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
Wednesday, October 28, 2009
Sunday, September 13, 2009
How Do You Measure Quality in the Auto Business?
Am I presumptuous enough to lecture J.D. Power on how to measure quality? Not really. My point is that there is more than one way to calculate vehicle quality. General Motors and Ford are sporting some gaudy J. D. Power rankings these days. Some of their products are ranked as equal to the leading imports. I’m sorry to have to leave Chrysler out of this discussion. It is anyone’s guess where Chrysler’s future quality numbers will end up, given that many important decisions are being made by Fiat. Fiat’s hallmark has not been quality in the past and many dealers, including myself, still have a bitter taste in their mouth from Fiat’s last foray into the U.S. market. But Chrysler/Fiat will be a subject for another day.
So what might be a better measure of quality than J.D. Power and other quality surveys? I submit that resale value is the most important measure of quality as perceived by consumers and the market in general. Quality is more than fit and finish. Quality includes how well an OEM’s vehicles hold their customer’s money together. In this regard Honda and Toyota have set the mark. Other than their traditionally high fit, finish, and NVH (Noise, Vibration, and Harshness) achievements, they have eschewed large volume fleet sales. They have also disdained direct to consumer rebates. As a consequence, their CPO (Certified Pre-Owned) programs serve to strengthen their strong resale values whereas the Domestics are desperately trying to rehabilitate themselves. Consumers do not appreciate the OEM, with whom they just did business, undermining the value of their new vehicle. They might appreciate the rebate they just received that helped motivate them to buy, but they certainly resent waking up one day and discovering they are thousands of dollars “upside down” in their recently purchased vehicles. Many owners of Domestic vehicles don’t find out how bad their financial situation is when they try to trade their vehicle 36 months or sooner into their finance contract. There is no doubt the resale value issue has a strong impact on whether a consumer is a repeat buyer frm an OEM.
Ubiquity is the Enemy of Cachet
So how do Toyota Camry and Honda Accord, two of the best selling vehicles in the U.S. auto market, maintain their cachet in the face of their large sales volumes? In my mind, its boils down to the fact that you rarely see those vehicles in fleet and rental service. In addition, you don’t see consumer rebates advertised. Just as I was becoming sold on the J. D. Power rating on the Chevy Malibu and the good things said about the car in the press, I observed a couple hundred Malibus decked out as taxis at McCarran Airport here in Las Vegas. At the taxi cab pick up station there was Malibu after Malibu rolling up to pick up passengers. It left a bad taste in my mouth. While there are many Toyotas and Hondas coming back into the market as pre-owned vehicles, they are mostly three year old lease turn ins and natural trade ins, whereas there is a much higher number of Domestics recycling in a year or less. Many of these are daily rental turn ins. This, coupled with direct to consumer rebates outweighs any J. D. Power quality ratings in the mind of consumers..
Resale Value, Residuals, and Leasing
Leasing is in the news again. GM and Chrysler have both announced recently they will re-enter leasing. I still can’t get used to the idea that Chrysler finances and leases through GMAC. Chrysler has been out of leasing since last July when lenders forced them to give up leasing as a condition of granting essential financing. GM’s lack of capital and huge residual losses forced GM to scale back leasing last fall. GM will be leasing through U.S. Bank in 5 northeastern states. Other OEMs have continued to lease through their captive finance arms and independent banks. GM and Chrysler have lost substantial market share as a consequence of their not being in the leasing business for the last months.
What is the lure of leasing to an OEM? They can offer lower monthly payments for shorter terms and achieve a higher degree of repeat business through leasing. In addition, there are depreciation credits available as the title of a lease vehicle is held in the name of the OEM. These depreciation credits come in handy if the OEM is profitable. In addition, trade equity and cash down payment lowers the monthly payment a lot more on short term lease contracts than on long term finance contracts. Cycling the consumer more often leads to increased market share when your competition can’t compete. Lower resale value (residuals) means it costs Domestics to subvent their residuals and money factors to be competitive with Toyota and Honda.
And now we see Ford is pushing their new world class Taurus, bi turbo, direct injection, AWD, etc. as a police cruiser. They already devalued the name Taurus in past years by making it the most common fleet vehicle in history. It appears Detroit has not learned their lesson.
So what might be a better measure of quality than J.D. Power and other quality surveys? I submit that resale value is the most important measure of quality as perceived by consumers and the market in general. Quality is more than fit and finish. Quality includes how well an OEM’s vehicles hold their customer’s money together. In this regard Honda and Toyota have set the mark. Other than their traditionally high fit, finish, and NVH (Noise, Vibration, and Harshness) achievements, they have eschewed large volume fleet sales. They have also disdained direct to consumer rebates. As a consequence, their CPO (Certified Pre-Owned) programs serve to strengthen their strong resale values whereas the Domestics are desperately trying to rehabilitate themselves. Consumers do not appreciate the OEM, with whom they just did business, undermining the value of their new vehicle. They might appreciate the rebate they just received that helped motivate them to buy, but they certainly resent waking up one day and discovering they are thousands of dollars “upside down” in their recently purchased vehicles. Many owners of Domestic vehicles don’t find out how bad their financial situation is when they try to trade their vehicle 36 months or sooner into their finance contract. There is no doubt the resale value issue has a strong impact on whether a consumer is a repeat buyer frm an OEM.
Ubiquity is the Enemy of Cachet
So how do Toyota Camry and Honda Accord, two of the best selling vehicles in the U.S. auto market, maintain their cachet in the face of their large sales volumes? In my mind, its boils down to the fact that you rarely see those vehicles in fleet and rental service. In addition, you don’t see consumer rebates advertised. Just as I was becoming sold on the J. D. Power rating on the Chevy Malibu and the good things said about the car in the press, I observed a couple hundred Malibus decked out as taxis at McCarran Airport here in Las Vegas. At the taxi cab pick up station there was Malibu after Malibu rolling up to pick up passengers. It left a bad taste in my mouth. While there are many Toyotas and Hondas coming back into the market as pre-owned vehicles, they are mostly three year old lease turn ins and natural trade ins, whereas there is a much higher number of Domestics recycling in a year or less. Many of these are daily rental turn ins. This, coupled with direct to consumer rebates outweighs any J. D. Power quality ratings in the mind of consumers..
