tag:blogger.com,1999:blog-29593611131874750982024-03-14T05:14:47.846-04:00Autos and Economics<u><b>Mike Smitka</b></u> has followed the industry (and the Japanese and Chinese economies) for 40 years, as an academic economist and now in retirement. <u><b>David Ruggles</b></u> has worked every phase of the retail side: new and used, sales and management, lease financing and consulting, in both the US and Japan. He is also retired.Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.comBlogger375125tag:blogger.com,1999:blog-2959361113187475098.post-51440046072015254902023-09-26T17:54:00.006-04:002023-09-27T15:43:03.889-04:00Europe's Crackdown on Chinese EV Exports<p class="signature"><span style="font-size:1.2em;">Mike Smitka</span> <br />
Prof Emeritus of Economics, W&L Univ<br />
Judge, Automotive News <a href="https://www.autonews.com/awards/pace-program">PACE Awards</a> for supplier innovation<br />
Steering Committee, <a href="https://gerpisa.org">GERPISA</a> global auto industry research network<br />
Contributor, <a href="https://seekingalpha.com/">SeekingAlpha</a></p>
<p class="base">Europe is poised to launch an <strike>antidumping</strike> countervailing duty investigation of Chinese EV exports to Europe. Launching is a political decision. Once the "go" is given, however, it turns into an administrative process that runs according to set rules. What matters is whether the lawyers involved find subsidies in China; they will. [<span class="aside">You can find many details <a href="https://policy.trade.ec.europa.eu/enforcement-and-protection/trade-defence/anti-subsidy-measures_en">here on the European Commission Directorate-General for Trade website</a>, including the link to a spreadsheet of recent EU cases.</span>] It won't matter whether the EU provides similar incentives. Once launched, a guilty verdict is certain, and that could well lead to punitive tariffs that will bring an end to European EV imports from China. The process, however, will take several months, so might not affect European imports until June 2024.</p>
<p class="base">The initial announcement focused on the threat from cheap EV imports from China, naming several of China's EV startups. But that's not how the process works. The EU plays by the rules, and those rules focus on an industry or product category, and in general not an individual firm. So the reality is that the real focus, intended or not, is Tesla. That's because they're the dominant EV exporter – all of Europe's Model 3s come from Shanghai, and many Model Ys. Stopping those exports from Tesla's Shanghai plant will not only lessen the pressure on the German car companies and their high-priced EVs. It will also force Tesla to turn up the volumes of production of the Model Y in their plant in Berlin.</p><div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihqmF-rpR0gWnmBysafbVQcJlic8HVs828k-xvZC0pjXopL7x_wjBei-609UD3P3gag9vXH8MlLxoPH61KFKN0XpcrgJfcxnzJYZxvl6TUMixq71SWEH2QFtNMY4q9uz71VbEI7IoAuU0jokcvLjv6kxSR8Jp316cjs44Qh4_3wOmyY-9uhfeovyvfeUHS/s3135/Picture1.png" style="display: block; padding: 1em 0; text-align: center; clear: right; float: right;"><img alt="" border="0" width="400" data-original-height="2277" data-original-width="3135" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihqmF-rpR0gWnmBysafbVQcJlic8HVs828k-xvZC0pjXopL7x_wjBei-609UD3P3gag9vXH8MlLxoPH61KFKN0XpcrgJfcxnzJYZxvl6TUMixq71SWEH2QFtNMY4q9uz71VbEI7IoAuU0jokcvLjv6kxSR8Jp316cjs44Qh4_3wOmyY-9uhfeovyvfeUHS/s400/Picture1.png"/></a></div>
<p class="base">Other EU firms will be caught in the cross-hairs. The Dacia Spring EV comes from China; Dacia is Renault's lower-price brand. Some BMWs and Volvos come from China. Their volumes are still modest – the Spring sold just over 5,600 cars in August – but their plans are expansive. Tesla's volumes, however, aren't trivial. Over the past 12 months Tesla sold 103,000 made-in-China Model 3. I don't have detailed data for made-in-China Model Ys, but I conservatively estimate half of the 200,000 Tesla exported the past 12 months made their way to Europe. At 1 million units a year, that output represents 20% of their Shanghai plant's capacity. In other words, without exports to Europe the Tesla plant in Shanghai can't surpass the 80% utilization level that is the auto industry rule of thumb for being profitable. Making cars, after all, comes with high fixed costs, and the irony is that the lower the wage level, the more plant-level fixed costs matter. Tesla now sits in the normal position of a car company with aging product: cut prices to maintain sales and capacity utilization or keep prices high and see sales plummet. (There is after all what the media calls a price war going on in China's EV market, touched off by none other than Tesla.) Either way, margins collapse. Fortunately Tesla's starting point is one of good margins, so that alone won't push the company into the red. But it does undermine the case for investing in Tesla's stock.</p>
<p class="base">I add further detail in <a href="https://seekingalpha.com/article/4637500-chinese-evs-august-tesla-shanghai-challenge">my Sept 26 article on SeekingAlpha</a>. First, I provide underlying data. One key observation is that the era of rapid growth for China's EV market is over. Market expansion will no longer allow EV makers to see sales expand despite keeping prices high. Tesla has launched a refresh of the Model 3, produced for now only in Shanghai. The Chinese auto press however pans it as not worth the most prominent new feature, a higher price. And things will look much worse if the slowdown in the Chinese economy expands from real estate and shadow finance merchants in China's lower-tier cities to the wealthier metropolitan areas such as Shanghai where most EVs are sold.</p><div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimf2NLEBB5gWwfAimAk3XR4ot9drQBiSBHJ6x0z8KT7g9-6ZAXQeBwzcUZOPdc_MQGVmsy6Z4IGVVHgmpI1oFWhF-dqADOXG88EmxkjwwkAUnZai4YDVp-LlRtgwZbmxiNiO4wJSmIpSpELf71QdYAzHtplWUhC7ylZeSwaXH7ba1t6XQEfFv03xZznbaW/s3144/Picture2.png" style="display: block; padding: 1em 0; text-align: center; "><img alt="" border="0" width="400" data-original-height="2282" data-original-width="3144" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimf2NLEBB5gWwfAimAk3XR4ot9drQBiSBHJ6x0z8KT7g9-6ZAXQeBwzcUZOPdc_MQGVmsy6Z4IGVVHgmpI1oFWhF-dqADOXG88EmxkjwwkAUnZai4YDVp-LlRtgwZbmxiNiO4wJSmIpSpELf71QdYAzHtplWUhC7ylZeSwaXH7ba1t6XQEfFv03xZznbaW/s400/Picture2.png"/></a></div>
<p class="base"><em>Addendum</em>: I continue to look into the process, and previous EU countervailing duty examples. The calculated subsidy will be the sum of national level subsidies such as reduced income taxes, provincial subsidies and local subsidies. Those individual items of 1% here and 0.5% there can add up to a significant total, the 19 line items for Chinese truck & bus tires add up to 21.97% (min) and 75.91% (max), so the bottom line in that case is substantive. The DG-Trade does not substantiate every claim, or finds some below the threshold to do detailed calculations. And the geographic variation of policies in China mean that the final CV duties will likely vary from firm to firm, as the industry is spread across a wide swath of China.<br />There are many issues. How will they treat the free license plates for EVs in 8 of China's largest cities? – I have no idea. If data aren't provided, what will they use as a proxy? One example of subsidized land for a factory in China uses the price of a similar sized site in Taiwan as the comparator. That may or may not be a higher price, but there's some incentive for the industry in China to cooperate lest the Trade Directorate choose arbitrary comparators that are unfavorable. However, recent Chinese legislation that classifies much data as "sensitive" may impede cooperation, lest company officials end up in jail for sharing classified information with a foreign government.<br />Out of the 432 line items in the database, 274 are for purported subsidies to exporters in China; many others are for India. As with antidumping cases, the steel industry generates multiple examples, but there are also ones for fiber optics, for commercial vehicle tires and on and on. br />Finally, one commentor on SeekingAlpha who has a Europe background believes the political decision has already been made. So now the devil will lie in the details.</p>
<p class="aside">Original article Sept 26, the final paragraph and other modifications addedd Sept 27.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-6797340072994611302023-09-02T21:49:00.000-04:002023-09-02T21:50:16.756-04:00China's EV Market: 2023Q2 update plus an analysis of Guangzhou Auto and its Aion EV brand<p class="signature">Mike Smitka</ br>Prof Emeritus of Economics</p>
<p class="base">In July the Guangzhou Auto (GAC)'s Aion brand was #2 in China's EV market, behind BYD but ahead of Li and Tesla. However, the EV market is no longer expanding rapidly, and macroeconomic stormclouds suggest the normal fall sales surge will be muted. Still, does investing in GAC make sense?</p>
<p class="base">In an article published today (Sep 2, 2023) on the finance website SeekingAlpha, I argue that GAC will not continue its rapid growth, while the ongoing restructuring of its recently shuttered joint venture with Mitsubishi Motors should improve profitability. Two other joint ventures, with Toyota and Honda, also appear to be profitable, but again don't provide a growth story – they're only just adding EV assembly lines, so are also capacity constrained.</p>
<p class="base">Management states that Aion is currently profitable, and that they anticipate an IPO. If that comes to fruition, it would make GAC more attractive, and might be interesting on its own. But that would await the ability to show a full year of profits, so I believe won't take place until next spring.</p><div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOtNhnuf9JC7gCiQWNA1S9bA2hHKmfvnzfuHY2NifqUTwkJlWSv2MTFxi_6XHla4w9pbyzHuO9h7tmBgX4AazvYnmEqAZ5R7fNVETp9Z664HGuC2L5-uqYcvZtWJv05suzG1REomJGeA3P6VP63fHKONvXb4DcbbmNw-FUhWsVARdqFVrCX9CKPYogkFgq/s3135/Aion.png" style="display: block; padding: 1em 0; text-align: center; clear: right; float: right;"><img alt="" border="0" width="320" data-original-height="2282" data-original-width="3135" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOtNhnuf9JC7gCiQWNA1S9bA2hHKmfvnzfuHY2NifqUTwkJlWSv2MTFxi_6XHla4w9pbyzHuO9h7tmBgX4AazvYnmEqAZ5R7fNVETp9Z664HGuC2L5-uqYcvZtWJv05suzG1REomJGeA3P6VP63fHKONvXb4DcbbmNw-FUhWsVARdqFVrCX9CKPYogkFgq/s320/Aion.png"/></a></div>
<p class="base">Now SeekingAlpha articles are normally behind a paywall, but you can try going here <span class="aside" style="font-size: 1.05em;><a href="https://seekingalpha.com/article/4632760-china-2023-q2-nev-update-focus-on-guangzhou-automobile">China 2023Q2 NEV Update: Focus on Guangzhou Automobile and Aion</a></span>. My analysis draws on a database I've created over the past 3-odd years that has monthly sales data by model since Jan 2020, plus drivetrain, price bracket, brand, firm and segment. I read articles from the Chinese-language auto websites on a daily basis, and of course have overall background from 3 decades of research on the Japanese and North American auto markets.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-3939303281787162542023-03-15T10:22:00.005-04:002023-03-15T10:22:58.163-04:00Automotive Productivity: Plant Architecture<p class="signature">Mike Smitka<br />GERPISA Steering Committee<br />Judge, Automotive News PACE Awards</br >Prof Emeritus of Economics, W&L</p>
<p class="callout">This is the first little bit of an article on factory architecture, why it changed and its implications for the industry</p>
<p class="base">I've both enjoyed and leared a lot from the <a href="https://substack.com/">substack</a> articles at <a href="https://constructionphysics.substack.com/">Contruction Physics</a>. I've started thinking about how I would approach the same general set of topics for automotive. Starting on the construction end of things, early factories were fairly compact, because the use of steam power required locating things as close as possible to the power plant. The first factory I worked in was huge in length, to the point that bicycles were still used, but it was also built in 6 floors. If you look closely at the Diego Rivera <a href="https://en.wikipedia.org/wiki/Detroit_Industry_Murals"> Detroit Industry Murals, based on Rivera's first-hand observations in 1932 of Ford's Rouge complex in Dearborn, Michigan, you still see belts in use. Electric drive motors were pervasive by that time – Henry Ford worked at Detroit Edison prior to launching his first of three successive automotive startups in 1903. The transition, however, took decades.</p><div class="separator" style="clear: both;"><a href="https://dia.widen.net/content/23tbmpffi4/webp/33.10.S-S2.webp" style="display: block; padding: 1em 0; text-align: center; "><img alt="" border="0" width="800" data-original-height="642" data-original-width="800" src="https://dia.widen.net/content/23tbmpffi4/webp/33.10.S-S2.webp"/></a></div>
<div class="separator" style="clear: both;"><a href="https://upload.wikimedia.org/wikipedia/commons/d/d1/Ford_Piquette_Avenue_Plant_-_Front_Exterior.jpg" style="display: block; padding: 1em 0; text-align: center; clear: right; float: right;"><img alt="" border="0" width="320" data-original-height="600" data-original-width="800" src="https://upload.wikimedia.org/wikipedia/commons/d/d1/Ford_Piquette_Avenue_Plant_-_Front_Exterior.jpg"/></a></div>
<p class="base">Ford's operations when he started building the Model T were on the top 2 floors of a small building in what is today the <a href="https://en.wikipedia.org/wiki/Ford_Piquette_Avenue_Plant">Ford Piquette Avenue Plant</a> in Detroit, a half mile north of the Rivera Murals at the <a href="https://dia.org/">DIA</a>. It was an open hall with a series of work stands. At that time Ford relied on craft techniques, carting components made by outside suppliers up a freight elevator to be assembled by experienced fitters into a vehicle. A railroad spur ran up to the back of the building, essential for bringing in bulky and heavy engine castings and frames.<br /> <span class="aside">Now a museum, it makes <a href="https://www.fordpiquetteplant.org/">a wonderful venue for receptions</a> – we held the closing "gala" of the June 2022 GERPISA conference there, surrounded by Model T versions and "upfits" into pickup trucks, snowcats and so on.</span></p><p class="base">Ford's first purpose-built factory, a few miles away in Highland Park, didn't come until 1910. It was a multi-story operation, but unlike Piquette was full of machinery, and from 1912-3, a moving assembly line.</p>
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<a href="https://upload.wikimedia.org/wikipedia/commons/2/2c/Farm_Mechanics_1922_Ford_Highland_Park_cropped.png" style="display: block; padding: 1em 0; text-align: center; "><img alt="" border="0" width="800" data-original-height="417" data-original-width="800" src="https://upload.wikimedia.org/wikipedia/commons/2/2c/Farm_Mechanics_1922_Ford_Highland_Park_cropped.png"/></a></div>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-19026992873673991862023-01-22T15:47:00.004-05:002023-01-24T12:07:21.605-05:00China's Population Decline: Not "News"<p class="signature">Mike Smitka<br />Judge, Automotive News <a href="https://www.autonews.com/awards/pace-program">PACE</a> supplier innovation awards<br />Steering Committee, <a href="https://gerpisa.org">GERPISA</a> auto industry research network</p>
<p class="signature">Prof Emeritus of Economics, W&L</p>
<p class="base">That China's population would start declining in the 1990s was a "done deal" a quarter century ago. By that point the One Child Family policy had extended the existing low fertility regime of China's cities into the much more populous countryside. The resulting smaller families meant that by 1998 the much smaller cohort of potential mothers under the One Child policy were themselves having few children. Meanwhile, urbanization meant that the number of families for whom a single child made sense was rapidly expanding, while a countryside where child labor was central to the well-being of families was fading. Between changes in target fertility for young mothers, and the cumulative impact of below-replacement fertility, future population decline was locked in place.</p>
<p class="callout">...that's China's population decline makes headlines is a surprise...</p>
<p class="base">A bit more on the details. Maintaining a stable population requires that women average 2.1 surviving children, to ensure that there's at least one daughter to replace each mother. Since 1980, estimates of the "Total Fertility Rate" have remained well below 2.0 – even with the policy's many exemptions, families with 3 or more children remained a distinct exception. Hence a quarter century ago it was already clear that China's population would at some point begin to decline. Not only was the number of 15-19 year old women 6% lower than in 1980, the number of 0-4 year girls was 15% lower. By the mid-1990s the age of marriage had also risen, and teenaged mothers are now highly unusual. So by 1998, the mothers of the late 2010s had already been born, and were far fewer in number. Even if the timing of onset and rate of decline couldn't be pinned down without knowing how rapidly lifespans would increae (ditto subsequent fertility changes), the broad outline was there to be seen by anyone who understood basic demographics.</p>
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<p style="text-align: center;">China's Population Structure, 1998<br />from <a href="https://PopulationPyramid.net">PopulationPyramid.net</a></p><a href="https://www.populationpyramid.net/china/1998/" style="display: block; padding: 1em 0; text-align: center; "><img alt="" border="0" height="480" data-original-height="1110" data-original-width="1086" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoF6TmK8TzyRSHrlVJS0MVjychdZWoNgLoJJQKyzT1QKqWtb0xjDHplGj8PYb-gOR5Hmj6cq3nrMxlgwjfdtoKkL9-thv86xOkaqo4r2UgYC1t6tK9XvEm49htWcNmNWm2F_cIM2nZUVufLJsxLViovuzp5pnrGTlRyPCaWpgGV3K4bP6MTmFnB5lVtw/s320/ChinaPopPyramid.jpg"/></a></div>
<p class="base">Of course we now know those details. Longevity did increase, and helped by very low child mortality, a girl born today can expect to live 80 years. Older Chinese are in no hurry to die! On the opposite end, however, fertility hasn't just remained low, it's fallen. As a result, the number of 0-4 year girls in 2022 is an estimated 40% below the number of young 20-24 year old women in 1991. Even if these girls go on to average 2.1 children – so far all evidence points to them not doing so – the number of mothers will fall through 2043. As the population pyramid shows, with today's girls the smallest cohort in decades, total population wouldn't start to stabilize for another 60 years, when that cohort of women starts to die off. Because China's population is so large, an option available to the US or the EU – accepting large numbers of immigrants – won't work. There simply won't be enough young people elsewhere in the world to fill the gap.</p>
<div class="separator" style="clear: both;"> <p style="text-align: center;">China's Population Structure, 2023<br />from <a href="https://PopulationPyramid.net">PopulationPyramid.net</a></p><a href="https://www.populationpyramid.net/china/2023/" style="display: block; padding: 1em 0; text-align: center; "><img alt="" border="0" width="480" data-original-height="1082" data-original-width="1106" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpKwYRPyeNp1AK4ATdLdKSxnSBwbiXtm1ZrbXcc-9HmndXnRZG0X_xd3UV2xAlkXPmy72OJyzEHEGPVm_1dYc82yjNN9BV065r1rcvrL49Kpk82uskYEGtGaUNR_DCJs8jIzMKJBCPXj3gpkbfoplD_SO2cBsM_vGuiK7UDvQdIyWUn9TM646dJX1jcA/s400/ChinaPopPyramid2023.jpg"/></a></div>
<p class="base">I've simplified the story. Not all women have children at age 20, and mortality rates vary with age and can predictably be expected to change as today's younger Chinese grow up with cleaner air and better drinking water, and are far less inclined to smoke. Of course they're also better fed and sedentary, which works in the opposite direction. Fertility rates will be different, even if the experience of Japan, Korea, and Southern Europe suggest they won't rise. Chinese exhibit a preference for sons, and by the late 1990s families engaged in selective abortions, so that the ratio of boys to girls rose 10 percentage points; the TFR thus needs to be 2.3 to guarantee that enough young girls will be born to replace their mothers. Aging likewise is uneven, tempered by the timing when larger cohorts reach their 70s. So demographers combine data on age-specific fertility and mortality to generate projections. Pandemics aside, those are pretty good over a 2-decade timespan. Thereafter the high-fertility, low-mortality case diverges from the low-fertility, high-mortality one. Still, the fact that every mother in 2043 has already been born provides a solid baseline.</p>
