The Homa Files

Insightful article by Megan McArdle,  business and economics editor for The Atlantic … 

Punch line: Both the auto companies and the UAW took the most obvious course at any given time, while not realizing that their cumulative decisions were entirely toxic.  They created a non-competitive cost structure that lured foreign competition that wasn’t burdened by high labor costs/

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The Atlantic, New GM, Same Old Union?, Oct 5 2010

In the mid-1950s the Big Three had settled into a relatively stable relationship with the UAW. 

When contract time came around, the UAW picked off the company it perceived as the least able to survive a strike; used the threat of a strike to get a good contract; and then demanded the same from the other two. 

Management bought union peace with concessions that seemed cheap at the time:  tax-favored pension and health care benefits. 

Those companies were now in a bad position, because if they risked a strike, their competitor, who already had a contract, would take all their customers.

This relationship essentially meant that the Big Three simply didn’t compete on labor cost, work processes, or any of the other labor-side innovations that have enhanced productivity over the last forty years.  

This was good for the UAW and good for the auto manufacturers, because arguably it actually helped cement their cosy oligopoly by removing one of the major competitive pressures. 

In hindsight, this was stupid for many reasons. 

• Automation made it possible to produce more cars with fewer workers. 
• Foreign competition cut into market share — the Big Three had about 90% of the US market at the end of World War II, versus about 45% today. 
• Workers started living a lot longer than they were expected to.  Now, GM has a little over 50,000 hourly employees–and about a half a million retirees. 
• Soaring health care costs made the health care benefits even more of a problem than the pensions.

Had there been no foreign competition, this wouldn’t have mattered so much.  

Unfortunately for the Big Three, there was competition, from foreign automakers who didn’t have the same legacy cost structure. 

Critics of the union say that the union should have been willing to give back more on labor.  That’s easy to say, but hard to do; unlike many unions, which put their retirees on inactive status, UAW’s bylaws gave retirees considerable power.  Naturally, by the time 90% of your membership is retirees, those bylaws are not going to be altered.

Critics of the company say that the company could have dealt with these problems by making better cars.   How, exactly, were they supposed to make better cars when they were burdened by these huge legacy costs? 

The company was burdened with these costs simply because it had made extraordinarily generous promises in an era when health care was cheaper — and when the firms and the union had a cozy arrangement that allowed them to pass any increase in their labor costs onto consumers. 

Full article:
http://www.theatlantic.com/business/archive/2010/10/new-gm-same-old-union/64088/

GM is rushing to IPO before the mid-term election to “prove” the wisdom of the bailout.

Pundits are saying that the company’s politically motivated IPO could jeopardize taxpayer ”investment.”

Here’s why:

• Taxpayers have somewhere between $40 billion to $60 billion “invested” in Gov’t Motors
• For taxpayers to come out whole, the Treasury’s 304 million of the company’s 500 million common shares would need to average $131 to $197 per share
• That would put GM’s implied valuation at somewhere between $65 billion to $98 billion.
• Ford has a market value of only $40 billion.
• Ford’s near-yerm earnings are expected to be six times those of GM.
• If investors valued both companies the same …  taxpayers would incur a 50% loss.
• And, oh yeah, the market isn’t looking all that good these days.

Ken’s Bet: Watch the Administration to rush the IPO and then strong-arm Goldman et. al. to buy up GM shares at inflated prices and either push the share on clients (think CDOs) or eat them in their proprietary accounts.

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Post inspired by: Obama’s ‘Mission Accomplished’ Moment At GM, 08.30.10
http://www.forbes.com/2010/08/30/general-motors-ipo-elections-opinions-columnists-shikha-dalmia.html?boxes=opinionschannellatest

The initial headlines were that US auto sales were up big in July.

Not so fast.

Yeah, they were up versus July 2009, but …

• Industrywide deliveries dropped to an 11.1 million pace
•  GM’s sales rose 1.5% … they were expected to rise 10%.
  Ford’s sales fell 0.7 %, trailing analysts’ estimates for a 10% gain.
  Chrysler sales gained 1.1%, versus a 2.2% expectation
  Toyota and Nissan sales dropped, but topped expectations.

The results show GM’s turnaround efforts may be slowing after last year’s bankruptcy.

Bloomberg, GM, Ford and Chrysler Sales All Lag Estimates,  Aug 3, 2010 Aug. 3
http://www.bloomberg.com/news/2010-08-03/gm-s-july-u-s-auto-sales-rise-5-4-falling-short-of-analysts-estimates.html

Punch line: A government watchdog slammed the Obama administration’s handling of auto dealer closings that were pushed through last year to speed the bankruptcy proceedings of Chrysler and General Motors.

