus crucial. That means improving the feasibility of solar, wind, hydro and biomass.

What’s With the Higher New Vehicle MSRPs?

Ruggles – AFN – Dec 2013
The price of new vehicles has been rising at a steady rate despite record auto manufacturer profits.  This has been accomplished by just raising the price, through added content to base vehicles, and reduced expenditure on incentives. What is driving this trend? I see no evidence of any real movement in manufacturing costs. Labor costs via the D3 UAW contract are locked in for the next few years. What’s the deal?

Thursday, November 28, 2013

NADA White Paper on Incentives

I found the NADA White Paper on Used Vehicle Depreciation (pdf) interesting. Key sections are:
  • Why we’ve seen so much volatility in depreciation in the past
  • What to expect in terms of depreciation through 2014
  • How external factors influence depreciation trends
  • Which vehicle segments face a greater upturn in depreciation

Ruggles

“Buy a Car, Get a Check” and the recent NADA White Paper on Incentives

ruggles: the following is a collection of notes and has not a published column.

NADA recently published a long awaited white paper on incentives. While it is chock full of salient data and information, there are some things missing. I will try to fill in some blanks based on my own experience and perception. Before getting into the discussion, it is important to understand that the conclusion of the report, that incentives degrade residual values and therefore brand equity, is unassailable. My purpose is to add to the discussion.

The Best Selling Vehicles by State

David Ruggles

I found this chart from Dealer Communications quite interesting. Business Insider notes the following on the topic:

The auto industry has become so globalized, you can find the same Ford in Detroit and in Beijing. So it’s not surprising that Americans’ taste in passenger vehicles has become a bit homogenized.

To find how much difference there is in our car-buying habits, we asked Kelley Blue Book to pull the data from the start of the year to find the best-selling ride in each state.

Not surprisingly, Ford F-Series family of trucks dominated the list, coming in at number one in more than 30 states. But Americans elsewhere have different tastes: Florida and Maryland went for the Toyota Camry. Hawaii liked the Toyota Tacoma.

So regions persist – large pickup trucks are near-unique to the US and Thailand – amidst increasingly global tastes, as per an earlier post reflecting an interview with just-retired Ford Chief Creative Officer J Mays at World Cars World Trade.

Thursday, November 21, 2013

Why Pay for Science?

Mike Smitka

In my Industrial Organization class we chatted about the logic of funding basic science in a world of which the US is an ever-smaller slice.[1] The economic gains to basic research remain highly uncertain, and applications may not come for decades.[2] Furthermore, science is mobile: conventions are international in nature, results – in economics, working papers indexed HERE – are disseminated rapidly. So aren't the incentives to free ride? At the level of a US state there's no obvious need to fund basic science, yet the focus of "flagship" universities is just that (and liberal arts colleges such as Washington & Lee face pressures from accreditation, reputation and faculty peer pressure to be mini-Harvards).

The public policy temptation is to free ride upon the R&D expenditures of others.

Thursday, November 7, 2013

BK + Five Years

Automotive News has a retrospective with brief quotes from various participants. Let me briefly mention three that I found thoughtful despite the brevity imposed by the 2-page layout.

Wednesday, November 6, 2013

Data update: November 2013

Here are assorted data for your perusal – unfortunately due to the government shutdown data releases are delayed or (for certain data) a month will be skipped. For example, the "Employment Situation" was scheduled for November 1st; instead it will come out November 8th. Click on charts to expand to full size. – note that except for a large (negative) blip in the unemployment data, released after this post was written, it's more of the same. With the end of the government shutdown next month will likely see a rebound in the opposite direction.   

Thursday, October 31, 2013

Jay Alix Now Takes Credit for GM Bailout

Editor’s Note: Lots of people–including President Obama–have trumpeted their role in the success of the government-backed turnaround plan that saved General Motors, the most important industrial company in the history of the United States. But on the fifth anniversary of the crisis, Forbes presents an exclusive, unprecedented look at what really happened during GM’s darkest days, how a tiny band of corporate outsiders and turnaround experts convened in Detroit and hatched a radical plan that ultimately set the foundation for the salvation of the company.

Author Jay Alix, one of the most respected experts on corporate bankruptcy in America, was the architect of that plan, and now, for the first time, he reveals How General Motors Was Really Saved.

Saturday, October 26, 2013

Transparency and the Retail Auto Business

The new buzz word in the Auto Industry these days is “Transparency.” Auto manufacturers have fallen in  love with the word, as have vendors looking to charge Dealers money to bring "Transparency" to their customers. To some, the word is euphemism for “One Price,” where every buyer pays the same profit margin.  This has been proven to be an abject failure. The demise of the Ford Collection is the prime example.  We could revisit the Saturn debacle, but why? How many times does the lesson have to be learned. Does anyone actually think Saturn was a success story?

There are still Dealers using “One Price” as a strategy of Negotiation, but “One Price” ONLY works when there is more demand than supply. Most Dealer’s fantasy is to wake up one day and find out that his nearest competitors have all gone to a “One Price” strategy.

Friday, October 25, 2013

Did We Dodge a Bullet?

Ruggles, Auto Finance News

Or did we just get President Obama’s Second Choice?

Now that Larry Summers has taken himself out of the running for the position of Chairman of the Federal Reserve Bank of the United States, President Obama has appointed the current Fed Vice Chairman, Janet Yellen, to the post.   If confirmed, it would make Yellen one of the most powerful woman in the world, with her hands on the controls of the globe’s largest and most powerful economy.