Resale Value, Residuals, and Leasing
Leasing is in the news again. GM and Chrysler have both announced recently they will re-enter leasing. I still can’t get used to the idea that Chrysler finances and leases through GMAC. Chrysler has been out of leasing since last July when lenders forced them to give up leasing as a condition of granting essential financing. GM’s lack of capital and huge residual losses forced GM to scale back leasing last fall. GM will be leasing through U.S. Bank in 5 northeastern states. Other OEMs have continued to lease through their captive finance arms and independent banks. GM and Chrysler have lost substantial market share as a consequence of their not being in the leasing business for the last months.
What is the lure of leasing to an OEM? They can offer lower monthly payments for shorter terms and achieve a higher degree of repeat business through leasing. In addition, there are depreciation credits available as the title of a lease vehicle is held in the name of the OEM. These depreciation credits come in handy if the OEM is profitable. In addition, trade equity and cash down payment lowers the monthly payment a lot more on short term lease contracts than on long term finance contracts. Cycling the consumer more often leads to increased market share when your competition can’t compete. Lower resale value (residuals) means it costs Domestics to subvent their residuals and money factors to be competitive with Toyota and Honda.
And now we see Ford is pushing their new world class Taurus, bi turbo, direct injection, AWD, etc. as a police cruiser. They already devalued the name Taurus in past years by making it the most common fleet vehicle in history. It appears Detroit has not learned their lesson.
Ruggles in Wards, reprinted with permission
Ta-Ta Clunkers; Now What?
Let's hope a dead spot won't follow successful program
By David Ruggles, Ward's Dealer Business, Sep 1, 2009 12:00 PM
Let's hope a dead spot won't follow successful program
By David Ruggles, Ward's Dealer Business, Sep 1, 2009 12:00 PM
Cash for Clunkers has been a surprise success to many, including government.
Hopefully, we won't have a serious dead spot now that Clunkers is kaput. We all know how rebates can be like getting on drugs.
Training consumers not to buy until the next program contributes to a “whip saw” market that makes good consumer satisfaction impossible. It also makes marketing dependent on loading up dealers' inventories and then introducing a program to sell them.
Still, Clunkers was worth it. In my 38 years in the business, this has been only the second time I have seen a federal initiative spark so much sales activity in the new-vehicle business. The first time was when the Nixon administration repealed the excise tax on cars in 1971.
There have been other government initiatives that stimulated sales, but mostly through tax policy. Most recently, the Bush administration provided a substantial tax credit for those purchasing a vehicle over a particular GVW rating.
This was meant to spur the purchase of trucks by ranchers, farmers, plumbers, and other small business people. It also spurred the purchase or lease of Navigators, Escalades, Suburbans, etc. to doctors, consultants, and anyone who could take of advantage of the business write off.
But the tax policy measures didn't have the broad appeal of Cash for Clunkers.
As a consequence, about 707,000 old vehicles have been designated for the crusher. Engines have been destroyed to ensure the clunkers do not find their way back into the system. Initially, this is having an impact on the Buy Here, Pay Here dealers. What the Feds call “clunkers,” they call inventory. Any revival of the program will exacerbate their plight.
Clunkers is not the only factor impacting the pre-owned market. The low seasonably adjusted annual sales rate has generated fewer sales. This means fewer pre-owned vehicles will be available down the road.
A lot fewer rental vehicles have been placed in service. There's a dearth of new leases put on the books. As pre-owned values strengthen, fueled by the inevitable shortage, there will be more people in an equity position than before.
I expect this trend will be tempered by people keeping their vehicles longer. We all know that above-average miles have a major impact on true resale value at auction. But the trend is certainly toward higher pre-owned prices down the road.
Despite the recent rise in pre-owned prices we hear complaints from dealers that some guidebooks' loan values are not reflective of what is really going on in the pre-owned marketplace, so owners who should show equity are shorted by lenders who use those guides in their finance advance calculation.
Another interesting by-product of the strengthening pre-owned market might be the impact of current lease returns to the OEM captives and independent bank lessors.
I am told many lenders took write offs for current and anticipated residual losses. Some of those previously stated losses may turn out to be profits in the current marketplace, which is driven by the pre-owned shortage and low fuel prices.
Pre-owned values can only go so high, but perhaps we have not yet hit the ceiling. Just imagine a world where new vehicles can be sold without rebates or dealer “trunk money.”
A true pull market scenario would strengthen pre-owned values even more and provide even more trade equity for would-be buyers. Might we be able to return to the pre-Joe Garagiola days when the baseball player turned Chrysler TV pitchman said, “Buy a car, get a check” in 1975? My guess is probably not.
The domestic auto makers have trained an entire generation not to purchase unless there is a rebate. In addition, there are just too many competitors all vying for sales. Where will it end up? Nobody knows. Here's hoping those guidebook loan values will catch up with the market. Dealers and consumers need all the legitimate help they can get!
Former auto dealer David Ruggles is president of Advanced Concepts & Techniques. He is at Ruggles@msn.com and 312-925-1863.
Sunday, September 6, 2009
No Smoking Gun? -- Financial Innovation
Mike Smitka
The appellation "luddite" rings nasty, at least to this economist. I am after all an erstwhile student of the history of innovation and am steeped in "IO", the economics of "Industrial Organization." But look as I may, I cannot find evidence—far less make a compelling case—that the recent spate of acclaimed financial innovation is beneficial.
Let me accept at face value the claims of innovation. Now securitization goes back decades, if not more. Bank letters of credit and bill discounting are both forms of credit insurance, and they go back centuries. So I'm skeptical that Wall Street has innovated rather than merely created an impenetrable smoke-screen of complexity.
Mind you, my skepticism is tempered by my own experience in finance, working on Eurodollar syndicate loans to Latin America in the late 1970s, in the first heady days of large-scale international finance since the collapse of such markets in 1914. For those too young to remember, every single one of those loans went bad, taking the economies of a continent with it—and giving regulators the option, which they failed to exercise, to shut down Citibank. Instead forbearance was the game of the day. But at the time they were marketed as safe. First, syndication allowed banks to diversify their risk, since the organizers could sell off the bulk of what were for the time very large loans, while those purchasing it were doing so in bite-sized chunks from different borrowers and different countries. Second, banks could hedge their funding and maturity risk, because while these were long-term loans (one I worked on to a "greenfield" Brazilian steel venture carried a 12-year term) the interest rate was reset every 6 months against LIBOR (the London Interbank Offer Rate). If interest rates bumped up a bit, banks wouldn't face the potential disintermediation that was at the time plaguing savings and loan banks. (Remember your history?—the plague is typically fatal. It's an appropriate adjective.) Banks didn't even need to boost their deposit base, but could borrow in the very same London market, arbitraging their good credit ratings (LIBOR) to lend on to Brazil (LIBOR+25bp at the peak of the bubble). Sound familiar?