This is neither new news, nor surprising.

HomaFiles reported on these dealer closings when they were going down.

A local dealer told us at the time:

1. There would be no savings to the car companies since the bulk of their dealer support costs are variable costs, e.g. cooperative marketing programs
2. In fact, the companies would lose “floor plan” inventory – the cars that dealers have to buy, finance, and keep on their lots.  Fewer dealers translates to fewer cars on lots.
3. The major criteria for closing were political … dealers who opposed Obama’s plan were warned … and if they continued to make waves, they were put on the “to be closed” list.
4. Surviving car dealers might become more profitable since fewer dealers means less price competition
5. The biggest impact of dealer closings would be the dealerships’ employees.  As the guy told me:
   ”I’ll still have my foreign nameplate stores … may have to sell one of my beach houses … but that’s no big deal.  I worry about th 50 to 100 employees per store … some have been with me for 30 years …  I can’t absorb them into my other stores … and I don’t think any surviving dealers will pick many of them up.

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Excerpted from Dow Jones: Watchdog Criticizes Treasury’s Role In Auto Dealer Closures, July 18, 2010

The decision by Treasury’s auto task force to reject the companies’ plans for gradual dealer closures in favor of an accelerated process may have exacerbated job losses in the midst of a recession.

The office of special inspector general Neil Barofsky, set up to monitor the $700 billion financial bailout known as TARP, took the administration to task for failing to sufficiently oversee the closures and weigh the broader economic impact of its decisions.

“Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses and thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls — all based on a theory and without sufficient consideration of the decisions’ broader economic impact.” 

The audit said “only time will tell” whether the accelerated closures will help the companies’ profitability. But Treasury should have “taken every reasonable step” to ensure the closures were necessary and that the benefits to the companies outweighed the economic costs of “potentially tens of thousands of accelerated job losses” 

But many dealers and their congressional representatives said the process by which GM and Chrysler chose which dealerships to cut was arbitrary.

Full article:
http://online.wsj.com/article/BT-CO-20100718-703295.html

Excerpted from WSJ: Back to the Future: GM Bets on Trucks, Jan. 13, 2010

GM now is trying to boost revenue and return to profitability in a bid to repay the $6.7 billion in cash it owes the U.S. government. The Treasury Department also invested roughly $50 billion more in GM that was converted into a 60% stake in the auto maker.

The government has pushed GM, Chrysler — which also restructured in a federally financed bankruptcy — and other auto makers to produce smaller, more fuel-efficient vehicles, including battery-powered cars.

But, GM announced that it is using freed up cash to fund a major update of its full-size pickups, a bet that consumers and businesses will resume buying trucks after a long lull in sales.

GM, which had relied on full-size pickups such as the Chevrolet Silverado for a major portion of its U.S. revenue and operating profit, had put off redesigning the trucks as its finances collapsed and it underwent a government-backed bankruptcy reorganization last year.

Trucks sales sagged in the past two years after gasoline spiked to $4 a gallon in 2008 and home sales — a big driver of truck purchases by contractors and builders — collapsed amid the recession.

Until the past few years, full-size pickups had been a big business for Detroit car companies. They often sell for $30,000 and more and generate thousands of dollars in operating profit each.

“When the housing industry starts to pick up, you will see truck sales increase immediately and companies will need to have fresh products out there,”

Full article:
http://online.wsj.com/article/SB126334663717427135.html?mod=WSJ_hps_LEFTWhatsNews

In March, Pres. Obama and his “car czar” axed GM’s CEO Rick Waggoner and appointed  Fritz’ Henderson to replace him, change the organizational culture, and save the company.

Oops.

On Tuesday, the GM board forced Henderson to resign, and initiated a search for his successor.

Good luck.   

Bringing in new blood is likely to be pretty hard since the company’s major shareholder (Uncle Sam) is capping pay offers, and restricting bonuses. 

The paradox: GM needs somebody with great judgement … and anybody who would take the job is disqualified based on that criteria alone.

http://online.wsj.com/article/SB10001424052748703735004574570370686365390.html?mod=article-outset-box

TakeAway: Under Cash for Clunkers, some owners of large pickups cashed in old trucks for between $3,500 and $4,500 toward new Hummer H3 SUVs that got only 16 mpg.        

