Turbos vs Hybrids?

Another guest post by Mr. Liu, as this ties well with the previous post. Original draft May 8, 2013 with editing by Smitka (the prof)

Forced induction provided by turbochargers and superchargers is a nice way to get more power out of an engine with a fixed displacement. The manufacturers of this technology are a fairly concentrated group, however, which is a worry to OEM's. If the supply of these forced induction products is too concentrated with a few select manufacturers, then there is a worry that if demand for blowers goes up substantially, then the suppliers will have undue leverage in price setting. Therefore, OEM's are encouraging other suppliers to enter the market.

...Toyota is hedging its bets ... with both a turbo and a hybrid ...

Do Suppliers Now Drive Technology?

Originally posted May 14, 2013 by Oliver Liu on the W&L Economics 244 Web Site and paralleling one by Marybeth Benjamin. Modest additions by the Prof.

At the Federal Mogul Plymouth Technical Center, I was shown a new spark plug technology that Federal Mogul engineers developed called the Advanced Corona Ignition System (ACIS). ACIS looks like a conventional spark plug except it has a crown on the end instead of the ignition electrode with the ground in front. ACIS fills more of the chamber with ignition-producing electricity (25 mm i/o 1 mm), which will allow for higher compression ratios (about twice conventional levels), resulting in a cleaner burn with improved fuel economy and emissions. It's also faster and the corona can be modified in line with engine speed. The engineer, Mr. Mixell, said that ACIS will be optimized with changes in engine design and that it may take a while before it is available in aftermarket applications for older vehicles.

State Franchise Regulation

This is the fourth carryover from student blogs, with guest blogger Asher Stevens-Lubin. In his defense he wrote this post at the very start of the term, before we'd covered franchising issues (and had David in as a speaker). Both Ruggles and Smitka append comments. Roberts-Lubin's citations are detailed at the bottom.

The cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of vehicle price, with 15 percent on the end of the manufacturer (in the form of advertising, loans, and rebates) and the other 15 percent solidly on the side of the retailer, or dealer. This 15 percent of the total price of a given vehicle is due to the cost to dealers of financing inventory, paying for insurance, advertising, and paying commissions. [Source: Marti et al.]

Maryann Keller - Recent Speech at a JD Power Conference

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.

Why are there still car shows?

This is the third in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

...marketing has changed, auto shows haven't...

Shanghai Auto Show

The marketing "world" today is significantly different than that of 40 years ago, but motors shows today are remarkably similar to those of the 1960's. As the Shanghai Motor Show of a few days ago came to a close, it occurred to me that car shows in general seem to have lost much of their original purpose, or at the very least have not adapted to the internet.

First, given the ease with which the cars are frequently discovered before they even make it to the show, the main purpose of showing off vehicles which the public has never seen before doesn't seem to make sense. Take the new BMW X4 – virtually no one was surprised at the design, because it was available on the internet long before the show. Secondly, the argument that the purpose of the shows is to get as much exposure as possible for new vehicles also seems to fail, because the companies could just as easily provide images of the cars (which is what the vast majority of people see anyway, given that most people are not able to attend these shows) via the internet.

Libertarianism's Achilles' Heel, by E.J. Dionne Jr.

Here are comments stimulated by the following Washington Post item of Wednesday, June 12, 2013 12:00 pm

Every now and then someone hits the nail on the head by E.J. Dionne Jr.

Maryann Keller Testimonay RE: Tesla versus the state of Texas

Considerations for the State of Texas

Consumer Benefits of the Independent versus Factory-owned New Car Retailer

April 9, 2013

My name is Maryann Keller. I am the Managing Partner of Maryann Keller & Associates LLC, a management consulting firm specializing in the automotive industry. I have served in this position for more than twelve years. My firm is and has been engaged on a wide variety of consulting projects for clients including automotive OEMs, lenders, private equity firms, government agencies, and retailers. Several law firms and one US government agency have engaged me to provide expert witness testimony in support of litigation. I have never served as an expert witness in any litigation involving or related to auto retailing or auto dealers.

I currently serve as a Director on the Boards of two companies. The first is a privately-owned franchise new car dealership group in the State of Maine, and the second is for Drivetime Automotive, a privately-held multi-state automotive retailer specializing in providing subprime credit customers with affordable transportation. At various times in the last twelve years, I have served on the Boards of several public companies including Sonic Automotive and Lithia Motors, both multi-state franchised dealership operators, and for Dollar Thrifty Automotive Group, a rental car agency. Prior to starting my own firm, I was President of priceline.com’s automotive services division during 1999-2000. That start up operation was essentially a sophisticated lead generation process that matched online shoppers of new cars to franchised dealers.

The competition for transport: room for cars?

This is the second in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

... it's to sell a car in my country!! ...
Guest Blogger: Clara Suong Tran

I had an opportunity to work on the Ford Vietnam account when I interned for a U.S. public relations firm based in Hanoi in 2011. Although my focus was the media and branding side, I also learned a lot about Ford Vietnam's business model. What stood out is how hard it was for Ford to sell a car in my country.

During my 3 months in Hanoi, Ford introduced the Fiesta to Vietnam, opened 2 new showrooms, worked on assembly line expansion and was the subject of a tax scandal on imported parts. The new Fiesta was priced at $27,000 - totally unaffordable for 90% of Vietnamese people. The majority of the population farm on small parcels, which limits their incomes. However, even an urban family in Hanoi or Saigon has an annual income of only $6,000-$10,000. As a result we rely on motorbikes for transportation.