<p class="base">That the likely population decline of 2022 makes headlines is thus a bit surprising. That the media coverage fails to focus on the consequent decline of the working age population, which is of the essence to future economic growth, is even more surprising. I know though from 3 decades in the classroom that the demographic momentum that comes from a population's age structure and birth/death rates is not intuitive. Even I, more numbers oriented that most humans, was once surprised by how much we know two decades in advance. It's also key to understanding retirement issues, and that too is not intuitive to a 20-something. As our societies age, though, it will come to dominate all of the middle- and high-income societies.</p>
<strong>Addendum</strong>
<p class="base">That having a second child is viewed as challenging comes out in a January 24, 2023 New York Times article, "<a href="https://www.nytimes.com/interactive/2023/01/24/world/asia/china-unfinished-apartments.html">They Poured Their Savings Into Homes That Were Never Built</a>" by Isabelle Qian and Agnes Chang. The article traces 4 individuals who took out mortgages to purchase apartments on which construction has ceased. Three indicate demographic implications: one a broken engagement and end of plans to have a child, and two who now "... can’t imagine trying to buy another home or having a second child," and a second who proclaimed that, due to the lost downpayment on a storefront property and continued mortgage payments, they are “... afraid to have another child. The income and expenses barely break even.” Nothing a government run by old men is going to do will enable such couples to have the three or more children necesary to reverse population decline.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-32652365970186643392022-08-23T09:48:00.003-04:002022-08-23T09:58:38.238-04:00Cars as Differentiated Durable Consumer Goods<p class="signature">Mike Smitka<br />Retired Economist<br /><a href="gerpisa.org">GERPISA</a> Steering Committee<br />Automotive News PACE Judge</p>
<p class="base">The investor site <a href="https://seekingalpha.com/">SeekingAlpha</a> just posted my most recent article, <a href="https://seekingalpha.com/article/4536322-tesla-stock-thin-model-pipeline">Tesla's Thin Model Pipeline</a>. That article is an application of the economics of differentiated durable goods to the auto industry.</p>
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<p class="base">First, autos are highly differentiated consumer good. Car company strategies reflect that, since Alfred Sloan organized General Motors to offer <a href="https://www.thehenryford.org/collections-and-research/digital-collections/artifact/192114">A car for every purpose..."</a> (the ad is downloaded from the digital archives at <a href="https://www.thehenryford.org/collections-and-research/">The Henry Ford</a>). More generally, use cases differ tremendously, from utilitarian transport to vehicles meant to display wealth. Work vehicles are even more differentiated, with up-fitters adding bodies to frame/drivetrain/cab sets for a multiplicity of businesses. We have small commuter cars, family-oriented SUVs, performance cars, and full-sized pickups with towing packages for farmers and others – I go past the Virginia Horse Center every time I head to town, lots of fifth-wheeler duallies.</p>
<p class="base">Empirically, that suggests lots of models and a fragmented market. I use model-level data for Europe and for China (the world's largest vehicle market) to show just that. In Europe, no single model (or model series, e.g. the BMW 3-series) holds even 2% of the market, while over 400 models were available. In China, only 3 vehicles (barely) cleared 2%, while over 540 models were available. And these are just passenger vehicles. I don't have comparable data for the US, so I did a "deep dive" into the market-leading F-150 to show that it in fact consists of a family of models, suggesting that the upper limit for market share is likewise 2%.</p>
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<p class="base">The second piece is that vehicles are durable, with the average car on the road over 12 years old, and light trucks even older (from memory, 14 years). Used car sales are roughly 3x those of new. Hence new cars compete with used, and the more years a new car model is on the market, the greater the cannibalization from used cars. Henry Ford discovered that the hard way in the mid-1920s, as sales of the Model T fell despite repeatedly lowering the price. Ultimately Ford shut down production.</p>
<p class="base">The economics literature on durable goods pricing is thin, and I know of only one set of studies that directly address that issue, from Adam Copeland of the NY Fed, solo and with various co-authors. Transaction data are hard to come by, the datasets compiled by various consulting companies are expensive and need to be cleaned up to handle rebates to consumers and dealers. That most new car purchases are accompanied by trade-ins further muddies the data. Their findings include an annual price drop of nearly 9%, and a shift down the income scale as a model ages. US consumers are well aware of these trends, and those on a tight budget time their purchases accordingly. Such consumers are also more likely to compare new and used cars. My son just bought a Subaru Legacy, and he shopped both. Given the current (August 2022) distortions in the market, he found that if he could wait, he could purchase a new car at MSRP, sticker price. If he wanted one immediately, he had to purchase used and pay above sticker. He could and did wait.</p>
<p class="callout">...to grow, Tesla has to develop a portfolio of new products and regularly renew existing ones...</p>
<p class="base">Combine both of the above and the result is that car companies offer a portfolio of products that they renew on a regular basis. On SeekingAlpha I detail that as well, looking at the release cadence of new and refreshed models by the luxury car companies with which Tesla competes. As to Tesla, they have only one concrete future product, the Cybertruck set to launch in the summer of 2023. This year they've also refreshed the interior of the Model S. However, they've not updated the sheet metal on any of their existing vehicles – the Model 3 is overdue for that – nor have they announced any future product, only vague promises to come out with a limited-volume Roadster. Furthermore, I detail the limited market for pickups in China and Europe. The Cybertruck may do well in the US, but it's not a global vehicle. The stock market values Tesla as a high-growth company. However, they have revealed no strategy to develop a portfolio of products or to regularly renew existing products. My analysis indicates they can't grow without doing both.</p>
<p class="aside">Tesla appears likely to launch the Semi in 2023, but that is not a passenger vehicle and again is aimed at the US market.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-7220651048343603502022-08-02T20:33:00.001-04:002022-08-02T20:35:54.189-04:00China's NEV Market: Rising Segments, Falling Segments will generate winners and losers<p class="signature">Mike Smitka<br />
Prof Emeritus of Economics<br />
Automotive News PACE Awards Judge</p>
<p class="base">I've been tracking Chinese sales data for a couple years, and pulled together thoughts in a brief article,
<a href="https://seekingalpha.com/article/4528836-china-nev-segment-analysis-byd-vw-and-geely-stand-out?source=all_articles_title">China NEV Segment Analysis,</a> on the finance website <a href="https://seekingalpha.com/">Seeking Alpha</a>. The midsized segments, both sedans and SUVs, are stagnant. That's where Tesla's Model 3 and Model Y compete. In contrast, the compact "A" segments are expanding. Players there include one one startup, XPeng, but has BYD, VW and Geely as major players. To my surprise, I also find SOEs with decent shares, particularly GAC's Aion [GAC is owned by the Guangzhou Municipal government]. Most of the SOEs have lived quite well off of profits earned by their joint venture partners, such as Toyota and Honda for GAC. Are these proper commercial ventures, drawing upon the experience of SOEs in designing vehicles and running factories? Historically the SOEs were poor at design and at marketing. Some of that is the home boy effect – you won't find many Aion vehicles on the streets of Shanghai or Beijing. I don't know the produzct, I'm not a "car guy," so maybe these are real ventures properly run with earning money as a goal. But they could also be the result of party hacks pushing management to follow the EV trend, using their joint venture profits to make up for a lack of business acumen (and a very crowded market).</p>
<p class="base">I also argue that the car market faces many headwinds. China has worked through the demographic dividend generated by falling birth rates, but now the working age population is shrinking, and probably the overall population as well. It's easy among the monthly NEV sales hype to overlook that the overall Chinese car market peaked in 2017. Then there's the end of the real estate bubble, evidenced by the failure of Evergrande, and the prospect of continuing lockdowns, an ironic side effect of China's initial success in using a combination of testing, contact tracing and quarantines to suppress the pandemic. There's no concrete left to pour after the huge infrastructure expansion that kept China from suffering the worst effects of the US real estate meltdown. That ammo has been depleted, and while Beijing talks about boosting car sales to offset the slowdown, consumers can't sell the condo that represents the biggest part of their life savings, and on top of that are worried that their bank may be the next one to shut its doors.</p>
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<p class="base">In any case, it will be interesting to see who does well in the NEV market, which just (barely) set a new sales record in July of 560,000 units. I think it's the bigger players who will fare well. VW's R&D spend is $3.6 billion a quarter; that's <em>more than the combined revenue</em> of XPeng and Nio, two of the current "pure play" EV favorites. Cars are in the end a consumer product, and having a broad, regularly refreshed portfolio of models on offer is of the essence. So my belief is that in the end the global OEMs will do well, and one or more of the private Chinese car companies: BYD, Geely and Great Wall. BYD is already in 6 of the 9 segments I tracked, as is Geely. VW, despite its late start, is already in 7. They cover most of the bases already. In contrast, Tesla can't seem to get new product out the door, and is stuck with but two models, and those in the stagnant mid-sized segment. They aren't heading towards failure, but they do risk being left in the dust as an also-ran.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-44830108446695939682022-04-08T00:08:00.001-04:002022-04-08T00:08:05.770-04:00Car Price Inflation: I Expect a Rapid Reversal<p class="signature" style="font-size: 13pt;">Mike Smitka<br />GERPISA 2022 Planning Committee<br />Automotive News PACE Judge<br />Prof Emeritus of Economics</p>
<div class="callout" style="font-size: 13 pt; color: blue; text-align:justify; border: 2px; border-style: solid; border-color: black;">Auto industry researchers, journalists and others, please consider attending the June 14-16 GERPISA conference in Ann Arbor, Michigan. A one-day price is available for locals who don't want to attend the full conference. A Tuesday dinner/reception and a Thursday Gala at the Ford Piquette Avenue Museum in Detroit. Breakfasts and lunches included. Morning events will be available to virtual participants; afternoon events are aimed at those attending in person. Go to <a href="https://gerpisa.org/">GERPISA.org</a> for details.</div>
<p class="base">New car prices – and dealership profits are at record highs. Base models are unvailable, and high used car prices add to the mix. From another angle, the two line items are the biggest elements driving our 7% inflation rate. I believe, however, that "normalization" – greater availability, softer prices – will be sudden, muted only by the low level of cars flowing into the used vehicle market by car rental companies and other fleet operators. Why? – the market for high-end vehicles just isn't that large, so the shift from sticker-plus to discounting will occur over just a few months. Once it does, car makers will face a stronger incentive to produce vehicles with less expensive trim levels and in less expensive price segments. They won't have to discount the latter immediately, because such vehicles simply haven't been available. That won't last long, perhaps another 6 months.</p>
<p class="base">To understand my logic, it's necessary to step back and look at the dynamics of the market since the onset of the pandemic. New and used markets are tightly linked, and the sources of "new" used cars (that is, sales by first owners) are part of the story. Yes, there's a chip shortage, and a war. However, that's but one factor, and you should be wary of such simple explanations. Analytics would be much simpler if we lived in a monocausal world, but we don't.</p>
<p class="base">I'll put an arrow chart at the bottom, but I think a chronological exposition highlights the multiple feedback effects and channels of causation. So grab onto your seats, here we go!</p>
<ol><li style="font-size:13pt">The initial total shutdown froze both production and sales. Nothing happened – except in the used car market. Without business travel, Enterprise, Hertz and their peers were lift with fleets of cars that lost value by the day. We're not talking small numbers – Enterprise had about 2,000 vehicles just at the Detroit airport, and nearly 200 at their rural Rockbridge County, Virginia store, to serve a population of a mere 35,000. It didn't help that a couple of these companies were in poor financial help. What resulted was a fire sale, as rental companies "de-fleeted" as fast as they could, even if it meant booking a loss on the vehicle. Used car prices crashed.</li>
<li style="font-size:13pt">However, that process ended once fleets had been slashed. In a normal year Enterprise buys 1 million new vehicles, the world's single largest purchaser. The flip side is that they also normally sell 1 million used vehicles directly to consumers and dealers, or dispose of them through used car auctions. Now none were flowing into the market. Consumers weren't driving much, remote work lessened commuting and attendant accidents, and with fewer new cars being sold, trade ins were also lower in number. Consumers who normally bought used cars held onto their cars longer, too, so that source also fell.</li>
<li style="font-size:13pt">When demand returned, prices had nowhere to go but up. With used car prices rising at their fasted rate in history, demand shifted to new cars. Well, new car prices rose, initially because discounts shrank, and then vanished. Enter fleet purchasers. Normally they would opt for lower trim levels and include a higher mix of sedans than the overall market. But car companies weren't willing to discount those, or even to produce them. Instead they had to hold onto cars longer, and try to offset higher purchase prices on the SUVs they did buy with higher rental prices. So while there were more tradeins, the huge flow of one-year-old, moderate mileage rental vehicles of pre-pandemic times didn't return. Meanwhile used car purchasers found they couldn't afford to get rid of their old ride for one that was a bit new and more reliable.</li>
<li style="font-size:13pt">You have surely noted that I've not mentioned supply chain problems. That's because I believe they are secondary to the interactions of new and used vehicle markets, and the flow of used vehicles. Lost production hurts, because when car companies are constrained in what they can produce, they move upmarket in trim levels and vehicle segments. For those old enough to remember, that happened in Spring 1981 when Japan agreed to Reagan's "Voluntary" Export Restraint that limited Honda, Toyota and their competitors to a combined 1.68 million units. I was about to buy my first new car, and watched the price on a subcompact rise 25% almost overnight. I didn't have to buy a more expensive trim package. Instead, I was forced to buy add-ons, a paint protection package that began peeling within a couple months, from a vendor no longer around. Grrr. But such is common in today's market. Clearly chip shortages add to the price swings, but even if we didn't have them, I am sure we would have seen a sharp spike.</li>
<li style="font-size:13pt">So where is the market heading? Well, the dynamics I've sketched propped up the prices of luxury SUVs and fully-loaded vehicles. It won't take much to reverse that, because we all have run through stimulus money while wages aren't rising enough to push ordinary workers into the 15 million or so individuals with an income high enough to purchase a new vehicle. I've already heard from a couple reliable (but off-the-record) sources that big pickups and the largest class of luxury SUVs aren't selling. The rest won't be far behind.</li>
<li style="font-size:13pt">Now the permanent shift will come once car rental agencies are able to re-fleet. Hertz coming out of bankruptcy is in my judgement showing desperation in striking deals to contract for large numbers Tesla EVs and now Polestar EVs. (I suspect the actual contracts are rife with escape clauses so that the numbers prove more PR than a purchase commitment.) Again, I am reading hints of re-fleeting, versus none a month ago. Within 9 months those cars will be cycled out, because from then on it will be easier for rental companies will able to buy more cars. Prices for used vehicles will drop rapidly, and across the board.</li>
<li style="font-size:13pt">Note one implication: we will go from sharply rising new and used car prices to sharply falling ones in the space of 3-4 months. Gasoline prices are another major component for US inflation. Petroleum prices are set in global markets, and Russia is 11% of global production. The US is 20%, but is a modest net importer. So Russia accounts for a larger share of global exports. How much short-term flexibility do Saudi Arabia and the other Gulf states have to increase output? How leaky with Russian sanctions be? I don't know, but I don't expect further price increases. If so, then the two biggest sources of inflation will turn negative, and energy prices become neutral. I've already been surprised by how long inflation has lasted, but I remain convinced it's transitory.</li>
</ol>
<p class="base">I have opted to focus this post on the components of new and used vehicle markets, while shying away from data. OK, typically 2 or more used cars sell for every new car, and I can with some effort put specific numbers on that. It would make for a long and turgid post, or longer and less readable one. It's also very, very hard to get current data on fleet purchases and other components of a very dynamic market. I've also simplified, with no mention of interest rates or leasing. I don't believe my argument depends on such details.</p>
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<p class="blogcommentmore">From my presentation at the June 2021 GERPISA virtual conference.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-58388674102410413942022-01-19T20:52:00.001-05:002022-01-19T20:52:09.923-05:00Tesla China: Upside is Vanishing<p class="signature">Mike Smitka<br />Prof Emeritus of Economics<br />GERPISA.org 2022 conference team</p>
<p class="base">The following appears on the SeekingAlpha finance blog. I wrote this last week, editorial approval took a long time due to COVID.</p>
<p class="base">Were I to rewrite it, I'd probably start:</p>
<p class="dblin">"...in 2021 Tesla exported an average of 15,000 Model 3's a month to Europe. At some point, though, Tesla Berlin will start production. Where will the Model 3's go? – they're in the "B" midsized sedan segment in China, which is the slowest growing EV segment in China. Furthermore, within the segment Tesla lost market share quarter by quarter in 2021. So the one place they won't go is to Chinese consumers. They want SUVs and fresher vehicles.</p>
<h2>Tesla China: As Good As It Gets?</h2>
<p>Jan 19, 2022 03:09 PM | Tesla, Inc.(TSLA) | By: Mike Smitka
<ul><li>Tesla's CY2021 sales of 321,145 units are stellar, bolstered by December sales of 70,602 units.