Source: Associated Press: Clunker pickups traded for new pickups, Nov 4, 2009

The most common deals under the government’s $3 billion Cash for Clunkers program, aimed at putting more fuel-efficient cars on the road, replaced old Ford or Chevrolet pickups with new ones that got only marginally better gas mileage.

The single most common swap — which occurred more than 8,200 times — involved Ford F150 pickup owners who took advantage of a government rebate to trade their old trucks for new Ford F150s. The fuel economy for the new trucks ranged from 15 mpg to 17 mpg based on engine size and other factors, an improvement of just 1 mpg to 3 mpg over the clunkers.

Owners of thousands more large old Chevrolet and Dodge pickups bought new Silverado and Ram trucks, also with only barely improved mileage in the middle teens,.

Those deals helped the Ford F150 and Chevy Silverado — along with Ford’s Escape midsize SUV — climb into the Top 10 most-popular vehicles purchased with the government rebates. The most common truck-for-truck and truck-for-SUV deals totaled at least $911 million.

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In scores of deals, the government reported spending a total of $562,500 in rebates for new cars and trucks that got worse or the same mileage as the trade-ins — in apparent violation of the program’s requirements.

More than 95,000 of the new vehicles purchased under the program — or about one in seven — got less than 20 mpg, according to the data.

Plenty of consumers bought relatively low-mileage trucks and SUVs with the help of government checks.

Full story:
http://news.yahoo.com/s/ap/20091104/ap_on_bi_ge/us_cash_for_clunkers

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On the plus side:

Popular high-mileage commuter cars including the Toyota Corolla, Honda Civic, Toyota Camry and Ford Focus also were among the Top 10 most popular new vehicles bought under the four-week program, with 105,280 of those models sold for a total of about $2 billion.

Ken’s Take: The core question re: the effectiveness of C4C is whether the program created incremental demand for cars or simply paid people to shift likely demand earlier. Initial results are coming in … synopsis: ouch !

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Excerpted from WSJ: One of Washington’s all-time dumb ideas, Oct. 4, 2009

Remember “cash for clunkers,” the program that subsidized Americans to the tune of nearly $3 billion to buy a new car and destroy an old one?

Last week U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%.

Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future. Exactly as critics predicted.

Burton Abrams and George Parsons of the University of Delaware added up the total benefits from reduced gas consumption, environmental improvements and the benefit to car buyers and companies, minus the overall cost of cash for clunkers, and found a net cost of roughly $2,000 per vehicle. Rather than stimulating the economy, the program made the nation as a whole $1.4 billion poorer.

In the category of all-time dumb ideas, cash for clunkers rivals the New Deal brainstorm to slaughter pigs to raise pork prices. The people who really belong in the junk yard are the wizards in Washington who peddled this economic malarkey.

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http://online.wsj.com/article/SB10001424052748703628304574453280766443704.html?mod=djemEditorialPage#printMode

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Ken’s Take: I seem to be the solitary mind thinking that GM should keep the Saturn brand and distribution network and use them for sale and distribution of electric and hybrid cars.  Seems like a perfect fit to me.

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Excerpted from WSJ: Collapse of Penske Deal Spells End For Saturn, Oct. 1, 2009

A deal to save GM’s Saturn brand fell through after former race-car driver Roger Penske unexpectedly abandoned a bid to buy its network of dealers, prompting GM to say it would shut the operation down.

It also likely will add Saturn’s 350 dealers to the thousands of U.S. auto retailers that are closing in the car industry’s worst downturn since World War II.

The novel bid to create a car company that didn’t build cars fell apart when Penske Automotive Group failed to secure a related agreement to have France’s Renault SA supply autos for dealers to sell when GM stopped building Saturns in about two years.

For Saturn, it likely means the end of the road for a quirky brand that analysts believe never made money in its 19-year history. GM created Saturn in an attempt to better compete against Japanese auto makers such as Toyota Motor Corp.

Saturn won loyal fans who liked its customer-friendly image and no-haggle sales policy.

But GM produced few new Saturn models in the 1990s and, despite a flurry of critically acclaimed cars added this decade, it never met its sales targets.

The chance of another buyer stepping in to purchase Saturn is remote.

Saturn will wind down by October 2010 under agreements GM already made with the brand’s dealers. Many of the dealerships are expected to close before that deadline. GM remains in talks to sell Saab and Hummer, and is shutting down Pontiac.

GM said earlier this year that Saturn, Hummer and Saab generated an average annual pretax loss of $1.1 billion a year. The moves leave GM with four brands: Chevrolet, Cadillac, Buick and GMC.