Anyway, what are the claims made for securitization, credit default insurance and the like? The fall into two main camps, that these innovations lowered the cost of finance, and that they provided finance to borrowers who for one reason or another lacked access.
If we look at the macroeconomy, did firms go on an investment boom? No, to the extent that we'd label the last decade of growth "robust" (which requires ignoring what happened to wages), then the sources were consumption and exports. If all of these new products lowered the cost to borrowers, it's not there in the data, or at least not enough to show up without resorting to fancy econometrics.
How about access? Well, sure, lots of new borrowers got money up front, but we have incontrovertible evidence that those who received sub-prime "mortgages" couldn't handle the payments. (Not that a "3/27" ever made sense as a loan; such "mortgages" were never anything more than a bet that real estate prices would continue to appreciate). Now we're starting to see other sorts of borrowers. The most prominent right now is credit card debt, but commercial real estate loans are starting to go bad. Losses on local and state government debt, another area of innovation, will surely follow. So improved access turned out to be a short-run illusion. And this shouldn't be a surprise: back in antiquity, in the 1990s, it wasn't as though banks enjoyed zero rates of default on their portfolios. They took their chances, but generally were able to pay for their mistakes, rather than needing bailouts.
Innovation in finance ought instead to be looked upon as fool's gold, which can only be sold to the naive. (And remember the age of those "in the game"—naïve was apropos.) The essence of banking, and of finance in general, is the proper measurement of risks. We've had claims of a "new world" in finance since the days of the South Sea Bubble. But underlying cash flow analysis isn't a matter of rocket science, it's a matter of wisdom. Who knows what the risk characteristics are of a new product?—initially, no one. And how do you regulate it? Too little and too late. New products arise in the shadows, because finance is a very mature product, and there just isn't anything new under the sun.
To conclude: there is a smoking gun. It's too soon to tell, however, whether a conviction of involuntary manslaughter will follow. For those wielding the gun committed crimes against multiple economies, killed their employers and robbed the wealth of millions of unsophisticated citizens. But the outcome will likely be a mistrial: the defendant has bought off a lot of potential judges and jurors and remains able to buy expert witnesses sufficient to shout down the prosecution.
Let me accept at face value the claims of innovation. Now securitization goes back decades, if not more. Bank letters of credit and bill discounting are both forms of credit insurance, and they go back centuries. So I'm skeptical that Wall Street has innovated rather than merely created an impenetrable smoke-screen of complexity.
Mind you, my skepticism is tempered by my own experience in finance, working on Eurodollar syndicate loans to Latin America in the late 1970s, in the first heady days of large-scale international finance since the collapse of such markets in 1914. For those too young to remember, every single one of those loans went bad, taking the economies of a continent with it—and giving regulators the option, which they failed to exercise, to shut down Citibank. Instead forbearance was the game of the day. But at the time they were marketed as safe. First, syndication allowed banks to diversify their risk, since the organizers could sell off the bulk of what were for the time very large loans, while those purchasing it were doing so in bite-sized chunks from different borrowers and different countries. Second, banks could hedge their funding and maturity risk, because while these were long-term loans (one I worked on to a "greenfield" Brazilian steel venture carried a 12-year term) the interest rate was reset every 6 months against LIBOR (the London Interbank Offer Rate). If interest rates bumped up a bit, banks wouldn't face the potential disintermediation that was at the time plaguing savings and loan banks. (Remember your history?—the plague is typically fatal. It's an appropriate adjective.) Banks didn't even need to boost their deposit base, but could borrow in the very same London market, arbitraging their good credit ratings (LIBOR) to lend on to Brazil (LIBOR+25bp at the peak of the bubble). Sound familiar?
Anyway, what are the claims made for securitization, credit default insurance and the like? The fall into two main camps, that these innovations lowered the cost of finance, and that they provided finance to borrowers who for one reason or another lacked access.
If we look at the macroeconomy, did firms go on an investment boom? No, to the extent that we'd label the last decade of growth "robust" (which requires ignoring what happened to wages), then the sources were consumption and exports. If all of these new products lowered the cost to borrowers, it's not there in the data, or at least not enough to show up without resorting to fancy econometrics.
How about access? Well, sure, lots of new borrowers got money up front, but we have incontrovertible evidence that those who received sub-prime "mortgages" couldn't handle the payments. (Not that a "3/27" ever made sense as a loan; such "mortgages" were never anything more than a bet that real estate prices would continue to appreciate). Now we're starting to see other sorts of borrowers. The most prominent right now is credit card debt, but commercial real estate loans are starting to go bad. Losses on local and state government debt, another area of innovation, will surely follow. So improved access turned out to be a short-run illusion. And this shouldn't be a surprise: back in antiquity, in the 1990s, it wasn't as though banks enjoyed zero rates of default on their portfolios. They took their chances, but generally were able to pay for their mistakes, rather than needing bailouts.
Innovation in finance ought instead to be looked upon as fool's gold, which can only be sold to the naive. (And remember the age of those "in the game"—naïve was apropos.) The essence of banking, and of finance in general, is the proper measurement of risks. We've had claims of a "new world" in finance since the days of the South Sea Bubble. But underlying cash flow analysis isn't a matter of rocket science, it's a matter of wisdom. Who knows what the risk characteristics are of a new product?—initially, no one. And how do you regulate it? Too little and too late. New products arise in the shadows, because finance is a very mature product, and there just isn't anything new under the sun.
To conclude: there is a smoking gun. It's too soon to tell, however, whether a conviction of involuntary manslaughter will follow. For those wielding the gun committed crimes against multiple economies, killed their employers and robbed the wealth of millions of unsophisticated citizens. But the outcome will likely be a mistrial: the defendant has bought off a lot of potential judges and jurors and remains able to buy expert witnesses sufficient to shout down the prosecution.