The good news is that the Model Y is holding onto its share in the "midsized SUV" segment, and that segment expanded 3.5x in 2021. CY2022 should be good.</li>
<li>The bad news is that the Model 3 lost share in the "B" sedan segment throughout 2021, and that segment grew the slowest in 2021.</li>
<li>With no new models until 2023 or later, CY2022 is as good as it gets.</li?</ul>
<a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Femail-st.seekingalpha.com%2Fclick%2F26418872.27033%2FaHR0cHM6Ly9zZWVraW5nYWxwaGEuY29tL2FjY291bnQvZW1haWwtYXV0aD9zYWlsdGhydV9hdXRoX3BhcmFtPTQyNzAyODoxNjQyNjIzMDEyOjQyNDAxOTE1YzQzZTU1OGMxMDBmNGU3MmM2OWFkZTRjJnJlZj1odHRwczovL3NlZWtpbmdhbHBoYS5jb20vYXJ0aWNsZS80NDgwMzg3LXRlc2xhLWNoaW5hLWFzLWdvb2QtYXMtaXQtZ2V0cyZ1dG1fc291cmNlPXNlZWtpbmdfYWxwaGEmbWVzc2FnZWlkPTI4MDA%2F60ab81a1331a7514b33adbaeC3f416cd8&data=04%7C01%7CSmitkaM%40wlu.edu%7C0045a099fd25410a1a7508d9dbb18739%7Cd1a80622a99943e58eb67873905e939e%7C1%7C0%7C637782377788184027%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=V8W%2BvUc3W2Eg4V%2ByCUNdCabQlZ0utA%2Fp60QBmhvNAWw%3D&reserved=0">Read the full article now</a> »Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-54844635551588390632021-09-23T23:23:00.002-04:002021-09-23T23:23:32.224-04:00Tesla, GM and BYD: Three China Strategies<p class="signature">Mike Smitka</p>
<p class="base"><a href="https://seekingalpha.com/article/4456702-china-ev-market-comparing-gm-byd-tesla-tsla-stock">SeekingAlph</a> published an article by yours truly today comparing the stategies of Tesla, BYD and GM in the Chinese market. As you may know, GM has far and away the best-selling EV in China in the Wuling Hongguang MINI EV, which sold over 40,000 units in August 2021, and has held the top slot since launching in September 2020.</p>
<p class="base">In the article, I noted that GM has a long history of leveraging successful inexpensive vehicles to sell more up-scale and profitable models, going back to the formative period of the 1920s under Alfred Sloan and his "a car for every pocket" product portfolio. But when I wrote the article, there was as yet no evidence on how they would do that for the Hongguang, which is made by the SAIC GM Wuling joint venture, but did not carry the GM logo.</p>
<p class="base">Now we know: Wuling has a new logo, with GM at the center.</p>
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<p class="base">In my mind, that puts GM in a strong sales position in China, as the market for EVs expands by leaps and bounds. In contrast, Tesla has no coherent strategy, with only one "fresh" model (the Model Y) and an uncertain future for the Model 3. (We won't know until September EV sales data are out, because Tesla bunches sales in the last month of the quarter.) As a firm, they seem to be in no rush to build a product portfolio, and instead are placing a huge bet that the Model 3 and Model Y will remain strong sellers indefinitely. They amplify that with a US-centric product strategy: their next vehicle will be the CyberTruck, singularly unsuited to the Chinese market, where pickups are an unstylish niche. Worse, over 50% of Tesla's sales are in China's 10 largest cities, where the CyberTruck is an even worse fit. As a firm, their stock price depends on rapid expansion, which is only possible if they can gain share in China and Europe. With everyone but them launching product aimed squarely at the core market segments in China and Europe, that is not going to happen.</p>
<p class="base">In contrast, BYD ticks all the boxes for success. They have a broad product portfolio, and a regular cadence of renewing old models. They have commercial vehicles (thanks to SeekingAlpha comments by MaxedOutMomma for the <a href="https://en.byd.com/truck/about/#byd-in-op">link to BYD's commercial products</a>). They have broad geographic coverage. And they're currently the #2 EV producer in the world's largest market.</p>
<p class="base">All for now, to not abuse SeekingAlpha's exclusivity. Look for a long, detailed article there in about a month. Note that my most consistent COVID lockdown project [alongside caring for 2 young granddaughters] has been to learn to read Chinese. I've progressed enough to follow Chinese-language automotive news on a regular basis. Well, the news output there is huge, so far my focus has been the new energy vehicle passenger car market – I've bookmarked about 30 sites, and look at a half-dozen almost daily. I'll be expanding my purview to include commercial vehicles. Consistent with that, let give a plug for Richard Doner, Gregory Noble and John Ravenhill's <a href="https://smile.amazon.com/Political-Economy-Automotive-Industrialization-East/dp/0197520251/"><em>The Political Economy of Automotive Industrialization in East Asia</em>, which includes a really nice chapter on China. Of course Peter Warrian and I also have a chapter on the Chinese auto industry in our 2017 book, <a href="https://smile.amazon.com/Profile-Global-Auto-Industry-Innovation/dp/1631572962/">link here</a>.</p>
Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-37441054702922863562021-08-06T12:35:00.001-04:002021-08-06T23:25:27.016-04:00Cars selling at MSRP is an outrage?<p class="signature">Mike Smitka
Retired Economist and Judge,
Automotive News PACE Awards for supplier innovation</p>
<p class="dlbin">This is an edited version of an overly long comment posted on "<a href="https://jalopnik.com/this-conversation-with-a-dealer-will-hurt-your-brain-1847429900">This Conversation With A Dealer Will Hurt Your Brain</a>" on Jalopnik.com.</p>
============
<p class="base">I am shocked, totally shocked, that someone should be asked to pay MSRP for a car. Surely you all routinely negotiate a nickel off of every ear of corn you buy from Walmart or Food Lion?? – “I wanted one a little larger, but for a bit of a discount I’ll make do with this one.”</p>
<p class="base">Now to the world of a dealership in August 2021 in the US.
<ol><li style="font-size: 140%; margin: 8px 0;">In many regions of the US there’s excess demand for certain vehicles at MSRP. With a phone call, they’d be able to sell every vehicle on their lot to another dealer within the hour, without discounting or having to take another, less desirable, vehicle in return.</li>
<li style="font-size: 140%; margin: 8px 0;">Most dealers are in business for the long haul and thus don’t want to sell over MSRP because it won’t generate repeat business or service business. (<span class="aside">Note all of the 18,000 dealerships in the US are well-managed, so those most vocal in complaining about dealers are likely encountering an exception. Or are the sort of customer who, at the end of the day, has annoyed others right and left.</span>)</li>
<li style="font-size: 140%; margin: 8px 0;">So you as a dealer want to sell to someone local, as you have decided NOT to charge what the market will bear, and not to empty your lot today of all cars.</li>
<li style="font-size: 140%; margin: 8px 0;">So asking someone to come in is both reasonable and fair. <b>If</b> you aren’t going to raise your price and thus must turn away customers, <b>then</b> turn away the one who isn’t local, because you certainly won’t get their service business and you’re unlikely to get repeat business. (<span class="aside">The Jalpnik writer was complaining about not being given a quote over the phone.</span>) </li>
<li style="font-size: 140%; margin: 8px 0;">But you still have excess demand and right now you can’t get another dealership to swap inventory. You can’t replace that F-150 on your lot. (Change the model name to match the local market.)</li>
<li style="font-size: 140%; margin: 8px 0;">So what are you to do? You favor someone who has used your dealership before.</li>
<li style="font-size: 140%; margin: 8px 0;">You also favor someone who gets financing through you. For my last two cars, I got a better rate that way, too. My local credit union and bank weren’t competitive. But despite the lower rate, the dealership still got a finders fee – and I’d rather they got a cut on the deal than my local bank getting to pocket everything. The dealership was active in the local community, supporting this and that. The owner lived locally, as do the employees. But my banks ... they all now have their own foundation, to let them fund “socially responsible” ventures that they can trumpet in their investor PR. No money for the local food bank, or youth sports team.</li>
<li style="font-size: 140%; margin: 8px 0;">You especially favor someone with a good tradein, because used car prices are at a historic high. Some models are hard to find at the used car auctions of Manheim and Adessa, leased vehicles are being kept by their owners, and rental car companies are holding onto their current fleet because they, too, have a hard time buying new cars. So you can more readily make money on a tradein, if it's anything decent. You can give a bit of a discount, you can pay a bit over KBB or some other used car price guideline on the tradein, and have a both a happy repeat customer and a bit of profit. (<span class="aside">The price increase there is the biggest component of the recent uptick in inflation in the US.</span>) </li></ol></div>
======
<p class="base">Multiple comments assumed implicitly that dealerships don’t need to make money. Now in general dealerships <b><em><u>don’t</u></em></b> make money selling new cars. As a project for students I got a Honda dealership and a luxury dealership group (5 stores, 3 brands) to go through their financials with me and then the class. At best they earn enough to keep the lights on, even the luxury dealers. They survive because they operate multiple businesses under one roof – new (individual customers and local fleets), used (retail and wholesale), service (with "loaners" – effectively car rentals – as one component), parts (retail and wholesale), and finance and insurance, They need to run them jointly and competently if they are to stay profitable, as they all face competition. [<span class="aside">As to the numbers: one was a local dealer with whom I had a longstanding relationship, who knew the numbers would stay confidential. The other was someone I knew from before he became a dealer, who also happened to have a son in my class that term. They brought inch-thick reports with them, the problem wasn't data accuracy, it was being overwhelmed by the data that comes with the complexity of a dealership.</span>]</p>
<p class="base">In normal times – Summer 2021 is <b><i>NOT</i></b> normal – US customers want a car, today. (In some countries, you have to order a vehicle, there’s no local inventory. Not here.) That means there’s a constant mismatch between what a dealer has on hand and what customers want. In normal times, dealers can swap new cars with other dealers to offset that, but it’s always better for them to sell what’s on their lot. (<span class="aside">That’s on average, see my two examples below.</span>)</p>
<p class="base">Note, too, that on average MSRP is too high, because even if there’s high demand at launch, cars stay in production for 4 or more years, with a "refresh" at the midpoint. Over time a model has to compete with other, newer models that offer features unavailable at the relevant cost point when the model was engineered (think of things such as adaptive cruise control). Worse, after the first and especially the second year, it has to compete with used cars of the same model, as rental car companies "defleet," as leases expire, and as the more well-heeled customers decide they simply want something different. As a consequence, on average prices fall 9% per year. So -9% by the end of the first year, -17% by the end of the 2nd, -24% by the end of the 3rd, and a whopping -31% by the end of the 4th year. That's obscured because early vehicles tend to be fully loaded, and so well above base MSRP. Over time packages get made standard, 0% financing kicks in, and more vehicles are closer to base. Finally, as the replacement model launches and dealers work to clear their lots, we get the more visible discounts. Oh, and remember that you've never owned a new car: the moment you take possession (which, in some states, happens when you sign the last piece of paper, it's a used vehicle, and can no longer be sold as new.</p>
<p class="base">Again, there's the average, and none of us is ever quite average. My last 2 new car purchases provide a case in point. For my wife’s CR-V, that was not a problem, as Honda only offered 3 trim levels and we didn’t want an unusual color. We were also local. [Unfortunately our trade-in was on its last legs and it died on the dealer’s lot. If only it had waited one more day...] For my Chevy Cruze, I wanted a stick shift, and across the entire region there wasn’t much inventory, so I had to pay a bit more [mainly in time and travel], and compromise on color. You all can think of your own variation, the closer your “drive” is to the high-volume commodity end of the market, the less varied the pricing. The more idiosyncratic, the wider the price quote and the more painful the purchase process – for me and for the dealer, who may only discover after the fact that by not giving me a good price, they ended up with that stick shift on their lot for another 9 months, which with floor plan and insurance and other incidentals put them into the red on that particular vehicle.</p>
<p class="base">Finally, this world is shifting with online retailing. In some states, but not all, fully contactless sales are possible, there’s no notarized document that has to be signed in person. So as noted, new car sales aren’t profitable (given overhead), and the margin on used cars has been compressed, with wide variation because it’s a much harder business to manage. Service volume is declining, and has been for two decades as intrinsic quality is increasing. With increasing complexity, however, dealerships aren't losing market share. EVs won’t change the trend: with 280+ million registered vehicles in the US, even strong sales won’t quickly shift their share of of the “parque”. Walmart, Costco and others are entering the market, and certainly they can bring scale and online skills to the sales end. I don't view that as a threat to dealers. Why? – it's a thin margin business, full of hassle. Walmart is of course used to thin margins. I believe, though, they're in for an unpleasant surprise on the hassle. Meanwhile, the number of dealers in the US will continue its slow decline, as the less well-managed exit. Again, that's obscured by the way things are reported: the number of stores isn't falling very rapidly, but the number of stand-alone stores is, as 5- and 10-car dealership groups become more common.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-90156374087896403502021-04-29T10:13:00.002-04:002021-04-29T10:13:11.399-04:00China's Auto Industry: There Will Be No Winners in the EV Race<p class="signature">Michael Smitka<br />Prof Emeritus of Economics<br />Judge, <a href="https://www.autonews.com/awards/pace-program">Automotive News PACE Awards</a> (for supplier innovations)<br />Steering Committee, <a href="http://gerpisa.org/en">GERPISA</a> global automotive research network</p>
<div style="border-color: #505151; border-style: solid; border: 2px solid rgb(80, 81, 81); font-size: 115%; font-weight: 600; line-height: 1.9; margin: 56px; padding: 6px 8px; text-align: center;">Please read <a href="https://seekingalpha.com/article/4421482-china-ev-market-many-losers-no-big-winners">my post on China's EV industry</a> on SeekingAlpha, an investment blog.</div>
<p class="base">Here I summarize a few points covered in my SeekingAlpha article published this morning, and provide data in a more readable format – I found it hard to reformat tables on SA for readability. I will also try to provide more data on the new model effect, and a foretaste of a planned SA article on the Wuling Hongguang.</p>
<p class="callout">...the success of the Wuling Hongguang is great news for the environment...</p>
<p class="base">First, here is a nicer table on segments. The data come from different sources, which obviously categorize vehicles differently. So it's suggestive. For reference, the Tesla Model 3 is a "B" segment vehicle, and the Model Y is a "B" segment SUV. The Model Y in particular faces a lot of competition, while the Model 3 is getting stale and appears on Chinese automotive websites only with reports of quality issues. Profits will be hard to come by for all players, but that's generally the case in the automotive world, which is cyclical, capital intensive and generates thin margins.</p>
<table style="width: 80%; align: center; border-style: solid; border-width: 2px;">
<tbody>
<tr style="background-color: #CCCCCC; font-weight: 700;"><td>Class</td><td>All Models</td><td>EV Models</td><td>March 2021 EV Sales</td><td>All 2021 Sales</td><td>EV Share</td></tr>
<tr><td>A00 微型车</td><td>16</td><td>14</td><td>64,189</td><td> 61,333 </td><td>105%</td></tr>
<tr><td>A0 </td><td>20</td><td>4</td><td>9,515</td><td>47,273</td><td>20%</td></tr>
<tr><td>A 紧凑型车</td><td>94</td><td>21</td><td>17,021</td><td>467,553</td><td>4%</td></tr>
<tr><td>B 中型车</td><td>44</td><td>4<td>38,251</td><td>226,260</td><td>12%</td></tr>
<tr><td>C 小大型车</td><td>16</td><td>1</td><td>7,956</td><td>70,293</td><td>11%</td></tr>
<tr style="background-color: #CCCCCC; font-weight: 700;"><td>Sedans</td><td>190</td><td>45</td><td>126,932</td><td>872,712</td><td>15%</td></tr>
<tr><td>A0 小型SUV</td><td>64</td><td>20</td><td>7,314</td><td>136,724</td><td>5%</td></tr>
<tr><td>A 紧凑型SUV</td><td>112</td><td>15</td><td>15,148</td><td>476,866</td><td>3%</td></tr>
<tr><td>B 中型SUV</td><td>79</td><td>15</td><td>19,018</td><td>227,550</td><td>8%</td></tr>
<tr><td>C 中大型SUV</td><td>20</td><td>4</td><td>7,588</td><td>31,350</td><td>24%</td></tr>
<tr><td>MPV</td><td>39</td><td>4</td><td>1,263</td><td>75,702</td><td>2%</td></tr>
<tr style="background-color: #CCCCCC; font-weight: 700;"><td><strong>SUVs</strong></td><td>314</td><td>58</td><td> 50,331</td><td>948,192</td><td>5%</tr>
