I've been quoted several times this past week. See for example the following May 7 Bloomberg story but note I'm unsure how long the link will work. A nearly identical version appears here on the (Bloomberg) Business Week site.
Mike Smitka
Tuesday, February 9, 2010
Monday, February 8, 2010
The Revolution in Japanese Retailing
I don't just do autos, I also do research on Japan and teach to earn my keep, lately intro macroeconomics ("Principles"), a course on the Chinese economy (which I've been doing for a quarter century) and come this spring an intensive four-week course on the auto industry.
Here's a link to an article I wrote for the February 2010 edition of TOE (The Oriental Economist report at http://www.orientaleconomist.com), part of a book project on the transformation of the Japanese economy since the bubble. I enjoyed working with Rick Katz, the editor, to get it to size, filling the available space, no more, no less. But I don't have anything on Japanese auto dealerships, nor does my co-blogger David Ruggles, who is also knowledgeable in that area. Soon...?
Here's a link to an article I wrote for the February 2010 edition of TOE (The Oriental Economist report at http://www.orientaleconomist.com), part of a book project on the transformation of the Japanese economy since the bubble. I enjoyed working with Rick Katz, the editor, to get it to size, filling the available space, no more, no less. But I don't have anything on Japanese auto dealerships, nor does my co-blogger David Ruggles, who is also knowledgeable in that area. Soon...?
Changing retail, changing lifestyles: From mom & pop to mallsThe link now works -- enough snow shoveled to get to campus and upload it. But more snow due tomorrow and again over the weekend....
Mike Smitka
Why Throttle-by-Wire not Cable?
I've seen many comments in discussion forums bemoaning the move from cable to electronic throttles. Here are a number of reasons why that's necessary. Part of this stems from a visit in January to a supplier that developed the vehicle stability system for the BRP Spyder three-wheel motorcycle. Though I'm not an engineer, I've sat through enough engineering presentations to give a sense of the "why."
First, e-throttles improve fuel efficiency; even a skilled driver will give too much or too little gas as they change speed, climb a hill, etc -- an electronic throttle acting through fuel injectors can adjust 50 times a second, probably faster... That's even more important if you have a turbocharger as it can take a while for them to adjust to a change in speed. And of course the output signal can also be used by the transmission to adjust the shift point if, for example, it senses a hard acceleration.
Second, e-throttles also allow emissions to be cut: add in not just throttle and wheel speed but also the oxygen sensor and an electronic throttle lets the engine adjust to reflect a host of other parameters, something impossible with a cable.
Third, you need it for traction control and stability control, as the car must be able to automatically ease off the throttle if it senses the wheels slipping.
Fourth, in a hybrid you have to coordinate the electric power with the engine power, there is no way for a person to process the data needed to do that, much less process the data and drive at the same time.
Fifth, you need it for fast stop/start where easing off on the gas or braking turns off the engine, and then turns the engine on again, all so fast that you don't notice it. That boosts fuel efficiency immensely, esp in city driving.
Sixth, cables are probably worse than an electronic throttle in terms of intrinsic quality, you have to keep dirt and moisture from getting in yet allow the cable to move in and out, you have to get the physical connection right in assembly, kinks or excessive vibration and you can have friction in one spot until it seizes. And you still need springs, and you can still get the pedal stuck on carpet or get your shoe jammed under it or. I've had to replace the gear shift cable, on a car but not a throttle cable that I can recall. Experienced boaters know to check their cables periodically -- I had a cousin killed when a steering cable failed and threw him from a boat.
Seventh, a cable is physically bigger than wires, weighs more, and costs more than a pedal sensor plus wires.
In short, the combination of consumer and regulatory constraints on a modern vehicle mandate an electronic throttle.
First, e-throttles improve fuel efficiency; even a skilled driver will give too much or too little gas as they change speed, climb a hill, etc -- an electronic throttle acting through fuel injectors can adjust 50 times a second, probably faster... That's even more important if you have a turbocharger as it can take a while for them to adjust to a change in speed. And of course the output signal can also be used by the transmission to adjust the shift point if, for example, it senses a hard acceleration.
Second, e-throttles also allow emissions to be cut: add in not just throttle and wheel speed but also the oxygen sensor and an electronic throttle lets the engine adjust to reflect a host of other parameters, something impossible with a cable.
Third, you need it for traction control and stability control, as the car must be able to automatically ease off the throttle if it senses the wheels slipping.
Fourth, in a hybrid you have to coordinate the electric power with the engine power, there is no way for a person to process the data needed to do that, much less process the data and drive at the same time.
Fifth, you need it for fast stop/start where easing off on the gas or braking turns off the engine, and then turns the engine on again, all so fast that you don't notice it. That boosts fuel efficiency immensely, esp in city driving.
Sixth, cables are probably worse than an electronic throttle in terms of intrinsic quality, you have to keep dirt and moisture from getting in yet allow the cable to move in and out, you have to get the physical connection right in assembly, kinks or excessive vibration and you can have friction in one spot until it seizes. And you still need springs, and you can still get the pedal stuck on carpet or get your shoe jammed under it or. I've had to replace the gear shift cable, on a car but not a throttle cable that I can recall. Experienced boaters know to check their cables periodically -- I had a cousin killed when a steering cable failed and threw him from a boat.
Seventh, a cable is physically bigger than wires, weighs more, and costs more than a pedal sensor plus wires.
In short, the combination of consumer and regulatory constraints on a modern vehicle mandate an electronic throttle.
Mike Smitka
Thursday, February 4, 2010
Room for Debate: Toyota
For pieces aimed to stimulate debate by yours truly among others, see the February 4, 2010 NYTimes Opinion page "Room for Debate."
Mike Smitka
Wednesday, January 27, 2010
Unemployment
I've been tracking various subcomponents of unemployment for the past year, and just updated things before my "Principles of Macroeconomics" class devoted to what unemployment is and how it's measured. In the process, I found I'd not included recent data on the decline in labor force participation. The numbers are disheartening: the good months during 2004-2008 had 66.2% of the working age population in the labor force; that's now down to 64.6%, a change of 1.6 percentage points. Since the relevant target group is some 237 million people, that comes out to 3.7 million individuals who've "dropped out" on top of those 15.3 million unemployed. And note that the base may skew things: 10 years ago, 67% of people were in the labor force.