Thursday, August 27, 2009
Followup
Mike Smitka
One quick point: if the underlying analysis of the previous post of a specific link between the housing bubble, the use of home equity lines and thence car sales is accurate, then we should see that showing up in differential behavior in low-bubble and high-bubble economies: areas with big bubbles should have had a greater car sales boom and a greater crunch (including repossessions). Of course empirically that could be difficult to identify, because the "bubble" areas (as I believe is very much the case, but have not checked) have higher unemployment and hence will have lower car sales and higher repossessions, independent of a finance link. Perhaps that can be done because only certain classes of credit histories showed a propensity to use home equity, whereas unemployment may hit both the conservative and the spendthrift alike. That's not an easy empirical task, closer to what might be needed for a serious PhD-level research project if not a multi-year PhD thesis project.
Tuesday, August 25, 2009
No More Clanging Clunkers, No More Sales
Mike Smitka
What, now that the clunkers program has clanged to a close? In a couple days we'll see what total August sales were like – I'm risking bytes of criticism writing now – but I'm afraid it will be back to business as normal. Afraid, because normal this year has been an SAAR of 10 million or less. The level of enthusiasm makes it clear that sales have been pulled forward; it'll be payback time. The problems run deeper: cars were affected by the bubble, and not just housing.
A recent NBER working paper by Atif Mian and Amir Sufi of the University of Chicago bolsters the argument that I've made in earliers notes. My analysis was based solely on an analysis of sales and scrappage data relative to the vehicle stock; they started out with data on 266,000 individuals in the Equifax credit rating database. (Don't worry – they couldn't actually look at individual records, but instead had to extract information from data that Equifax had already sanitized and then mildly aggregated.) But combined with data on geography and housing prices and demographics, they could paint a picture of where prices had gone up, areas where housing supply was "inelastic" so that shifts in demand showed up as higher prices rather than more construction. They could then look at who borrowed: not those with in places where prices moved little, but those who were in "hot" markets, and who started out with lower incomes and/or lower credit scores. And did they ever tap the equity; credit records made it clear that these people were also buying a lot of vehicles, vehicles they earlier had not been able to afford. But those same locations are ones where mortgage holders are now under water (see Federal Reserve data on credit conditions, illustrated by maps color-coded at the county level). They're losing their houses and their cars, not buying new ones. In other words, there was a bubble in the auto market as well, people buying on credit backed by unrealized capital gains.
That really is not news, though it makes for sobering and poignant stories (see the New York Times series on the Beth Court neighborhood in Moreno Valley, outside LA). But what Mian and Sufi show is that behavior didn't change much in the many urban areas where there was no run-up in housing prices (I'll append a graph I created from the Case Schiller real estate index that illustrates the contrast). In other words, the big boom in car sales came from the same people who were splurging on home renovations and vacations by pulling equity out of their houses. Well, that equity isn't there to the tune $1 trillion in California alone (data from an August 13th study by First American CoreLogic). In Nevada 45% of homeowners have negative equity of 25% or more of their mortgages; in California, 25%. These people aren't buying cars anytime soon. So while house prices may have bottomed out – and the recession ended – that doesn't mean the good times will roll again.
That's not only because of all the people who lost everything (or soon will, given that 5% of the labor force has now been unemployed for over 27 weeks, and another 2% for 15-26 weeks). On average the rest of us are worried. State and local governments are only now cutting their budgets; commercial real estate hasn't hit bottom yet. There are a lot of pink slips yet to be distributed. So there's no reason to think those of us who were more conservative in our habits are suddenly going to loosen pursestrings that long have been tight. Let's be honest with ourselves; if we're thrifty, it's by necessity: home equity is what we have from paying down the mortgage, not because the spot of mother earth we occupy was suddenly worth megabucks
A recent NBER working paper by Atif Mian and Amir Sufi of the University of Chicago bolsters the argument that I've made in earliers notes. My analysis was based solely on an analysis of sales and scrappage data relative to the vehicle stock; they started out with data on 266,000 individuals in the Equifax credit rating database. (Don't worry – they couldn't actually look at individual records, but instead had to extract information from data that Equifax had already sanitized and then mildly aggregated.) But combined with data on geography and housing prices and demographics, they could paint a picture of where prices had gone up, areas where housing supply was "inelastic" so that shifts in demand showed up as higher prices rather than more construction. They could then look at who borrowed: not those with in places where prices moved little, but those who were in "hot" markets, and who started out with lower incomes and/or lower credit scores. And did they ever tap the equity; credit records made it clear that these people were also buying a lot of vehicles, vehicles they earlier had not been able to afford. But those same locations are ones where mortgage holders are now under water (see Federal Reserve data on credit conditions, illustrated by maps color-coded at the county level). They're losing their houses and their cars, not buying new ones. In other words, there was a bubble in the auto market as well, people buying on credit backed by unrealized capital gains.
That really is not news, though it makes for sobering and poignant stories (see the New York Times series on the Beth Court neighborhood in Moreno Valley, outside LA). But what Mian and Sufi show is that behavior didn't change much in the many urban areas where there was no run-up in housing prices (I'll append a graph I created from the Case Schiller real estate index that illustrates the contrast). In other words, the big boom in car sales came from the same people who were splurging on home renovations and vacations by pulling equity out of their houses. Well, that equity isn't there to the tune $1 trillion in California alone (data from an August 13th study by First American CoreLogic). In Nevada 45% of homeowners have negative equity of 25% or more of their mortgages; in California, 25%. These people aren't buying cars anytime soon. So while house prices may have bottomed out – and the recession ended – that doesn't mean the good times will roll again.
That's not only because of all the people who lost everything (or soon will, given that 5% of the labor force has now been unemployed for over 27 weeks, and another 2% for 15-26 weeks). On average the rest of us are worried. State and local governments are only now cutting their budgets; commercial real estate hasn't hit bottom yet. There are a lot of pink slips yet to be distributed. So there's no reason to think those of us who were more conservative in our habits are suddenly going to loosen pursestrings that long have been tight. Let's be honest with ourselves; if we're thrifty, it's by necessity: home equity is what we have from paying down the mortgage, not because the spot of mother earth we occupy was suddenly worth megabucks
The graphs below look at housing prices relative to the CPI index, real GDP and nominal GDP. One focuses on four of the metropolitan areas with the greatest run-up in prices, a couple of which have come back to earth, and then some. The other highlights cities where there was comparatively little change. I left the scale the same on both, which results in a lot of blank space on the second one, plus it's hard to read because the graphs lie more or less on top of each other. Which is the point it is meant to illustrate.
