Wow, 3 weeks since my last update. I knew it had been a while but I didn't realize that I'd slacked quite this bad. It certainly hasn't been due to me being busy - I had all of last week off. More along the lines of I haven't had a whole lot to say.
I talked about doing a long post on the auto bailout, but after having a couple hour-long conversations with various people about it I got a little burned out on the topic and don't really want to go too much in depth on it. The long-short of it is that on principle I am against it. The auto industry is not merely going through a liquidity crisis like a lot of other businesses are. They have been struggling and burning through cash at an almost unimaginable rate for the better part of 2 decades now. They simply were able to get away with it as long as credit was so easy. However, as I have oft repeated, I am a pragmatist and I recognize the extremely detrimental effect (both economically and psychologically) that letting the Big 3 go under would have on the labor market and the country as a whole right now, so I won't be that upset if some form of bailout ends up being authorised. The main problem is that I don't want this to open the floodgates for all struggling industries to parade through Washington with their hands out. For that reason, I will only be really upset if money is given without any form of punitive stipulation, such as the removal of the current management. One of the arguments I've heard from the auto company reps is "why was it a good idea to bail out Wall Street but now it's a bad idea to bail out the auto industry?" That's just a terrible argument. If you are asking for money, you have to make the case why it's a good idea to give it to you, and not basically say "well you made this mistake once, so how about you just keep on making it?" Regardless of what happens, the Big 3 are going to need to do some major restructuring if they want to survive. They are simply carrying way too much debt to ever be profitable with their business model. Even with the dramatic reduction of benefits set to take effect in 2010, they will need to find a way to turn some of their creditors into equity holders or all they will be doing is delaying the inevitable. As they say, when you jump off the top of the 80th floor for 79 stories you can feel like you're flying.
And, as a final point, having all of the CEOs flying up to Capitol Hill on private jets was just idiocy. I know that it's a relatively minor thing, but it just shows complete lack of foresight on their part. It's like a guy going out to beg while he's wearing an Armani suit. And really I blame their respective PR departments. Each company has teams of people that are dedicated only to upholding the company's image. How can it be that not one of them stood up and said "Um, think about how this is going to look."? If truly no one did, that doesn't speak very highly of the level of talent in the organization. And if someone did and was shot down, that doesn't speak very highly of the decision making process. But then again what do you expect from a company who said in the mid-90s that hybrid cars would never be economically viable?
Finally finished Warren Buffett's book, and I still can't recommend it enough for anyone with even a passing interest in business. As my next "educational read" I've started to read Contours of the World Economy, which is a series of essays that analyzes the economies of the major empires and civilizations from the Romans on. So far it's pretty good, although quite dry. But I've read that it's used as a textbook in some college macro-economics classes, so I guess that's to be expected.
Hope that everyone had a good Thanksgiving! I'll try not to make it another 3 weeks before my next update.
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19 comments:
Hehe.
"I'm too burned out to talk about Detroit. So here is a blog on Detroit."
Again, the whole thing comes down to fiscal responsibility. For many years now, a great population of the car-owning population would buy a new car either before or immediatly after they were done paying for their old one. Like they would buy a new car on a 5 year loan, and then buy a new one after 4 years (or 5 years 1 month.) Fiscal responsibility says to keep that car until the maintenance bills would exceed a new car, but people like new things.
Now that it is time for the country to collectively tighten our belts, new cars are one of the first things to go. And cars that get >20 mpg.
And to put on my republican hat for a minute, part of this problem is the government protections enjoyed by the big 3. Essentially we enacted special protections to create an oligopoly. And then enacted steep import tariffs to ensure a smaller amount of competition from overseas. And a lack of competition inspires decreased innovation.
/rant
"...what do you expect from a company who said in the mid-90s that hybrid cars would never be economically viable?"
They weren't economically viable then. They aren't economically viable now. Toyota takes a loss on each Prius sold. The first year they expect to make a profit (on the Prius)is 2010, when their new model will be released. And this is partly because production will be moving to the United States.
In fact I can't find a Hybrid that actually MAKES a profit at all. It's a pretty well known fact among car geeks that the only models to continue to make a profit for any of the big 3, and Toyota, for that matter, are light trucks and luxury vehicles. And don't forget the undercoating.
The cheap little fuel efficient cars consistently lose money for the carmakers. They only keep them on line because they have to meet CAFE standards.