<tr style="background-color: #CCDDCC; font-weight: 700;"><td>Passenger Vehicles</td><td>504</td> <td>103</td><td>177,263</td><td>1,820,904</td><td>17%</tr>
<tbody>
</table>
<p class="base">But first, EV sales dominate the minicar segment, the most prominent of which is the GM Wuling Hongguang MINI. My thoughts on why that's the case lie below. Second – ignoring the very small A0 car and the luxury C class sedans and SUVs, the other segment with high sales is the B segment, where the bulk of China's higher-priced models are found. In other words, EVs sell in the minicar segment, and in high-priced segments.</p>
<p class="base">Second, the EV market is quite large, but the small share in several segments suggests lots of room for growth. But why are sales in the A segments of sedans and SUVs so small? It's not for a lack of models. I argue as well that that's for the same reason that the A00 segment sells well.</p>
<p class="base">Here's a neat photo that shows just how small the drive motor can be for a very small car:</p>
<div class="separator" style="clear: both;"><a href="https://n.sinaimg.cn/sinakd2020123s/120/w1081h639/20201203/0fc5-ketnnaq7361120.jpg" style="display: block; padding: 1em 0; text-align: center; clear: right; float: right;"><img alt="" border="0" width="320" data-original-height="473" data-original-width="800" src="https://n.sinaimg.cn/sinakd2020123s/120/w1081h639/20201203/0fc5-ketnnaq7361120.jpg"/></a></div><p class="base">The key is costs. Minicars, due to their small size and their target at commutes (with ranges of <a href="https://hj.pcauto.com.cn/article/482404.html">just over 100 kms</a>) allow them to be built and sold on a commercial basis. However, all other segments try to address a wider market, emphasizing range (or rather range anxiety.) That leads to a viscious circle: range requires a big battery, batteries are heavy so those vehicles also require a more robust frame and suspension, which adds further weight. And both add cost, including beefier drive motors and drivetrain components that can handle higher torque, and more capable power control modules. Quite simply, EVs are more costly than ICEs, and sell only when large subsidies are available.</p>
<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMyO-FUNwZCPxSo0pzzhvNIFe2W6fCWGn3sqYGbtiAqPsHSV1cCSbtV-8XoDiMXcW01SqOvZepGF1yVscWvFs_o2oXti1hUMzTnnUR6MjzNpYLngLlE2qxBoHgyG6QF_aRwU-0ZQ2HpqHD/s733/Hongguang+drive+motor.jpg" style="display: block; padding: 1em 0; text-align: center; clear: right; float: right;"><img alt="" border="0" width="320" data-original-height="486" data-original-width="733" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMyO-FUNwZCPxSo0pzzhvNIFe2W6fCWGn3sqYGbtiAqPsHSV1cCSbtV-8XoDiMXcW01SqOvZepGF1yVscWvFs_o2oXti1hUMzTnnUR6MjzNpYLngLlE2qxBoHgyG6QF_aRwU-0ZQ2HpqHD/s320/Hongguang+drive+motor.jpg"/></a></div>
<p class="base">In practice, that means EVs only sell in cities that impose license plate restrictions in the name of controlling congestion. While 71 Chinese cities have over 1 million registered vehicles, it's only the Shanghai's and Beijing's of China that impose operating restrictions on vehicles that lack local "Class A" license plates. This is similar to London's restrictions on vehicles entering the center city. Now those cities allocate some plates via a lottery, but the chance of winning is very low (0.5% in Hangzhou in February 2021, for example). So in practice car buyers must buy a plate at auction, which can run up to $12,000. That's enough to offset the high prices that EV makers need to charge to cover costs.</p>
<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiron9E9u-tKL6G0tzrogApK9ZT38LWWC_0tien0Xsyws8U_8sAj5Ze7vFobKHhVENJHZbWtWXRC8qb_3YZkND5RJfGR9EZgZCJsLO-mfINQaqJGh8qGhffPDPX2R_yTyCNEibcEXweKZ9q/s781/Hongguang+cutaway.jpg" style="display: block; padding: 1em 0; text-align: center; clear: left; float: left;"><img alt="" border="0" width="320" data-original-height="527" data-original-width="781" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiron9E9u-tKL6G0tzrogApK9ZT38LWWC_0tien0Xsyws8U_8sAj5Ze7vFobKHhVENJHZbWtWXRC8qb_3YZkND5RJfGR9EZgZCJsLO-mfINQaqJGh8qGhffPDPX2R_yTyCNEibcEXweKZ9q/s320/Hongguang+cutaway.jpg"/></a></div>
<p class="base">Then there are the A00 models. Perusing descriptions of the vehicle on an array of Chinese-language websites suggests that the Hongguang uses 3 batteries: a standard lead-acid one to run lights and infotainment, and an LFP one supplemented by a small NCM battery. Furthermore, GM uses 5 different suppliers for those batteries, they have enough volume to avoid making themselves beholden to a single supplier.</p>
<p class="base">All of this means that A00 EVs are commercially viable without subsidies. They have a vast potential market in the countryside, where dedicated parking / access to an electric outlet are less problematic. They also fit the use case, the top two of which are short-range commuting and taking your kid to school. They're a great 2nd car. Both are points made in surveys cited in the latest "blue book" on the Chinese NEV market, 中国新能源汽车大数据研究报告 (2020).</p>
<div class="separator" style="clear: both;"><a href="https://n.sinaimg.cn/sinakd2020123s/278/w1141h737/20201203/de0c-ketnnaq7361124.png" style="display: block; padding: 1em 0; text-align: center; clear: right; float: right;"><img alt="" border="0" width="400" data-original-height="517" data-original-width="800" src="https://n.sinaimg.cn/sinakd2020123s/278/w1141h737/20201203/de0c-ketnnaq7361124.png"/></a></div>
<p class="base">But will this market generate a "winner," to match the current mindset among investors? No, because there will be a lot of players, and because even if profitable, per-unit profits aren't great on a vehicle costing well under US$10,000.</p>
<p class="base">However, from an environmental perspective this is great news. Large, long-range EVs aren't great for the environment, even if the rise of "green" electricity means that in more and more regions of the world they are probably a modest increment over a gasoline-powered car. Chinese consumers are discovering that a very small vehicle actually meets there needs. We can hope that consumers in the EU and US make a similar discovery, as surveys make it very clear that most round-trips are short in distance and involve at most one passenger. So while it may not be a great boost to GM's bottom line, the Wuling Hongguang is a major step in improving the environmental footprint of vehicular transportation.</p>
Sources: <ol><li>getting out of car https://n.sinaimg.cn/sinakd2020123s/120/w1081h639/20201203/0fc5-ketnnaq7361120.jpg</li>
<li>small size of drive motor http://www.020h.com/uploadfile/2020/0801/20200801103440585.jpg</li>
<li>cutaway of chassis / componentry: http://www.020h.com/uploadfile/2020/0620/20200620032359548.jpg</li>
<li>supplier list https://n.sinaimg.cn/sinakd2020123s/278/w1141h737/20201203/de0c-ketnnaq7361124.png</li></ol>
Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-22557871965169760852021-02-23T13:57:00.003-05:002021-02-23T14:08:48.860-05:00The Automotive Model Cycle: The Battle Against Fading into Irrelevance<p class="base">Let's play around with the model life cycle. It's fundamental to the industry, indeed we see it in other consumer durables: computers, cell phones, cameras, bicycles, skiis, exercise equipment. Then there's clothing – in most statistical systems, clothing is classed as a current consumption good, but I've t-shirts I've been wearing for 20 years, and dress shoes that are even older. The only reason to buy new clothing is so that I don't look my age. (Yeh, dream on...)<sup class="note">Note 1</sup></p><div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJy3AqmU8HxCtWpsOBIgtaVXFR794twgCCxUq1rpB0Eho2tqWqcE8FgMmdnSIlgdeG0POuorkX-NN_W-CyGfr0nZ8S4UgPmhoHKwVJAQxgpBqBg1xhgZ9ghES2UWKO31tnWaL3dwoq8lUM/s725/auto+kauf.png" style="display: block; padding: 1em; text-align: center; clear: right; float: right;"><img alt="" border="0" height="200" data-original-height="725" data-original-width="535" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJy3AqmU8HxCtWpsOBIgtaVXFR794twgCCxUq1rpB0Eho2tqWqcE8FgMmdnSIlgdeG0POuorkX-NN_W-CyGfr0nZ8S4UgPmhoHKwVJAQxgpBqBg1xhgZ9ghES2UWKO31tnWaL3dwoq8lUM/s200/auto+kauf.png"/></a></div><p class="callout">...what you see: information on the latest models...</p>
<p class="base">The life cycle is intimately connected with the concept of progress, and it's linked as well to the differentiation that comes from being in fashion, and the influence of what's fashionable on how we look at things. But rather than delve into the abstract, that newer is better, and that as social creatures style matters, here I reflect upon the process a car purchaser goes through, and how that leads to valuing the new.</p>
<p class="base">So how do you go about searching for your next car? And you do search, because it's an expensive purchase, and model characteristics mean that some won't fit your normal use, and they won't fit your wants. Even if you are part of the minority that limits yourself to a new vehicle, there are roughly 350 models available at any given time, each with multiple trim levels. Pickup trucks are the extreme case. With the Ford F-150, do you want a 5-1/2, 6-1/2 or 8 foot bed? Now if you want that 8' bed, you can't get the SuperCrew® with a full second row. Oh, and there are engine choices, for that 8' bed SuperCab you have 3 choices. There are multiple towing options, multiple driver assist camera options, and infotainment packages. You need to sort through all this.
</p>
<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZsi4WQ6LsqNL0sE5KzyApq6tAlnaqk2PDFmep4eOxUo2i6BMCCa3h3dhHO9FqhvqW6mzOQHpCSM26OkB47OSk9R_ar06tANkZDe20TqWeFKQl9xTlEsaAEeZVMX0arSG3sPedW5Z_3hZt/s703/green+car+magazine.png" style="display: block; padding: 1em; text-align: center; clear: left; float: left;"><img alt="" border="0" height="200" data-original-height="703" data-original-width="559" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZsi4WQ6LsqNL0sE5KzyApq6tAlnaqk2PDFmep4eOxUo2i6BMCCa3h3dhHO9FqhvqW6mzOQHpCSM26OkB47OSk9R_ar06tANkZDe20TqWeFKQl9xTlEsaAEeZVMX0arSG3sPedW5Z_3hZt/s200/green+car+magazine.png"/></a></div><p class="base">So you turn to the many car sites and car mags. Support your friendly automotive journalist! They make the round of the auto shows and early test-drive road-and-track meets, all while being dined and wined (in that order, no drinks before getting into one of our five pre-production test vehicles dedicated to PR). Having had a fun day or three, it's off to write. Automotive News has AutoWeek. Then there's Car and Driver, Consumer Reports, and on and on. Go to Europe, or Asia, and you see the same. During 2019, before Covid set in, I was in train stations in Italy, France, Germany, Korea and Japan. Kiosks all display a rack's worth of car (and computer and camera and fashion) magazines, to guide the purchaser. Want an EV? Then buy the Green Car Magazine and read through their Praxistest [it's a German, not an American publication]. Want to off-road? Every country seems to have at least one publication devoted just to that segment.</p>
<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhn1SAHQN9c6t-PEkG_5U8nLT6Ct_q9X1xM2KtCklGgVb6lpIBSEP7j6O15qCQiLVdQfcSF4gH38ZTYAai8lhOFGqqK_xT_9NZISL2k3IC8OxnV6MmlzChCREf347jQlj0fyEXdZtNWMKuQ/s924/gasgoo.png" style="display: block; padding: 1em; text-align: center; clear: left; float: left;"><img alt="" border="0" width="320" data-original-height="631" data-original-width="924" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhn1SAHQN9c6t-PEkG_5U8nLT6Ct_q9X1xM2KtCklGgVb6lpIBSEP7j6O15qCQiLVdQfcSF4gH38ZTYAai8lhOFGqqK_xT_9NZISL2k3IC8OxnV6MmlzChCREf347jQlj0fyEXdZtNWMKuQ/s320/gasgoo.png"/></a></div><p class="base">Then there are the online resources. If you're in China, the world's biggest new vehicle market, you might go to <a href="https://auto.gasgoo.com/new-cars/C-107" target="_blank" rel="nofollow">Gasgoo</a> to look through their new car reviews. (Those aren't available on <a href="http://autonews.gasgoo.com/" target="_blank" rel="nofollow">Gasgoo's English-language site</a>.) Alternatives include the <a href="https://auto.163.com/" target="_blank" rel="nofollow">auto section at 163.com</a>, which resembles visually the car review portion US sites such as <a href="https://www.edmunds.com/car-reviews/">Edmunds</a>.)</p>
<p class="base">Now, think about what you see: information on the latest models. Yes, if you want to find information on that car that launched 2 years ago, you can find it. But maybe not in the latest issue of MotorTrend that you picked up at that 7/11 at your local gas station, or in the latest episode of <a href="http://www.autoline.tv/">Autoline Daily</a>. What you find most readily is information on what's new.</p>
<p class="base">Now at present automotive technology is changing rapidly. My wife's car doesn't have an autodimming mirror, my slightly newer car does. Mine has a turbo, and gets vastly better gas mileage. I would really like adaptive cruise control, but back then it was only available on cars above my target price range. Now it's pervasive. I really appreciated the heads-up display on a rental car in Germany, particularly as it kept track of the frequently-changing speed limit on roads around Freiburg. Since I seldom drive in places I'm not familiar with in the US, it wouldn't be high on my wish-list. But the diffusion of driver assist systems, and the 2+% annual increase in fuel efficiency, mean that new really is better.</p>
<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCNxBDs6tbWifrsPjxMG5bp6wIbFIdcYTlge_YyUIc7ixR8Giu9m2DYjOkAZ_ChBarD0jYWs7dLLXWBmZ9X77QhPMM93g6v-DiUjMxCI_cZU9qqH587B924oBZhDyTJu04Ly4Nwe20dVOz/s743/Beste+Sechs+Magazine.png" style="display: block; padding: 1em; text-align: center; clear: right; float: right;"><img alt="" border="0" height="200" data-original-height="743" data-original-width="616" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCNxBDs6tbWifrsPjxMG5bp6wIbFIdcYTlge_YyUIc7ixR8Giu9m2DYjOkAZ_ChBarD0jYWs7dLLXWBmZ9X77QhPMM93g6v-DiUjMxCI_cZU9qqH587B924oBZhDyTJu04Ly4Nwe20dVOz/s200/Beste+Sechs+Magazine.png"/></a></div><p class="base">Of course styles also change. In the US, pickup trucks outsell sedans. I do own a pickup, but I live in a rural area, unpaved roads included, and have to cart things to the garbage dump myself, and then there are downed tree limbs and DIY construction projects. But are pickups really needed in the suburbs? No, we want to stay in fashion. We may not notice new cars as new, but no matter how pristine in upkeep, we certainly recognize 10-year-old cars as old. I certainly do, and I'm hugely uninterested in fashion, I'm an industry nerd, but not a car guy. But survey the range of car mags, and it's clear that I'm the exception, not the rule.</p>
<p class="base">There's another influence at work: cars are durable goods. The longer a model has been on sale, the more plentiful the used cars become. This was well understood in the 1920s, when Ford's biggest competitor for his sole product, the Model T, was not an offering from General Motors or Hudson, but a used Model T. Companies adopt two strategies. One is to phase out old and launch new models on a regular basis. The other is to reduce prices as a model ages. An example is a study from the Federal Reserve, "Prices, production, and inventories over the automotive model year." They find a 9% annual drop in prices. By the end of 3 years – remember to compound! – that is a 25% drop in price. Even with the reduction in costs over time, with the amortization of the fixed costs of development and tooling, that rate destroys profitability by the 4th year or so. A mid-cycle "refresh" helps reset prices, but it only helps. Car companies need the new to stay in business.<sup class="note">Note 2</sup>
<p class="base">All of this comes together, mutually reinforcing our focus on new models over old. It shows up in how we shop. It comes from our sensitivity to style. It's reinforced by car company's product strategy. It's reflected in the vast array of car magazines and car sites, found in every market. Finally, it's a challenge to every new entrant to the industry, the Geely's and Tesla's of the world, who need to finance work on replacement models even as a new car enters production. For Tesla the Model 3 is already old hat, what those searching for an EV will find is – today's headlines – the forthcoming Hyundai Ioniq.<sup class="note">Note 3</sup> Dig a little further, and you'll find reviews of the Model Y. Even though the Model 3, Model S and Model X continue for sale, for all intents and purposes Tesla is car company with but one model.</p>
<p class="base">To sum, models sell best at launch. That's particularly noticeable in China and Japan, but there's certainly plenty of hoopla in the US. So keep the new models coming. And from an industry perspective, start production with the high-margin models, and pray that the launch goes well, because the PR begins well before the target date.</p>
<div style="font-size: 85%; font-family: cursive; color: green; font-weight: 400; text-align: justify">Notes and Digressions
<ol style="type: I; margin: 0 40pt 0 10pt">
<li>Clothing is now so inexpensive that ordinary Americans have a "wardrobe" – but if you pay attention, older houses didn't have closets, all one's clothing fit in a piece of furniture called a "wardrobe." Our house has walk-in his-and-hers closets.</li>
<li>There is an empirical literature on how car prices decline across the model cycle. See Copeland, A., Dunn, W. E. and Hall, G. (2005) Prices, production, and inventories over the automotive model year. Finance and Economics Discussion Series 2005–25. Board of Governors of the Federal Reserve System (U.S.). Available for download at <a href="https://www.federalreserve.gov/pubs/feds/2005/200525/200525pap.pdf">https://www.federalreserve.gov/pubs/feds/2005/200525/200525pap.pdf</a><br />
Subsequent studies using more recent data find a similar 9% rate of price decreases.