Mike Smitka
Thursday, January 7, 2010
It’s Unanimous!
Pre-Owned values will continue to rise as supply shrinks.
Early 2010 pronouncements by industry experts bear out what economists close to the industry have been predicting since the fall of 2008. With consumers keeping their present vehicles longer, and fleets and rentals putting off or reducing purchases, there are fewer vehicles coming back into the pre-owned market. In addition, the lack of leasing in the last 18 – 24 months means there are thousands fewer lease returns available. Add it all up, and the industry is looking at an extreme pre-owned shortage.
Edmunds.com analysts project that “the used-vehicle price strength of 2009 — caused largely by low inventory levels and healthy demand — will likely continue into 2010 thanks to "tight" supply and sustained demand.”
According to NADA, “about 8 million fewer used cars and trucks entered the U.S. market over the past two years, resulting in higher used-vehicle prices every month in 2009.” NADA is alone in expecting the pre-owned shortage to ease somewhat in 2010, predicting an additional 1 million vehicles traded in to dealerships in 2010 because of higher new vehicle volume. In my mind, this increase is not enough to make up for the loss of Cash for Clunker vehicles and the absence of tens of thousands of “off lease” and rental vehicles. If financing becomes available and fleet and daily rental companies replace large numbers of vehicles, there could be additional pre-owned inventory available. However, these will be much higher mileage units than ever before for each category due to the fact they have been kept in service so much longer than in previous years.
OpenLane predicts strong demand will drive wholesale market throughout 2010. “Reduction in trade-ins and overall sluggish new-vehicle market will be the primary wholesale demand drivers.”
ADESA's Tom Kontos has indicated that wholesale prices should continue to show "stable-to-firming" trends in the near future, saying that "although auction inventories are rising a bit — mostly from returns of off-rental units that normally occur earlier in the fall — supplies remain tight." Kontos’ conclusion? "Coupled with improving vehicle demand, this should keep wholesale prices in a stable-to-firming pattern through year-end and into 2010."
Ricky Beggs, Vice President and Managing Editor of Black Book, says, “Used vehicle values in 2009 showed mostly strength, and when looking at year-over-year levels showed some huge gains, even when the vehicles had significantly more miles on them.
Some of the same circumstances that helped used vehicles maintain their strength in values are still present and are part of the equation for 2010 and beyond. Due to much lower levels of new vehicle sales for the past two years, the number of used cars in the market place is greatly reduced. Daily rental units being turned in are also at lower levels, and are expected to be similar to the 2009 numbers.”
Eric Ibara, Director of Residual Value Consulting for Kelly Blue Book says, “While tightening supply will undoubtedly impact used car prices over the next few years, its effect will not be uniform or consistent throughout all segments and at all times. Some segments will benefit more from the reduction in daily rental volume. Obviously, manufacturers scaled back on fleet and lease volume to varying degrees, and the impact on their models will be in proportion to their actions. Late-model used car prices are also subject to new-vehicle transaction prices, but with the downturn in auto sales, many manufacturers took out production capacity, sometimes on a permanent basis. To this end, there should be less downward pressure coming from high new-car incentives, but again, the effect will vary from segment to segment and by brand.”
RVI Group predicts a “4 year pre-owned price climb.” For those who don’t know, RVI stands for Residual Value Insurance. These folks put their money where their mouth is as they guarantee virtually all insured residual values in the country. According to Rene Abdalah, Vice President of RVI Group, "We expect the year-over-year upswing in used prices to reach a peak of 13-percent in 2012 before starting to stabilize.”
What does all this mean? The sky is not the limit on pre-owned values. The MSRP and transaction price of a like model new vehicle places somewhat of a cap on pre-owned values. Lower OEM rebates and incentives could provide room for pre-owned prices to move even higher. The higher values caused by the shortage might somewhat improve consumers’ equity or negative equity positions in their current vehicles. But the biggest issue is supply.
I’m with RVI on this one. The shortage won’t be over in a matter of months. It will be years before we reach stability. Even if there is a supply of available pre-owned vehicles, the quantity with reasonable miles will be few. What can a dealer do?
If the dealer is a Ford Lincoln Mercury dealer, the OEM is helping out. The recent 27 month leases offered means dealers will have a supply of lease returns coming soon. If ever the market needed “Half-a-Car” and short- term principles it is now if only to supply pre-owned vehicles through lease returns. Eustace Wolfington, where are you? Wolfington and “Half-a-Car” proved the short-term theory back in the late 1980s and into the 90’s in an era where there was no pre-owned inventory shortage. If anything, this era was marked by over production of new vehicles and over saturation of rental and other program units by the OEMs, something they have vowed to eschew this time around.
Dealers who don’t have access to short-term residual based financing through their OEM should look to local credit unions. There are hundreds of credit unions across the country offering residual based financing and/or leasing.
Savvy dealers understand that the monthly payment drops $35. - $50. per month for every thousand dollars of trade equity or money down on a short-term lease or balloon. This means using the rebate or dealer incentive on a short-term lease or balloon, in lieu of a subvented long-term interest rate offers, can offer a surprisingly low monthly payment. If the consumer has additional down payment and/or trade equity, the payment/profit balance gets even better. Everybody wins and the dealer has a shot at the off lease vehicle at the end of term, as well as the opportunity to do business with the buyer again.
The pre-owned inventory shortage will be with us for a while. Why not take some measures to mitigate its impact on your business?
by David Ruggles
Written for Auto Finance News, January 2010
Early 2010 pronouncements by industry experts bear out what economists close to the industry have been predicting since the fall of 2008. With consumers keeping their present vehicles longer, and fleets and rentals putting off or reducing purchases, there are fewer vehicles coming back into the pre-owned market. In addition, the lack of leasing in the last 18 – 24 months means there are thousands fewer lease returns available. Add it all up, and the industry is looking at an extreme pre-owned shortage.