For those who don't understand or know about CAFE, in simple terms it goes like this:
The Government mandates that an auto maker have a Corporate Average Fuel Economy of 27.5 MPG for all passenger cars and light trucks (Pickups, SUV's, etc.).
The auto maker makes a truck that averages 12 MPG. They either need to make 1 additional car that averages 43 MPG; 2 more cars that average 36 MPG; 3 more cars that average a little over 33 MPG, and so on...
The problem with this is it's CHEAP to make a big v8 with limited technological advancements, but the car makers can charge BIG premiums for them because they have (aside from economy) huge benefits. They are powerful. They are simple to work on. They are tried and true technology that will (if taken care of properly) get 200,000 or more miles before needing an overhaul, and then they keep on going. The big American V8 is extremely reliable. My dad had a Dodge van with a 360Cid V8 and it had something like 250,000 miles on it when it was sold.
Small very technically advanced 4 and 6 cylinder engines are the exact opposite. They cost hundreds of millions to develop. They are temperamental. They require high levels of calibration and maintenance, and even then, they're only expected to last about 100,000 and then they need a lot of work.
This also speaks to Wier's point about selling a car after 5 years. It's because the warranty has likely run out, and buying a new engine for a 5 year old Honda costs as much as buying 2 running 5 year old Hondas.
So, John... Are you saying that hybrid vehicles ARE economically viable? Don't worry, that's not my only point.
My other point is that the real bogeymen are the UAW and the Government. They have BOTH saddled our only three remaining automotive conglomerates with requirements, rules, and regulations that automakers around the world have not had to deal with. Not to mention the taxes. In an effort to get every unskilled laborer in the land enough money to buy a Cadillac, the UAW has taken a job that, let's face it, a robot can handle, and paid an average $27 per hour.
I'm sure the very smart, and financially comfortable readers of this blog, find that a paltry sum. But in reality, these ARE people who do not have a requirement of higher education. This is the equivalent of Laverne and Shirley type work. I have been to an auto plant (GM factory in New Jersey), and it really is a marvel of mental mediocrity.
(Put this bolt here. Car moves on. Put this bolt here. Another car moves on)
Now, when car makers were able to make a profit on their cars, it wasn't a big deal to pay them the equivalent of $27/hr. Right after WWII it was hard to get enough workers to do this job. It wasn't the best opportunity available at the time. The automakers had to pay high wages to find people to do it, and they had to give huge bonuses, and provide unheard of benefits packages. There's nothing wrong with this. It's pure capitalism in action.
But later on, when manufacturing facilities found ways to increase profits by automating certain processes, the UAW pitched a bitch, and strong armed the manufacturers into less efficient methods. Then they demanded more money. They were well on their way to killing THE goose. Now if you do business in a state that has protections from hiring non-union labor, you are effectively at their mercy. Either pack up and move to another state/country, or cave in and try to eek out a profit on the back end with leather seats and attractive financing.
I’m not saying bail them out. I’m actually in favor of letting them go bankrupt. Break those crappy Union contracts. Then they should pack up and move to a southern state where Toyota pays $30/hour, but doesn’t have to pay workers NOT to work (please Google UAW Job Bank). Screw Detroit… give it to Canada. They’ve done it to themselves. The big 3 should all move to a Right to Work state, and regroup.
The government angle could take days to go through, so I'll just leave it at that for now. I'm sure you're all sick of reading this.
Not sick Mike.
Good stuff.
Yes, I'll still stand by my statement that hybrids are economically viable. First of all, there is a difference between something being viable and profitable. By virtue of how the accounting is set up, every new model introduced into the market can't be profitable for its first couple years since all the start-up costs (design, R&D, any new production lines that need to be built) are factored in. The statement that Toyota loses money on each Prius sold might be technically true, but it's an accounting illusion that doesn't really reflect the economic reality. It implies that if sales of the Prius suddenly doubled that Toyota's profits would go down, and that's simply not true. As long as your selling price exceeds your variable cost (which is certainly true with the Prius) then you have a positive contribution margin and thus each unit sold is profitable (even if you never achieve enough sales volume to get into the black).
