Velocity Overdrive, the Road to Reinvention

A Book Review

by David Ruggles and comments in italic by Mike Smitka

Dale Pollak’s third book, “Velocity Overdrive,” is another winner and is must reading for dealers and any student of the auto business. That includes auto manufacturer executives.

Dale’s ability to put into words the changes the industry has been experiencing has helped hundreds, if not thousands, of auto dealers, both new and used. He has rightfully pointed out that the delivery of information via the Internet has brought “efficient market” economic principles to the pre-owned business in particular, compressing available “spread.” New data driven management methods that are based on rapid inventory turn at lower, but real world gross profit for the specific market, actually produce considerably higher total gross profit through higher velocity, a concept difficult for some to grasp. In some areas of retail the benefits of sacrificing margine to increase inventory turns is commonsense. Automotive retailing is catching on: Daily, market realities are making believers out of skeptics.

My favorite chapters include 8, “Dealership Department Silos,” and 14, “The Extra Mile in Reconditioning.” In these chapters Pollak dares to challenge long and stubbornly held beliefs that the pre-owned department exists to be pillaged by the fixed operations departments. After all, it was thought, sales people and managers sell from their cost, not based on any kind of rational retail market value. And gross profit booked by charging retail prices for internal reconditioning, or “retail recon,” is retained regardless of what happens to the used vehicle, they thought. There are dealers who have followed this “retail recon” policy for another reason. They would rather pay management compensation based on fixed operations rates than sales manager rates. The Internet has changed all of that. Dealers still in denial on the issue especially need to read this book!!

Taking the Taxpayers out of General Motors

Ruggles – 12/26/2012

What many stockholders and taxpayers had feared, had Mitt Romney won the recent Presidential election, is coming true anyway. The taxpayers (U. S. Treasury) are quickly being taken out of their remaining General Motors ownership BEFORE the positive impact of the many new and exciting redesigned GM products to be introduced in the next few months can have the chance to boost retained earnings and share price. Waiting another 18 to 24 months could reduce or eliminate the loss that will be taken on the original taxpayer investment.

Honda as Japan's Exemplar

...Make where you sell, and that's not Japan...

For a while the impact on the auto industry of 3/11 – the earthquake and tsunami – and then the Thai flood garnered headlines. Lately the headlines in Japan have been politics, politics, and more politics. First there was the US election and the leadership transition in China – Japan's #2 and #1 trading partners. Then there are the upcoming elections in Japan and Korea. These have embroiled the auto industry, too, because of the attempt of various parties in China and Japan to wave the nationalist flag, with much of the fallout hitting bilateral Japan-China auto trade. All this has pushed more mundane news – the transition of the domestic Japanese auto industry – out of the headlines.

So here are two snippets, both using Honda as a foil, though these are more general issues.

Understanding the Mortgage Crisis

By David Ruggles

Preface: The following is the culmination of over 4 years of research. At one time I thought the mortgage crisis was due to “an unholy alliance between RW and LW forces. That was before I discovered that during the bubble period only 15% of mortgages and equity lines of credit (ELOCs) were made by Community Reinvestment Act lenders, and of those, only a small percentage were actual CRA loans. Further, according to the Federal Reserve study on the matter, those CRA loans have performed better than the overall mortgage loan market. The “fall back” position of the Republican Party when faced with the actual facts is to say, “There is certainly plenty of blame to go around.” This seems to be an attempt to equally apportion blame to both parties when it is clear that RW ideology is what caused the problem regardless of whether it was practiced by Republicans or the very few Democrats involved, Bill Clinton or Larry Summers, to name a couple.

I know it is RW orthodoxy to believe that Fannie Mae and Freddie Mac played a large role. The two Government Sponsored Enterprises (GSEs) were guilty of excessive lobbying, misstating their balance sheet based in a rather complicated legal case, and excessive executive compensation. But for those who want to know the truth and read further it will become clear that that Fannie and Freddie were victims of what RW ideology unleashed, not perpetrators. Had I seen “The Warning” earlier, I would have come to my conclusion earlier. As it was, I watched hours of Congressional testimony, the most entertaining being when Congress got again Hank Greenburg, retired CEO of AIG in front of them. So I studied AIG and Joe Cassano, head of AIG’s London Financial Products division. Then came, “All the Devils are Here,” by Bethany McLean and Joseph Nocera. I later waded through the highly partisan “Financial Crisis Inquiry Report” published by the panel entrusted to analyze the mortgage crisis. I then got my hands on the Federal Reserve documents issued by the Minneapolis Federal Reserve, link provided.

What Is The Mortgage Crisis? –

In short, the Mortgage Crisis is what is stymying the U.S. economy.

Why site assembly in Mexico?

...tariffs are 0% on vehicles shipped from Mexico...

Honda is building a full-sized assembly plant (200K units per year) as is Mazda; Nissan is adding a 3rd plant. Part of that is driven by the strength of the yen, at ¥81.3 per US$ on 17 November; the US is the biggest source of profits for the auto industry, so sourcing vehicles for the US market from a non-yen location is important. [The Euro is also strong, to which anyone who has traveled there on a dollar budget can attest. So while VW has operations in Mexico, here I focus on the Japan angle, because I'm teaching a course on the Japanese economy.]

But why Mexico? Logistics costs are high, because most vehicles will likely be exported and because the local supplier base is not as deep as in the US midwest (hence parts must be imported). So while quality is high and wages are competitive, it's not a priori a natural choice.