Edmunds.com analysts project that “the used-vehicle price strength of 2009 — caused largely by low inventory levels and healthy demand — will likely continue into 2010 thanks to "tight" supply and sustained demand.”
According to NADA, “about 8 million fewer used cars and trucks entered the U.S. market over the past two years, resulting in higher used-vehicle prices every month in 2009.” NADA is alone in expecting the pre-owned shortage to ease somewhat in 2010, predicting an additional 1 million vehicles traded in to dealerships in 2010 because of higher new vehicle volume. In my mind, this increase is not enough to make up for the loss of Cash for Clunker vehicles and the absence of tens of thousands of “off lease” and rental vehicles. If financing becomes available and fleet and daily rental companies replace large numbers of vehicles, there could be additional pre-owned inventory available. However, these will be much higher mileage units than ever before for each category due to the fact they have been kept in service so much longer than in previous years.
OpenLane predicts strong demand will drive wholesale market throughout 2010. “Reduction in trade-ins and overall sluggish new-vehicle market will be the primary wholesale demand drivers.”
ADESA's Tom Kontos has indicated that wholesale prices should continue to show "stable-to-firming" trends in the near future, saying that "although auction inventories are rising a bit — mostly from returns of off-rental units that normally occur earlier in the fall — supplies remain tight." Kontos’ conclusion? "Coupled with improving vehicle demand, this should keep wholesale prices in a stable-to-firming pattern through year-end and into 2010."
Ricky Beggs, Vice President and Managing Editor of Black Book, says, “Used vehicle values in 2009 showed mostly strength, and when looking at year-over-year levels showed some huge gains, even when the vehicles had significantly more miles on them.
Some of the same circumstances that helped used vehicles maintain their strength in values are still present and are part of the equation for 2010 and beyond. Due to much lower levels of new vehicle sales for the past two years, the number of used cars in the market place is greatly reduced. Daily rental units being turned in are also at lower levels, and are expected to be similar to the 2009 numbers.”
Eric Ibara, Director of Residual Value Consulting for Kelly Blue Book says, “While tightening supply will undoubtedly impact used car prices over the next few years, its effect will not be uniform or consistent throughout all segments and at all times. Some segments will benefit more from the reduction in daily rental volume. Obviously, manufacturers scaled back on fleet and lease volume to varying degrees, and the impact on their models will be in proportion to their actions. Late-model used car prices are also subject to new-vehicle transaction prices, but with the downturn in auto sales, many manufacturers took out production capacity, sometimes on a permanent basis. To this end, there should be less downward pressure coming from high new-car incentives, but again, the effect will vary from segment to segment and by brand.”
RVI Group predicts a “4 year pre-owned price climb.” For those who don’t know, RVI stands for Residual Value Insurance. These folks put their money where their mouth is as they guarantee virtually all insured residual values in the country. According to Rene Abdalah, Vice President of RVI Group, "We expect the year-over-year upswing in used prices to reach a peak of 13-percent in 2012 before starting to stabilize.”
What does all this mean? The sky is not the limit on pre-owned values. The MSRP and transaction price of a like model new vehicle places somewhat of a cap on pre-owned values. Lower OEM rebates and incentives could provide room for pre-owned prices to move even higher. The higher values caused by the shortage might somewhat improve consumers’ equity or negative equity positions in their current vehicles. But the biggest issue is supply.
I’m with RVI on this one. The shortage won’t be over in a matter of months. It will be years before we reach stability. Even if there is a supply of available pre-owned vehicles, the quantity with reasonable miles will be few. What can a dealer do?
If the dealer is a Ford Lincoln Mercury dealer, the OEM is helping out. The recent 27 month leases offered means dealers will have a supply of lease returns coming soon. If ever the market needed “Half-a-Car” and short- term principles it is now if only to supply pre-owned vehicles through lease returns. Eustace Wolfington, where are you? Wolfington and “Half-a-Car” proved the short-term theory back in the late 1980s and into the 90’s in an era where there was no pre-owned inventory shortage. If anything, this era was marked by over production of new vehicles and over saturation of rental and other program units by the OEMs, something they have vowed to eschew this time around.
Dealers who don’t have access to short-term residual based financing through their OEM should look to local credit unions. There are hundreds of credit unions across the country offering residual based financing and/or leasing.
Savvy dealers understand that the monthly payment drops $35. - $50. per month for every thousand dollars of trade equity or money down on a short-term lease or balloon. This means using the rebate or dealer incentive on a short-term lease or balloon, in lieu of a subvented long-term interest rate offers, can offer a surprisingly low monthly payment. If the consumer has additional down payment and/or trade equity, the payment/profit balance gets even better. Everybody wins and the dealer has a shot at the off lease vehicle at the end of term, as well as the opportunity to do business with the buyer again.
The pre-owned inventory shortage will be with us for a while. Why not take some measures to mitigate its impact on your business?
by David Ruggles
Written for Auto Finance News, January 2010
Saturday, December 19, 2009
What’s Really Going On
J. D. Power recently released the results of their study on owner retention. According to the study Mercedes Benz showed a significant increase in owner loyalty from 2008 at 67%, the highest score since J. D. Power has been measuring retention, and finished in the top spot. Honda, Toyota, Subaru, and Lexus complete the top 5. As I read the results of this study I thought of conversations I’ve had recently with Dealers who own multiple franchises including both Imports and Domestics. Some of these Dealers have had Chrysler and/or GM franchises terminated or have been told their franchise agreements will not be renewed.
It seems there are quite a few lessees bringing their GM or Chrysler vehicles back at termination of a lease that was put on the books 36 - 48 months ago through GMAC or Chrysler Credit. The way this is supposed to work is the lessee returns to the Dealer to turn in their previous lease vehicle and drives away in a same brand comparable vehicle, classic owner retention. Because of GMAC’s many issues, including having to service both Chrysler and GM dealers and their new commitment to “realistic” residuals, lessees who might prefer to stay in a GM or Chrysler vehicle are faced with a radical increase in monthly lease payment. This “lease payment shock” situation has not been happening at Dealers of the top 5 Manufacturers on the J. D. Power retention list, as their OEM captive finance arms have continued to provide consistent lease support of their products.