Regardless, GM certainly made an error by opting to not be an industry leader in the hybrid market. They obviously realized this or they wouldn't be as heavily invested in the Volt as they are now. And regardless of what happens with the bailout, their fate is likely tied to how successful the Volt ends up being. And they are likely to run into the same problems in marketing that they had with the EV1 (the ill-fated electric car). How do you push a car as a "cleaner, more efficient alternative to the dirty gas-guzzlers" without damaging the sales of all the "dirty gas-guzzlers" you are still trying to sell?
"As long as your selling price exceeds your variable cost (which is certainly true with the Prius)"
Where did this information come from? I'm not yet convinced because I maintain that from the information I've read, the Land Cruiser ($65,000 and 13/18Mpg) pays for the Prius' existence.
"...GM certainly made an error by opting to not be an industry leader in the hybrid market. "
There are 6 Hybrid models in the Toyota linup. Three Toyotas, and three Lexus. Three of them released this model year. With Brand Engineering (renaming a model on the same chassis as another brand), there are 4 separate models.
There are 6 GM models, 5 of which have been out for multiple model years. Even accounting for brand engineering, there are 4 models.
This doesn't sound like a huge disparity in linups... there is a nice mix between economy cars and luxury cars in both stables.
GM has chosen to keep the same attractive body style as the rest of their cars, with the hybrid option available for certain models. In reality, this should be the more economically sound method, because you're not re-engineering the entire car... just the drivetrain. Ford also has a couple of Hybrid models available. The Escape/Mariner have been available for a few years.
But the Prius, with it's distinct shape, yells "HYBRID DRIVER HERE!!! I'M ECO-CONCIOUS!!!". I recall talking with you and Christy before you bought the Toyota, discussing the different options available. There were a lot of options even then. Why the Prius?
That's where GM, and Ford have both had a problem. Even though it's economically better to re-engineer just the drivetrain components, marketing-wise, it's a trendy selling point to look like you care. They both should have designed a model that "looks" like it's a hybrid.
And then they should have given it to a Japanese car company to make it for them.
Ha!
"Toyota has already reached the break-even point on sales of its hybrids; by contrast, its foreign competitors, like GM, still have years of bleeding red ink ahead of them."
That's from page 2 of this Newsweek article . The bottom line, though, is that no one really knows the exact costs of each Prius. It's propietary information and thus we'd need an insider in Toyota to tell us for sure. However, for Toyota to have actually priced their vehicle below their variable cost would be sheer lunacy, particularly after they started having long wait lists on Prius orders.
# of different vehicles offered is absolutely no indicator of who is an industry leader and who is not. Sales are and GM is getting crushed . In 2008 (through October): total # of Toyota/Lexus hybrid cars sold was 216,760; total # of GM hybrid cars sold was 10,549. Toyota also introduced the Prius in Japan in 1997, and in the US in 2000. The first non-SUV hybrid from GM was the Malibu, released earlier this year. Toyota beat GM to the market by 10 years (8 years in the U.S. market). I just don't see how the statement that "Toyota is the industry-leader in the hybrid market" is controversial. When you control 85% of the market share, you are the industry-leader.
"But the Prius, with it's distinct shape, yells "HYBRID DRIVER HERE!!! I'M ECO-CONCIOUS!!!"'
Sorry, but that's your bias. The Plymouth Prowler, PT Cruiser, Honda Element, Toyota Scion, and Mini (to name a few) are all cars with distinct shapes, so what are they "yelling"? And what is so "distinct" about the Prius' look anyway? It's a slightly elongated hatchback. Put it side by side with Christy's old 1995 Escort hatchback and it wouldn't look that much different.
Why a Prius? Well, yes, we did want to buy a hybrid since we decided we want to support that technology. Given that, we really didn't have a whole lot of choices. We didn't want (and couldn't afford anyway) an SUV hybrid, so that left us basically with the choices of a Prius, Camry, or Civic. We went to the Toyota dealership first, they didn't have any Camrys and then we test drove a Prius and loved it so we never made it to the Honda dealership.
Aside from that newsweek article, which I had not yet seen, there's a lot of debate online about whether or not Prius' are profitable. I'm still researching, but with development costs for the hybrid system alone estimated at $25Billion, it still seems difficult to see where they are eeking out a profit. But they DID lose money for ten years and two model lines on the Prius. That's outside of what I'd call
clearly and undisputeably viable, but that's my definition.
And as far as a distinct body shape, I guess I'm going by the definition of automotive journalists and other experts. Besides, the point I was making was that it doesn't share a body with other Toyota models in their linup. The Camry does, but it isn't selling nearly as well as the Prius, and I think the distinct body style is the reason.