Here's a link to a powerpoint from a talk I gave yesterday (Aug 25, 2009) that includes additional material.
Click to enlarge!
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Friday, August 7, 2009
Japan's Headlines: China not Clunkers
Mike Smitka
The top headline in the Nikkei today (Aug 7th) was neither their recession, nor their pending general election (and the potential change of government). It was July car sales in China, up 64% from from 2008 to roughly 1.1 million units. That's above the clunker-driven 1.0 million level in the US, and (as the percentage increase suggests) out of synch with sales doldrums during the past couple summers.
Part of the reason is that, despite the American perception of China as an economy dominated by exports, it's a country the size of the continental US, and that huge domestic expanse is peopled by 1.3 billion would-be consumers. The Chinese government is determined that they will be consumers. To make that happen, the government is providing plenty of domestic stimulus, unhindered (at least in comparative terms) by domestic banking problems, and with little of the pointless tax cuts and other fluff that bolstered the price tag of the "stimulus" package passed in the US. The ongoing construction of a national highway system provides plenty of room to speed things up (reversing the policy stance of a year ago, when the fear was inflation).
There are also vehicle-specific policies with bigger environmental implications than the US program that gets rid of a few seldom-driven1 "clunkers." Their tax breaks and and scrappage incentives (that include provisions to help rid rural roads of smoke-belching 3-wheelers), was implemented in a timely manner in January 2009. The focus is small vehicles, those with under 1600cc engines, with no loopholes to subsidize the purchase of trucks (unlike the US "clunkers" program). And if you visit Shanghai or Suzhou, while you'll find the roads filled with scooters and motorized bikes, the noise level is a fraction of what it used to be: they're electric, driven by batteries. The garages of condos include outlets to plug them in at night, enough to power the daily commute. But diesel fuel in China is still sulfur-laden, so the next-best alternative, a clean-diesel powered vehicle, is not yet an option there -- as was the case until two years ago in the US. So China can't (yet) follow the European option of small, clean and very-long-lived diesel powered cars.
Now the China market is profitable for the moment, and important to global firms. GM has actually shifted its international operations HQ to Shanghai, anticipating its sales there to top 1 million units in the near future; VW already sells over 1.0 million units a year. Accordingly everyone is pouring on capacity and dealers.
This may be a "bubble" of sorts. Already the shift towards smaller vehicles makes it less of a gold mine than a year ago on a per-vehicle basis. Meanwhile, the number of players is mind-boggling: not only are all of the major international players in the market (VW and GM have the top two spots) but there are still 80 local players. Yes, 80 -- because local governments support their "favorite son" firms. If you visit China, watch how the make of taxis varies as you move from city to city. The government is pushing for consolidation, and a couple of the bigger players have bought up a couple small ones. Others have quietly exited. But consolidation has been policy for years and years, and still there are 80 firms! Unless push comes to shove, Beijing has all too little clout at the local level, and this is just one example.
Lots of players ultimately means little profit. GM, Toyota and their rivals are jointly placing a big bet that that does not happen until they've been able to recoup their investment. However, that's a game of "chicken" and at the moment no one wants to blink and ease off on the throttle. I smell a bloodbath in the making, red ink puddled all over balance sheets. That may be 3 years away, but it will happen.
Meanwhile lots of incumbents remain due to (local) government largesse. A couple will turn out to have been well run and innovative, though at present they are still woefully lacking in engineering sophistication. In the background Beijing -- not the locals -- is making a big push towards electric vehicles; ditto battery technology. So a few local firms are likely to focus on electric vehicles (not nightmarishly complex hybrids), and in a market where drivers don't expect to go hundreds of kilometers at a stretch, there will be a local market (unlike in the US). The transition in drivetrain technologies may allow a couple global players to emerge out of the current plethora of small, high-cost producers.
Note that this has strong parallels with the Japanese case. There government policy also pushed for consolidation, and it also failed to accomplish that. Now the early post-WWII market did have about 30 players, and without local government support [Japan's is not a decentralized political system] or other deep pockets half of them soon exited; Toyota and Nissan both picked up with an extra factory or two in the process. The bottom line however was a market with a dozen firms, no dominant firm or even a "Big Three" that could mute competition. In Japan, it was improve efficiency or fail, and in the end that gave birth to Honda and Toyota.2 Japan's auto industry succeeded because industrial policy failed; the same, I suspect, will prove the case in China.3
Notes
1. Unfortunately the mandatory "CARS" survey that is part of the US "clunkers" program doesn't ask how many vehicles were owned. It does ask how many miles were driven the previous year -- as far as I can tell, no data from that question are yet available. Not surprising: most dealers haven't been able to get their "clunker" deals approved, much less gotten a check.
2. There are of course other Japanese firms, but only Honda, Toyota and Suzuki remain autonomous. Nissan is controlled by Renault, Mazda is de facto controlled by Ford, Fuso is owned by Daimler, Nissan Diesel by Volvo Truck, Toyota has purchased Hino and Daihatsu outright and has a large stake in Subaru/Fuji Heavy and Isuzu, and MMC has survived through the inexplicable largesse of its creditors and of Mitsubishi Heavy Industries.
3. I have only cursory knowledge of India. In contrast, I began studying about China in 1971, and while I ultimately became a Japan expert (more practical at the time), I've followed (and taught a course on) the Chinese economy for over 20 years, and have visited the country repeatedly.
Part of the reason is that, despite the American perception of China as an economy dominated by exports, it's a country the size of the continental US, and that huge domestic expanse is peopled by 1.3 billion would-be consumers. The Chinese government is determined that they will be consumers. To make that happen, the government is providing plenty of domestic stimulus, unhindered (at least in comparative terms) by domestic banking problems, and with little of the pointless tax cuts and other fluff that bolstered the price tag of the "stimulus" package passed in the US. The ongoing construction of a national highway system provides plenty of room to speed things up (reversing the policy stance of a year ago, when the fear was inflation).