So what is a returning lease customer to do when faced with a multi hundred dollar increase in their monthly lease payment? Some consumers might just leave with a bad taste in their mouth and go to another Manufacturer’s dealership. At a multi franchise Dealer, someone returning a Suburban, Yukon, Escalade, etc. might find happiness in a new Mercedes Benz, BMW, or Audi SUV at a dealership of the same owner. Someone returning a Cadillac STS might be thrilled to lease a new Lincoln MKS or a new Benz E Class. In my years of watching the Dealer leasing business I have often encountered these “lease payment shock” situations with domestics OEMs but rarely with the Japanese and European imports. It’s easy to see where GM and Chrysler’s market penetration is going. Firing executives can’t make up for a lack of competitive and consistent lease support.
Dealers who hold multiple franchises do so to keep from being totally dependent on a single OEM. This is also the type of Dealer that was targeted for termination by GM and Chrysler. They must want their Dealers to be so dependent on them that they become totally vulnerable to whatever their single OEM’s products and programs happen to be at any point in time. It seems they would prefer their Dealers not to have options when it comes to retaining a consumer who is looking for a replacement lease vehicle.
According to their logic, they want their Dealers to spend more on their facility, at a time when consumers more and more regard their computer monitor as the showroom. A savvy Dealer, or any business person, for that matter, will want to reserve as many options for themselves as possible. If GM and Chrysler can’t support their own products, why should they mind if a Dealer who puts the customer in a brand from another OEM? Perhaps GM and Chrysler think consumers are so loyal to their brand they will opt for a much higher lease payment than before, for a new like brand similar vehicle. Or maybe they know they are “behind the eight ball” but want their Dealers to suffer along with them?
At the very least, it becomes apparent that Manufacturers who manage their business in such a way that facilitates repeat business are far more likely to achieve it than those who don’t.
It seems there are quite a few lessees bringing their GM or Chrysler vehicles back at termination of a lease that was put on the books 36 - 48 months ago through GMAC or Chrysler Credit. The way this is supposed to work is the lessee returns to the Dealer to turn in their previous lease vehicle and drives away in a same brand comparable vehicle, classic owner retention. Because of GMAC’s many issues, including having to service both Chrysler and GM dealers and their new commitment to “realistic” residuals, lessees who might prefer to stay in a GM or Chrysler vehicle are faced with a radical increase in monthly lease payment. This “lease payment shock” situation has not been happening at Dealers of the top 5 Manufacturers on the J. D. Power retention list, as their OEM captive finance arms have continued to provide consistent lease support of their products.
So what is a returning lease customer to do when faced with a multi hundred dollar increase in their monthly lease payment? Some consumers might just leave with a bad taste in their mouth and go to another Manufacturer’s dealership. At a multi franchise Dealer, someone returning a Suburban, Yukon, Escalade, etc. might find happiness in a new Mercedes Benz, BMW, or Audi SUV at a dealership of the same owner. Someone returning a Cadillac STS might be thrilled to lease a new Lincoln MKS or a new Benz E Class. In my years of watching the Dealer leasing business I have often encountered these “lease payment shock” situations with domestics OEMs but rarely with the Japanese and European imports. It’s easy to see where GM and Chrysler’s market penetration is going. Firing executives can’t make up for a lack of competitive and consistent lease support.
Dealers who hold multiple franchises do so to keep from being totally dependent on a single OEM. This is also the type of Dealer that was targeted for termination by GM and Chrysler. They must want their Dealers to be so dependent on them that they become totally vulnerable to whatever their single OEM’s products and programs happen to be at any point in time. It seems they would prefer their Dealers not to have options when it comes to retaining a consumer who is looking for a replacement lease vehicle.
According to their logic, they want their Dealers to spend more on their facility, at a time when consumers more and more regard their computer monitor as the showroom. A savvy Dealer, or any business person, for that matter, will want to reserve as many options for themselves as possible. If GM and Chrysler can’t support their own products, why should they mind if a Dealer who puts the customer in a brand from another OEM? Perhaps GM and Chrysler think consumers are so loyal to their brand they will opt for a much higher lease payment than before, for a new like brand similar vehicle. Or maybe they know they are “behind the eight ball” but want their Dealers to suffer along with them?
At the very least, it becomes apparent that Manufacturers who manage their business in such a way that facilitates repeat business are far more likely to achieve it than those who don’t.
It’s Ed and the Board’s GM Now!
Just as President Obama has taken "ownership" of the U. S. economy, Ed Whitacre and the GM Board of Directors have taken "ownership" of GM. Let’s do a quick “body count.” Fritz Henderson, went from “hero” to “resigned” in a matter of weeks. Board Chairman Ed Whitacre recently said of Henderson, "The board gets along with Fritz; he has our unanimous support." After Henderson was "broomed" Whitacre then assumed Henderson’s CEO position in addition to his own Chairman of the Board duties, at least temporarily. At least Alan Mulally, President and CEO of Ford, had time to learn on the job before he found himself in total crisis. And Mulally came from a manufacturing background.
Brent Dewar, recently appointed by Henderson as head of the Chevrolet brand was “dismissed” and replaced by James Caldwell, who recently was head of Chevrolet fleet operations. This might make the people responsible for maintaining GM’s residual values a little nervous. Mike Richards, a recent Bob Lutz recruit after he left Ford, resigned as head of Buick-GMC after eight days. Lutz himself was reassigned and his marketing responsibilities were given to Susan Dochtery. Lutz is still vice chairman and a special advisor to Whitacre. I presume Lutz will be whispering into whichever of Whitacre's ears Steve Girsky isn't. Girsky is a board member and another special advisor to Whitacre, and is regarded by many as the mastermind of the dealer terminations.
Docherty had been tapped by Henderson to replace Mark LaNeve, who recently resigned as North America vice president of marketing and advertising. Ray Young recently announced his resignation as CFO. Mark Reuss, son of ex GM President Loyd Reuss and known as the “father of the Aztek,” is now the new Whitacre appointee as President of North American Operations. After running GM Australia for 18 months, Reuss was recently made vice president of engineering before this most recent appointment. According Whitacre, “Mark and Susan are terrific!” Given Whitacre’s recent endorsement of Henderson, LaNeve, and others, skeptics might be looking for salt shakers. The list of GM execs who have left the company recently is much longer than the names mentioned here. Many were only in their jobs for a very short time. Whitacre and the Board have brought executive “musical chairs” to a new level.