</li>
<li>First up on Gasgoo is Hyundai's Ioniq <a href="https://auto.gasgoo.com/news/202102/23I70242872C107.shtml">现代汽车IONIQ(艾尼氪) 5全球首秀 开启环保电动出行新时代</a>. On the German Green Car Magazine, it's the "<a href="https://greencarmagazine.de/volvo-xc40-recharge-pure-electric-awd-im-digitalen-dialog/" target="_blank" rel="nofollow">Volvo XC40 Recharge Pure Electric AWD im digitalen Dialog</a>. And so on. But there is a pure news story on the Tesla Model Y, reporting long lines at dealerships and a wait of 4 months or more for delivery.</li></ol>
</div>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-19970214358327212952020-03-02T15:15:00.001-05:002020-03-02T15:22:56.396-05:00Coronavirus and the Chinese Auto Industry<p class="signature">Mike Smitka<br />Emeritus Prof of Economics, W&L<br />Judge, Automotive News PACE Awards (supplier innovaiton)<br />Steering Committee, June 2020 GERPISA / PVMI Joint Detroit Conference</p>
<p class="base">The finance site <a href="https://seekingalpha.com/">SeekingAlpha</a> has just published an article of mine on <a href="https://seekingalpha.com/article/4328859-coronavirus-china-impact-on-global-automotive">the impact of the coronavirus</a>. They have exclusive rights, so I won't repost it here. I can though provide a synopsis.</p>
<p>
<ol><li>The Chinese industry accounts for about 30% of the global industry. The major global OEMs all have a presence there, as do the Tier I and many Tier II suppliers. All the big players have one or more R&D centers in China as well. Now the market has fallen the past 2 years, but for many global players it remains their single biggest market. For example, roughly 40% of VW's and of GM's unit sales are in China. For VW, Audi is a major luxury brand, so in some periods China has accounted for more than 40% of VW Group income. In CY2019 it generated $1.12 billion in income for GM, not including unreported licensing fees and profits on parts sales.</li>
<li>2020Q1 is already a disaster. January sales were down 19%. So far February sales look to be down over 90%. March sales will likewise be a disaster. Of course output has been zero or nearly so since the start of the Chinese New Years on January 24th. Since no one is buying cars – and China is a net importer of finished vehicles, not an exporter – it's just as well no one has been producing.</li>
<li>Conservatively, this represents on average a 10% less top-line for global auto in 2020Q1 (no sales in February, which is one-third of the quarter). Realistically, given an unexpected drop in January sales, it's more.</li>
<li>Going forward – we're now into March – things will remain grim. Why? China is in effect in a deep recession. Small business owners have had no income for 5 weeks or more, and their employees (if they still have any) haven't been paid for 2 months. (Historically you tried not to pay workers just before the New Year, because many either didn't return or used the holiday to switch employers.) But it's the Chinese bourgeoisie who buy cars. They can no longer afford one. March will go well if sales are only down 50% over 2019.</li>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM94tY4YseJnhzS2ZqWIaZGyMFL8P6Da9yOUO093vO_-V5w14THPZujxSpOUw_6H4nFSuDvFRsQKdXr4GXxab-pOExoufht36N44JvyjnTMRnKV2XbStFBWcgAYmcQDdjpAJlL4oGZs4wp/s1600/2020.02.21+AN+TV.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM94tY4YseJnhzS2ZqWIaZGyMFL8P6Da9yOUO093vO_-V5w14THPZujxSpOUw_6H4nFSuDvFRsQKdXr4GXxab-pOExoufht36N44JvyjnTMRnKV2XbStFBWcgAYmcQDdjpAJlL4oGZs4wp/s320/2020.02.21+AN+TV.png" width="320" height="195" data-original-width="1295" data-original-height="789" /></a></div><p style="text-align:center">Restarting production: A few workers, but no parts. Screenshot from Automotive News TV.</p>
<li>Going forward, what of government stimulus? Well, what tools does the government have? In 2009-2010 they used indirect fiscal policy, by letting governments borrow to build infrastructure and sell land to housing developers. They also speeded up the construction of the national expressway system (now more extensive than that of the US), a high-speed rail network and lots of airports. There's now a lot of excess capacity, new suburbs with almost no residents, and on and on. President Xi has encouraged the rise to the top of the most syncophantic, not the most imaginative. They will try doing more of the same – building yet more unoccupied suburbs – but that will no longer work.</li>
<li>Furthermore, stimulus won't help the bourgeoisie. Small businesses are poorly banked; monetary stimulus can't reach them. Instead they depend upon private lending, family networks and (above all) retained earnings. They also turned to real estate and unregulated investment trusts to park their wealth. Well, there's no way now to liquidate the 3 and 4 condominiums that many better-off Chinese own. Investment trusts tend not to have been professionally managed, even when they weren't dodgy. They're at best illiquid. So there's no way for help from Beijing to reach these businesses, and what these businesses have put aside for a rainy day aren't liquid in the current environment. So many will go out of business, and will also have lost their savings. They are not going to be buying cars.</li>
<p class="callout">...realistically, 2020Q1 automotive China top-line will be down two-thirds, which translates into a 20% top-line for global auto...</p>
<li>In sum, the Chinese economy is in a very deep recession, and there won't be a V-shaped recovery. There wasn't post-1992 in Japan, there wasn't post-2009 in the US. Car sales are not going to bounce back. So it's moot that supply chains are not yet up and running. The industry doesn't need to produce more vehicles, while dealers sit on copious inventories.</li>
<p class="callout">...If you will need new brake pads for your car before summer, get them now!! Advance/O'Reilly/Autozone won't be restocked anytime soon...</p>
<li>Supply chain issues will affect the North American and European industries. How much is unclear. Korean producers in particular are closely integrated to suppliers in northern China – it takes only a day for ships to cross from Tianjin to Incheon (though having flown over those shipping channels in November, congestion means it takes at least a day longer). It typically takes 4 weeks (and up to 6 weeks) for shipments to reach the US. But firms stock up in advance of the New Year, so the ships that should have sailed in early February are only now starting to not show up. (Pardon the syntax!)</li>
<li>And now there's coronavirus in Korea, Japan and Italy.</li>
</ol>
<p class="base">On SeekingAlpha I provide more detail on the role of Hubei and Wuhan. Look at a map: they're part of the Yangtze River Valley, closely tied to the greater Shanghai region that accounts for almost half of the Chinese auto industry. In a world of just-in-time suppliers, you can fill in the rest.</p>
<p class="base">What I've written here is framed in terms of industry averages. The "hit" will vary from firm to firm. While VW and GM look to China for 40% of their sales, Suzuki has withdrawn from the Chinese market. Some Tier I's are more dependent on China, some less. And then there are the Chinese companies whose sales are predominantly in China, such as BYW, Chery, Geely, Great Wall, and the domestic brands of the joint venture partners of VW and GM and the rest, including BAIC, Dongfeng, GAC, FAW, SAIC. (The shares of most Chinese Tier I's are not publicly traded, so I won't list names here.) </p>
Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-38301140270719169732020-01-11T18:59:00.001-05:002021-03-02T09:58:56.389-05:00GERPISA 2020: annual conference June 8-11 in Detroit<span style="font-size: 150%"><em><strong>As hardly needs stating, the June 2020 Detroit conference was cancelled, and we decided June 2021 would also be unrealistic. So the 2020 conference was made virtual on short notice. June 2021 will also be virtual, but with more lead time, and everyone is now experienced. For details, click for the <a href="http://gerpisa.org/en/node/6236">2021 Conference page</a>.</strong></em></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd9NwGq5Zj5U9FLBfWaupH1cvK88GHr_9ePfZoJA8RJixosmAYMEYwbQnARIzQMATUWW_THowc9-vx3D7Ze_j_DzlTZfPZ3FFuKdrHbFBxJD3Txs7wOXNXcL-SbRKCSDLY0GqFNm177rCs/s1600/GERPISA+Poster.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="976" data-original-width="690" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd9NwGq5Zj5U9FLBfWaupH1cvK88GHr_9ePfZoJA8RJixosmAYMEYwbQnARIzQMATUWW_THowc9-vx3D7Ze_j_DzlTZfPZ3FFuKdrHbFBxJD3Txs7wOXNXcL-SbRKCSDLY0GqFNm177rCs/s320/GERPISA+Poster.jpg" width="345" /></a></div>
<p class="base" style="font-size:120%">I'm in Paris right now, a mini-conference Friday at CCFA, the French auto industry association, and a planning meeting for the June 8-11, 2020 conference advertised at right. This conference will be joint with the Wharton PVMI, the successor organization to the influential MIT IMVP (International Motor Vehicle Program).</p>
<p class="base" style="font-size:120%">
The <a href="https://gerpisa.org">GERPISA</a> web site will have a link to the registration page, and we'll list keynote speakers and other details as they get confirmed. The conference will take place Mon-Wed in Ann Arbor, and Thurs at the Detroit Branch of the Federal Reserve Bank of Chicago, with an evening reception at the <a href="http://ford%20piquette%20avenue%20plant/">Piquette Museum</a>, which is where production of the Model T commenced in 1908, a wonderful venue. We are finalizing details of industry events on Monday 8 June and Thursday 11 June, and an add-on event for Friday 13 June, after the end of the conference.</p>
<p class="base" style="font-size:120%">Note that this week corresponds to the press and industry days of the "new" (June not January) Detroit Auto Show, more formally the <a href="https://naias.com/">North American Auto Industry Show</a>. Obviously we expect to leverage that, with details still under negotiation. Your truly and the others on are small planning committee will be very busy the next several months! Watch here and the GERPISA web site for more details; I'll post a bit on the conference content once I'm back in the US.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-54744935359927242782019-12-10T09:43:00.003-05:002019-12-10T13:59:32.055-05:00Interest Rates and US Investors: Don't Be Greedy!!<p class="signature">Mike Smitka<br />Professor Emeritus, Economics, W&L<br />Judge, Automotive News PACE Awards</p>
<p class="base">I've now begun posting the occasional article to the financial blog site <a href="https://seekingalpha.com/">SeekingAlpha</a>. I'll cross-post portions here. SA gives greater visibility than Blogger, and I even get paid a token amount. I've a couple posts on Tesla, and now one on <a href="https://seekingalpha.com/article/4311589-interest-rates-and-u-s-investors-caution">Interest Rates and US Investors</a>.
</p>
<p class="base">The core point is that very low interest rates are here to stay, because not just US growth but global growth is at a very low level, and for all the talk of new technology, appears likely to stay here. The bullet points from the article:
<ul><li>The latest unemployment data show a continuation of the steady increase in employment since the bottom of the Great Recession in 2010.</li>
<li>Interest rates show different patterns, with long rates going from low to lower.</li>
<li>For "value" investors, this poses two dilemmas. One is that low interest rates undermine the utility of discounted cash flow models. Caveat emptor!</li>
<li>The second is that low long-term rates imply neither growth nor inflation for the foreseeable future. Surely, stock market returns will be similar! Any claim of double-digit returns is too good to be true. Don't be greedy!</li>
<li>None of this applies if you're a (short term) speculative trader. As an economist, the short-run is "noise" - I can offer no analytic tools to help you.</li></ul></p>
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<p class="base">In the article I note that George Soros, now focused on philanthropy, has moved his fund from macro speculation (cf. his [in]famous bet against the British Pound in 1992. Now he's in it for the long haul, instilling Dawn Fitzgerald as CIO. With a focus now on steady returns for the long haul – a reasonable goal for most personal investors – they're looking at returns of 5% per annum, with years when they'll do worse.</p>
<p class="base">What are current bond returns? One approach is to look at current bond prices, which provide a 6-month yield of 1.58%, a 10-year yield of 1.83% [below the current level of inflation] and a 30-year yield of 2.27%. But another way to look at rates is to look at different rates across time to figure out the implied 1-year yield at different maturities, something I've posted about several times. That gives qualitatively the same picture: a steady secular decline over the past three decades, and (to allow reading individual series) the past 2-odd years. Implied one-year bond rates two decades from now are 2.55% using the most recent data (Monday, 09 Dec 2019).</p>
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<p class="base">Now these are nominal rates, which (by definition) are: i = real rate + inflation + risk premium. Unlike equities, US government bonds carry no default risk. At today's very low rates, the risk premium is also small: there's not much chance of bond prices rising [interest rates falling further], plus low rates imply bond prices are already high and can't go much higher. Markets are betting that inflation will remain low as well, and so there won't be much downside. Stocks ought to show a bit better return, the well-known and poorly understood equity premium. But the bottom line remains: unless you engage in speculation, you won't have returns much above 5%. And remember, most people leave casinos poorer.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-18540960754082744042019-10-28T11:42:00.002-04:002019-10-28T11:42:44.529-04:00EVs and the assembler business model<p class="signature">Michael Smitka<br />Prof Emeritus, Washington and Lee Univ<br />Judge, Automotive News PACE supplier innovation awards</p>
<p style="margin: 10pt 30pt;">This is an edited version of a post to the NBR email discussion forum, <a href="https://www.nbr.org/program/japan-forum/">NBR posts are archived here</a>.</p>
<p class="base">Mochizuki-san raises an interesting question.</p><p style="margin: 0 20pt; font-family: cursive; font-size: 90%;">I append the Mr. Mochizuki's original post in this thread at the end.</p>
<p class="base">The modern auto industry in the US began as pure assembly, initially Ford made no parts itself (zero!), but as it increased standardization it pulled more parts making in-house ca. 1910-1912. GM was built through M&A but was initially just a holding company, the parts makers didn’t necessarily supply any of its car assemblers. That changed in the 1920s, but GM spun off its parts making in the late 1990s / early 2000s, as did Ford. European car companies were never as integrated, we even have Magna Steyr assembling vehicles under contract.</p>
<p class="base">In Japan in the 1950s, car companies didn’t have the financial resources to vertically integrate, indeed Toyota spun off internal operations such as electrical components into what is now Denso, which then could raise funds on it own balance sheet. Toyota and Nissan also acquired some of the floundering independent car companies (there were 30 or so in the 1950s), turning them into branch assembly plants. But again, their focus was assembly, though they had shareholding interests in suppliers.</p>
<p class="base">So the major car companies around the world have long been focused on assembling components purchased from the outside (or into the 1990s in the US, from highly autonomous internal divisions), with drivetrains a partial exception (motors were generally “made,” except for diesels, but transmissions were sometimes outsourced - patterns in Europe were a bit different, transmissions were primarily outsourced).</p>
<p class="base">So what do car companies do? Final assembly, and design/development, and marketing and the coordinating of distribution. Since the 1990s they developed a “platform” (chassis plus suspension plus steering/braking), stuck different “top hats” on them, and filled them with purchased components. That was done in line with a product portfolio, to try to serve a broad array of the market (from the same platform) while providing protection against swings in taste. That vehicles today might be based on batteries and electric drive motors doesn’t challenge the industry's core business model.</p>
<p class="callout">...no disruption here: batteries and electric drive motors don’t challenge the industry's core business model...</p>
<p class="base">Have electric vehicle startups managed to successfully enter? My judgement is “no.” There are a host of EV companies in China, but that’s a result of massive subsidies. Despite subsidies, all startups in the US and Europe have flopped other than Tesla, and Tesla has survived only due to the Silicon Valley stock market bubble, they’re a quintessential “story stock” as they’ve burned through roughly $23 billion in capital. While they declared a very small profit for 2019Q3, it appears to be a result of one-off changes, as total revenue declined. Tesla is no longer a growth company, yet needs to raise more capital to stay in business. I didn’t think it would last through CY2019, but investors keep showering the firm with cash, and who is Elon Musk to say “no” to that?</p>
<p class="base">I think the evidence is pretty clear: car companies are indifferent to what’s under the hood, and the same is true of most consumers. If it’s cheaper to make battery electric vehicles, then that’s what they’ll do. If government fuel efficiency regulations force them to do so, as is happening in Europe, then that’s what they’ll do. [Until Dieselgate the EU had effectively mandated them for small cars – diesels were 70+% of the market in France – but they are intrinsically more expensive to make, and so you find few diesels in Japan, or in the US outside of work trucks.]</p>
<p class="base">Unfortunately battery prices have not yet fallen, and while there are almost daily announcements of “breakthroughs” none have made it into volume production – any new battery technology will show up first in cell phones and the like, and only (years) later in electric cars. The lead time to drive down production costs and build capacity makes it very unlikely that we’ll see high volumes until 2025, and unless chemistry cooperates, not even then. (There’s also the challenge of cobalt and lithium supplies, lots of exploration, not much investment in mines, even less in refining brine and ores, but all have multiyear lead times.) So car companies are looking at financial disaster, particularly in Europe, as regulations are pushing them to make cars that are too expensive for all except well-heeled consumers to purchase, but failing to sell EVs will result in fines in the euro billions per company per year, enough to bankrupt them. I expect to see a walk-back of such regulation.</p>
<p class="base">But to reiterate, Mochizuki-san’s question is interesting, and one that researchers focused on the industry (as well as consulting companies and car company executives) have debated and continue to debate.</p>
<p class="base">To return more narrowly to his query, the major electrical/electronics component suppliers have developed their own electric motors and specialized tooling (eg, for winding flat wires). It’s not clear though that they will dominate motors. There remain fundamentally different architectures, such as inductance versus permanent magnet motors, no standardization yet at even the level of the core technology, while packaging differs enough from vehicle to vehicle that there’s no standardization there, either. Will the car companies continue to make their own motors, using of course many purchased components, or turn to outside suppliers? I don’t think that will be apparent until 2030, after all sourcing component systems for EVs that will launch in 2023 has already been completed. It will take a couple model cycles – 8 years – for the dust to settle.</p>
<p class="base">In contrast, drive electronics are outsourced, and I don’t believe that will change. The original EV1 team at GM stayed together in what is now Delphi and Aptiv. The other big players are also in the game, Bosch and Denso and Continental and Valeo. A lot of the value added will be in the IGBTs and other specialized chips. Since the start of the 1980s the auto industry has been a huge consumer of semiconductors, at one time Delphi was the 4th largest chip company globally. But to my knowledge they and other suppliers (eg, Denso) no longer run fabs (or only do so as they’re fully amortized legacy plants).</p>
<p class="base">Battery cells are outsourced, except by the Chinese firm BYD, which began as a battery company, not a car company. In contrast, battery pack assembly is done in-house, again the packaging varies from car to car, and car companies know how to do assembly. That might change a bit, with outside firms supplying modules of cells that can then be assembled into packs. My hunch though is that in 2030 car companies will be making their own electric drive motors and assembling their own battery packs.</p>
<p class="base">So … we won’t see a repeat of the FANUC case, no "disruption" here. And if I’m wrong, it’s likely to be a Chinese firm that will be the global gorilla, given the sheer number of players there trying out different approaches. If success is 99% perspiration, well, they’re more likely than anyone else to come up with the bits and pieces that produce a winner.</p>
<p class="base">Mochizuki-san might be able to speak to that, the case of Kuka in industrial robots, which from touring factories is the big rival of FANUC. Why did they do so well, and not just FANUC. [Aside: Kuka is now Chinese-owned.] </p>
<p class="signature">mike smitka<br />
now prof emeritus of economics<br />
judge, automotive news PACE supplier innovation award<br />
(<i>with visits to suppliers in Japan and Korea in Nov 2019</i>)<br />
organizing team, June <a href="http://gerpisa.org/">GERPISA</a> 2020 auto industry research conference in Detroit</p>
<div class="dblin">
<p>On Oct 27, 2019, at 9:42 PM, Minoru Mochizuki <jfmember@NBR.ORG> wrote:</p>
<p>There was a major metamorphosis occurred starting in 1960s in the worldwide machine tool industry.