How many cars are there in this picture?

Has Auto Racing Outrun Its Usefulness?

This is the first in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

...road cars have been a reflection of racing...

Since the beginning of the automobile industry in the late 1800s, auto racing has been pivotal in the technological progression and proliferation of the modern motor vehicle. Developments often taken for granted in modern cars are attributable to innovations originally intended to shave seconds from a lap time. Advances in transmissions, engine efficiency and power, aerodynamics, suspensions, and safety technology are examples. Racing not only contributed to technical progress, but also to the car's social perception. As the old saying goes, "what wins on Sunday sells on Monday." Customers enjoy owning cars with racing pedigree. Even if your base Chevy Malibu will never enter itself in a road race, it feels a little more special because its (somewhat distant) cousin is currently dominating the NASCAR circuit.

But has auto racing seen the end of its useful life? Has technology reached such a point that advances in racing technology are no longer likely to trickle down to our mundane road cars? Have racing cars distanced themselves so greatly (for safety, speed, and regulatory reasons) that they no longer contribute to a culture of people buying cars because they perceive them as winners?

Take for example Formula One, what many would consider to be the pinnacle of automotive performance. Formula One race teams spend enormous sums of money in order to develop and produce their cars; Red Bull Racing has an annual budget somewhere north of US$296 million. Its cars are capable of speeds over 225 mph and 5 g's of sustained cornering force (about 5 times what your road car can hope to achieve). While technologically impressive, one has to wonder if the cars have diverged so far from their road-going counterparts that their innovation and sales boosting potential have been diminished. For example, tire technology has advanced to the point that Pirelli, the official supplier of all Formula One tires, intentionally engineers its tires to fail rapidly and unpredictably, so that pit stops and "tire strategy" become a bigger factor in races. Instead of innovating in a way that could benefit road cars, the focus is now on ensuring the sport remains entertaining.

NASCAR is another example of racing's departure from pedestrian vehicles [pardon the image!]. Up until the mid- to late-1960's NASCAR (National Association for Stock Car Auto Racing) literally involved major manufacturers racing stock cars, upgraded slightly for power and safety reasons. A Ford Mustang that you could buy off of the showroom floor was not all that different from what you saw the superstars of NASCAR racing on the weekend. Gradually, the cars began to employ non-stock chassis, engines, and eventually even bodies. Today, all NASCAR cars share a common "body template." A Toyota Camry race car shares the exact same body dimensions as a Ford Fusion (only the stickers differ). Your showroom floor Fusion now has about as much in common with its NASCAR brethren as it does a NASA space shuttle. As a result, one has to wonder, does a "Fusion" sticker on the front of a NASCAR vehicle really lead to increased Fusion sales?

As an auto enthusiast and an avid racing fan (a Lotus F1 fan here!) I want auto racing to continue to be a source of innovation and inspiration for the auto industry as a whole. However, at this point in time I can't help but wonder if auto racing has run its course. Shaving even one second from a lap time is becoming exponentially more expensive as more exotic and expensive materials and technologies are required.

Luckily, one bright spot of racing innovation remains: weight reduction. The process of making a vehicle of the same size and physical strength weigh less is a major focus of racing teams. Materials like carbon fiber and advanced aluminum alloys not only make cars faster, but also more fuel efficient. As auto manufactures struggle to meet fuel efficiency standards, weight reduction is a major emphasis. A lighter vehicle, all else equal, will consume less fuel. Materials like carbon fiber are incredibly strong and light, but until recently were both difficult and expensive to produce. [Joining them to the rest of the vehicle also requires advanced adhesives, which have migrated to regular production vehicles.] Luckily, economics of scale and technological developments have made materials like aluminum, magnesium and carbon fiber more feasible to use in your average road car.

These advancements match the current needs of the auto industry. With the ever rising cost of fuel consumers no longer need the 400+ horsepower "muscle cars" of the 60's and early 70's that barely achieve 10 miles to the gallon. Maybe auto racing does still serve a role, but that role has changed. As the requirements placed on the modern automobile change, so do the requirements placed on the race cars.

Road cars have been a reflection of racing. No longer!

...Tyler Kaelin...
with editing by Mike smitka

Comments by students and by the prof, edited for brevity

Andrew Shipp: Auto racing in the sense of technological inovation may have jumped the shark. However, the sport and skill of the drivers are still present and thriving. It may not come down to who has the best car any more, but this fact opens the arena to who has the best skill. This may give scientific data to help worse drivers improve their skills on real roads.

The Prof: As a judge for the Automotive News PACE supplier competition, which recognizes innovation, we used to see things coming out of racing into high end vehicles and then migrating towards mass market cars. Now we see examples of the opposite, innovations first launched on volume vehicles and then diffusing to niche markets but not making it to racing vehicles. Furthermore, I can't recall an example from recent years of the PACE competition where the innovation originated in racing. To give an example, turbos began in the racing arena, but with the downsizing of engines are now commonplace in cars. In PACE we continue to see innovation in turbos, but these are implemented first on production vehicles and not on racecars. So this is a very interesting thesis.

The Prof: No one ever "needed" 400hp! And while the price of gas is higher than in the recent past – corrected for inflation, gas prices during 1986-2003 were the cheapest in history – it's not clear prices will rise further. However, weight saving will remain a priority, due to CAFE (corp avg fuel economy) standards in the US and CO₂ regulations that exert comparable pressures in the EU and Japan.