Currently there are many more questions than answers. Whitacre has been unspecific at best in answering questions, as was Lutz at the recent LA Auto Show. Whitacre's public statement about Henderson’s departure was that “we all decided it was time for a change.” This after eight months on the job and the resent endorsement. GM is operating like a privately held company when, in fact, all taxpayers are owners. Churning executives does not breed confidence.
We’d all like some answers to some compelling questions. Some examples? How many of these executive changes were planned? Which of the “retirements” were actually firings? What do the severance packages look like for these people? Are “gag” agreements included and if so, for what price. What specifically caused the sudden rift between Henderson and the Board? Why did the Company reverse Fritz’s decision to sell Opel? Was Fritz blamed for the collapse of the Saab and Saturn deals?
Afew more questions: Henderson AND LaNeve were the public faces of the dealer terminations who misrepresented GM’s “savings” before Congress. Were they scapegoats sacrificed now that GM needs to rebuild its relationships with dealers? What does Steve Girsky know about anything? Who is the genius who thought it was a good idea to axe hundreds of Cadillac dealers compelling many potential buyers have to drive hundreds of miles for sales and service? How does “high throughput” per dealer make GM profitable? What has been the government Task Force role in the recent executive changes? Where will GM get the money to pay back the European governments that “bridge loaned” Opel while a buyer was being sought? How does GM expect to maintain U. S. market share of 19% after shedding 4 divisions, Saturn, Saab, Hummer, and Pontiac, while also cutting hundreds of dealers who represent the brands that GM kept? The Buick LaCrosse is a great vehicle, but what else does GM have on the way of compelling new vehicles to sell? How do you expect to force the market for VOLT beyond the “early adopters” without huge government subsidies and/or tax credits, especially if the price of fuel stays steady? And how does that work when the government is your owner? Does the government help you compete against Ford, Toyota, Honda, etc. who also employ thousands of Americans? What happened to the innovative diesel engine that was being readied for production? Did postponing that program provide money for fired executive packages and to pay off European governments?
Don’t tell me these new appointees are so great after you praised the last group just before you fired them. You need to give me and a lot of others compelling reasons to buy your stock when IPO time comes around. Gratuitously firing executives for not getting the instant results you desire is reminiscent of the behavior of a petulant owner of a pro sports team. If you’re so smart, why don’t you show them how to do it without destroying your resale values. You’re not building up a reservoir of trust and confidence in potential investors, let alone prospective buyers.
David Ruggles
submitted to Wards Dealer Business for January 2010
Brent Dewar, recently appointed by Henderson as head of the Chevrolet brand was “dismissed” and replaced by James Caldwell, who recently was head of Chevrolet fleet operations. This might make the people responsible for maintaining GM’s residual values a little nervous. Mike Richards, a recent Bob Lutz recruit after he left Ford, resigned as head of Buick-GMC after eight days. Lutz himself was reassigned and his marketing responsibilities were given to Susan Dochtery. Lutz is still vice chairman and a special advisor to Whitacre. I presume Lutz will be whispering into whichever of Whitacre's ears Steve Girsky isn't. Girsky is a board member and another special advisor to Whitacre, and is regarded by many as the mastermind of the dealer terminations.
Docherty had been tapped by Henderson to replace Mark LaNeve, who recently resigned as North America vice president of marketing and advertising. Ray Young recently announced his resignation as CFO. Mark Reuss, son of ex GM President Loyd Reuss and known as the “father of the Aztek,” is now the new Whitacre appointee as President of North American Operations. After running GM Australia for 18 months, Reuss was recently made vice president of engineering before this most recent appointment. According Whitacre, “Mark and Susan are terrific!” Given Whitacre’s recent endorsement of Henderson, LaNeve, and others, skeptics might be looking for salt shakers. The list of GM execs who have left the company recently is much longer than the names mentioned here. Many were only in their jobs for a very short time. Whitacre and the Board have brought executive “musical chairs” to a new level.
Currently there are many more questions than answers. Whitacre has been unspecific at best in answering questions, as was Lutz at the recent LA Auto Show. Whitacre's public statement about Henderson’s departure was that “we all decided it was time for a change.” This after eight months on the job and the resent endorsement. GM is operating like a privately held company when, in fact, all taxpayers are owners. Churning executives does not breed confidence.
We’d all like some answers to some compelling questions. Some examples? How many of these executive changes were planned? Which of the “retirements” were actually firings? What do the severance packages look like for these people? Are “gag” agreements included and if so, for what price. What specifically caused the sudden rift between Henderson and the Board? Why did the Company reverse Fritz’s decision to sell Opel? Was Fritz blamed for the collapse of the Saab and Saturn deals?
Afew more questions: Henderson AND LaNeve were the public faces of the dealer terminations who misrepresented GM’s “savings” before Congress. Were they scapegoats sacrificed now that GM needs to rebuild its relationships with dealers? What does Steve Girsky know about anything? Who is the genius who thought it was a good idea to axe hundreds of Cadillac dealers compelling many potential buyers have to drive hundreds of miles for sales and service? How does “high throughput” per dealer make GM profitable? What has been the government Task Force role in the recent executive changes? Where will GM get the money to pay back the European governments that “bridge loaned” Opel while a buyer was being sought? How does GM expect to maintain U. S. market share of 19% after shedding 4 divisions, Saturn, Saab, Hummer, and Pontiac, while also cutting hundreds of dealers who represent the brands that GM kept? The Buick LaCrosse is a great vehicle, but what else does GM have on the way of compelling new vehicles to sell? How do you expect to force the market for VOLT beyond the “early adopters” without huge government subsidies and/or tax credits, especially if the price of fuel stays steady? And how does that work when the government is your owner? Does the government help you compete against Ford, Toyota, Honda, etc. who also employ thousands of Americans? What happened to the innovative diesel engine that was being readied for production? Did postponing that program provide money for fired executive packages and to pay off European governments?