Up until 1950s, the world leaders by countries were US and Germany, providing all kinds of metal-cutting machines, large ones weighing hundreds of tons in weights for machining large components for electric generators and steam turbines, steel mills, ships and aircrafts, to small ones weighing less than a ton for machining small components such as precision shafts and screws. Those machine tools were controlled by skills of human operators.</p>
<p>With the introduction of computers into the machine tool industry, those metal cutting machines (lathe, milling machine, drilling machine, etc., generally called “machine tools”) came to be controlled by computers. They were thus came to be called numerically controlled (“NC”) machines, and further renamed as computer-numerically controlled (“CNC”) machines.</p>
<p>In the early days, the US machine tool industry led the way by inventing NC and CNC machine tools of all kinds. The computerization of machine tools, i.e., driving various types of cutting tools and grinding stones on and off, guiding the tools along the calculated loci three-dimensionally to form three dimensional shapes of the workpieces, were helped by electronic and computer engineers from the electronic and computer industry easily, thanks to the fluid employment practice in the U.S. Example of those US suppliers of NC systems were Bendix, Bunker Ramo, GE, etc. In contrast, those engineers existed only in the telephone and general electrical companies, so the Japanese machine tool companies were generally unable to develop the machines with the new kind of controls in-house. The machine tool manufacturers could not find electronic and computer engineers because of the lifetime employment system prevailing in those days. Thus, except a few cases of machine tool manufacturers, such as Okuma, the majority of Japanese machine tool manufacturers relied on the package consisting of central computer, sensor, and servo drive units, which can be easily connected to the machine drive axes, supplied by Fanuc, an offshoot of Fujitsu, a major Japanese telephone/computer manufacturer. Fanuc quickly became a major supplier of the backbone system of NC/CNC machine tools in Japan, This was essentially a standardization of the machine tool industry from the control and computerization side, making the Japanese NC/CNC machine tools more competitive in cost and performance. The predictable result was the conquest of the U.S. machine tool industry by the Japanese companies. Even in Europe, the world-wide home of the machine tool industry, although there were a few tries to compete against Fanuc, the competition ended when Siemens decided to cooperate with Fanuc. </p>
<p>The success by Fanuc and the Japanese machine tool industries continued in Europe and in Asia. The farming out of manufacturing of US products in China, for example, iPhones or automobile components, all relied on Fanuc and Japanese NC/CNC machine tools unanimously using Fanuc controls and drives. </p>
<p>The automotive industry seems to me facing now the same kind of fundamental change as the machine tool industry experienced about a half a century ago, with the advent of electric drive system in various formats, electric motors replacing internal combustion engines, and maneuvering to be controlled by big-data-based road information, sensors and computers. Will the history repeat the same course, where automobile manufacturing companies reducing their development efforts to the packaging of the chassis, compartments, mechanisms of steering, wheels and brakes, adopting the control system to be supplied by the outside source? Who will succeed to be the major supplier of the control system?</p>
<p>Minoru Mochizuki</p>
</div>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-32736178826416018462019-08-12T12:04:00.002-04:002019-08-12T12:04:39.989-04:00Ridehailing<p class="blogcommentmore" style="font-size:0.8em">I've phased into retirement this year, and over the past two months cleared out my office [with 3000+ books now occupying my parking place in our garage], gave 3 independent presentations/papers at 2 conferences during 3 weeks of travel in Europe, painted my unsold "bubble" house, and have put in many hours on deferred yardwork. I've another month of travel coming up, but will gradually return to blogging.</p>
<p class="signature">Mike Smitka<br>Professor Emeritus of Economics<br>Washington and Lee University</p>
<p class="callout">...taxis have never made much money, so interposing an app between rider and driver can never make much, either...</p>
<p class="base">Ridehailing is a financial disaster for investors, and for incumbents. By subsidizing riders, they've been able to capture market share from cabs and limo services, whose businesses appear to be down by over 50%. Medallion prices in NYC have crashed, so investors in such businesses, almost exclusively local entrepreneurs, have taken a bath. But it looks to me like investors in Didi Chuxing, Uber, Lyft and their many, many rivals will do the same. Indeed, neither Uber nor Lyft provide a compelling story that they have a route to profitability. Here are a few numbers.</p>
<p class="base">Uber and Lyft provide varying levels of detail in their quarterly financial reports and IPO filing. For Uber, revenue per gross booking, ridehailing adjusted net revenue (RANR) and RANR per trip are all down. They provide almost no details of their costs. Here are two key metrics I've culled for them:</p>
<table style="font-size:0.8em" align="center">
<tr><td></td><td style="text-align:right"></td><td style="text-align:right">2017Q1</td><td style="text-align:right">Q2</td><td style="text-align:right">Q3</td><td style="text-align:right">Q4</td><td style="text-align:right">2018Q1</td><td style="text-align:right">Q2</td><td style="text-align:right">Q3</td><td style="text-align:right">Q4</td><td style="text-align:right">2019Q1</td><td style="text-align:right">Q2</td></tr>
<tr><td>Adj Net Revenue</td><td style="text-align:right"></td><td style="text-align:right" width=”75”>$1,309 </td><td width=”75” style="text-align:right">$1,630 </td><td width=”75” style="text-align:right">$1,982 </td><td width=”75” style="text-align:right">$2,282 </td><td width=”75” style="text-align:right">$2,423 </td><td width=”75” style="text-align:right">$2,574 </td><td width=”75” style="text-align:right">$2,656 </td><td width=”75” style="text-align:right">$2,644 </td><td width=”75” style="text-align:right">$2,761 </td><td width=”75” style="text-align:right">$2,873</td></tr>
<tr><td>Ridehailing ANR</td><td style="text-align:right"></td><td style="text-align:right">$1,184 </td><td style="text-align:right">$1,447 </td><td style="text-align:right">$1,752 </td><td style="text-align:right">$2,000 </td><td style="text-align:right">$2,119 </td><td style="text-align:right">$2,223 </td><td style="text-align:right">$2,286 </td><td style="text-align:right">$2,282 </td><td style="text-align:right">$2,331 </td><td style="text-align:right">$2,314</td></tr>
<tr><td>Rideshareing ANR per trip</td><td style="text-align:right"></td><td style="text-align:right">$1.53 </td><td style="text-align:right">$1.63 </td><td style="text-align:right">$1.78 </td><td style="text-align:right">$1.84 </td><td style="text-align:right">$1.87 </td><td style="text-align:right">$1.79 </td><td style="text-align:right">$1.70 </td><td style="text-align:right">$1.53 </td><td style="text-align:right">$1.50 </td><td style="text-align:right">$1.38</td></tr>
</table>
<p class="base">Lyft does better in providing information. They stopped reporting total rides with 2018Q4, and they have only reported rider and driver incentives for scattered time periods; they do provide the total number of active riders. Excluding 2019Q1 with its IPO expenses, the only cost number that's improved on a per-active-rider basis is sales & marketing. In contrast, insurance reserves, costs of revenue, operations & support, R&D (<em>a large and to me mysterious item</em>) and general & administrative, as well as total operating costs, are all up on a per-rider basis.</p>
<table style="font-size:0.8em" align="center">
<tr>
<td>Lyft</td>
<td style="text-align:right">2017Q1</td>
<td style="text-align:right">Q2</td>
<td style="text-align:right">Q3</td>
<td style="text-align:right">Q4</td>
<td style="text-align:right">2018Q1</td>
<td style="text-align:right">Q2</td>
<td style="text-align:right">Q3</td>
<td style="text-align:right">Q4</td>
<td style="text-align:right">2019Q1</td>
<td style="text-align:right">Q2</td></tr>
<tr><td>Rides</td><td style="text-align:right">70.4 </td><td style="text-align:right">85.8 </td><td style="text-align:right">103.1 </td><td style="text-align:right">116.3 </td><td style="text-align:right">132.5 </td><td style="text-align:right">146.3 </td><td style="text-align:right">162.2 </td><td style="text-align:right">178.4 </td><td style="text-align:right">no data</td><td style="text-align:right">no data</td></tr>
<tr><td>Active riders</td><td style="text-align:right">8.1</td><td style="text-align:right">9.4</td><td style="text-align:right">11.4</td><td style="text-align:right">12.6</td><td style="text-align:right">14.0 </td><td style="text-align:right">15.5 </td><td style="text-align:right">17.4 </td><td style="text-align:right">18.6 </td><td style="text-align:right">20.5 </td><td style="text-align:right">21.8 </td></tr>
<tr><td>Insurance reserves per rider</td><td style="text-align:right">$21.96 </td><td style="text-align:right">$24.79 </td><td style="text-align:right">$26.75 </td><td style="text-align:right">$29.88 </td><td style="text-align:right">$33.30 </td><td style="text-align:right">$37.09 </td><td style="text-align:right">$39.76 </td><td style="text-align:right">$43.56 </td><td style="text-align:right">$45.71 </td><td style="text-align:right">$53.45 </td></tr>
<tr><td>Revenue per rider</td><td style="text-align:right">$21.42 </td><td style="text-align:right">$25.29 </td><td style="text-align:right">$26.59 </td><td style="text-align:right">$27.34 </td><td style="text-align:right">$28.27 </td><td style="text-align:right"> $32.57 </td><td style="text-align:right">$33.65 </td><td style="text-align:right">$36.04 </td><td style="text-align:right">$37.86 </td><td style="text-align:right"> $39.78 </td></tr>
<tr><td>Cost of revenue per rider</td><td style="text-align:right">$14.64 </td><td style="text-align:right">$15.31 </td><td style="text-align:right">$16.58 </td><td style="text-align:right">$16.51 </td><td style="text-align:right">$18.61 </td><td style="text-align:right">$18.92 </td><td style="text-align:right">$18.54 </td><td style="text-align:right">$19.73 </td><td style="text-align:right">$22.58 </td><td style="text-align:right">$28.90 </td></tr>
<tr><td>Operations and support per rider</td><td style="text-align:right">$4.47 </td><td style="text-align:right">$4.57 </td><td style="text-align:right">$4.24 </td><td style="text-align:right">$4.44 </td><td style="text-align:right">$4.28 </td><td style="text-align:right">$4.35 </td><td style="text-align:right">$5.32 </td><td style="text-align:right">$6.38 </td><td style="text-align:right">$9.13 </td><td style="text-align:right">$6.97 </td></tr>
<tr><td>R&D per rider</td><td style="text-align:right">$2.90 </td><td style="text-align:right">$3.00 </td><td style="text-align:right">$3.26 </td><td style="text-align:right">$3.79 </td><td style="text-align:right">$4.51 </td><td style="text-align:right">$4.15 </td><td style="text-align:right">$4.44 </td><td style="text-align:right">$5.17 </td><td style="text-align:right">$30.78 </td><td style="text-align:right">$14.21 </td></tr>
<tr><td>Sales & Marketing per rider</td><td style="text-align:right">$10.42 </td><td style="text-align:right">$11.43 </td><td style="text-align:right">$14.50 </td><td style="text-align:right">$16.66 </td><td style="text-align:right">$12.05 </td><td style="text-align:right">$11.30 </td><td style="text-align:right">$13.86 </td><td style="text-align:right">$11.77 </td><td style="text-align:right">$13.42 </td><td style="text-align:right">$8.30 </td></tr>
<tr><td>G&A per rider</td><td style="text-align:right">$1.90 </td><td style="text-align:right">$1.86 </td><td style="text-align:right">$2.38 </td><td style="text-align:right">$2.57 </td><td style="text-align:right">$3.19 </td><td style="text-align:right">$3.02 </td><td style="text-align:right">$3.58 </td><td style="text-align:right">$3.86 </td><td style="text-align:right">$9.95 </td><td style="text-align:right">$6.72 </td></tr>
<tr><td>Total operating costs per rider</td><td style="text-align:right">$37.47 </td><td style="text-align:right">$39.31 </td><td style="text-align:right">$44.13 </td><td style="text-align:right">$46.98 </td><td style="text-align:right">$45.90 </td><td style="text-align:right">$45.07 </td><td style="text-align:right">$49.06 </td><td style="text-align:right">$50.52 </td><td style="text-align:right">$94.29 </td><td style="text-align:right">$70.65 </td></tr>
<tr><td>Net operating revenue (loss) per rider</td>
<td style="text-align:right">(<span style="color:red">$16.14</span>)</td>
<td style="text-align:right">(<span style="color:red">$13.89</span>)</td>
<td style="text-align:right">(<span style="color:red">$17.50</span>)</td>
<td style="text-align:right">(<span style="color:red">$19.63</span>)</td>
<td style="text-align:right">(<span style="color:red">$17.53</span>)</td>
<td style="text-align:right">(<span style="color:red">$12.50</span>)</td>
<td style="text-align:right">(<span style="color:red">$15.44</span>)</td>
<td style="text-align:right">(<span style="color:red">$14.52</span>)</td>
<td style="text-align:right">(<span style="color:red">$56.43</span>)</td>
<td style="text-align:right">(<span style="color:red">$30.87</span>)</td></tr>
</table>
<p class="base">The whole sector is a disaster. I've scanned news for Didi, Grab and various others on a periodic basis, in several languages. Nothing I've found indicates anyone makes (or has ever made) a profit. Taking Lyft's 2019Q2 operating loss per rider, with about 10 rides per active rider per quarter (last reported 2018Q4), they need to increase what they charge by $3 a ride to break even. To make a decent profit, they have to bump prices by $5. That is an underestimate, because it will surely lose them market share, and drivers. And with fewer drivers, response times fall, making getting a Lyft even less attractive. In econ jargon, demand is surely relatively price elastic, and that's under the assumption that Uber also raises prices. And that means that Lyft and the others in the segment need to shrink if they are to ever make money.</p>
<p class="base">Taxi services – indeed transportation in general – are an intrinsically low margin. Trying to capture part of that margin by interposing an app between the person paying the fare and the person receiving the fare doesn't change that fundamental fact. Uber and Lyft can never capture more than a slice of that low margin.</p>
<p class="blogcomment" style="color:purple">Of course not all adjustment need be on the revenue side, but Lyft's data suggest they've had no success in trimming the cost side of their business.</p> Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-43249460301462656582019-02-12T16:02:00.000-05:002019-02-12T16:02:56.664-05:00A Disconnect: Electric Vehicles and Cobalt and Copper Prices<p class="signature">Mike Smitka, Economics</br>Washington and Lee University</p>
<p class="base">Some 80 battery EVs will be on the market by 2021. <b>IF</b> they sell at any volume, <b>THEN</b> demand for the underlying metals used in EV batteries, particularly lithium and cobalt, should rise. But instead prices have been falling for the past 12 months. So either traders aren't looking very far into the future, or they don't believe the EV revolution will actually occur.</p>
<p class="base">First, the price of cobalt has dropped to about 1/3 of its peak of a year ago. Yet this remains a crucial component of battery cathodes for the lithium chemistries in current use. While the lithium spot market is thin and not where most trading takes place, those prices have also fallen (listen to the <a href="http://lithiumpodcast.com/">Global Lithium Podcast</a> for details).</p>
<table style="float:right; text-align: center""><tr><td><iframe src='https://d3fy651gv2fhd3.cloudfront.net/embed/?s=cobalt&v=201902120040a1&d1=20140101&d2=20191231&h=200&w=400' height='200' width='400' frameborder='0' scrolling='no'></iframe></td></tr><tr><td>Cobalt Price from <a href='https://tradingeconomics.com/commodity/lithium'>tradingeconomics.com</a>, US$/metric ton</td></tr>
<tr><td><iframe src='https://d3fy651gv2fhd3.cloudfront.net/embed/?s=lithium&v=201902120040a1&d1=20140101&d2=20191231&h=200&w=400' height='200' width='400' frameborder='0' scrolling='no'></iframe></td></tr><tr><td>Lithium Price from <a href='https://tradingeconomics.com/commodity/lithium'>tradingeconomics.com</a></td></tr></table>
<p class="base">The disjuncture surely isn't because investors aren't sufficiently forward looking. After all, the prices of both hit record highs in March 2018, as the Tesla stock fever took hold. Since then, however, the market has cooled – if not crashed.</p>
<p class="base">One possibility is that there's a lot of metals production coming on-stream. That is, those close to the ground don't see a scarcity, rather they anticipate an increasing supply. That however is not what those in the mining industry are saying. While there's a lot of interest in brine extraction, none of those projects have started up. The geography makes that a daunting task – evaporating brine in a 4000m high desert remote from anything is a process fraught with challenges. Then the output has to be moved for refining. That refining is intrinsically expensive (you've a brine with Li and Na and K, all neighbors in the periodic table). According to insiders, capacity is not being added – again, listen to the GLP podcast. The various national governments also want to see that they get a share of the revenue, and so licensing is a drawn out process. In short, none of these are going to be producing much metal in the next 5 years. The same thing is true for hard-rock lithium resources in places such as Australia. Assessing the ore bodies, getting the permits, building the mine infrastructure, and building the refining capacity are all multi-year projects.</p>
<p class="base">Cobalt is even more of a barrier. With the exception of a small mine in Tunisia, cobalt is a by-product of copper (and to a lesser extent, nickel) mining. However, the price of both of these metals has fallen, and <a href="https://southerntimesafrica.com/site/news/another-botswana-copper-mine-bites-the-dust"> mines are being closed</a>, not opened. The best deposits are in the Democratic Republic of the Congo, which accounts for about 60% of global production. Much of the output includes metal from small, illegal mines employing child labor. While that may not matter for the Chinese market, it cuts into the amount available in countries with policies mandating ethical sourcing. Cobalt supply isn't going to grow in the next 10 years, and may even decline.</p>
<div class="separator" style="clear: both; text-align: center; float: right;">
<table>
<tr>
<td>
<a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=mXbF" imageanchor="1">
<img border="0" src="https://fred.stlouisfed.org/graph/fredgraph.png?g=mXbF" width="300" height="234" data-original-width="600" data-original-height="468" />
</a>
</td>
</tr>
<tr>
<td>Copper Price from <a href="https://fred.stlouisfed.org/">FRED</a>
</td>
</tr>
<tr>
<td>
<a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=mXbC" imageanchor="1" >
<img border="0" src="https://fred.stlouisfed.org/graph/fredgraph.png?g=mXbC" width="300" height="234" data-original-width="600" data-original-height="468" />
</a>
</td>
</tr>
<tr>
<td>
Nickel Price from <a href="https://fred.stlouisfed.org/">FRED</a>
</td>
</tr></table></div>
<p class="callout">the fall in prices ... must be a story of demand...</p>
<p class="base">Thus <b>IF</b> the fall in prices is not a supply story, <b>THEN</b> it must be one of demand. Yes, interest rates have risen, and that ought to push commodity prices down. But the change in present value from discounting sales in 2022 at 3% instead of 0.3% isn't much – 3% compounded over 3 years drops the value 8.5%. That's a far cry from the observed 65% decline.</p>
<p class="base">That leaves a decline in expected demand from EVs, which constitute the bulk of battery demand, and the fastest growing component. The main issue is that we now have increasing evidence that EVs don't sell. The GM Bolt, the Nissan Leaf, and the Renault ZOE have not been hits – though Renault to its surprise sells a lot of ZOEs in rural France, where home charging is practical. Ditto China, where BEVs sell in cities with high subsidies (including being able to jump the queue for license plates), and sell not at all elsewhere.</p><p class="base">Then there's Tesla. Only in 2018 did the company reach cumulative US sales of 200,000 units [and hence the halving of the $7500 Federal individual tax rebate]. The Model 3 continues to garner news, but by Tesla's own admission it has tapped out sales in the US, and is switching its emphasis to exports to Europe and China. After all, the market for an expensive sedan is fairly small, particularly in a world in which demand is shifting to mid-sized SUVs. But while the target segment represents a strategic error on Tesla's part, the expensive part is common to all EVs. They just don't offer a compelling value proposition to consumers who don't care about fast acceleration, or about which drivetrain lies under the hood.</p>
<p class="callout">...people don't care what's under the hood of their car...</p>
<p class="base">Part of the challenge is that, even with EVs in the mix, the fuel efficiency of vehicles on the road continues to improve. It's now possible to power a full-sized pickup truck with a 4-cylinder engine, thanks to improved turbocharging, fuel injection and computerized combustion timing, and a host of ancillary improvements such as lighter pistons, better piston rings and better bearings. Add to that improved body-in-white engineering with the mixed use of aluminum, magnesium, and varieties of high-strength steel, and modern vehicles can pass today's more stringent crash tests while holding down vehicle weight. (BIW improvements are of course available for BEVs.) Then there are today's 10-speed automatic transmissions, that leave the engine operating at its sweet spot more of the time. Meanwhile "light" electrification – electric fan and water and oil pumps, electric steering, start/stop systems, alternator power-boost systems, and potentially electric valves – are eliminating the parasitic drag of hydraulics and belts. As 48V systems diffuse, efficiency will continue to increase. Car companies, though, don't advertise these as "hybrids." But more and more, that's what people are actually driving. Again, people don't care what's under the hood.</p>
<p class="base">For consumers, as <a href="http://dolanecon.blogspot.com/2019/02/properly-measured-its-never-cost-less.html">Ed Dolan points out in a recent blog</a>, fuel is a historically low component of the cost of ownership of a vehicle. Absent a carbon tax (or Persian Gulf war) that drives up the price of gasoline, the cost of batteries needs to fall below that of an ICE-powered car, given the perceived challenge of recharging on the fly. At present no such battery technologies are entering production, which means that they won't be available on a volume car in the next 8 years. Another alternative would be a change in consumer behavior, where households become comfortable with owning a small EV commuter car, and using short-term rentals for longer trips. In fact, people are opting for SUVs that can cover all usage cases, while short-term rental businesses such as ZipCar lose money.</p>
<p class="callout">...metals markets implicitly believe EVs are <span style="color:black; border-bottom: black solid 2px">not</span> the wave of the future...</p>
<p class="base">To return to the main theme, I conclude that recent price movements in metals markets reflect a growing realization that battery electric vehicles are not the wave of the future. That will change if new battery chemistries prove out. But those chemistries won't use cobalt and may not use lithium. Hence sales of those metals into the EV market will remain small, and eventually disappear.</p>
<p class="aside">1. In some parts of the world, such as Brazil, this is complemented by the availability of biofuels and CNG competitive with petroleum-derived gasoline and diesel. Even with a carbon tax, there is no business case for a BEVs. Likewise work continues of fuel cells, which may prove a good match in countries that turn to storing intermittent "green" energy output as hydrogen. Particularly for readers in the US, it's easy to overlook the country- and region-specific variety in markets for motor vehicles.</p>
<p class="aside">2. Lithium-ion batteries are a poor match for utility-level energy storage, where on the battery side vanadium-flow technologies are already superior.</p>
<p class="aside">3. Having just visited suppliers and looked at their order books, MY2022 is basically a done deal. The validation - pilot production - volume production cycle for a new battery will take at least 5 years before it can be incorporated into a high-volume passenger vehicle. So as of early 2019 we're looking at MY2027 as the earliest date for the rapid expansion of BEVs.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-80527145356017729302019-02-07T12:25:00.000-05:002019-02-07T13:29:33.039-05:00Tesla and Elasticities: An Economics 101 Lesson<p class="signature">Mike Smitka</br>Prof of Economics, W&L</p>
<p class="base">An elasticity is a qualitative and quantitive tool to put bounds on real-world behavior. If a change in one variable leads to a more than proportional change in another, then the relationship is "elastic." Numerically, it's the ratio of percentage changes. Here I apply it to a simple but interesting case, Tesla's $1,100 price cut.