Full article:
http://online.wsj.com/article/SB125434260817353567.html?mod=WSJ_hps_LEFTWhatsNews#printMode

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Ken’s Take: A friend of mine recently finished cobbling together — from scratch — an electric car.  Gotta love it when somebody walks the talk … instead of just talking.  Way to go Brian.

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From the St. Cloud Minnesota Times:

For Brian Darovic, filling up his car is as simple as plugging in a toaster — and almost as inexpensive.

Darovic of Sartell recently converted his car from a standard, gas-powered vehicle to an electric, battery-powered vehicle.
“Sure, you could buy a GM Volt next year for $40,000,” Darovic said. “But are you going to be spending $40,000 on a car next year? I’m not.”

Though electric car conversion kits are available for between $10,000 and $15,000, Darovic was determined to build it from scratch.

He found a 1994 Saturn and spent more than a year on the project. He sketched designs and then removed the vehicle’s engine, fuel tank, exhaust system and radiator. They were replaced with an electric motor, 12 batteries and a device that controls the motor speed.

The project cost between $9,000 and $10,000, not including labor.

The car covers about 25 miles per charge with a top speed of 60 mph. But Darovic expects to reach 40 miles per charge after he finishes fine-tuning the vehicle.

Darovic estimates his Voltessa will cost about $1 per charge or a little more than 2 cents per mile.

Electric cars are also low maintenance. Tires, brakes, shock absorbers, lights, horn, radio, seats, glass and body work remain the same as those of a gasoline-fueled engine.

But there is no more need for oil changes, antifreeze, belts, exhaust systems or tune-ups. Electric motors are essentially zero maintenance and last the life of the vehicle.

While Darovic had experience working with cars, he said the conversion process is simple enough for those with less experience. “Just about anybody could do it. It’s not rocket science.” 

As demand increases and costs decrease, electric cars are likely to become more affordable. For those that don’t want to wait, converting an existing vehicle to electric power offers a cost-effective solution for today.

http://www.sctimes.com/article/20090926/NEWS01/109260013&referrer=FRONTPAGECAROUSEL

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Reuters – CNBC.com, Toyota Plans $1 Billion Marketing, More Hybrids, 17 Sep 2009

Toyota landed three models among the top 10 sold in the recent “Cash for Clunkers” incentive program by the U.S. government.

Now, Toyota is preparing a $1 billion marketing campaign — 30 percent to 40 percent more than the company typically spends in the quarter — to boost U.S. sales in the fourth quarter, while also expanding its line of hybrid models under the Prius name.

The $1 billion will include a media campaign, as well as buyer and dealer incentives, including sweeteners for leasing.

Word of the media blitz comes less than a week after General Motors announced its own media campaign, in large part aimed at recapturing consumers who believe Toyota and other foreign automakers make better products.

Toyota executives said the company planned to sell 500,000 to 600,000 hybrid vehicles globally by the end of 2009.

Full article:
http://www.cnbc.com/id/32903880

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From the WSJ:

The federal “cash for clunkers” program pushed auto sales to their highest levels in over a year. But.analysts say the boost is likely temporary and some anticipate falloff.

Auto sales for August were between 13 and million on a  seasonally adjusted annual rate .

For comparison, auto sales regularly hit 16 million a month before the recession, they have since dipped, hitting a low in February of 9.1 million.

Even within August, the numbers point to a pullback. On a weekly basis, dealers sold cars at an annualized rate of over 19 million in the first week of the clunkers program, followed by weeks of car sales at rates of 12 million.

In the final week of August, after the program ended, sales slumped to eight million.

And, according to Edmunds.com, the clunkers program caused “unintended consequences”, including higher car prices and lower levels of supply.

Dealers raised their prices on Toyota Corollas, for example, by approximately $445 while the clunkers program was in effect. Many dealers were charging sticker prices (or more) for hybrids.

WSJ, Next for Auto Sector, Post-Clunker Hangover, Sept 1, 2009 
http://online.wsj.com/article/SB125175596718373969.html

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TakeAway: There’s a big difference between unintentional and un-anticipatable – neither the pull-up of sales nor the jacked up prices should surprise anybody.

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Bottom line: the C4C program jacked $3 billion from about 100 million tax payers, redistributed it to 750,000 clinker owners (some tax payers, some not), and leveraged the rebates dollar-for-dollar into $3 billion in new consumer debt.

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Talk with friends over the weekend turned to the C4C program … specifically, how many rebate-takers were driving clunkers because they couldn’t afford a fancy new ride.  Consider the implications if that’s true.