There are also vehicle-specific policies with bigger environmental implications than the US program that gets rid of a few seldom-driven1 "clunkers." Their tax breaks and and scrappage incentives (that include provisions to help rid rural roads of smoke-belching 3-wheelers), was implemented in a timely manner in January 2009. The focus is small vehicles, those with under 1600cc engines, with no loopholes to subsidize the purchase of trucks (unlike the US "clunkers" program). And if you visit Shanghai or Suzhou, while you'll find the roads filled with scooters and motorized bikes, the noise level is a fraction of what it used to be: they're electric, driven by batteries. The garages of condos include outlets to plug them in at night, enough to power the daily commute. But diesel fuel in China is still sulfur-laden, so the next-best alternative, a clean-diesel powered vehicle, is not yet an option there -- as was the case until two years ago in the US. So China can't (yet) follow the European option of small, clean and very-long-lived diesel powered cars.
Now the China market is profitable for the moment, and important to global firms. GM has actually shifted its international operations HQ to Shanghai, anticipating its sales there to top 1 million units in the near future; VW already sells over 1.0 million units a year. Accordingly everyone is pouring on capacity and dealers.
This may be a "bubble" of sorts. Already the shift towards smaller vehicles makes it less of a gold mine than a year ago on a per-vehicle basis. Meanwhile, the number of players is mind-boggling: not only are all of the major international players in the market (VW and GM have the top two spots) but there are still 80 local players. Yes, 80 -- because local governments support their "favorite son" firms. If you visit China, watch how the make of taxis varies as you move from city to city. The government is pushing for consolidation, and a couple of the bigger players have bought up a couple small ones. Others have quietly exited. But consolidation has been policy for years and years, and still there are 80 firms! Unless push comes to shove, Beijing has all too little clout at the local level, and this is just one example.
Lots of players ultimately means little profit. GM, Toyota and their rivals are jointly placing a big bet that that does not happen until they've been able to recoup their investment. However, that's a game of "chicken" and at the moment no one wants to blink and ease off on the throttle. I smell a bloodbath in the making, red ink puddled all over balance sheets. That may be 3 years away, but it will happen.
Meanwhile lots of incumbents remain due to (local) government largesse. A couple will turn out to have been well run and innovative, though at present they are still woefully lacking in engineering sophistication. In the background Beijing -- not the locals -- is making a big push towards electric vehicles; ditto battery technology. So a few local firms are likely to focus on electric vehicles (not nightmarishly complex hybrids), and in a market where drivers don't expect to go hundreds of kilometers at a stretch, there will be a local market (unlike in the US). The transition in drivetrain technologies may allow a couple global players to emerge out of the current plethora of small, high-cost producers.
Note that this has strong parallels with the Japanese case. There government policy also pushed for consolidation, and it also failed to accomplish that. Now the early post-WWII market did have about 30 players, and without local government support [Japan's is not a decentralized political system] or other deep pockets half of them soon exited; Toyota and Nissan both picked up with an extra factory or two in the process. The bottom line however was a market with a dozen firms, no dominant firm or even a "Big Three" that could mute competition. In Japan, it was improve efficiency or fail, and in the end that gave birth to Honda and Toyota.2 Japan's auto industry succeeded because industrial policy failed; the same, I suspect, will prove the case in China.3
Notes
1. Unfortunately the mandatory "CARS" survey that is part of the US "clunkers" program doesn't ask how many vehicles were owned. It does ask how many miles were driven the previous year -- as far as I can tell, no data from that question are yet available. Not surprising: most dealers haven't been able to get their "clunker" deals approved, much less gotten a check.
2. There are of course other Japanese firms, but only Honda, Toyota and Suzuki remain autonomous. Nissan is controlled by Renault, Mazda is de facto controlled by Ford, Fuso is owned by Daimler, Nissan Diesel by Volvo Truck, Toyota has purchased Hino and Daihatsu outright and has a large stake in Subaru/Fuji Heavy and Isuzu, and MMC has survived through the inexplicable largesse of its creditors and of Mitsubishi Heavy Industries.
3. I have only cursory knowledge of India. In contrast, I began studying about China in 1971, and while I ultimately became a Japan expert (more practical at the time), I've followed (and taught a course on) the Chinese economy for over 20 years, and have visited the country repeatedly.
Monday, July 20, 2009
Opel & GM
Mike Smitka
Further to my earlier post, Is there a GM without Opel?, the sticking points of GM's negotiations with the Magna-Gaz/Sberbank are over intellectual property rights: Opels are (currently) the core of GM's international operations and rights thereto can't be freely given away. My opinion stands: GM cannot afford to let Opel go and remain an ongoing enterprise. Too many of its engineering resources are bundled into Opel, and vice-versa. Germany doesn't want restructuring, enough unemployment already, and as partners in the current "trust" that controls Opel... How this works out is crucial. And apparently some at GM concur.
More posts shortly, following up on the June Business History Conference in Milan, on the tension between "administration" (as in MBA) and management (as in long-run health) and on health care. But first I have a book review, a manuscript review and an article to complete, all on the Japanese economy. And it's hard not to spend time reading about political turmoil, with PM Aso about to dissolve the Diet for an election that will almost surely dislodge him (and probably the ruling LDP coalition) from power.
Further to my earlier post, Is there a GM without Opel?, the sticking points of GM's negotiations with the Magna-Gaz/Sberbank are over intellectual property rights: Opels are (currently) the core of GM's international operations and rights thereto can't be freely given away. My opinion stands: GM cannot afford to let Opel go and remain an ongoing enterprise. Too many of its engineering resources are bundled into Opel, and vice-versa. Germany doesn't want restructuring, enough unemployment already, and as partners in the current "trust" that controls Opel... How this works out is crucial. And apparently some at GM concur.
More posts shortly, following up on the June Business History Conference in Milan, on the tension between "administration" (as in MBA) and management (as in long-run health) and on health care. But first I have a book review, a manuscript review and an article to complete, all on the Japanese economy. And it's hard not to spend time reading about political turmoil, with PM Aso about to dissolve the Diet for an election that will almost surely dislodge him (and probably the ruling LDP coalition) from power.
Tuesday, July 14, 2009
Toyota and General Motors
Mike Smitka
The new General Motors was spun out of bankruptcy on Friday, July 10th. Its prospects are uncertain. The new cost structure and (one hopes) an end to complacency should lead in time to successful enterprise. Eventually: we should find caution in that GM's now much larger rival Toyota continues not only to lose money, but to lose it at a faster rate than GM-old.
What gives?