And finally, your not listening (looking) when you go off on the subject of Toyota's market leadership. I never disputed that they are the standing, and likely to be for a long time, leader in blazing the hybrid trail. I merely stated that your allusion that GM had been ignoring the segment was off base. They have had hybrids for a few years. They have been selling poorly, but they've had them. GM has, for decades upon decades, been a follower in almost every area of the auto industry, but your comment was demagoguery at best.
The only thing I said that was clearly true was that the Prius' selling price was higher than its variable cost and if there is even any discussion/debate about whether or not the Prius is profitable then this clearly has to be true.
In your earlier post you quoted me talking about GM not being an industry leader so it read to me like you were disputing it. I guess you weren't, so nevermind. I think my other point still stands though. GM definitely ignored the hybrid market for a long time. They were beat to the market by 8-10 years.
Finally, how do I argue with "there's a lot of debate online" and "I'm going by the definition of automotive journalists and other experts."? If (and when) Weir or I offer anecdotal evidence such as that, you are the first person to call for a source. But, yes, I agree that it does have a distinct body style. I just don't think it's such a huge radical departure. My question still stands though: what are all these other cars with distinct body styles "yelling"? And if you look at the differences in gas mileage between hybrids I think there's more than just the distinct body shape causing the sales discrepancy.
I just ahve a quick comment here, maybe more tomorrow, but the Prius was more than its body shape or gs mileage.
First of all, even before it got popular, demand was VASTLY higher than supply. IIRC it was waitlisted for 2 years. Whether it was marketing or bad planning, this created a buzz, and made it kind of an 'it' car.
Also, it had Hollywood. There were film premieres that the stars all arrived in Priuses(?). It gave the aura of being cool, even though people thought it looked funny.
Americans love to feel like they are sitting at the cool kids table, and owning a Prius was, for a while, equivalent. This was well before gas was $4.50. This was well before 'green' became a buzzword.
so there were a lot of thinigs that went into the Prius popularity and marketshare. I don't know about any of the economics though, and am too lazy to look it up at the moment.
From http://www.glgroup.com/News/Is-Toyotas-Prius-Being-Dumped-On-The-US-Market--23242.html
"Toyota has never been forthcoming on the question of whether or not the Prius was, and perhaps still is, a 'loss-leader,' i.e., that it was being sold for less than its cost of production in order to establish a market.
One reason that Toyota could not answer this question is simple enough: Under WTO rules such loss-leading sales might well be determined to constitute 'dumping,' or selling below the actual cost of producing the product in its home country, which is considered a predatory pricing scheme, which gives an unfair advantage to the dumper and can be punished by special import duties and fines to level the playing field."
I can't find an actual "variable cost" to a Prius. However, Jim Press, who is an exec at Chrysler and who was the former president of Toyota Motor, North America, has stated that the cost of producing the Prius was subsidized by the Japanese government. That has (I think logically) led me to believe that Toyota is hiding some of the cost of production. If they can successfully hide this cost from everyone, they can claim they are making a profit, when they might actually be taking a loss.
From http://www.thetruthaboutcars.com/category/news-blog/hybrid/
"...continuing reports that Toyota may be taking a loss on every Prius"
Interestingly from that particular article, anyone notice that the new Honda Insight looks strangely like a Prius?
Speaking of styling... (links below)
"The funky five-door Prius is one of the most distinctive shapes on the road--a truly futuristic piece of car design. Love it or hate it, you can't miss it." - Motor Trend
"Its unique hatchback styling gives it a distinctive look..." - Forbes Auto
"Of course that distinctive styling that says "Hey, I'm Green!" is one of the draws of the Prius to some buyers." - Autobloggreen (oooooh, SNAP!)
"However, there's no guarantee the 2010 Prius will have the distinctive styling that lets everyone know you're doing the right thing for the environment." -Business Week (double snap!)
http://www.motortrend.com/roadtests/intellichoice/369_0508_review_2005_toyota_prius/index.html
http://www.forbesautos.com/showmodel/toyota/prius/
http://www.autobloggreen.com/2007/10/07/honda-takes-a-shot-at-the-prius-in-a-new-parody-ad/
http://www.businessweek.com/lifestyle/content/jun2008/bw2008066_698864_page_2.htm
Links:
Motor Trend
http://tinyurl.com/6edm4s
Forbes Auto
http://tinyurl.com/5fclao
Auto Blog Green
http://tinyurl.com/6dwp92
Business Week
http://tinyurl.com/6p54kr
Is it my turn to say "you're not listening"? I already agreed that the Prius has a distinct body style.