Wednesday, October 23, 2013

People LOVE Their Car Dealer, But Hate Yours

Steve Finlay - WARDS June 2013

People carry on a love-hate relationship with car dealers.

They typically love their dealer, as evidenced by rating websites where grateful customers say things like:

  • “He cares about his clients and is extremely helpful with any questions or issues.”
  • “I have always been extremely pleased with the service and professionalism.”
  • “It was honestly the BEST customer service I’ve received in my whole life.”

But many consumers dump on dealers in general. Disliking from afar is a human flaw. Disdaining faceless groups is a building block of bias.

Tuesday, October 22, 2013

Outsiders Poised to Buy Car Dealerships

Oct. 15, 2013 Phil Villegas&nbsp

Reprinted from WARDS AUTO

As the auto industry surges, private-equity firms and others may drive up blue-sky values, but they face obstacles.

This is an attractive time to be a car dealer. Dealership profitability is up across the board, automaker are producing great vehicles and the upswing looks like it will last for the next few years.

Accordingly, we’re once again seeing activity brewing from outside speculators looking to enter and redefine the dealership arena. It’s similar to 2004 through 2007 when individuals and entities new to the industry vied to buy dealerships.

Saturday, October 19, 2013

Can “Friction” Be Eliminated in the Buying/Selling Equation?

Ruggles in WARDS October 2013
At the recent J. D. Power event held in Las Vegas in October Scott Painter, TrueCar CEO, introduced a new theory, something most of us had never heard. According to Painter, elimination of “friction” from the car buying process could lead to a 20 million SAAR in the near term. He seems to believe that the “agony” and trepidation car buyers feel about the car buying experience costs the industry sales, as if many consumers are so fearful of the car buying process that large numbers of potential car buyers essentially hold on to their current vehicle so they don’t have to venture into a punishing game where there is a chance they might not “win.” According to Painter, there are many things that the industry would have to do to achieve the elimination of the harmful “friction.”Note 1
One of those “friction” causing items, according to Painter, is the practice of OEMs offering “trunk money” to dealers,

The Fundamentals of Global Oil Economics

By Gal Luft and Anne Korin

The first U.S. energy secretary, James Schlesinger, observed in 1977 that when it comes to energy, the United States has “only two modes -- complacency and panic.” Today, with the country in the middle of an oil and gas boom that could one day crown it the world’s largest oil producer, the pendulum has swung toward complacency. But 40 years ago this week, panic ruled the day, as petroleum prices quadrupled in a matter of months  

Data Check: Should you add inventory or build capacity?

One side effect of the government shutdown is a delay in data collection and release. If you're in business, you either track directly data such as that below, or rely on those who do. So this is what the impact looks like for this month...

Thursday, October 17, 2013

The PACE of supplier innovation

GM just announced that it will begin selling a dual gasoline/CNG (compressed natural gas) version of its Impala – the first Chevy in years (decades!?) to get a top rating from Consumer Reports. Now such vehicles are standard in Brazil, allowing the country to take advantage of the widespread availability of natural gas.

Friday, October 11, 2013

China: all's well ... for now

Today VW claimed sales of 2.35 million units in Jan-Sep. Meanwhile GM's PR machine releases brand sales monthly. I track these, out of curiousity and because I teach a course on the Chinese economy (in which I use Michael Dunne's American Wheels as one of 4 books I ask students to read). GM's 9-month total is ... 2.35 million units.

At one level it seems rather silly for a manufacturer to seek to be the market leader – after all, you can typically boost sales through aggressive discounting, and while a price war is great for consumers and car dealers, it's really, really bad for manufacturers. However, journalists find "who's first" makes good copy,

Sunday, October 6, 2013

The Economy and Car Sales

Every month I peruse select details of the monthly labor market surveys – the Current Population Survey and the Current Employment Survey – for hints on how the economy is performing. Not this month, thanks to the continuing inability of the House to pass a budget, or now even a continuing resolution. Both the Bureau of Labor Statistics and the Bureau of Economic Analysis, key sources, are hit. Ironically, this month is when such data might be most helpful, because the timing of labor day makes it hard to interpret September car sales data.

...we've lost access to data on employment and wages just when an early Labor Day makes it hard to interpret auto sales

Tuesday, October 1, 2013

Automotive Futures: High Tech or High Dreams?

In the online NBR Japan Forum (and in a chat with a retired vice miniser of METI – the Japanese Ministry of Economy, Trade and Industry [経済産業省]) – I hear about how electronics, hybrids, and yes, fuel cell vehicles will turn around the [domestic] Japanese auto industry. (The US, too, has its advocates of industrial policy.) After all, the Prius has been a huge success.
This is wrong on three counts.

Friday, September 27, 2013

Maryann Keller Speech to the NADA/JD Power Conference, NYC, MArch 2013

For the over four decades I’ve been involved with the auto industry, first as an investment analyst and now as a consultant and director serving on the boards of both automotive companies and auto dealers. Over those four decades, I’ve heard many arguments made against the franchise dealer system…which dealers never fail to disprove time and time again.

One myth promulgated in the 1990s - and now resurfaced by Tesla - is that factory stores save money by reducing distribution expenses wrongly estimated at 30% of total expense.

“Moral Motors” vs the Traditional Franchise New Car Dealer.