Running some back-of-the-envelope numbers, it’s likely that C4C buyers took on debt (auto loans) equal or greater than the tax payer provided rebates.

Here’s the logic, using rough, top-of-mind assumptions:

Assume that a clunker qualifies for a $4,000 rebate, that the clinker owner applies the rebate to a new $24,000 car, and that $20,000 balance is rolled into a shiny new auto loan. (Note: no money down – just like the home deals that got us into this mess).

Assume the $20,000 is financed at 6% over a 4 year term.  The monthly payment is just a bit under $500.

So, the clunker-trader walked into the showroom with a clunker and no auto loan payments. 

He rides out with a cool new ride and a new $500 monthly payment.  Hmmm.

Assume that 1 in 4 clunker-traders are rich folks who pay cash, and that the other 3 take out auto loans.

Project the numbers to the whole program (calcs below) … and PRESTO – the C4C program jacked $3 billion from about 100 million tax payers, redistributed it to 750,000 clinker owners (some tax payers, some not), and leveraged the rebates dollar-for-dollar into $3 billion in new consumer debt.

Frankly, I’m not sure if that’s good or bad.  Maybe the stimulative effects are worth it.

But, it begs the question: isn’t this how we got into this mess in the first place?

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copyright K.E. Homa 2009, All Rights Reserved

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Most reports tout the Cash for Clunkers programs as a runaway success.

In fact, about 250,000 C4C deals were transacted in a week or two – fully utilizing the budgeted $1 billion – at an average rebate of about $4,000.

But …

Marketing promotions should always be evaluated on an incremental basis.  That is, how many sales were induced over and above what would have happened any way.

Car authority J.D. Power and Associates thinks that most of the cars purchased through the C4C program were simply sales that would have happened this year but were pulled ahead a few months. The company thinks that as few as 20% of the cars bought in the program are really new sales to the market. That means that as many as 80% of the cars would have been sold this year anyway. Edmunds.com, which tracks vehicles pricing and buying data, agrees. They say: “when the public thought that the program would cease after the first billion dollars was spent, they rushed to dealerships.By Aug. 20, we could be back to pre-clunker sales levels.”

So what ?

Well, from a marketing analysis perspective, the full cost of a program should be assigned to the incremental sales.  So, the $1 trillion should be allocated across 50,000 incremental car sales (20% times 250,000).  That’s about $20,000 per incremental sale. 

Recast, phase 1 of C4C took 250,000 clunkers off the road by, in effect, giving away 50,000 new, more fuel efficient cars.

Worth it? 

You decide.

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See Business Week, Cash for Clunker Interest Slows, August 14, 2009
http://www.businessweek.com/autos/autobeat/archives/2009/08/cash_for_clunke_10.html

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Ken’s Take: Maybe I was mistaken when I said I was mistaken …

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Excerted from CNNMoney.com, Interest in Cash for Clunkers sputters, August 11, 2009

After sparking an initial rush to showrooms, the Cash for Clunkers program seems to be running out of fuel.

Interest in Cash for Clunkers has fallen 15% since its peak, and the number of people planning to buy cars could fall to pre-Clunkers levels by next week, an auto research group said.

Under the Clunkers program, vehicles purchased after July 1 are eligible for refund vouchers worth $3,500 to $4,500 on traded-in cars with a fuel economy rating of 18 miles per gallon or less.

The program ran through its initial $1 billion in its first week,leading lawmakers to approve an additional $2 billion in funding.

But interest in the program peaked on July 29, and demand has waned, according to the report from Edmunds.com.

The report, which cited Internet shopping data, said if current trends continue, auto purchase intent will fall back to pre-Cash for Clunker levels by August 20.

The original money set aside for “created a Gold Rush mentality where consumers hurried to take advantage before funding ran out.”

The additional $2 billion in funding removed the urgency to participate.

Full article:
http://money.cnn.com/2009/08/11/autos/cash_for_clunkers_interest_declines/?postversion=2009081114

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According to the Department of Transportation …

Top Trade-Ins Under Cash for Clunkers

1.  Ford Explorer
2.  Ford F150 Pickup 2WD
3.  Jeep Grand Cherokee 4 WD
4.  Jeep Cherokee 4 WD
5.  Dodge Caravan/Grand Caravan

Top New Car Purchases: Cash for Clunkers

1.  Toyota Corolla
2.  Ford Focus FWD
3.  Honda Civic
4.  Toyota Prius
5.  Toyota Camry 

Draw your own conclusion …

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Ken’s Take: I’m still betting under on this one …

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According to the WEJ …

Ssome analysts are predicting that new car sales could hit 15 million in 2012 because …

• American motorists are scrapping 10 million to 12 million vehicles each year.
• There are nearly 6million buyers who have been kept out of the market because they owe more on their vehicles than they’re worth.
• There are millions of consumers who bought the “near new” cars that the daily rental fleets quickly turned over at auction. Now, daily rental companies are holding their inventory much longer (30,000 miles plus), so the “near new” customer will be back in the new car market.