Don’t tell me these new appointees are so great after you praised the last group just before you fired them. You need to give me and a lot of others compelling reasons to buy your stock when IPO time comes around. Gratuitously firing executives for not getting the instant results you desire is reminiscent of the behavior of a petulant owner of a pro sports team. If you’re so smart, why don’t you show them how to do it without destroying your resale values. You’re not building up a reservoir of trust and confidence in potential investors, let alone prospective buyers.
David Ruggles
submitted to Wards Dealer Business for January 2010
Friday, November 27, 2009
Published in Auto Finance News
Fanning the Flames
By David Ruggles
Recent quotes from high-profile individuals have really kept the pot boiling in recent days. First, Arizona senator and previous presidential candidate John McCain was quoted as saying, “If anybody believes that Chrysler is going to survive, I'd like to meet them." This touched off a firestorm of comments from a variety of people with differing opinions, including congressmen from the state of Michigan. Meanwhile, Michael Steele, chairman of the Republican National Committee, called General Motors Corp.’s $1.2 billion third-quarter loss “further proof that President Obama's economic experiments are wrong for America." All this during a week in which talk abounded about GM’s potential IPO plans and the Dow hit 10,400.
In the middle of all this, Lee Iacocca weighed in with his opinion. In his mind, “Chrysler has a better chance of survival than does GM, which is just too big.” In my mind, Chrysler’s chance of survival is 50-50 at best, while GM’s chances are much better. But I’m not a politician, so I can speculate publicly. I am, however, rooting for both companies for the good of the country and all the people who depend on the auto industry.
I recall the tone and buzz during the previous Chrysler bailout. After the economy began to turn around and Chrysler became profitable again, Iacocca became so incensed at a comment made by President Ronald Reagan that he paid off the government-guaranteed loans early. This, despite the fact that Chrysler did not receive an interest credit for the early payoff, which represented an unexpected windfall to the taxpayer. Reagan had reportedly whispered in Iacocca’s ear that it was a good thing Jimmy Carter was in the White House, or Chrysler would have been “down the tubes,” or some such comment. In Iacocca’s mind, there was serious satisfaction to be had by paying the government off early — almost as good as spitting in Reagan’s eye. In addition, he got the government out of Chrysler’s business. Taxpayers made out well on the previous auto industry bailout. Not commonly known is the fact that the government imposed an additional $1 million per month administrative fee in addition to collecting interest at the rate of 15.9%. Taxpayers also saved the expense of hundreds of thousands of people on unemployment compensation and the forced assumption of Chrysler’s pension liability on the Federal Pension Guarantee Fund. Unfortunately, the previous Chrysler bailout success was wasted with the DaimlerChrysler “merger of equals” and the ill-fated sale to Cerberus Capital Management LP.
A re-read of Iacocca’s autobiography from 1984 is just as interesting 25 years later as it was at the time, and provides real insight to the events of that era. There are some real similarities with current events in the auto industry. In the book, Iacocca rails at the government Loan Guarantee Board, the Auto Task Force of their day, for making Chrysler sell its corporate jet. He recalls the decision to pay the government guaranteed loans back seven years early, even though it was a risky move at the time and saved no interest. It took the government a month to figure out how to deal with a loan guarantee paid off early, especially one in the amount of $813,487,500. Iacocca won a bet with New York City Mayor Ed Koch — a bushel of apples — over who would pay off its loan guarantees first, New York City or Chrysler. Chrysler had borrowed $1.2 billion for 10 years, but paid it back in full in three. The automaker paid $404 million in interest and $33 million in administrative fees. In addition, the government received $311 million for warrants issued at $13 per share, at a time when Chrysler shares were trading for around $30. This was an additional windfall for the taxpayers in return for a temporary foray into “socialism,” a term heard loudly and often in those days. Iacocca takes some real shots at the Reagan administration and “laissez faire” economics in his book.
Auto industry history is being written again. Auto manufacturers can make money as fast as they can lose it. GM’s and Chrysler’s future is uncertain at best, as is the economy that supports the industry as a whole. Oldsmobile, Plymouth, Eagle, Pontiac, and Saturn are brands that have disappeared or are on their way out. But for those who assert the government can’t do anything right, the previous auto industry bailout had a great outcome for taxpayers. This time around, I hope the “nattering nabobs of negativism,” to quote Spiro Agnew, will be forced to eat crow again.
David Ruggles is a former dealer-owner and consultant with nearly 40 years’ experience in the auto industry. He has conducted an annual seminar on auto dealership issues and processes in Japan since 1993, and helped develop specialty software focused on pre-owned leasing. He can be reached at ruggles@msn.com.
The following was cut for space reasons, and for being overly political for the publication:
It will certainly be interesting if GM can achieve a successful IPO, pay off the government loans, and buy out the government stock holdings at a profit to taxpayers. In the minds of some, there must not be any precedent for the government doing anything successfully. I suspect there are some who might replay Steele’s quote, and those of others who opposed the GM/Chrysler bailouts, back to them repeatedly during a political campaign at some point. But Steele is known for having “foot in mouth” disease, and I’m pretty sure McCain’s future political aspirations do not extend beyond the state of Arizona. As I recall, it was a Republican administration that "bridge loaned" GM and Chrysler with approximately $17 billion dollars in December 2008, after Congress had turned down its own bailout plan.
By David Ruggles
Recent quotes from high-profile individuals have really kept the pot boiling in recent days. First, Arizona senator and previous presidential candidate John McCain was quoted as saying, “If anybody believes that Chrysler is going to survive, I'd like to meet them." This touched off a firestorm of comments from a variety of people with differing opinions, including congressmen from the state of Michigan. Meanwhile, Michael Steele, chairman of the Republican National Committee, called General Motors Corp.’s $1.2 billion third-quarter loss “further proof that President Obama's economic experiments are wrong for America." All this during a week in which talk abounded about GM’s potential IPO plans and the Dow hit 10,400.