First, some ground rules.  This is not to imply that the “traditional” franchised new vehicle dealers aren’t “moral.”  But there is a perception among many consumers and certain consumer watch dog groups that certain “traditional” dealer practices are “unsavory,” at best.

Thursday, September 26, 2013

$2 billion and counting: the supplier conspiracy

The conspiracy of Japanese wiring and electronics suppliers to put the screws to Toyota and other customers has now led to the largest antitrust action in history. What we know appears stupendous in scope. To date 20 suppliers have paid fines totaling $1.6 billion in the US (an additional $347 million in fines in Europe and Japan brings the total to $1.95 billion). Some 21 executives have pleaded guilty to felony antitrust charges including jail time and financial penalties. Wired participants, secret locations, coded communication and an expanding list of auto parts and firms, spanning 10 or more years and at least 4 continents. Wild!

Auto Dealers Take CFPB Issues to Washington DC

Excerpts from NADA Front Page; comments by Ruggles follow

More than 400 fran­chised auto deal­ers weighed in with Wash­ing­ton law­mak­ers ear­lier this week on the Con­sumer Finan­cial Pro­tec­tion Bureau’s (CFPB) effort to end the dis­counts that cus­tomers can nego­ti­ate when financ­ing a car or truck through a deal­er­ship. The vis­its to Capi­tol Hill were orga­nized as a part of the National Auto­mo­bile Deal­ers Association’s Wash­ing­ton Conference.

Thursday, September 19, 2013

Don’t be Forced to Sign a Renewal Franchise Agreement

Posted on September 6th, 2013 by Richard Sox from Dealer Magazine

Some things never change. The factories keep telling dealers that when the expiration date in their franchise agreement arrives the dealers must agree to the terms of the renewal agreement the factory puts in front of them and, unfortunately, some dealer continue to believe the lie! DON’T SIGN A RENEWAL FRANCHISE AGREEMENT UNLESS YOU ARE SATISFIED WITH ITS TERMS.

Monday, September 16, 2013

The Nano and the Model T: History Lessons Not Learned

Nano: no price is low enough

Back in 2007 the Tata Nano ultra-low-cost 4-seat car garnered attention; other companies were rumored to be starting their own projects. However, since its 2009 launch it has not sold well. While Japan has its "kei" cars (軽自動車), which are taxed less and until recently did not require proof of a parking spot, economy cars have not sold well. And while the "kei" cars are less expensive, they're not cheap, and come with amenities car drivers in developed countries expect, such as air conditioning.

...Tata fortunately didn't bet everything on the Nano...

We in the US have our own experience with a product similar in concept to the Nano: the Model T. At the onset it was still out of reach of the average American, but Henry Ford and his engineers improved production efficiency and otherwise lowered costs, so that while it initially sold for $850, when production ceased in 1926, it was selling for $350 [using the BLS inflation calculator, that's equivalent to about $4,800 today]. Or rather, not selling.

Sunday, September 8, 2013

Fed Tapering and Interest Rates

If Past is Prologue

Ruggles AFN September 2013

Federal Reserve Chairman Ben Bernanke let it slip a couple of months ago that the Fed might begin to “taper its asset purchases” this fall. “Asset purchases” in this case is a euphemism for the Federal Reserve buying our own U.S. Government debt. The Fed has been buying about $85 billion in U.S. Government bonds each month for quite some time, representing about 60% of total U. S. debt purchases. Yes, they do this by “printing money,” another euphemism.

Markets didn’t like the sound of Bernanke’s comment and immediately retreated, the Dow from a record high of over 15,000. Certainly, markets hang on every word Bernanke speaks, reacting to the actual words as well as to what they think he means. Bernanke says the Feds future actions will be “data driven.” Analysts believe the Fed could begin their “taper” as soon as September if data for August looks favorable.

Saturday, August 31, 2013

The Bad Old Days: Chrysler Mack Stamping

I often wonder how many people read this blog. I was thus heartened by a substantive comment on my previous post on Mack Stamping in the City of Detroit. Let me add a bit on the bad old days.

...Quality was a management issue...

In 1973 I was working on a rail line [cross-member = engine cradle?] when the die on one of the old, old flywheel presses shifted, in the first machine on the line. The operator noticed it, called the foreman, and they tried hitting a piece. Bent, as they expected. We then ran it through the rest of the machines. The inspector came over, and threw it down in disgust, because not only was it bent, but the bolt holes were out of true. No way to fix. Repairing would require pulling a millwright from some other emergency; the plants were running 24/7 so there was no downtime for maintenance.

[I'm leaving out the colorful language and gestures, talking – screaming! – was a challenge given the high ambient noise levels, particularly when you were near the smaller punch presses.]

We quickly had the general foreman there, and the top inspector. So what happened? We worked the full shift making scrap. Only the plant manager and the #2 had the authority to shut down a line, and they were out for meetings at some other facility. The priority was indeed to "make production" and for that purpose bad parts counted, not just good.

We worked the full shift making scrap.