First, Toyota has gone where the money is: larger vehicles in North America. Toyota now sports V-8 engines, a full-sized pickup truck and a range of SUVs and other light trucks. Does that sound familiar? Well, so are the consequences: red ink. It was making its Tundra pickup in both Indiana and Texas; no more. All production is now in Texas – and that plant was closed for over 3 months in summer-fall 2008, and runs only one instead of two shifts. So it has billions in sunk costs that are generating little to no revenue, and is reluctant to lay off workers, as that policy has been a mainstay in its battle to keep plants union-free. Nor is the prognosis good: even if gasoline prices stay low, Toyota has few rural dealerships. Despite cutbacks, the Detroit Three still do.
Second, Toyota has focused on the American market in general, again because that is where the money is. The company is a modest player in Europe, and a latecomer to China; the population in Japan is aging, and the number of licensed drivers in its home market is in decline. It may book profits in Japan, because that's where the production of most Lexus vehicles is still located. But sales depend on the US.
It gets worse: product planning also followed the money. Anyone of my generation can remember (or often owned) a Toyota at one time (my first new car purchase, in 1981, was a Toyota Tercel). They were small, sparingly powered rust-buckets, but with good mechanicals for their time (by today's standards, they were junk). No longer are Toyotas small or sparingly powered. That pairing generates profits – the public perception of fuel economy is swayed by the Prius, but the Prius makes no money, at least since the price was lowered to fight the Honda Insight at the same time that the yen strengthened. But back to that pairing: such vehicles are peculiar to the North American market, and don't sell well in Japan or Europe. Those markets are left with larger vehicles that don't fit, they're just a bit too large on every dimension. Toyota thus struggles to sell such potential high-margin vehicles everywhere else in the world.
Third, they became a big company with big ambitions, replete with MBAs in various HQ functions. For those who don't know their history, Toyota was bailed out by the Japanese government in 1950, because they kept "pushing the metal" on dealers despite a recession. One measure, along with kicking the Toyota family out of management, was to split off the sales functions to increase their ability to say "no" to the factory. The separation between Toyota Auto Sales and Toyota Motors lasted about 30 years, but they've now been merged for 25 years. Headquarters staff over the past decade came to dominate product planning, investment planning, well, MBAs plan. But not always well, not when they are far removed from the "real" world of sales and manufacturing. Sure, Toyota was earning a better return on assets, 5+% instead of the early 3-4%, while return on equity was pushed to 15% and above. And sales kept increasing, first overtaking VW, and then briefly GM.
They were going to rule the world; they had already taken over Daihatsu and Hino inside Japan, and more recently acquired stakes in Fuji Heavy Industries ("Subaru") and Isuzu, both former GM affiliates. They upped their share of Denso to a controlling stake. And there was Lexus, and the Tundra, all those other nice high-margin vehicles. To support this growing empire took a lot of investment. But while the product plan looked good on paper, it wasn't necessarily what the people on the ground were comfortable making and selling. Furthermore, product proliferated, a car for every niche for every name plate. Inside Japan Toyota maintained 5 distribution channels and 47 cars in its 4 "legacy" channels, 9 for its new Lexus channel, and 13 more at Daihatsu (covering the minicar end of the spectrum). Add another 14 light commercial vehicles – but leaving out all of the heavy truck and bus makes of Hino – and they have 83 model names inside their domestic market. [my count] Toyota's brands are muddied and the cars are bland.
It doesn't take much imagination to see what happens to marketing costs. To make matters worse, Toyota outright owns several large (40-plus sales point) urban dealerships, because they can't operate as profitable ventures. (Not that people seconded from headquarters – with salaries paid by the parent company – improve matters.) And think of the engineers: they're so busy doing product, and all that totally new stuff for the US, that they don't have time to do things right, at least by their standards. Recalls are up sharply. Costs, too, because forcing commonality takes time, and time they do not have. (Remember, in today's auto industry most manufacturing is at parts firms, so using parts in common is the key to cost control.)
Fourth, they have their own unions to contend with, and those unions include engineers and regular office workers, not just factory hands. Plus it's easier to coordinate inside Japan, because even today language skills are weak. So we now find Toyota entering a steep recession with the ability to build 10 million vehicles, all according to plans from HQ, but with sales of only 6.5 million. Worse, they have added to that capacity not only in places such as Texas but also in Japan, where they can now build 4.5 million vehicles. In the process they have allowed their export share to gradually rise from under 40% in the mid-1990s to roughly 65% in 2008. But even as exports have fallen due to the global recession the yen has strengthened, amplifying their losses.
We may not have seen the worst of it. Toyota has quietly added a couple stamping facilities, bought from a failing domestic supplier. But it surely has many other suppliers, pushed to match its expansion, that have weaker cash reserves and weaker management. As things stand, they will have to pick up the tab (which to me is ethically appropriate, but is surely not part of the financial projections of their MBAs). And already their ROA has swung from 5.9% in April-June 2007 to -10.4% in Jan-Mar 2009. That's a swing in profits before taxes of Δ¥1,654 billion (or ΔUS$17.8 billion at this weeks average of ¥93 per dollar). Toyota maintains a sterling (though recently lowered) credit rating and sits on $30 billion in cash and securities and $40 billion in financial receivables. But it also has $64 billion in short-term debt and long-term debt due this fiscal year. Far better than GM, but as a big, heavy firm its cushion is not as comfortable as it once was.
Wish the new president Toyoda Akio good luck! If it wasn't for his ability to borrow to tide things over, he'd be facing a tougher battle than GM's new CEO Fritz Henderson.
The new General Motors was spun out of bankruptcy on Friday, July 10th. Its prospects are uncertain. The new cost structure and (one hopes) an end to complacency should lead in time to successful enterprise. Eventually: we should find caution in that GM's now much larger rival Toyota continues not only to lose money, but to lose it at a faster rate than GM-old.
What gives?
First, Toyota has gone where the money is: larger vehicles in North America. Toyota now sports V-8 engines, a full-sized pickup truck and a range of SUVs and other light trucks. Does that sound familiar? Well, so are the consequences: red ink. It was making its Tundra pickup in both Indiana and Texas; no more. All production is now in Texas – and that plant was closed for over 3 months in summer-fall 2008, and runs only one instead of two shifts. So it has billions in sunk costs that are generating little to no revenue, and is reluctant to lay off workers, as that policy has been a mainstay in its battle to keep plants union-free. Nor is the prognosis good: even if gasoline prices stay low, Toyota has few rural dealerships. Despite cutbacks, the Detroit Three still do.