"But, yes, I agree that it does have a distinct body style."
See; there it is. I just suggested that there was more at play than that in the Prius' success vs. other hybrids. I also think that given the far better mileage the Prius gets vs. other hybrids (though the gap is narrowing) there is a case to be made that Toyota's idea of designing a pure hybrid was better than hybridizing an existing model.
My whole point in asking what other cars with distinct body styles are yelling was this: whenever you (the collective you, not you specifically Mike) make a statement such as "this person is doing X, that means they are trying to say Y" that statement reveals more about you than it does about them. Two people watch the movie "Colors" and one walks away saying that it glorifies violence and the other says that it rightly shows its consequences. Whether right or wrong, their statements likely will give more insight into them than they will the movie. I don't automatically assume that a Prius driver is trying to announce "I'm green" any more than I assume a Hummer driver is saying "I don't care about the environment." They are both just stereotypes. I am positive that there are a lot of people that bought the Prius just so they could show off how green they are. But I'm just as positive that there were a lot of people who simply saw that gas was likely to get more and more expensive and just wanted to get the most fuel efficient car available. Some people want their cars to define them; some people just see a car as a way to get from point A to point B faster than a 10-speed.
As to the financial question, Toyota is not hiding some of its costs: it's hiding ALL of it! Part of their competitive advantage is 15-years of knowledge gained from working on hybrid technology. All of their competitors are left to reverse engineer the product in an attempt to figure out exactly what the costs are. It's certainly possible that Toyota is falsely claiming that they are breaking even on the Prius, but it's also just as likely that they are exaggerating the cost to dissuade new entrants (and as a by product, people feel like they are getting a great deal on a more expensive vehicle). All we can do is speculate.
The bottom line is that except for some absolutely extraordinary circumstances you would not price your car below your variable cost. And even in situations where you would (Best Buy was famously rumored to have done so with CDs when they first opened) you certainly would not dump $25billion into R&D just so you would have the privelege of manufacturing yourself into bankruptcy. And even if you were stupid enough to do THAT, why in the world would you stick to that price level even after you started having huge waiting lists?
From what I understand, John, Best Buy still does it with DVD's and CD's. I think WalMart does it too. God, and if you want to talk about loss leaders, look at all the shenanigans from Black Friday.
The thing is, that all of those stores have other products with higher profit margins. It is possible to go into Best Buy to pick up a DVD and also walk out with an XBOX controller, an Ipod dock, and belt clip for your cellphone.
The concept of the loss leader (as I'm sure you know) is to get people in the store to buy something else.
I just don't see that happening on an item like a car. No one is going to walk into a Toyota dealership to buy a Prius and decide to pick up a Camry as well just because it is close to the register.
But is this really what we want to be talking about today? Aren't we all proud to be from Illinois?
Hey, I'm from New Jersey... we know how to take a bribe without getting jammed up by the feds.
Yeah, I've only read a little bit about it today so I want to withhold writing up a big thing about it until I've learned more but it seems pretty much a slam dunk. When I first heard that he'd been arrested I assumed that it had something to do with the Rezko investigation, so I was pretty shocked to see he was auctioning off the Senate seat.
Let's see; soliciting a bribe for the President-elect's vacated position while you're already being investigated for ties to a real estate scandal in the job where your predecessor left in disgrace and is now in jail. I don't know if I'm more blown away by the arrogance or the stupidity.
Well, I guess I can thank the Obama voters for this one. If he hadn't been elected, Blago wouldn't have had the opportunity to try and auction off his senate seat, and this wouldn't have happened.
See, there's a silver lining to every dark cloud :-)
Thanks guys!
You want a silver lining to the Obama election Mike? How about all the liberals going crazy over his (so far) center-right cabinet?
(Haha, I totally hijacked this thread.)
Yeah, I think all the "change" comments have been made already, but it's nice to know you've noticed. Hell, I'm surprised he hasn't chosen McCain as his Sec. of Defense!
LOL!!!
Toyota sucks.
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Just kidding, John
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