Sunday, August 25, 2013

Japan's Changing Labor Force

...it's too late for less male-centered policies...
ImageA concurrent set of posts on the NBR Japan Forum is on the role of women in the labor force. At younger ages, the shift towards greater participation is dramatic, a 30 percentage point jump among 25-29 year olds. Participation for women age 30-34 is following in parallel, with about a 13 year lag:
ImageHowever, this is less economically meaningful than at first glance. Women are not going to be able to save Japan from its demographic challenges. Of course it is these very same women who are not having lots of children. But more to the point, these young women are now the only daughters of an already smaller generation of women.
So even a continued increase in women pursuing careers — already apparent among younger women — will only have a modest impact on the shrinking of the labor force. There are simply too few in these age brackets, and the number is falling yearly. Hence despite the rise in participation, the total number continues to decline:
Policy changes could smooth things, and from a microeconomic perspective (and a lifestyle perspective) could bring many benefits, particularly to women. [For an amusing portrayal of the challenge of a stay-at-home father, albeit in a US context, see Kim Stanley Robinson's Forty Signs of Rain.] But from a macroeconomic perspective it's too late for less male-centered policies around the workplace and the home to make a difference.

For the Japanese auto industry – by which I mean the industry located in Japan – this has strong implications. First, this is one of the underlying changes reflected in a set of graphs I posted on the future of the auto industry in Japan: firms hoping to sell cars face a shrinking market. It also means that recruiting workers will be harder. In Japan (unlike in China and India) families do not engage in sex selection (aborting girls), and the change in the number of young men in the labor force is likewise declining. (Indeed, because the participation rate for men has long been near 100%, the drop is more rapid as there has been no offsetting rise in the proportion of men working.)

This shows up too in technical fields; the number of engineers is down 15% from peak and casual observation (academic 2006-7 at Chiba University, a strong engineering school) is that many of those in technical fields are international students. Unless the auto industry (by which I mean suppliers, who generate two-thirds of employment) globalize, they will cease to be players, lacking the engineering clout to stay in the game. And if the unsuccessful efforts of my son (as a TEFL-certified teacher) to find an English teaching job in Japan are at all representative, young Japanese are not learning English. Meanwhile, of course, Honda and Toyota already employ 1,000 or more at their technical centers in the US. As businesses, they are positioning themselves to draw upon a global pool of engineering talent. That however does not help the Japanese industry.

Friday, August 23, 2013

World Cars, World Trade

GM is positioning Buick as a global brand drawing upon global product. As we've earlier blogged, this will work only if there is a convergence in tastes across major markets that allows the same vehicle to be made and sold with only minor modifications. Now the brand name may not be the same; what is a Buick in China may be an Opel Mokka in Europe and not sold in the US at all – though in this case the Buick Enclave is, as detailed in this Bloomberg article.

homologation and lower tariffs would benefit us

This isn't just to lessen risk (though in the case of China, that's been upside risk!), as argued in Spreading out for a little elbow room, a post by one of my students. Partly it's a story of platforms, as a manufacturer enjoys economies of scale when the same underlying vehicle can be tweaked. But ideally it's about selling the exact same vehicle on a global basis. That then works to the benefit of global suppliers (and to the detriment of medium-sized suppliers in Japan and elsewhere that have a narrow geographic footprint), as an OEM can ask them to supply the same part everywhere, down to the plastics and steel and so on that if allowed to vary can introduce defects, defects that are thus subtle and hard to diagnose, or add on to costs for local redesign and retesting.

At present, however, there are limits. The Insurance Institute for Highway Safety imposes crash tests that are unique to the US. Europe has its rules for pedestrian impact. Headlight standards vary, and require redesign and recertification. A standard approach in Europe – lights that track as you turn, and adjust vertically ascending and descending hills, are not always allowed in other markets. And providing those functions interacts with styling. So homologation of such rules across markets can bring big benefits.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership, as well as the on-going Trans Pacific Partnership talks with Japan, Australia and others. How autos are treated could be a boon to the US industry.

And by the US industry I don't mean just the Detroit Three (though if we're precise, only GM is headquartered in Detroit, reflecting a long-run trend to exit the city). Michigan is the leader of exports within NAFTA, both to Canada and to Mexico. BMW in Spartanburg, SC leads the auto industry in exports, and has just completed a $900 million expansion. (I've been through their paint shop, which includes a PACE Award-winning innovation from PPG that eliminates an entire oven.) But Audi is opting for Mexico because as an exporter they find it a better location for the range of available free trade agreements and resultant lower tariffs. (Audi's plant will be the only one to make certain products, as discussed in The Tariff Advantage of Mexico.)

So homologation and lower tariffs would benefit us, and benefit others. We'd presumably have to lower the temporary 1963 "Chicken War" tariff on light trucks that's still in place 50 years later. But while there is convergence across markets in what people drive and in styling – as our students heard in the spring from J Mays, Ford's Chief Creative Office, reflected in their notes here and here – that convergence is not complete. Japan's "minicar" market is deeply entrenched; so are big pickups in the US. So it's really not credible threat to the Detroit Three, who hold a lock-grip on pickups (Toyota has about a 6% share, Nissan closer to 1%). There's nowhere imports could come from. So as I see it, we'd benefit from these agreements. We might see some low-volume vehicles that for now are found only in Europe, because of the cost of adapting to US standards. Low-volume however is the crucial adjective.

Tuesday, August 20, 2013

Tesla says Model S crash test score is best NHTSA has ever recorded

by Jonathan Ramsey of AutoBlog

"We found out a couple of weeks ago that the Tesla Model S aced the crash tests administered by the National Highway Traffic Safety Administration. What we didn't know until Tesla filled in some of the details is that the Model S scored more than five stars on the way to recording the best result of any car the NHTSA has ever tested. While NHTSA's highest public rating is five stars, the Vehicle Safety Number it gives to manufacturers can go higher, and Tesla says the Model S scored a 5.4. That's a better result than has ever been achieved in NHTSA testing of a passenger car, SUV or minivan.