Conceivably, streamlined car manufacturers are positioned to make serious money when the market turns up.

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Excerpted from: WSJ, The Auto Industry’s Comeback, July 29, 2009
http://online.wsj.com/article/SB10001424052970204886304574308202570479912.html

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I still don’t get it, but obviously I was wrong when I bet under on Cash for Clunkers (C4C). I disn’t think it would generate much showroom traffic, let alone sales.

Bit by all reports, C4C is the hottest promotion since Hoover UK almost bankrupted itself by offering free plane tickets with the purchase of a vacuum cleaner.

Where did I go wrong ?

First, I assumed that the $4,500 government rebate was just a replacement for a trade in allowance.  So, only real clunkers – worth less than $4,500 as a trade – would be advantaged.

Second, I assumed that clunkers were being driven by downscale folks who didn’t have the scratch for brand new rides – who bought used cars and drove them until they died.  These folks, I thought, wouldn’t be able to step-up to buy new cars.

Apparently, many rich folks make their teenage or college kids drive hand-me-down cars – maybe to humble them.  Dealers are saying that these are the clunkers being traded in.  So, the kids get fancy new bumpers for their Obama ‘08 stickers.

Third, and most important, I underestimated naturally pent-up demand. According to an analysis by Edmunds.com “in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place .. over 100,000 buyers put their purchases on hold waiting for the program to launch.”

OK, I missed on the program’s initial take-up, but I still see problems:

1) Reports say that the bulk of deals are for non-Detroit brands. Oops.

2) Easy prediction: fraud will be prevalent, e.g. clunkers showing up on used car lots instead of scrap heaps.

3) It’ll be hard to go off the needle.  Over the past few years, auto companies have tried – with only modest success – to wean the market off deep price rebates.

Let’s see what happens when taxpayer-funded discounts end.  Hmmm.

Maybe they won’t. Ouch.

Even so, gotta admit that it makes me smile to see the President touting Cash for Clunkers as his administration’s hallmark stimulus initiative.  That alone is worth a couple of billion dollars.

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Source for Edmunds data
http://online.wsj.com/article/SB10001424052970204619004574324350084909302.html?mod=djemEditorialPage

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Ken’s Take:  I’ve posted a couple of times that I think GM made a huge mistake by failing to capitalize on the early brand success of Saturn … and that Government Motors blundered by ditching the brand  instead of using it as the umbrella brand for eco-cars. 

It will be interesting to see how well Penske is able to leverage the Saturn brand. 

My bet: Saturn will flourish, GM’s stable of passe brands will continue to fade.

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Excerpted from Business Week, “Penske to Buy Saturn from GM”, June 5, 2009

Roger Penske , a legendary figure in auto racing, is about to take on a decidedly less racy piece of Detroit.  Penske will buy GM’s Saturn brand of passenger cars and SUVs .… The racing legend and car-dealership magnate – who owns 310 retail automotive franchises and 25 collision repair centers — will have other automakers build the vehicles while he handles sales, service, and marketing … the brand that 25 years ago was supposed to transform GM.

GM Chairman Roger Smith first unveiled the Saturn idea in November 1983, describing it as a revolutionary new way to build and sell small cars in America. But the project was slow to develop and the brand did not officially launch until 1990. It featured the well-known tagline: “A different kind of car company.”

GM hoped Saturn would lure younger buyers away from imports with smaller, hipper cars. The new factory in Spring Hill had more flexible work rules than traditional GM plants. But despite the cult-like following that grew up around Saturn, the brand never made money for GM. The factory stopped making Saturns in 2007 .

“This is still a good business and we are going to make it better,” Penske says.

Penske’s auto businesses run the gamut from exclusive distribution of the tiny Smart cars in the U.S. for Daimler-Benz to worldwide car and truck dealerships representing 40 different brands.

Despite boasting one of the most honored sedans on the road today, the Aura, and the highly acclaimed Outlook SUV, Saturn’s overall sales have been falling.