Will GM Again Go Bankrupt?

...there's not a shred of data to support BK Round II...

I've received an email making the rounds claiming General Motors is destined for bankruptcy before the end of Obama II. I've now heard the same pronouncement from several other directions. However, just because someone thinks that government support during GM's bankruptcy process was wrong does not mean it hasn't worked. I won't address any specific claim, in part because none that I have encountered looked at GM's sales data, much less perused their financial reports. It is though appropriate to ask what leads a firm towards bankruptcy, and whether there's evidence GM is heading that way.

The New Romney on GM

...loan guarantees would have given all the gains to Wall Street...

David and I blogged in 2009 and then many times since on the so-called auto bailouts. (Since when is bankruptcy a bailout? -- there were no winners, all lost something.) From the start we noted that the vertical structure of the industry -- suppliers, assemblers, dealers -- was central, because GM's failure would have taken them all down. This is not a trivial issue: suppliers employ between 2 and 3 people for every "automotive" worker, and dealerships employ fully as many as all of manufacturing. In 2009 all were teetering on the edge of bankruptcy. Without normal financial markets that would have meant Chapter 7 dissolution, not Chapter 11 restructuring. And let's not forget that the whole industry is woven together in a complex pattern. Most cars are sold today by dealership groups; your GM dealer is also a Toyota dealer. In the strained market of 2008-9, the failure of one would have led banks to foreclose on the other in a rush for repayment. And the supplier to GM is also a supplier to Toyota and to BMW. They would have no more been able than GM to make cars -- or even get repair parts to keep the service bays of their dealers generating revenue. Even in the Great Depression of the 1930s there was never a complete collapse.

Mitt Romney's father may have once been the CEO of American Motors [for those without long memories, the Jeep portion of the old AMC continues to mint money, and to keep Toledo Ohio afloat], but that doesn't mean the son inherited a deep knowledge of the industry. Mitt is ignorant of (or chooses to ignore) this complex structure,

GM and the Upcoming Presidential Election

by David Ruggles

Amid the political turmoil of election season the rescue of the domestic auto industry by the George W. Bush administration and the Obama Administration is certainly a political football. The President and the Democrats have to defend the fact that the “rescue” wasn’t done perfectly, although a debate rages over exactly what those imperfections might be and who is responsible for them. Many Republicans are sticking to their position that the domestic auto industry should have been allowed to liquidate and eventually reform, although that logic doesn’t play well in the key “swing states” Ohio and Michigan. Governor Romney was adamantly against the “bailout” saying “Let Detroit go Bankrupt” and declaring that “a bail out would insure their failure.” Of course, this is all confused by Romney’s attempt in the Republican debates to actually take credit for the rescue saying, “They took my advice.” (His campaign has repeatedly declined comment when asked to clarify their candidate’s position on the issue.)

It also seems to ignore the fact that in the case of liquidation, there would have obviously been a huge cost dropped on the various states for unemployment compensation, a ripple impact through the banking system, chaos in the supplier base, and a disruption of military procurement. The ultimate result could have been a true Depression. Most pragmatic politicians wouldn’t have taken the risk, despite rhetoric to the contrary.

The Upcoming Fiscal Cliff

By David Ruggles, originally published in Auto Finance News

The upcoming “fiscal cliff,” as it’s known in investment circles, is the proverbial “sword of Damocles” hanging over the head of the world economy. Somewhere, Grover Norquist is smiling, while the global economy hangs in the balance. When the country’s two political parties couldn’t agree on a deficit-reduction package ― which the Republicans held as hostage to approving an increase of the country’s debt ceiling a year ago, according to Senate Minority Leader Mitch McConnell ― the two parties entered into a sort of “death pact” known as sequestration. Both parties agreed to concessions previously deemed unpalatable to force them into an agreement before the end of 2012. The concessions have the potential to bring catastrophic impact to the U.S. economy and, hence, to the global economy.

Energy Self-Sufficiency: A Realistic Goal or a Pipe Dream?

By Gal Luft for the International Global Security Network

Western publics seem to believe that energy self-sufficiency is an ideal response to those who attempt to wield the ‘energy weapon’. I argue, however, that no state will be able to achieve full energy independence, let alone avoid future spikes in prices, in an economically globalized world.

The desire for self-sufficiency has always been a common trait of human society. After all, no one likes to be dependent upon others, especially for vital commodities and services. From a geopolitical perspective, this sentiment is arguably at its strongest when it comes to energy. The Arab Oil Embargo, Russia’s gas supply cutoffs to Europe and Venezuela’s and Iran’s threats to use the ‘oil weapon’ have all reinforced importing nations’ urge for energy self-sufficiency. No country is more preoccupied with this than the United States, where for the past four decades achieving energy self-sufficiency has been the mainstay of Washington’s energy policy. The only difference between Republicans and Democrats is that the former emphasize supply side solutions (‘Drill Baby Drill’) whereas the latter call for an ‘oil diet’ that uses less oil through taxation or increased fuel economy standards. The result is that the overwhelming majority of Americans believe that energy self-sufficiency will improve national security, alleviate the debt and budget crisis and yield lower and more stable gasoline prices. This worldview is based on myths and poor understanding of how the modern global energy market actually works. True energy security requires both uninterrupted energy supply and affordable prices. In today’s globalized world, energy self-sufficiency guarantees neither.

Is self-sufficiency really possible?