Tesla's press release says that after its internal tests showed that it would score five stars on government's crash tests, it addressed any other weak points it found on the vehicle to ensure it would get perfect marks "no matter how the test equipment was configured." It was already going to do well in the frontal test, as the lack of an engine allows much more leeway in creating an occupant-saving crumple zone. And the rollover test was aided by the battery pack being located in the floor. The low center of gravity meant that the Model S couldn't be rolled over "via the normal methods and special means were needed to induce the car to roll."

Nested aluminum extrusions along the hatchback's flanks took care of the side pole intrusion test, the Model S not only scoring five stars but, according to Tesla, leaving nearly nine times more "driver residual space" post-impact than the five-star rated Volvo S60. And when the roof of the Model S was tested for crush resistance, the testing machine broke just after it crossed the four-G mark - the Model S, on the other hand, didn't."

Ruggles writes: A neighbor bought one of these. It is flat out beautiful. I have seen them at auto shows and at a Tesla showroom, but this is the first one I've seen on the road. My wife made me go around the block for another look, and she is ambivalent about cars.

I predict the beef over the Tesla company owned showrooms will blow over. Even Elon Musk isn't rich enough to finance a real distribution system, even if he included all of his friends. As long as they are a boutique manufacturer, he'll be just fine with the current setup, as we noted in a May 23rd post on Tesla's Distribution Challenge. The next step, if he gets that far, will require a dealership system. He will be selling off his company owned stores for large multiples. It isn't practical to try to attract investors if they know they would be having to compete against their supplier. Then there are those pesky franchise laws.

Super investor increases stake in General Motors

As feds are selling GM stock, Buffett is buying.

DealersEdge Headlines

Billionaire Warren Buffett's investment firm Berkshire Hathaway Inc. boosted its holdings in General Motors by 60 percent to 40 million shares, the firm disclosed in a recent SEC filing. That brings Berkshire Hathaway’s holdings to 2.9 percent of outstanding GM stock, according to a report in the Detroit News and SEC filings.

The firm initially purchased 10 million shares in 2012, when the stock was trading in the low $20-per-share price. It closed last week at $34.55, down $1.02. At current prices, the stake is worth more than $1.38 billion.

Mr. Buffett acquired the new shares in GM in the three months ending June 30. That's the same period during which the U.S. Treasury has been steadily selling off its holdings in GM it received as part of its $49.5 billion bailout.

Thursday, August 15, 2013

Fuel Cells Still a Viable Option?

Based on an original post by Daniel Tomm on the Econ 244 course blog

By chance there is a CNN Money story today (Aug 15) on fuel cells, Has the fuel cell car's time finally come? by Brian Dumaine, senior editor-at-large @FortuneMagazine, which will appear in the September 2, 2013 issue of Fortune. This post was written prior to seeing that story.

Automotive News reported here on May 13th that Hyundai, Mercedes, Nissan, and Toyota have been working with the U.S. Department of Energy to prepare hydrogen fuel-cell powered cars. This public-private partnership – if successful – will lead to a new class of alternative fuel vehicles. These would cut point-source emissions to zero, because the only on-vehicle byproduct is water. At present the underlying hydrogen source is natural gas; fuel cells thus likely have a low overall greenhouse gas emissions burden.

...specialized applications may develop ... passenger cars won't be one of them...


Tuesday, August 13, 2013

The Tariff Advantage of Mexico

Adapted from a post by Griffin Cook on the Econ 244 blog, May 18, 2013

Audi's decision to place the plant that will build the new Q5 crossover in Mexico resulted from more than cheaper labor and government incentives. After all, assembly is likely 10% or less of manufacturing costs, and direct labor only one piece of that. Inventives are even less a factor – what big greenfield plant wouldn't likewise enjoy incentives if located in the US? (See an August 13th Bloomberg story on efforts to recruit car-related factories in the US.) So other considerations likely dominate.

According to CEO Rupert Stadler, Europe's growing interest in SUVs and and crossovers played a key role. The European Union slaps a 10 percent tariff on U.S.-built vehicles, which would have cost Audi more than $3,000 per vehicle – and only 25% of the plant's cars will likely be sold inside NAFTA. A majority will instead be headed for the European Union.

This is part of a growing trend in which cars are produced in a foreign country and then exported to the home country, in part due to cheaper labor costs and flexibility in trade laws, but also access to a supply base and to hedge foreign exchange risk. This presents a problem for the European Union, with production in its periphery, outside the Euro zone.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership. Lowered tariffs would help the US. And another component is homologation, which might lessen the divergence in safety and testing standards that mean that Audi and BMW (whose South Carolina plant exports 70% of its output) must produce slightly different products for different markets – variations in headlight standards, how emissions are measured, and on and on.

Sources:

Sunday, August 11, 2013

Red and Yellow

A guest post by Andrew Shipp; original draft May 15, 2013 on the Econ 244 blog

Florida revealed a scheme to shorten yellow light times. The reduced intervals have, in some areas, doubled the tickets given to citizens for running a red light. According to one Dept of Transportation official, the practice may raise money for the state but makes traffic extremely unsafe. "A one-second increase in yellow time results in a 40 percent decrease in severe red-light related crashes." In some communities the yellow light interval change was below the nationally mandated minimum time limit. After that was discovered, the counties upped the time back to national levels but did not tell the drivers who were ticketed under the old light time.