The unit has been a thorn in GM’s side for years. It started out with a bang, created from scratch in the 1980s to compete with Japanese small cars and inject entrepreneurial spirit into a lethargic company. Its cars were sold in upgraded dealerships that fostered a sense of community; thousands of customers would flock each year for a reunion at the Saturn factory in Spring Hill, Tenn.

But GM starved the brand of competitive new products throughout the 1990s. By the time management tried to reinvigorate Saturn with new car designs after 2000, the brand’s image had taken a huge hit.

“When Saturn launched in the 1980s, it was the new, new thing, with the best dealer service and no-haggle pricing that put customers at ease,  But in recent years, it has just been another GM division, operating the same as Chevy or Pontiac, with nothing to differentiate it and a marketing message that keeps changing, so that people haven’t been able to get a handle on what the brand is supposed to be.”

Saturn sales are down almost 60% this year, worse than most other brands. Consumer demand has waned, especially since GM made it clear earlier this year that it would sell the brand. At the current pace, fewer than 100,000 Saturns will sell this year. The brand, said Penske, should be able to rebound toward the 200,000 level it enjoyed, on average, during the last five years. 

Penske thinks he can change that. “We will be able to bring totally fresh and unique product to Saturn, and we can leverage what is still an excellent dealer network and the fact that we have no legacy costs to worry about”.

As romantic as owning a car company sounds, Penske rattled off more rational reasons for buying the business from GM. He pointed to the fact that some 3.5 million Saturn customers have vehicles on the road today, meaning that he can count on steady demand for parts. Also, Saturn’s more than 300 dealers have modern, up-to-date facilities and sell only Saturn vehicles. “It is incredibly valuable to have an established business like this without all the legacy costs GM had to worry about covering.” 

First off, he won’t own any manufacturing plants. All production will be outsourced.  Saturn will continue to buy today’s vehicles from GM for at least two years. Penske will talk to other auto manufacturers in Europe and Asia about supplying new products after that.   Auto companies have far more manufacturing capacity than they need, so all would be eager to add Saturn’s current sales volume to their factories. “Our success has been with handling the business that is closest to the customer, so I don’t want us to get into our own manufacturing business.”

As Penske looks to replace models … he will solicit designs from that company—or perhaps from a contracted design studio—for a plan that differentiates the vehicle from any the manufacturer is selling under its own name. 

Full article:
http://www.businessweek.com/bwdaily/dnflash/content/jun2009/db2009065_956038.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

Ken’s Take: A couple analyses I did last summer suggested that people drive more when they get higher MPG from their vehicles … largely (or completely) offsetting the efficiency gain.

http://online.wsj.com/article/SB124338431100556717.html?mod=djemalert

Here are a couple of articles citing studies going back to the 19th century that draw the same conclusion.

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Excerpted from Heritage Foundation, “Why the Government’s CAFE Standards for Fuel Efficiency Should Be Repealed, not Increased”, July 11, 2001

Clearly, the CAFE program has failed to accomplish its purposes. Consumption has not decreased.

As fuel efficiency improves, consumers have generally increased their driving, offsetting nearly all the gains in fuel efficiency.

Advocates of higher CAFE standards argue that increasing miles per gallon will reduce gas consumption. What they fail to mention is the well-known “rebound effect”–greater energy efficiency leads to greater energy consumption.

As more fuel-efficient vehicle costs less to drive per mile, so vehicle mileage increases.

Since 1970, the United States has made cars almost 50% more efficient; in that period of time, the average number of miles a person drives has doubled.
http://www.heritage.org/Research/EnergyandEnvironment/BG1458.cfm

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Interesting Historical Perspective

Excerpted from WSJ: “The rebound effect: Conservation Wastes Energy,”  May 17, 2001

Way back in the 19th century, English economist Stanley Jevons embarked on a study of coal and its consumption. He was intrigued by the introduction of James Watt’s new, efficient steam engine, which began replacing older, more energy-hungry engines.

Jevons found that in Scotland (Watt’s native land), coal consumption was initially reduced by one-third. But in the ensuing years of 1830 to 1863, there was a tenfold increase in consumption. Why? The engines were so much cheaper to run that people used them far more than they ever would have before. Greater efficiency had produced more energy use, not less.

The same arguments apply to government-mandated energy efficiencies today.

Since 1970, the U.S. has made cars almost 50% more efficient; in that period of time, the average number of miles a person drives has doubled. Studies show that when consumers buy more energy-efficient air conditioners, they run them longer because it still costs the same amount.

