Bill Vlasic's Once Upon a Car

This term I have my students reading 4 auto books:

• Rudi Volti's short historical overview, (2004). Cars and Culture: The Life Story of a Technology, Greenwood Press, 2004.
• Tom Wolfe '51, Kandy-Kolored Tangerine-Flake Streamline Baby, William Morrow, 1965. We were also fortunate to have him as a guest speaker, taking advantage of his visit to campus for the 11th annual Tom Wolfe Weekend Seminar funded by the Class of 1951.
• Stealing Cars: Technology and Society from the Model T to the Gran Torino by John Heitmann and Rebecca H. Morales, just published by Johns Hopkins University Press. Prof Heitman will also be a guest speaker.
and finally
• Bill Vlasic's Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers–GM, Ford, and Chrysler, William Morrow, 2011. If the GM story quietens, he might be able to join us for dinner in Detroit.

I call attention to the latter book, because we are reading it in conjunction with the visit of Bill Cosgrove '67, a retired Ford executive who worked directly with many of the people from Ford who appear in Mr. Vlasic's book. Mr. Cosgrove has read it a couple times (he also quotes from Maryann Keller's Collision Course), and will expect us to be familiar with the content.

To help with class discussion – at least one student should be familiar with any particular incident Mr. Cosgrove might bring up – and also because Vlasic's book is much richer than we have time to cover in class, students are preparing notes, selecting quotes and following up with questions. Those are divided into 3 pieces:

• Chapters 1-12
• Chapters 13-24,
and
• Chapters 25-32 plus the Epilogue.

I've a good group of students, their notes are thoughtful and they pose good questions. If you've read the book, then they ought to be interesting, and if you're preparing to read it (an "ought to" for anyone reading this blog!), well, come up with your own questions!! This and more are found at Economics 244 at http://econ244.academic.wlu.edu

Peak Oil is Here

I will write a follow-up post asking what I got wrong and what (if anything) I got right with my analysis below.
When done, I'll put in a cross-link.

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

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

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

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

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

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

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

Econ 244: The Auto Industry

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

GM & Toyota: Of course they generate scandals!

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

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

Corporate Gulf Between Japan, West

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

. . . . . .

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

. . . . . .

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

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

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

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

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

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

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

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

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

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

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

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