(WTSP 10 News followed the story.)
The Prof notes that in some countries traffic signals include time remaining,
and drivers are off the moment a light turns green. Woe to anyone who fails
to stop in advance of a light turning red!

Saturday, August 10, 2013

The Decline of the Japanese Auto Industry

Here are three graphs, pulled from a talk I gave at UMTRI in the spring. The Japanese auto industry – that is, manufacturing and retail inside Japan – faces permanent decline.

Two trends interact. First, due to demographics Japan's population is in decline, and so is the number of licensed drivers. I don't have statistics on the latter, but I have used Census data and population projections to calculate the potential number of licensed drivers. (In Japan you can't get a license as young as in the US, and after age 70 it becomes increasingly hard to get your license renewed.)

Second, the vehicle mix is unfavorable. From the production standpoint, exports are important, but the data show that the market isn't increasing, has more low-value vehicles and is very volatile. The third graph is the domestic parc, which is what matters for dealers. Here the story is even worse, while full-sized cars rose in share along with incomes, that process has ended. Instead what we see is a decline in mid-size car sales (compacts in the US context) and their replacement by "kei" minicars.

Here are implications, as I see them.

  1. Over time dealers will face extraordinary pressure. That will be accentuated by the geographic aspect of population decline, because population will fall more and age faster in rural areas where car ownership is highest. Rural areas are already distinctly older than the major urban areas (Tokyo-Yokohama-Kawasaki-Chiba, Osaka-Kyoto-Kobe, Nagoya, Hiroshima, Fukuoka-Kita Kyushu, and Sapporo). Their potential market is literally dying off. Dealerships in Japan are also unable to sell across prefectural boundaries, so better-run dealerships can't use the internet to extend their geographic market to offset local decline.
  2. Manufacturers will face a smaller market. They have a large number of distribution channels – not including trucks, Toyota has six channels: Daihatsu, Netz, Corolla, Toyopet, Toyota and Lexus, with lineups that overlap and cannibalize each other. (Dealerships are also multi-point, with sales points each trying to buy business from other parts of the same dealership, while the strong players in used cars are independents such as Gulliver.) Rationalizing production and model mix and distribution will be traumatic, as we've seen with the efforts of GM, Ford and Chrysler in dropping multiple brands.
  3. Suppliers will have an even harder time. Small Japanese suppliers were slow to internationalize. Even worse, when I've visited suppliers in Japan for engineering presentations – and in sharp contrast to similar visits in the US and France – I've been the only non-Japanese in the room. That hurts in two ways.
    • First, there just aren't that many would-be engineers graduating from Japanese universities. Without international staff they simply won't be able to stay in the game. Honda and Toyota have huge engineering operations in the US that can handle the entire vehicle development process. As far as I can tell, that's not the case with most Japanese-headquartered suppliers.
    • Second, in order to serve their customers on a global basis, suppliers need to have the same global capability. Some will finesse that by being acquired by foreign firms, and thereby globalize their engineering. Others will prove unable to build a global engineering and manufacturing presence because they've been slow to delegate decision-making and build capabilities and staffing outside Japan. They will steadily lose market share to firms with HQs outside Japan. Indeed, my scanning of industry news (in English, Japanese and [less frequently] German) supports that. Toyota is turning more and more to the big US/Europe based global suppliers, because their own "keiretsu" suppliers can't support Toyota's global footprint.
    • Now this is a third bullet, but is speculative so I won't claim it as a 3rd point. My belief is that because of the two factors above Japanese suppliers lag in technology. Casual empiricism turns to the body of finalists in the Automotive News PACE competition, who are chosen on the basis of successful innovation. Japanese firms are largely absent. [Mea culpa: the competition is entering its 20th year, and I've been a judge since the start.] Not having a truly global mindset, not having the bulk of engineers in Japan able to use English as a working language, means that Japanese suppliers are behind the eight ball in technology. Sometimes it's better to be a bit behind where you can learn from other's mistakes and simply not invest spend money on "advanced concept" R&D that leads to dead ends, the "bleading edge" thing. OEMs also want second sources, so even firms that have reasonable intellectual property know they won't have a monopoly. Still, my judgement is that being second source is less profitable. And being second-source based on production in Japan is a losing proposition.
  4. Japan, as a geographic entity, is already a shrinking part of the global industry. Of course the growth of the BRICs and ASEAN means the same is true of the Euro zone and of NAFTA. My belief is that slow internationalization will accentuate the impact of a shrinking domestic market. That's particularly good new for non-"Japan" suppliers.

In the 1980s the US industry feared that domestic firms would disappear under the onslaught of Japanese "keiretsu" suppliers. That's not what we see if we look at the top 100 suppliers today.

Sunday, August 4, 2013

Diversion: An Economic Model of US Elections

Economics helps explain disarray in politics, at least politics US-style. Put every voter on a line, from right to left; candidates move towards the center. With a little bit of detail added, this model, due to Hotelling, helps clarify the strategic nature of our electoral game. (Harold Hotelling's simple model of product differentiation dates to 1929. The politics version is the median voter theory.)

Where on a small beach would two pushcart vendors locate? Assume they start on the ends of the beach, each to their own side. They then split the business – everyone goes to the nearest vendor, with the person in the very middle indifferent which he chooses. But let one vendor push his cart partway towards the center, and that cart then splits the business that lies between, plus everything towards their end, and so gets more than half the business. The response is obvious: the other cart moves towards the center as well. Repeat, and eventually they're next to each other, at the center of the beach.