Consumers, in short, spend to the size of their billfolds.

And that is the failing of government-led demand reduction.

There is only one thing that convinces Americans that they should conserve — market prices. Only when gas prices start to pinch will Americans drive less or hunt for smaller cars.
http://www.opinionjournal.com/columnists/kstrassel/?id=95000484

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Ken’s Take: Virtually all economists agree that the way to shift people to hybrids and other fuel efficient vehicles is to impose a large gas tax — say, $2 per gallon.  That’s what the UK does now. 

I’d agree with the economists, except that I know the Feds would just waste the money. 

Predictabilty, most people — make that ‘almost all’ — think that hiking gas taxes is a very bad idea.  In other words, it’s political suicide.

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According to Rasmussen:

Only 22% of Americans are willing to spend more to buy an energy-efficient hybrid car to help the environment. Even last October, after record high prices at the pump, just 37% said they were more likely to buy a hybrid car than they were a year earlier.

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Given last year’s record-high gasoline prices and the still-fluctuating price at the pump, most Americans aren’t interested in the government tacking on any more, even in the name of fuel efficiency.

Just 10% of adults think the federal government should increase the tax on gasoline by a large amount as a way of encouraging people to buy more fuel-efficient cars … 81% oppose a large tax hike for that purpose, and 8% don’t know.

Americans also took a dim view of another car-focused tax when it was proposed earlier this year. Seventy-three percent (73%) rejected the idea of taxing drivers based on how many miles they drive to help fund the building and repair of roads and bridges. Only 18% supported a mileage tax.

In April of last year, 60% of Americans favored suspending the federal gas tax completely for the summer to offset soaring gas prices.

Full article:
http://www.rasmussenreports.com/public_content/business/gas_oil/81_oppose_gas_tax_hike_to_encourage_sales_of_more_efficient_cars

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Ken’s Take: Let me be sure that I got this right: Chrysler is bankrupt and in bankruptcy proceedings.  GM is bankrupt but is trying to duck bankruptcy proceedings. Fiat gets a part of Chrysler without paying a dime for it.  GM snags a part of Fiat.  So, one bankrupt company is bailing another, using an Italian auto juggernaut as the conduit.

I must be missing something

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From the NY Times:

Four years after paying $2 billion to extricate itself from a partnership with Fiat, General Motors is seeking a stake in the Italian automaker …

G.M., despite its precarious financial position, now feels it has a bargaining chip with its Latin American unit, and is negotiating with Fiat over what it might get in return. G.M. executives are holding out for at least 30 percent of the Fiat Auto Group.

Fiat and G.M. frequently clashed during their five-year partnership, which began in 2000. Fiat engineers said G.M. was too cautious and unwilling to embrace new technology that would have created cleaner, more fuel-efficient engines. In Germany, meanwhile, Opel engineers became convinced that Fiat didn’t share its focus on detail or quality standards.

Full article:
http://www.nytimes.com/2009/05/07/business/global/07auto.html?scp=1&sq=gm%20fiat&st=cse

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Excerpted from New York Times, “With the Car Industry in Trouble, Nissan Rolls Out the Mobile Device”, by Stuart Elliott, April 5, 2009

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Nissan Motors is betting an estimated $20 million that a spirited campaign can get drivers to purchase the Nissan Cube–a cute, smallish car scheduled to go on sale on May 5.

And scratch the word “car,” for the campaign to introduce the Cube in the United States refers to the vehicle as a “mobile device.”

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The phrase, borrowed from the digital domain, signals that the intended market for the Cube is younger drivers. It also signals the focus of the campaign: presenting the Cube as a part of a fun, busy life that can be customized and personalized as easily as a cellphone ring tone or a Facebook page.

To underscore all that, the campaign borrows terms from technology like “search engine,” “browse,” “storage capacity,” “add friends” and “set preferences” to describe features of the Cube. And the media mix skews decidedly toward nontraditional elements like iPhone games, wallpapers, text messaging, the Internet and MP3 downloads.

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The Cube is entering a crowded category of the depressed auto market composed of niche models meant as emotional purchases rather than rational. Such cars are intended to attract attention for unusual design rather than horsepower, bling or fuel economy.

Nissan comments, “This is a tough time to bring anything out, whether a car or a new TV. So we decided we wouldn’t think about it as a car,” he added, but rather “position it as designed to bring young people together — like every mobile device they have.”

Edit by DAF

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Full article:
http://www.nytimes.com/2009/04/06/business/media/06adco.html?ref=media&pagewanted=print

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