<p class="base">The demand for cars is not very elastic in price. There are lots of 300+ models to choose from in the US, from a variety of manufacturers and in types ranging from compact cars such as the Fiat 500 and the Smart to full-sized pickup trucks replete with towing packages and other options. Then there are performance cars, and most popular of all, small SUVs and crossovers, such as the Toyota RAV4 and the Honda CR-V. There's very little substitutability across vehicle classes; someone looking for a pickup truck does not cross-shop the Fiat 500. The price isn't terribly important. And so demand for any single model is inelastic – it can help sway the choice against a similar vehicle.</p><p class="dblin"> (<span class="aside"><em>Mea culpa</em>: my wife drives that latter. I prefer a smaller sedan with a stick shift, in my case a Chevy Cruze. My son drives a Subaru Forester, bought used, and we have a F-250 pickup to handle the tasks of living in the woods.</span>)</p>
<p class="callout">...a 2% drop in price leads to an 8% drop in gross revenue and a 60% drop in net profit...</p>
<p class="base">For the Tesla Model 3, there are (at least according to afficionados) no similar vehicles. Someone either wants one (and has the money to make that happen), or they don't. A $1,100 difference in price, or a decrease of about 2% with average sales prices (ASP) of $50,000, won't lead to many more sales – if you can't afford a $50,000 vehicle then you probably can't afford one at $49,000. It might make a big of difference if you're comparison-shopping against a similar-sized BMW or Audi. Let me ere on the high side, and assume a 1.0 elasticity. That is, the 2% drop in price will push up the quantity demanded by 2%. As a result, total revenue for Tesla will be unchanged: the drop in price will be just offset by the increase in sales.</p>
<p class="dblin"><span class="aside">I ignore the impact of the phasing out of Federal tax credits. As of January 1st, those drop from $7500 to $3750 so net of the just-announced price cut by Tesla, the bottom line cost to US consumers has in fact risen by $2650.</span></p>
<p class="base">But for a company with a parlous balance sheet, what matters isn't total revenue but profits and cashflow. Now Tesla claims a gross profit margin of 24%. They don't calculate that in the same way as other car companies – despite self-proclaimed industry-best margins Tesla has never earned a full-year profit. But for the sake of argument, and to keep numbers round, let's us 25%. Given an ASP of $50,000, they then have a gross profit of $12,500 per vehicle. And they've just cut that by 8%.</p>
<p class="base">The bottom line is clear: if Tesla is extraordinarily lucky, they'll maintain total revenue. But they'll earn 10% less gross profit on that revenue. With automotive revenue of $6.3 billion, and a gross margin of 25%, they've gross income of $1.6 billion. Lop off 8%, and this falls by $126 million. So assuming nothing else goes wrong relative to 2018Q4, net income falls from $210 million to $80 million, or a 60% drop in net profit. While timing may affect that – lower sales in Q1 as Model 3s sit on ships en route to Europe, and then higher revenues in Q2 as they make their way to customers – the impact is permanent.</p>
<p class="base"><strong>Note that at each step along the way I have rounded numbers in favor of a better profit number for Tesla.</strong> Tesla has also cut prices for Model S and Model X over the past 6 months, without any increase in sales. I don't try to factor that in, again to provide a more optimistic case for Tesla.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-57060261571559336902018-11-24T20:40:00.002-05:002018-11-27T14:26:28.902-05:00Chinese Industrial Policy: an automotive example<p class="base">In Japan, motor vehicles were few and far between in the 1950s, and in 1956 half of all vehicles produced were still 3-wheelers. Car production surpassed that of trucks only in 1969, and it was only from the mid-1970s that there were more cars than trucks on the road. Even in 1985 there were only 711,000 full-sized cars on the road. It was not a big market for higher-end vehicles.</p>
<p class="base">But a November 22nd Bloomberg story on the (to date) counterproductive outcomes of the "China 2025" industrial policy leads me to address a different set up issues, whether automotive industrial policy makes sense. To do I switch back and forth from automotive historian mode to economic analysis.</p>
<img class=" alignright" src="https://upload.wikimedia.org/wikipedia/commons/thumb/7/78/Shutoko_expwy_C2_route.png/678px-Shutoko_expwy_C2_route.png" width="260" height="390" style="float:right" />
<p class="base">In Japan, promoting the auto industry via import substitution industrialization was costly. That's one reason that there were so few vehicles on the road. Industrial policy imposed a cost not just on vehicle users, but on everyone who relied on logistics – which was, of course, everyone. And because there were so few vehicles, the postwar plans for highways and local roads got moved to the back burner. The Yokohama ring road was laid out in 1950, but completed only in 2005. The outer Tokyo ring was planned back in 1927, but not completed until 1985, and at only 4 lanes. The last segment of the inner portion wasn't completed until 2015. Some of the connecting roads and junctions are still under construction. (In Chinese, ring road is h<i><span lang="zh-Latn-pinyin">uánlù</span></i> 环路; in Japanese, 環状線 kanjousen.)</p>
<p class="base">Of course there's the contribution to the domestic economy. If it's being subsidized, through policies that allowed firms to charge prices far above international levels, then the contribution of that industry is smaller than that of non-subsidized sectors of the economy. That's made worse in this case by the negative externalities of costly logistics. The Japanese domestic auto industry likely wasn't competitive in the subcompact segment until the mid-1970s, and from then on could survive without subsidies. But competitive full-sized cars came even later. BMW made a fortune in the 1980s and 1990s in Japan because they could charge higher prices than in other global markets, suggesting that the Japanese producers weren't competitive in that segment until the 1990s, and (given branding) perhaps not even until 2006, when Toyota at last launched their "German-killer" Lexus marque inside Japan. While Japan removed formal trade barriers by 1971, Japan's domestic market was small. The preferred route for the Detroit Three was via acquisitions, not <em>de novo</em> "greenfield" plants or exports (which would have been compact cars from Europe, not large cars from the US).</p>
<p class="base">Trade models don't show that subsidizing industries saves on foreign exchange, because (cf. expensive domestic transport above) it raises costs for exporters and for firms that face import competition. Japan's surge in exports to the US following the 2nd oil crisis was brief, as the market for subcompacts collapsed by the mid-1980s. But in the meantime the US formally subsidized direct foreign investment (via the VER, voluntary export restraint, imposed by the Reagan Administration in May 1981) and encouraged imports (a side effect of the strong dollar policy of the early 1980s, one of the channels through which high interest rates helped quell inflation).</p>
<p class="base">So I don't think that "It would have been self-defeating not to support MITI's policy to nurture - and protect - Japan's infant auto industry." (citing Roger Schreffler, of Wards Automotive, arguing on the NBR Japan Forum about US policy towards Japan in the Cold War.) It would have made more sense in the 1950s to welcome imports, and particularly to welcome direct foreign investment. The industry would have been more efficient early on, to the benefit of the growth of the economy as a whole. Through 1967 Japan faced periodic balance-of-payments crises, including a trip to the IMF in 1961, but by 1969 foreign exchange reserves were robust for the first time in the post-WWII era, while 15 years of rapid growth had raised incomes and automotive sales – it was only in 1967 that passenger cars first outsold commercial vehicles. Policy was to open the industry up to trade – while a grad student some decades back I read through many contemporary Japanese sources, where the need increase competitiveness was touted year in and year out, even while agriculture was fenced off from such pressures. It didn't hurt that there were several large car producers, and several that failed – when everyone was lowering costs, it was improve or die. Toyota did the former better than anyone else, for regular cars, while Suzuki was the undisputed champ for minicars (in Japanese, <a href="https://autosandeconomics.blogspot.com/2016/03/kei-cars-in-japan-galapagos-sector.html">"kei" cars or 軽自動車</a> / 轻汽车).</p>
<p class="base">China's industry provides a case in point. The early industry began with a turnkey car factory built by Soviet engineers; it focused on trucks, but from 1955 made small numbers of cars so that the senior leadership could appear at public functions in a Chinese vehicle. A few joint ventures were allowed in the 1980s; that of VW in Shanghai did well, at one point accounting for 80% of all passenger cars made in China. The was also an Audi plant in Manchuria, which used an assembly line exported from a plant VW was closing in South Africa; that helped lay the groundwork for a black Audi becoming the vehicle of choice for Party officials. (There was also an engine JV of Mitsubishi Motors, which supplied truck plants throughout China.) Meanwhile protectionism allowed lots of inefficient assemblers to exist, at peak around 200 – in the 1950s Japan had 30 or so manufacturers, which wasn't all that different given the 12-fold disparity in population.</p>
<p class="base">In Japan those small, inefficient producers were whittled down in numbers, some through M&A (Toyota of the firms that became Kanto Jidosha and Toyota Auto Body, Nissan of Prince, 3 different Mitsubishi companies into Mitsubishi Motors), some via exit. But it took a long while for others to attain scale, and in 1980 there were still 8 passenger car makers (Toyota, Nissan, Honda, Subaru, Mitsubishi, Isuzu, Mazda, Daihatsu – did I forget one?).</p>
<p class="base">China took a different route, touched off by the entry of GM in 2001, and a wave of subsequent ventures by the top global motor vehicle manufacturers (ditto agricultural and construction equipment firms). Motor vehicle prices fell rapidly, and continue to fall 17 years later. Exports? – not so much, because the economy grew so fast that the leading firms (the various joint ventures GM and VW) had no excess capacity, and as long as that was true, margins on sales within China remained more attractive than those on exports, which have to cover the costs of shipping and tariffs (2.5% for the US, now 10%). And they've worked on their road network, at the regional and the national level – unlike Japan, congestion isn't for a lack of planning and effort.<a href="https://cdn3.i-scmp.com/sites/default/files/styles/980w/public/2014/08/12/beijing-back-graphic-0812.png?itok=R9_XXq6X"><img class="alignright " src="https://cdn3.i-scmp.com/sites/default/files/styles/980w/public/2014/08/12/beijing-back-graphic-0812.png?itok=R9_XXq6X" width="228" height="382" style="float:left" /></a></p>
<p class="base">So the bottom line is that import substitution industrialization was an utter and complete failure before 2001. Allowing global companies to dominate the industry has been a boon: high quality, lower cost "global" vehicles made with Chinese labor, and Chinese-made parts (every global supplier for which I've tracked down information, an ongoing research project, has a substantial presence in China). All of this now comes with increasing levels of local engineering, as local staff gain experience. So it's a tale of two China's, the worst of times under Japanese-style industrial policy, and the best of times when the market was opened.</p>
<p class="base">There's a bit of irony: China's domestic market is slowing, so in an early 2017 book (Smitka and Warrian, <a href="https://smile.amazon.com/Profile-Global-Auto-Industry-Innovation-ebook/dp/B01MS2ALIU/">$9.99 on Kindle</a>) and in a January 2016 blog post, <a href="https://autosandeconomics.blogspot.com/2016/01/chinas-auto-industry-meltdown-last.html">China's Auto Industry Meltdown</a>, I predicted excess capacity and exports within a couple years. Indeed, GM and Honda make niche products in China that are too low in likely sales to justify production in NAFTA, and had begun exports. Those have ended, at least to the US. A few "local" firms that aren't doing well inside China do have excess capacity and exports – I rode in one such in Lima, Peru, but definitely a step up from a used car but a step down from the entry-level global products of Toyota (the Yaris) and Kia (the Rio). There's no sign that China will manage to build significant levels of exports (through 2017 they've run a trade deficit on automotive products), because the most competitive firms – Toyota, Nissan, VW, GM, Hyundai-Kia – have local production bases around the world. But China remains a labor-abundant, capital-scarce economy for which the auto industry is still a weak fit. I've heard though that China does OK on the international trade front without the auto industry.</p>
<p class="base">But how about electric vehicles, one focus of the <a href="https://www.bloomberg.com/opinion/articles/2018-11-22/trump-pressure-on-made-in-china-2025-is-doing-beijing-a-favor">Bloomberg article</a>. They estimate that between them the national and provincial / local governments have spent $59 billion between 2009 and 2017. If you pay consumers enough they will buy them – Tomasso Pardi of ENS-Paris Saclav and Director of the <a href="https://gerpisa.org">GERPISA auto industry research association</a>, together with Deng Xiaoxiang, <a href="https://autosandeconomics.blogspot.com/2017/07/germany-will-be-first-in-evs-but-dont.html">analyzed insurance data on EVs in China</a>. (Why insurance data? – you can't use sales data due to the fraudulent registration of EVs by unscrupulous "manufacturers" to pocket subsidies.) They found that despite the equivalent of US $8,000 in direct subsidies from Beijing, in many provinces there were effectively zero sales. EVs sold only in cities that added their own cash subsidies – in Beijing, up to US$15,000 – and indirect subsidies (such as getting license plates immediately, while waiving the US$2500 license plate fee and the 10% sales tax). In Beijing, with a quota of 50,000 licenses, total sales of EVs were 58,000.</p>
<p class="callout">...from a selfish perspective, we should cheer China 2025 on...</p>
<p class="base">Beijing's China 2025 policy may sound great, but it can't overcome the limitations of lithium electrochemistry that keep battery cell prices high. China does lead the global electric vehicle industry, not because they're better, but because they have spent more. I'm guardedly optimistic that it is possible to develop better batteries. However, until scientists find ways are found to get around the current limitations, mass-market BEVs remain years down the road. Even if it's Chinese labs that develop the core technologies, that won't give the Chinese industry an advantage – second movers in the rest of the world will be able to improve on their chemical engineering. (No, that would not be stealing – you can't patent basic science.)</p>
<p class="base">So from a selfish perspective, we should cheer China on – let them be the ones to invest in creating global public goods. The more China 2025 money spent on battery R&D, the more likely improvements will come our way!</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-54877343271385664812018-08-06T12:32:00.002-04:002018-08-06T12:32:47.918-04:00Quick thoughts on the stock market impact of the trade war<p class="signature">Mike Smitka, Economics, W&L</p>
<p class="base">What are the market implications? Below are quick thoughts. I will refine this initial and very tentative analysis over the next month. Above all, I need to add detail on the investment implications.</p>
<p class="base">There can be little doubt that we are moving to higher and higher tariffs against China; the must-be top-of-the-news mindset of President Trump makes it very hard for those on the other side to defuse things, much less back down. Trump may be riveted on the stock market, and think that swings in Chinese equity prices drive politicians there. He apparently has never heard that all politics are local, and that the Chinese leadership can scarce be seen to "cave in" to a foreign power. Will the war spread? That depends on whether the Administration lashes out in the face of a global trade deficit that is more likely to grow that to shrink. That's thanks to their own actions, the fiscal stimulus packaged passed by Congress earlier this year with Presidential support. Demand will increase, even if not by much, and that will require more (net) imports. After all, few Americans remain unemployed, so factories can't expand and we won't see much uptick in domestic output. Goods (and services) will have to come from somewhere, which means reduced exports and increased imports.<p>
<p class="base">Complementing that demand-and-supply story are higher domestic interest rates. Thanks in part to a growing Federal deficit amidst a strong economy, Treasuries are more attractive to global investors, and to get those they have to buy dollars. The White House will talk of a Chinese currency war, but the dollar is stronger across the board – Canada, Europe and Japan, along with most of our other trading partners. This will offset some of the pocketbook impact of trade, keeping imports high, while the strong dollar and the higher cost of intermediate goods such as steel will hurt exporters. Again, this complements the above analysis of supply and demand. [Wonks will recognize that a net increase in Treasury purchases by non-residents must necessarily be matched by a net increase in the trade deficit.]</p>
<p class="base">Myths abound. One is that tariffs will cut our deficit. A quick glance at the data should inject a dose of realism, but twitter and TV "sound bites" aren't a good way to highlight basic arithmetic. Numbers aren't the story-monger's strength. So ... to data: in the year through Q2 we collected under $45 billion in customs duties, and that's already up sharply this last quarter. With higher tax rates, the total might go to $100 billion, paid of course by US consumers. Why not more? – we import $3 trillion a year, so shouldn't revenue approach 25% of that, or $750 billion? No, because all sorts of things will continue to face no tariffs. Examples include most of the goods shipped to us from Canada and Mexico ($300+ billion each) and the $250+ billion we import in energy products. That drops the amount subject to taxes by almost $1 trillion. Of course higher taxes also induce shifting to avoid them. Trade is no exception. Again, we might, possibly, collect $50 billion in additional revenue. That offsets little of the $1 trillion-a-ear increase in the budget deficit from early 2018 tax cuts passed by Congress. [Wonks should look at the history of the US prior to 1914 and the imposition of a national income tax.]</p>
<p class="base">Now the Administration is encouraging the belief that the Chinese will back down, and we can return to the good old days of a strong US. Unfortunately — unless Trump caves very soon — there will be a permanent impact, as the rest of the world evolves to take advantage of the absence of the US. A lesson in point is that several of our "temporary" retaliatory tariffs to the 1963 "[frozen] Chicken War" with Europe are still in place over 50 years later. In addition, China's biggest trading partner isn't the US, it's Europe. The world will evolve without us, to our detriment, and to China's advantage in its quest for global power.</p>
<p class="base">Part of the reason the impact won't soon be reversed is that no one will want to waste time negotiating with the US. After all, a 3am tweet storm can undo everything. The President has been less than consistent, and doesn't engage in the sort of careful, briefing- and reading-intensive memo and staff work to see that he understands what negotiators can achieve, and they understand his priorities as they consider many hundreds of policy options. Plus we lack negotiators: the Administration has lots of unfilled positions at USTR, among other places. But above all the other side understands that the people across the table have no idea whether Trump will back them, and has little incentive to make a counter-offer that might be on the news an hour later and claimed as a "victory", as the new starting position.</p>
<p class="base"><span style="font-size: 120%"><strong>Investors:</strong></span><br> several takeaways</p>
<p class="base">For investors, what matters are identifying stocks and bonds that will be differentially affected.