So let's look at an election to Congress. That process starts with primaries; there's lots of local variation, but for simplicity assume they're limited to party members. Now voting is inconvenient, and primaries don't always get much publicity. So let's further assume that only those who really care vote. Candidates align themselves at the center of their party, and so we get one candidate at the 1/4 mark, another at the 3/4 mark. He who can move most successfully to the center wins the popular vote. If one candidate missteps and does not quite move to the center, the other candidate can take advantage of that. Of course random factors matter – an untimely scandal, spending money unwisely, misjudging which states are on the edge and so not allocating enough time, or even personality. The model doesn't capture everything.

This simple model highlights the dilemma Republicans (and in some races, Democrats) face, as the primary system pulls them to the right, with the issue of race (plus, less centrally, social nostrums) uniting a large enough block of activists to turn out to vote. As activists moved further from the center, that suggested that Democrats could win presidential elections even with weak candidates, by moving to right of center. Put in a strong candidate, a good campaigner such as a Clinton or an Obama, and you have a landslide. (Strong candidates and strong presidents aren't the same thing – we elect people because they're good at campaigning, not at policy or administration or negotiating with Congress.) Party activists who love the game, or love power are happy with this process. However, the party faithful will typically be unhappy with their final candidate, because the median activist isn't a centrist.

Now lots of assumptions are hidden in this model. However, we don't need a perfectly uniform distribution, or (with lots of caveats) only one dimension. We can, for example, let money sway matters, allowing candidates to "buy" votes. Of course two can play that game, and if it's harder to buy votes the further you are from a potential voter's position, then there's still pressure to move towards the other candidate.

However, the model does require flexibility; voters opt for whomever is closest to them, even if they're at one end of the spectrum and the candidate is all the way in the center. In other words, no one running for office gets locked into their initial positions. (In economics, the Stackelberg model assumes that's not the case.) A second crucial assumption is that there are only two players; three's a crowd, and there's no equilibrium strategy. Third, if the market is a circle rather than a line, then two players move as far apart as they can, the opposite result – but in my judgment that's not how politics works, even if the extreme right and the extreme left may be hard to distinguish on strong state issues (think Weimar Germany, where both the right and the left were nascent dictators and central planners).

So why are our politics not centrist? First, there seems to be a limit on how quickly (that is, how far) a candidate can re-center after the primary. In terms of the Hotelling model, if voters are limited in how far they will travel – they won't vote for someone who "betrays" them – then candidates will be limited in how far they can reposition themselves after the primary election. (In the Hotelling model, this comes for example from using the square of the distance a voter must travel.) The harder it is for a Republican to shift away from positions needed to win a primary, the easier it is for the Democrats. But potentially the Democrats enter the race with similarly untenable positions, if their primaries are similarly dominated by activists far from the political center. Casual empiricism, though, suggests that while there is a distinct "Right" in American politics, there is no Left – the US has never had a strong Socialist Party, or even a Labor Party. What "liberal" means is unclear. And that's an important point. Due to their diffuse positions those with some sort of liberal inclination have only a weak pull on a candidate, and a good grassroots campaign can turn out their vote.

In the last election, Republican candidates did not move. Perhaps this was a defect in the candidates themselves, or in their use of the same political advisors they employed in the primary, who were unable to distance themselves from their "natural" constituency. However, it's not just been this one election, and the Democrats (rhetoric aside) seem to be center or center-right, which would be consistent with what would happen with a coherent Right and an incoherent Left. To reiterate, the Greens and others on the left have always been too fractured to be a threat in primary elections. And when they do field a candidate who has campaign salience, the result is electoral disaster for Democrats: the further a candidate moves towards the Republicans, the greater the potential for a magnetic personality such as a Ralph Nader to nibble away at the more liberal part of their base.

Of course if being an incumbent get's you close to half the vote, then strategy doesn't much matter – an incumbent has to try hard to lose. Redistricting throws open the process, at least on the margins; scandals can matter. (Think of this as adding a second dimension, a "probity" axis, where scandal means the incumbent has chosen an extreme position, on the sideline, thereby ceding more of the playing field to the opposition…) In addition, for the House (but not the Senate) local issues can have salience. In practice, though, that seems to mean that rural candidates are always pro-farmer, whatever their party label; candidates move so far to the center that they're indistinguishable on such local issues. In any case, to the extent that incumbency dominates other factors, the only elections where this Hotelling model matters are ones for open seats – whether one views Romney's candidacy as amusing or as sad, if incumbency really matters, it was doomed all along to irrelevance.

To sum up, the Hotelling model suggests that a large swath of voters will always be unhappy with presidential candidates, come the general election. Our politicians are "slick" and "untrustworthy," flip-flopping, betraying those who worked for them in the primaries. Thanks to smaller electoral districts and hence a less diverse electorate – gerrymandering accentuates that – members of the House will also be more polar than the electorate as a whole. Granted, you always want to bargain down to the wire. But if the center dominates, then you do end up with a deal. That doesn't seem to be happening today, and this simple economic model suggests that all that is required to generate this is the rise of a modest-sized "sticky" right.