In the middle of all this, Lee Iacocca weighed in with his opinion. In his mind, “Chrysler has a better chance of survival than does GM, which is just too big.” In my mind, Chrysler’s chance of survival is 50-50 at best, while GM’s chances are much better. But I’m not a politician, so I can speculate publicly. I am, however, rooting for both companies for the good of the country and all the people who depend on the auto industry.
I recall the tone and buzz during the previous Chrysler bailout. After the economy began to turn around and Chrysler became profitable again, Iacocca became so incensed at a comment made by President Ronald Reagan that he paid off the government-guaranteed loans early. This, despite the fact that Chrysler did not receive an interest credit for the early payoff, which represented an unexpected windfall to the taxpayer. Reagan had reportedly whispered in Iacocca’s ear that it was a good thing Jimmy Carter was in the White House, or Chrysler would have been “down the tubes,” or some such comment. In Iacocca’s mind, there was serious satisfaction to be had by paying the government off early — almost as good as spitting in Reagan’s eye. In addition, he got the government out of Chrysler’s business. Taxpayers made out well on the previous auto industry bailout. Not commonly known is the fact that the government imposed an additional $1 million per month administrative fee in addition to collecting interest at the rate of 15.9%. Taxpayers also saved the expense of hundreds of thousands of people on unemployment compensation and the forced assumption of Chrysler’s pension liability on the Federal Pension Guarantee Fund. Unfortunately, the previous Chrysler bailout success was wasted with the DaimlerChrysler “merger of equals” and the ill-fated sale to Cerberus Capital Management LP.
A re-read of Iacocca’s autobiography from 1984 is just as interesting 25 years later as it was at the time, and provides real insight to the events of that era. There are some real similarities with current events in the auto industry. In the book, Iacocca rails at the government Loan Guarantee Board, the Auto Task Force of their day, for making Chrysler sell its corporate jet. He recalls the decision to pay the government guaranteed loans back seven years early, even though it was a risky move at the time and saved no interest. It took the government a month to figure out how to deal with a loan guarantee paid off early, especially one in the amount of $813,487,500. Iacocca won a bet with New York City Mayor Ed Koch — a bushel of apples — over who would pay off its loan guarantees first, New York City or Chrysler. Chrysler had borrowed $1.2 billion for 10 years, but paid it back in full in three. The automaker paid $404 million in interest and $33 million in administrative fees. In addition, the government received $311 million for warrants issued at $13 per share, at a time when Chrysler shares were trading for around $30. This was an additional windfall for the taxpayers in return for a temporary foray into “socialism,” a term heard loudly and often in those days. Iacocca takes some real shots at the Reagan administration and “laissez faire” economics in his book.
Auto industry history is being written again. Auto manufacturers can make money as fast as they can lose it. GM’s and Chrysler’s future is uncertain at best, as is the economy that supports the industry as a whole. Oldsmobile, Plymouth, Eagle, Pontiac, and Saturn are brands that have disappeared or are on their way out. But for those who assert the government can’t do anything right, the previous auto industry bailout had a great outcome for taxpayers. This time around, I hope the “nattering nabobs of negativism,” to quote Spiro Agnew, will be forced to eat crow again.
David Ruggles is a former dealer-owner and consultant with nearly 40 years’ experience in the auto industry. He has conducted an annual seminar on auto dealership issues and processes in Japan since 1993, and helped develop specialty software focused on pre-owned leasing. He can be reached at ruggles@msn.com.
The following was cut for space reasons, and for being overly political for the publication:
It will certainly be interesting if GM can achieve a successful IPO, pay off the government loans, and buy out the government stock holdings at a profit to taxpayers. In the minds of some, there must not be any precedent for the government doing anything successfully. I suspect there are some who might replay Steele’s quote, and those of others who opposed the GM/Chrysler bailouts, back to them repeatedly during a political campaign at some point. But Steele is known for having “foot in mouth” disease, and I’m pretty sure McCain’s future political aspirations do not extend beyond the state of Arizona. As I recall, it was a Republican administration that "bridge loaned" GM and Chrysler with approximately $17 billion dollars in December 2008, after Congress had turned down its own bailout plan.
Wednesday, October 28, 2009
Rattner's "Tell All"
I have been trying to resolve a mystery for months. When it was announced that General Motors and Chrysler were terminating dealers as a part of restructuring through bankruptcy, I smelled a rat. So did many who have been around the auto business for a while. Historically it has been a practice of auto manufacturers to add sales points as a method of driving volume and market share. Were we expected to think they no longer cherish these objectives? In a complete turnaround from their histories, they asserted that closing dealerships saved money for the manufacturer. The mystery? Whose idea was it? Who imposed it? I have speculated that it was forced on GM and Chrysler by the government’s Automotive Task Force in its zeal to impose a “Toyota Throughput” model. Both the manufacturers and the Auto Task Force blame the other for the dealer terminations.
Part of the answer came at the recent Auto Finance Summit held in Las Vegas at Red Rock Hotel and Casino. One of the high points was an address to attendees by Rick Wade, a member of the Automotive Task Force. During his address, he never specifically mentioned the decision to cut dealers, but his tone indicated that he thought everyone figured that dealer terminations were necessary to make GM and Chrysler viable. He came across as an enthusiastic, bright, and well-intentioned person who was placed in a position, with the other members of the Task Force, where important decisions had to be made quickly. He was quite pleased, as am I, that GM and Chrysler have been, at least temporarily, “saved.” Before being called to serve, Wade was certainly an auto industry outsider, for better or for worse.
But the real bombshell has been Steve Rattner’s recent article in Fortune magazine, where he reveals all sorts of interesting inside information. Rattner is the now-resigned head of the Automotive Task Force during the Chrysler and GM bankruptcies, the real “car czar.” Some of the information he reveals probably should have stayed “inside” for a while out of common courtesy and discretion. In particular, he shares his personal views on GM management, and Rick Wagoner in particular, in a particularly caustic manner. He reveals the content of private conversations. In his tell-all piece he also acknowledges the challenge of dealing with the N.Y. attorney general’s investigation of his former firm, Quadrangle, while simultaneously heading up the “Team Auto,” as they called themselves. He freely admits that he and his fellow task force members knew little of the auto business.