<ol style="list-style-type: lower-roman"><li>With taxes on intermediate products (steel), avoid final goods producers (autos). However, that advice has to be muted because many such firms are global businesses that earn only a minority of their profits in the US. Be wary of "US" brands, as those may be hit by future anti-American campaigns in China, and not just what happens to their sales in the US. General Motors sells more vehicles in China than in the US, and is highly exposed to such risk. Anyway, if you can quickly spot individual intermediate goods producers (that is, still overlooked by the market), their profits may rise. And I suspect that in a market dominated by trends, many hard-goods firms are already underpriced.</li>
<li>Amazon and Walmart may be hurt, as their sales depend on final goods—their customers aren't buying rolls of steel. The lower half of the income scale in the US are the ones who have benefitted the most from trade. Here's an example—I ask my students how big their closets are, and then point out that older houses (pre-WWII) in rural Virginia often have <b>NO</b> closets. Why? – clothing was too expensive for all but the wealthy to have more than a couple changes of clothing. With various trade deals, even the poor in the US can have 5 pairs of trousers and 20 shirts and lots of shoes, socks and underwear. Then there is consumer electronics, including cell phones. China runs labor-intensive "screwdriver" plants that import components from the US [and elsewhere] and export complete units back to the US. So the Chinese economy obtains relatively little of the value added. Unfortunately, tariffs are blind to such details, taxing the gross and not the net amount. Again, Walmart and Amazon sell a lot of those, and will be hurt. Can Apple lobby for an exemption? If I were China, I'd try to turn on the PR machine to make it hard for Trump to carve out highly visible exceptions...</li>
<li><b>Extrapolate</b>: I expect the pain will show up in places we don't initially expect.</li></ol>
<p class="base">Details on the trade front are still few: most tariff hikes are still at the "promised" stage and are not yet effective. Second, much trade is under long contracts, so historically it takes 18 months for measures to work there way across the Atlantic and Pacific. Yes, tariffs can (and will) affect goods while they're in transit, so the price impact will be felt more quickly than changes in quantity. But the impact will consist on small increases in the prices of a large number of goods. Consumers may not connect the dots between trade policy and why they're having such a hard time making ends meet. But that won't be hidden to mass-market retailers, whose sales will inevitably be hit.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-35627330076763367212018-07-19T14:30:00.001-04:002018-07-19T18:11:56.755-04:00Tesla Bond, again<p class="signature">Mike Smitka</p>
<p class="base">I posted an article on <a href="https://seekingalpha.com/article/4188308-teslas-bond-junk-tesla">Seeking Alpha</a> on Tesla's junk bond. It may be behind a fire wall. In any case, here's the key chart, updated subsequent to the SA post to include data back to November 1, 2017 (previously I'd only taken things back to December 1st, 2017).</p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigLfSs8kQr-YpKIYay5b2ogkD5FAjdwbZRuHrcu4ObxQUGa6sQRjICiV3aptay-ByVwq6VNg2lH_FDEiq4cj81tuNEHBLIadoKZbf_CvA_vEeZUAiG86PzyyaSFDoUpVQBMEh-MaUKt0_x/s1600/Picture1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigLfSs8kQr-YpKIYay5b2ogkD5FAjdwbZRuHrcu4ObxQUGa6sQRjICiV3aptay-ByVwq6VNg2lH_FDEiq4cj81tuNEHBLIadoKZbf_CvA_vEeZUAiG86PzyyaSFDoUpVQBMEh-MaUKt0_x/s400/Picture1.png" width="400" height="289" data-original-width="1425" data-original-height="1031" /></a></div>
<p class="base">There's only a very weak correlation between the stock price and difference in the bond yield (relative to a "B" bond index) prior to the March 27th downgrade of Tesla's straight bond (5.3% yield, 8/15/2025 maturity, semiannual coupon). There's a strong correlation after the downgrade, usefully exactly 1:1, that is Stock $1 ↑ <==> Yield differential 1 bp ↓.</p>
<div class="blogcommentmore">=========
<br>Regression results:
<br>Stock price ==> bond price relative to "B" bonds
<br />
<br>March 28 - Jul 18: 1.01 (±0.01) t=10.77 observations=77
<br>Nov 1 - March 26: 0.38 (±.11) t=3.43 observations=100
</div>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-54197686491549542292018-05-11T15:19:00.000-04:002018-05-11T16:21:05.170-04:00Tesla Bond Yield<p class="signature">Mike Smitka<br />Economics, W&L</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjtSu2aCWkKLxNQzgxd_qcc5pxozWA4xhpkGv7Q8aICd244Cmsj_EZ_S8p8SitQ5aolM8vEDcUoJYA4WsUjDvQDV7KtQ0mTpBYWRC39Ir_5PEHMeQBrNDSbcNqeDXsOXG-YJ1DrDEKtHEZ/s1600/Tesla+Yield.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjtSu2aCWkKLxNQzgxd_qcc5pxozWA4xhpkGv7Q8aICd244Cmsj_EZ_S8p8SitQ5aolM8vEDcUoJYA4WsUjDvQDV7KtQ0mTpBYWRC39Ir_5PEHMeQBrNDSbcNqeDXsOXG-YJ1DrDEKtHEZ/s400/Tesla+Yield.png" width="400" height="289" data-original-width="1425" data-original-height="1031" /></a></div>
<p class="base">Tesla has one straight bond, an 8-year bond at 5.3% with a semiannual coupon payment, maturing Aug 15, 2025. I have been putting trade data into a spreadsheet for several months, with the underlying goal of comparing that bond with "B" rated bonds. Does the Tesla bond track other low-rated bonds? The quick answer is "yes." That has two caveats: first, the bond is thinly traded, and I benchmark against one bond fund that provides only a daily closing price. Second, the differential moves around, with one obvious discontinuity: yields jumped when Moody's downgraded Tesla.</p>
<p class="callout">...bond traders trade the rating, not the company...</p>
<p class="base">First, the graph below provides trade-by-trade yields and a trade-volume-weighted moving average (a lot of 1,000,000 counts more than one of 5,000). These data are only for sell-side prices, and don't differentiate between various markup strategies. There are days with a dozen or fewer trades, and only the occasional day with 30 or more. Crude, but I chose not to throw out observations or try to adjust for markups (I could see no pattern). I did look at buy-side data, but there are very few trades reported, so I kept them out of the mix.</p>
<p class="base">What do we see? Back in early April the yield jumped to 8.5%, and over the past month has gradually rise back to 8.4%. However, that's in the context of rising interest rates. So comes the second chart, to which I added additional days on a sampled basis (every 25th screen of prices...). When Tesla first issued their bond, it traded at a 40bp premium to the <a href="https://fred.stlouisfed.org/series/BAMLH0A2HYBEY">ICE BofAML US High Yield B Effective Yield</a>. That disappeared within a month, and thereafter (with noise) the Tesla bond traded at a 25bp premium to B-bonds. Then came the Moody's downgrade, and yields instantly jumped by 150bp relative to B-bonds. Yields then fell back for most of April, but are now back to the immediate post-downgrade level.</p>
<p class="callout">...I see noise, not trend...</p>
<p class="base">My hunch is they'll stay at about where they unless (or if you're a bear, until) there's another downgrade. That's based on the assumption that those buying such bonds assemble a broad portfolio, particularly for ones with a low rating. In other words, bond traders trade the rating, not the company. Nothing in bond prices suggests that they read Tesla's financials closely. Yes, yields climbed almost 40bp after the earnings call – but in a noisy manner. Indeed, the most recent date (Thur 10 May 2018) shows yields dropping a bit. I will revisit in a month or so, but for now what I see over the last month is noise, not trend.</p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu7u5B0G2NvjbMag0fV4sMI5IxPuIXDE5LBsWCZu0r_PAo06sl1veJ9gyeyukZvxb5EhlR4xP-tOm8jvZkDe4IVhjHFii9MAg1aFqcBLjSM-wuy_EHVeYyeefSueA1_mKXDKrVaEU2z0JU/s1600/Tesla+Bond+Premium.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu7u5B0G2NvjbMag0fV4sMI5IxPuIXDE5LBsWCZu0r_PAo06sl1veJ9gyeyukZvxb5EhlR4xP-tOm8jvZkDe4IVhjHFii9MAg1aFqcBLjSM-wuy_EHVeYyeefSueA1_mKXDKrVaEU2z0JU/s640/Tesla+Bond+Premium.png" width="640" height="463" data-original-width="1425" data-original-height="1031" /></a></div>.</p>
<p class="blogcommentmore">Notes:
<ol><li>I could not get excel to label the axis sensibly for trade data, which provide the hour and minute and not just the day. So the axis is trade by trade, rather than by date.</li>
<li>Trades are detailed by the Financial Industry Regulatory Agency at <a href="http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?symbol=TSLA4530907&ticker=FTSLA4530907">Tesla bond yield</a>.</li>
<li>On some days there are as few as 3 recorded buy-side transactions. I don't report those data, but the yield differential tracks that of the sell side. While logically buyers pay more than sellers, fees get buried in prices and I cannot in general match a "buy" with a "sell." When I can, the price is typically identical, that is, fees aren't built into the reported price.</li>
<li>I had been intending to track data longer, but post now in response to Bill Maurer on <a href="https://seekingalpha.com/article/4172226-tesla-bonds-head-new-lows">Seeking Alpha</a>.</ol></p>
Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-17143089794861850862018-04-06T20:30:00.001-04:002018-04-07T17:44:14.000-04:00Licensing our technology to China? Shhh ... it's nicely profitable<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXVNZs4fpHk9aRYSvfOtzNYC1BCWk_J71PzXWX1T-hn2wYc-lrb7QjN9Ynz0ldxij5lydy8U02z9yC-10L4nI1PXRoUel1P9so7FHBywqwCerJEJPi85Rr6PTMeulgqV0PZtDwqxoF7RH6/s1600/180429Poster.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXVNZs4fpHk9aRYSvfOtzNYC1BCWk_J71PzXWX1T-hn2wYc-lrb7QjN9Ynz0ldxij5lydy8U02z9yC-10L4nI1PXRoUel1P9so7FHBywqwCerJEJPi85Rr6PTMeulgqV0PZtDwqxoF7RH6/s320/180429Poster.jpg" width="245" height="320" data-original-width="1223" data-original-height="1600" /></a></div>
<p class="signature">Mike Smitka, Economics<br />Washington and Lee University<br />Bass II, RCS</p><p class="base">As an observer and sometimes participant in industrial policy debates for 30+ years, few industries are "winner takes all." It's just not the way either technology or competition works. In addition, few technologies turn out to be national in significance. Lots of players, lots of niches, not many jobs. There's typically a long delay between invention and innovation, and initial commercialization seldom makes money. Most patents are never used.</p>
<p class="base">Furthermore, producers can't capture all the benefits. Users have their place in the value chain, except for the odd discrete product they're the ones who integrate it into what final consumers purchase. If the technology lets final purchasers reorganize their businesses, they too capture benefits. As a result, the whole world benefits from advanced countries subsidizing new technology. The gain to any one country is much smaller. And it's a big world: no one country can dominate more than a few slices of the market, even when they are the size of the US or China.</p>
<p class="base">So here's a devils advocate position: the more China subsidizes their push into new (for them) technologies, the better it is for us, the United States. Let China bear the costs, which are upfront, and let us reap the eventual benefits. For the MBA's out there, think net present value: it's negative.</p>
<p class="callout">...Don't kill the goose!...</p>
<p class="base">Oh, and licensing is a fool's game, and it's not us who are being fooled. Licensing is only good for yesterday's technology, you can't license something that doesn't yet exist or has no obvious value. In the auto industry, the product cycle means that a MY2018 vehicle represents the technology of 2014-2015 – and the technology in a Honda CR-V is going to lag that in the Acura RDX. Remember, too, that licensing is only the first step. The Chinese "partner" has to then get that technology into production. That takes a good 3 years. Licensed technology is old technology.</p>
<p class="base">And licensing only covers what the other party can see – that's the equivalent of Tesla's purchase of lots of robots. Yes, you've the hardware and the access to the patents. But that doesn't tell you how to make a factory full of them operate, or how to design products for which automation saves money. That's tacit knowledge, embodied in part in teams of engineers who are in turn embedded in a larger engineering operation and networked with counterparts at component suppliers and capital equipment vendors. If the Chinese want to get their factories to run and their products to work right, they have to hire teams of consulting engineers. So those licensing get fees up front, get ongoing training contracts, and are the gatekeepers for buying specialized equipment and materials and so on. All of these can be nicely profitable, while leaving the Chinese perpetually 5 years behind.</p>
<p class="base">This will vary from industry to industry. But many of the companies being "ripped off" are in fact crying all the way to the bank. They just have to be careful not to boast about it lest they kill the goose that is laying the golden eggs. How long has Shanghai GM been up and running? – the Buick Sail project started around 1999, the vehicle launched in 2001. So after 20 years how have they fared? They're still in the drivers seat for their regular trips to the bank.</p><p class="base">Yes, GM's local partner, SAIC, is in the back seat. Why? Parts is because technology isn't readily transferred. But remember where the car is headed: SAIC is also on the way to the bank. Being a passenger isn't so bad, since GM delivers profits like clockwork. Neither SAIC nor the numerous other "domestic" Chinese auto companies have managed to make regular money on their own. Entering the auto industry is hard. Better to license, and license, and license some more. Don't kill the goose!</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0tag:blogger.com,1999:blog-2959361113187475098.post-38792981293165439482018-01-30T16:22:00.002-05:002018-01-30T16:22:21.259-05:00The Trump Bump in Coal<p class="signature">Mike Smitka<br />Washington and Lee University</p><iframe allowtransparency="true" frameborder="0" scrolling="no" class="alignright" src="//fred.stlouisfed.org/graph/graph-landing.php?g=hXR3&width=402&height=285" style="height: 285px; overflow: hidden; width: 402px; clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></iframe>
<p class="base">I've no idea what Pres. Trump will say in his SOTU address, but it is useful for me, living near coal country, to look at what's happened in my neck of the woods. (<i>BTW, I do live in woods!</i>) In particular, can any president return jobs to regions with long-standing employment challenges? We in the US have tools to address "cyclical" unemployment, and hence affect what goes on at the national level. "Structural" unemployment is a different matter. Regional problems are, well, regional, with different origins. If we really want to do something, we need thus to diagnose causes and tailor solutions, region by region. No single national policy will do the trick. But in a Federal system we're not set up to do this: regional policy butts up against our many states, and a region may be comprised of slices of geography lying in several different states. Overcoming this institutional barrier – creating cross-state cooperation – isn't something possible without a great deal of hands-on, and likely heavy-handed, leadership. </p>
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<p class="base">Coal is a case in point. There's "met coal" that gets converted into coke and is used in smelting steel from iron ore. Imports aside, we (and everyone else) have become really good at recycling steel. The biggest example there is the rise of minimills, which recycle scrap into useable product. But even "basic steel" uses a charge of scrap that goes into the basic oxygen caldron alongside iron from the smelter. There are imports as well. The bottom line is that steel is a declining source of demand.</p>
<p class="base">Then there's "thermal" coal that goes into power plants. Here the challenge is that alternatives are attractive. When oil prices are high, coal production does OK – but it doesn't rise, despite our growing economy. Today however energy prices aren't high, and coal output reflects that. Tax benefits aren't going to change that. (Note: The more important alternative today is natural gas. I tried to put natural gas prices into the chart, but it made the graph unreadable. Nor did I try to address how much coal is from WV versus Colorado or other regions where mining is less costly.)</p>
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<p style="margin-top: 8pt; text-align: justify; line-height: 1.3em;">Is there anything that a US president could do about this? Probably not: our current president is not to blame. But whatever might be done to help supporters in West Virginia won't help those in Ohio. There's no generic solution. Retraining programs might help, but even if community colleges could develop programs offering "portable" skills, those who finish programs would need to leave the region to find a job, so it might be helpful to add a one-time relocation allowance to training programs. That won't save the affected communities. It would help build a better future for the children of miners, and for younger Americans in general.</p>Mike Smitkahttp://www.blogger.com/profile/10310816368811158899noreply@blogger.com0