Addendum: Economics insists that models aren't sensible if they don't lead to equilibrium behavior. A "sticky" right opens room on the left for a third-party candidate, because it leads Democrats to move to the right of center. If political entrepreneurs succeed in finding issues that will unify those to the left, then the center can lose all salience. Now the right end of the US spectrum seems to have defined itself around racial and class lines, white and prosperous, with a largely overlapping group of social conservatives. That's a shrinking base, but the Hotelling model suggests that as long as we maintain a system of party-oriented primaries, that base won't become irrelevant anytime soon, at least for the House of Representatives. This is not what many political pundits assume to be the case, but does match the continued power of a distinct minority in the House. We'll see come fall whether the Senate continues to be less affected.

One other implication is that in districts with strong incumbents, it's hard to motivate the average person who might vote for an opposition candidate. Only strongly driven voters participate – in other words, you get kooky candidates, who take positions incompatible with any sort of move to the center. That reinforces the strength of the incumbent...

Saturday, August 3, 2013

GM, and Ford – Onward and Upward?



As of this writing, the stock price of General Motors closed at almost $37.00, while Ford closed at about $17.  Both announced strong second quarter profit results.  Have GM and Ford peaked?

I’m not in the business of giving buy/sell stock recommendations but a discussion of both the head winds and tail winds the Detroit 2 automakers face going forward might be interesting.  

In the case of GM, the current stock price represents a degree of redemption.  GM’s Initial Public Offering stock was priced at $33.00 in November 2010, after it emerged from Chapter 11 bankruptcy. Immediately after the IPO the stock price took a quick jump to near $40.00, then dove to a low point of around $18.00 as recently as 18 months ago.  Some RW pundits, including Forbes, were predicting GM would be back on bended knee to the U.S. Government looking for funds to survive.   Since the IPO, GM has hemorrhaging cash in Europe as was the old GM.  

But after a decent first quarter in2013, GM just announced a $1.2 billion profit for the second quarter.  The company holds over $44 billion dollars in cash and credit and is rolling out new and well accepted models every few weeks, it seems.  The company enjoys a favorable UAW contract for the next few years, and is selling into a U.S. auto market with considerable pent up demand.  Chevrolet is setting sales records, and a resurgent Cadillac has restored brand prestige.  In fact, production restraints from cutbacks made during the bankruptcy period restrain current production and profits. 
It is expected that the U.S. Government will complete its sell off of GM stock in 2014.  In the middle of all of this, GM and its stockholders enjoy a gift provided by the Federal Government.  The new GM was granted “loss carry forwards” from the old GM that could amount to $45 billion in tax savings in the coming years.  That’s a lot of money that can be deployed in new technology and model development.  

On the flip side, GM’s market share remains a challenge.  Toyota has regained the mantle of world’s largest auto manufacturer.  There are no big captive finance arm profits contributing to overall results as there used to be with the old GM and its captive GMAC before GMAC got involved in mortgage lending.  For perspective, GM Financial, GM’s new “owned captive,” contributed $264 billion to GM’s bottom line. Ford Motor Credit contributed $454 million to Ford’s bottom line on about 20% fewer vehicle sales.  Ally Bank, GM’s “non owned captive,” and the old GMAC, is using its own profits to pay back to U.S. taxpayers for keeping it alive during the 2008 – 2010 crisis. 
Europe remains a challenge for GM.  Vice Chairman Steve Girsky has been been dispatched there to deal with the morass of labor and bureaucratic issues in a market that doesn’t look like it will rebound any time soon.  But the losses in Europe have recently been trimmed.

There continues to be executive shuffling at GM.  There are a couple of major exec announcements a month with high level executives either being “broomed” or leaving for “personal reasons.” The Board of Directors has developed no plan for CEO Dan Ackerson’s successor and seems to be particularly dysfunctional.  Ackerson himself seems to be a challenge for GM employee morale.  Even the rapid growth in China has been tempered recently.  GM’s recent buy into Peugeot is interesting.  Noted auto industry analyst Maryann Keller referred to that recent investment as “GM buying in to a “black hole.” 
 
Ford’s stock had reached low ebb in November 2008, closing as low as $1.26.  The stock price peaked at $19.00 in January 2011, driven by Cash for Clunkers euphoria and auto industry exuberance caused by the record GM IPO. The current stock price represents a significant recovery from $9.20 in November 2011.  The company just announced a second quarter pre-tax profit of $2.6 billion, which is more than GM on fewer sales.  The company states their liquidity as $37.1 billion.  Ford recently doubled its dividend to 10 cents per share, its highest in seven years.  according to Reuters. 
Ford also benefits from the same beneficial UAW contract it gained from UAW as a consequence of the overall U.S. auto industry reorganization. Ford Motor Credit contributes greatly to the parent company’s bottom line.

Ford, like GM, is challenged in Europe and is facing market share erosion at home.    Ford has to compete with two U.S. competitors, Chrysler and GM, which shed debt through their bankruptcies, while having to pay all of its own obligations.  The company continues to struggle with the Lincoln brand, having shed its Mercury division.  

On balance, things look good overall going forward for both automakers, despite the obvious challenges.  Europe won’t be in the economic doldrums forever.  Despite declining market share in the U.S., the home market seems to be advancing toward the old standard of a 17 million SAAR. (Seasonally Averaged Annual Rate)  As costs stay in line and sales continue to advance with the expanding SAAR, without huge incentives required to achieve them, profitability should stay strong for the both automakers for the foreseeable future.  Some analysts see Ford as a $40.00 stock with GM at $60.00.  Time will tell.