It is true Team Auto had no real precedent to rely on and faced a critical time schedule. It made me wonder why he was selected to the post in the first place. He must not be expecting to be considered for any important positions in the future as it is unlikely that anyone would speak candidly to him knowing his penchant for being less than discreet.
The Bush administration had “bridged” GM and Chrysler over to the Obama administration with an injection of $17.4 billion in TARP funds in late December 2008. The decision to use a Section 363 bankruptcy strategy to accomplish a quick “cleansing” of liabilities through Chapter 11 has at least temporarily saved the two companies and hundreds of thousands of jobs. For this, I commend Rattner and Team Auto. If things go as planned, GM will IPO in the next couple years and buy out the government’s stock holdings. Chrysler’s situation is much more fragile and depends on Fiat more than anyone should be comfortable with. But GM and Chrysler were saved at a time when their liquidation could have touched off a catastrophic chain of events in the auto industry and the overall economy.
So what about my mystery? Who made the decision to terminate dealers? I’m not talking about shutting down Pontiac and Saturn or selling Saab and Hummer. A business case can be made to support these decisions. I’m talking about decimating the Cadillac dealer network and terminating thousands of viable GM franchises across the country. I’m talking about terminating 789 Chrysler, Dodge, and Jeep franchises.
There was a recent article in Automotive News on Jim Press, Chrysler’s now discredited and terminated co-president, which itemizes many apparent contradictions in Press’ career. I distinctly recall Press and GM CEO Fritz Henderson during the Senate committee hearings itemizing the “savings” they would realize by terminating dealers. I didn’t hear anything that smacked of the truth. It is now disclosed that Press had his own private reservations about terminating dealers. Mark LaNeve, the recently deposed head of GM sales, has stated publicly that he is worried about GM’s lack of dealer coverage and its negative impact on sales and market penetration. He expressed concern about GM making orphans of 900,000 GM owners. Then there is the quote from Joe Eberhardt, Chrysler Group’s past senior vice president for sales and marketing: “When a company loses a dealer, its overhead costs stay the same and — at least in the short term — it loses a few hundred car sales. There's no immediate payback." Carl Woodward, a longtime CPA serving auto dealers, also disputes any claims of net savings to auto manufacturers by terminating dealers. In his 6,000-word article for Fortune, Rattner took no credit for the dealer terminations. I wonder why.
published in Auto Finance News
Part of the answer came at the recent Auto Finance Summit held in Las Vegas at Red Rock Hotel and Casino. One of the high points was an address to attendees by Rick Wade, a member of the Automotive Task Force. During his address, he never specifically mentioned the decision to cut dealers, but his tone indicated that he thought everyone figured that dealer terminations were necessary to make GM and Chrysler viable. He came across as an enthusiastic, bright, and well-intentioned person who was placed in a position, with the other members of the Task Force, where important decisions had to be made quickly. He was quite pleased, as am I, that GM and Chrysler have been, at least temporarily, “saved.” Before being called to serve, Wade was certainly an auto industry outsider, for better or for worse.
But the real bombshell has been Steve Rattner’s recent article in Fortune magazine, where he reveals all sorts of interesting inside information. Rattner is the now-resigned head of the Automotive Task Force during the Chrysler and GM bankruptcies, the real “car czar.” Some of the information he reveals probably should have stayed “inside” for a while out of common courtesy and discretion. In particular, he shares his personal views on GM management, and Rick Wagoner in particular, in a particularly caustic manner. He reveals the content of private conversations. In his tell-all piece he also acknowledges the challenge of dealing with the N.Y. attorney general’s investigation of his former firm, Quadrangle, while simultaneously heading up the “Team Auto,” as they called themselves. He freely admits that he and his fellow task force members knew little of the auto business.
It is true Team Auto had no real precedent to rely on and faced a critical time schedule. It made me wonder why he was selected to the post in the first place. He must not be expecting to be considered for any important positions in the future as it is unlikely that anyone would speak candidly to him knowing his penchant for being less than discreet.
The Bush administration had “bridged” GM and Chrysler over to the Obama administration with an injection of $17.4 billion in TARP funds in late December 2008. The decision to use a Section 363 bankruptcy strategy to accomplish a quick “cleansing” of liabilities through Chapter 11 has at least temporarily saved the two companies and hundreds of thousands of jobs. For this, I commend Rattner and Team Auto. If things go as planned, GM will IPO in the next couple years and buy out the government’s stock holdings. Chrysler’s situation is much more fragile and depends on Fiat more than anyone should be comfortable with. But GM and Chrysler were saved at a time when their liquidation could have touched off a catastrophic chain of events in the auto industry and the overall economy.
So what about my mystery? Who made the decision to terminate dealers? I’m not talking about shutting down Pontiac and Saturn or selling Saab and Hummer. A business case can be made to support these decisions. I’m talking about decimating the Cadillac dealer network and terminating thousands of viable GM franchises across the country. I’m talking about terminating 789 Chrysler, Dodge, and Jeep franchises.
There was a recent article in Automotive News on Jim Press, Chrysler’s now discredited and terminated co-president, which itemizes many apparent contradictions in Press’ career. I distinctly recall Press and GM CEO Fritz Henderson during the Senate committee hearings itemizing the “savings” they would realize by terminating dealers. I didn’t hear anything that smacked of the truth. It is now disclosed that Press had his own private reservations about terminating dealers. Mark LaNeve, the recently deposed head of GM sales, has stated publicly that he is worried about GM’s lack of dealer coverage and its negative impact on sales and market penetration. He expressed concern about GM making orphans of 900,000 GM owners. Then there is the quote from Joe Eberhardt, Chrysler Group’s past senior vice president for sales and marketing: “When a company loses a dealer, its overhead costs stay the same and — at least in the short term — it loses a few hundred car sales. There's no immediate payback." Carl Woodward, a longtime CPA serving auto dealers, also disputes any claims of net savings to auto manufacturers by terminating dealers. In his 6,000-word article for Fortune, Rattner took no credit for the dealer terminations. I wonder why.
published in Auto Finance News
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