Second, Toyota has focused on the American market in general, again because that is where the money is. The company is a modest player in Europe, and a latecomer to China; the population in Japan is aging, and the number of licensed drivers in its home market is in decline. It may book profits in Japan, because that's where the production of most Lexus vehicles is still located. But sales depend on the US.
It gets worse: product planning also followed the money. Anyone of my generation can remember (or often owned) a Toyota at one time (my first new car purchase, in 1981, was a Toyota Tercel). They were small, sparingly powered rust-buckets, but with good mechanicals for their time (by today's standards, they were junk). No longer are Toyotas small or sparingly powered. That pairing generates profits – the public perception of fuel economy is swayed by the Prius, but the Prius makes no money, at least since the price was lowered to fight the Honda Insight at the same time that the yen strengthened. But back to that pairing: such vehicles are peculiar to the North American market, and don't sell well in Japan or Europe. Those markets are left with larger vehicles that don't fit, they're just a bit too large on every dimension. Toyota thus struggles to sell such potential high-margin vehicles everywhere else in the world.
Third, they became a big company with big ambitions, replete with MBAs in various HQ functions. For those who don't know their history, Toyota was bailed out by the Japanese government in 1950, because they kept "pushing the metal" on dealers despite a recession. One measure, along with kicking the Toyota family out of management, was to split off the sales functions to increase their ability to say "no" to the factory. The separation between Toyota Auto Sales and Toyota Motors lasted about 30 years, but they've now been merged for 25 years. Headquarters staff over the past decade came to dominate product planning, investment planning, well, MBAs plan. But not always well, not when they are far removed from the "real" world of sales and manufacturing. Sure, Toyota was earning a better return on assets, 5+% instead of the early 3-4%, while return on equity was pushed to 15% and above. And sales kept increasing, first overtaking VW, and then briefly GM.
They were going to rule the world; they had already taken over Daihatsu and Hino inside Japan, and more recently acquired stakes in Fuji Heavy Industries ("Subaru") and Isuzu, both former GM affiliates. They upped their share of Denso to a controlling stake. And there was Lexus, and the Tundra, all those other nice high-margin vehicles. To support this growing empire took a lot of investment. But while the product plan looked good on paper, it wasn't necessarily what the people on the ground were comfortable making and selling. Furthermore, product proliferated, a car for every niche for every name plate. Inside Japan Toyota maintained 5 distribution channels and 47 cars in its 4 "legacy" channels, 9 for its new Lexus channel, and 13 more at Daihatsu (covering the minicar end of the spectrum). Add another 14 light commercial vehicles – but leaving out all of the heavy truck and bus makes of Hino – and they have 83 model names inside their domestic market. [my count] Toyota's brands are muddied and the cars are bland.
It doesn't take much imagination to see what happens to marketing costs. To make matters worse, Toyota outright owns several large (40-plus sales point) urban dealerships, because they can't operate as profitable ventures. (Not that people seconded from headquarters – with salaries paid by the parent company – improve matters.) And think of the engineers: they're so busy doing product, and all that totally new stuff for the US, that they don't have time to do things right, at least by their standards. Recalls are up sharply. Costs, too, because forcing commonality takes time, and time they do not have. (Remember, in today's auto industry most manufacturing is at parts firms, so using parts in common is the key to cost control.)
Fourth, they have their own unions to contend with, and those unions include engineers and regular office workers, not just factory hands. Plus it's easier to coordinate inside Japan, because even today language skills are weak. So we now find Toyota entering a steep recession with the ability to build 10 million vehicles, all according to plans from HQ, but with sales of only 6.5 million. Worse, they have added to that capacity not only in places such as Texas but also in Japan, where they can now build 4.5 million vehicles. In the process they have allowed their export share to gradually rise from under 40% in the mid-1990s to roughly 65% in 2008. But even as exports have fallen due to the global recession the yen has strengthened, amplifying their losses.
We may not have seen the worst of it. Toyota has quietly added a couple stamping facilities, bought from a failing domestic supplier. But it surely has many other suppliers, pushed to match its expansion, that have weaker cash reserves and weaker management. As things stand, they will have to pick up the tab (which to me is ethically appropriate, but is surely not part of the financial projections of their MBAs). And already their ROA has swung from 5.9% in April-June 2007 to -10.4% in Jan-Mar 2009. That's a swing in profits before taxes of Δ¥1,654 billion (or ΔUS$17.8 billion at this weeks average of ¥93 per dollar). Toyota maintains a sterling (though recently lowered) credit rating and sits on $30 billion in cash and securities and $40 billion in financial receivables. But it also has $64 billion in short-term debt and long-term debt due this fiscal year. Far better than GM, but as a big, heavy firm its cushion is not as comfortable as it once was.
Wish the new president Toyoda Akio good luck! If it wasn't for his ability to borrow to tide things over, he'd be facing a tougher battle than GM's new CEO Fritz Henderson.
This article relies on Toyota financial reports, on a 3-part series in the Daily Automotive News 小室祥子「トヨタ・新時代への展望」『日刊自動車新聞』 連載: 26, 27, 30 June 2009 and an article in Bungei Shunju 井上久男「覇者トヨタに何が起きたのか」『文芸春秋』March 2009, 94−108. While I did not stumble across it before drafting this note, see also the 22 June 2009 Bloomberg article Toyoda Asks How Many Times Toyota Errs Emulating GM Failures by John Lippert, Alan Ohnsman and Kae Inoue. Based on it, I edited my comments on the operation of the San Antonio, TX truck plant. They also note that Toyota dedicated its Woodstock, Ontario car plant in December 2008, and provide other examples of the firm's (overly) ambitious expansion plans.
Sunday, July 12, 2009
WMRA Radio Show Mon 13 July
Michael Smitka will be on a live program, Virginia Insight, on WMRA Public Radio in Harrisonburg Virginia Monday, July 13 at 3 pm EDT. You can listen to an archived podcast HERE.For more information see the show's website; the host Tom Graham brings a fascinating array of individuals to WMRA's studios, including periodic updates on Virginia politics. WMRA is my local station, and I'm glad to be a supporter!
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