Is It Worth the Cost?

I haven’t been in the market for a new car for some time now, and as a result I was only vaguely aware of Ford repositioning its product line. I don’t recall seeing ads for the Fusion or Taurus sedans for some time now, and it has been a while since the company has allocated any marketing resources for the Fiesta or Focus lines, at least on any channel where I would have seen them. It’s not as if this is a particularly radical action anyway; every large company that makes consumer products has to reposition at least some of its products from time to time as customer preferences change and the economy fluctuates. But apparently these most recent moves are raising the prospect of reduced sales going forward…

You can pick up the article from the Automotive News site if you want to, but what they’re talking about is a survey that indicates that at least some percentage of Ford owners will purchase their next vehicle from another company if their preferred model of sedan isn’t available. The findings aren’t conclusive – the sample size isn’t big enough, for one thing – but it suggests that the company’s plan to replace sedan models with SUVs and crossovers offered at a similar sticker price may have failed to take into account the fact that some people don’t like SUV body types, or that some people are more loyal to the kind of car they want to drive than they are to the brand identity…

What is really odd about these findings is that they are almost directly contradicted by trends in purchasing decisions in recent years. Whether SUV types really have higher profit margins than sedans or not depends on whom you ask, but the market has definitely been trending toward them for some time now, and it’s hardly surprising that Ford would try to produce more products in the categories in which they sell the most units. From a strategic viewpoint, the real question is whether Ford can achieve enough additional sales – or, failing that, secure enough additional revenue – through this change in their product mix to make up for whatever they lose by discontinuing the sedan models…

Now, I don’t mean to imply that this kind of forecasting is easy, or that the consumer preference analysis that drives it is something that anyone can just throw together on the spot. One could argue that eliminating products with lower purchase prices and higher gas mileage (e.g. lower operational costs) might be viewed negatively by people in some market segments; one could also argue that if you alienate buyers at the entry levels of your product line you have dramatically reduced the possibility that they will ever graduate to the more lucrative levels. On the other hand, there may also be savings that can be realized by producing a smaller number of models, requiring a more limited variety of parts, which are not obvious from the published information. At least, that seems to be the way Ford is placing its bets…

I’m going to try to keep an eye on this one as the next few model years hit the market. It’s possible that the Forward Planning team at the Ford Motor Company knows more about the way their market is developing than the folks at Automotive News (or various scruffy bloggers) do. But it’s important to remember that they’ve been wrong before, too…

Wagging the Elephant

Some time ago in this space I brought you the story about how many “foreign” cars were now being built in the United States, like the Toyotas being built in Ohio, and how many supposedly domestic cars were being built from parts not made in this country. An investigation team had taken all of the parts from that model year’s Ford Mustang and Toyota Camry and sourced all of the parts, only to discover that while both cars were assembled within 500 miles of where I’m sitting right now, the supposedly foreign Camry had more American-made parts than the All-American Mustang. I wish I could tell you that it comes as a surprise that no one in Washington seems to have read either the original article or my commentary on it, but I’d be lying…

An article on the CNN Money page this week reports that the proposed (or threatened) steel and aluminum tariffs are projected to drive the cost of the Camry up by about $1,800 dollars for the next model year, and possibly more thereafter, depending on how the trade wars develop. There hasn’t been any word yet on how much the cost of a Ford Mustang will go up, but since these (and several other Ford products) use even more foreign metals and parts, it seems likely that the Mustang will be hit at least as hard. Toyota hasn’t said how much of the price increase they intend to pass along to the consumer via a higher sticker price, but unless they want to eat the entire increase out of their profits they are going to have to pass at least some of it on…

It’s hard to say what the overall effect will be on the US economy, let alone the world’s economy, but the impact on anyone in this country who wants to buy a Toyota Camry is certainly clear: they will have to scrape up another $1,800 plus whatever it costs to finance the increase. If a similar increase hits all of the other companies that manufacture and sell cars in this country, including Ford, GM, Chrysler, Hyundai, Honda, Mercedes, BMW, and others, it’s going to make it much harder for ordinary Americans to buy a car, and I can’t imagine that’s going to be good for the workers who build the cars, either. And that doesn’t even consider the effect that having all of those companies losing sales, all of their suppliers losing sales, and all of their employees having less to spend on consumer goods is going to have…

In theory, if this situation was protecting a similar number of workers and consumers it might be worth considering such an action. But with metals production in the United States continuing to drop, it isn’t clear if the developing trade war is going to save any jobs, let alone enough to replace all of the ones potentially at risk if the automotive industry in this country is thrown into a crisis. And I have to point out that cars are only one of the more obvious products that are made out of steel and aluminum in the US; if a similar effect were to cascade across all of the other sectors of consumer goods, the overall effect could make the 2008 economic crisis look like a minor inconvenience…

In politics, the expression “Wag the Dog” is used to mean a stunt intended to divert attention away from an unpopular action, but the term derives from the old saying about “the tail is wagging the dog,” which is more about a minor part of something taking on more importance than the whole. I would say that in this case both expressions apply; the health of one American industrial sector that has been in decline for decades is being given priority over dozens of other sectors, and goodness knows what this fiasco is supposed to keep us from noticing. Except that, when things get to this scale, it’s really more a matter of the tail wagging the elephant…

Beyond Our Means

I read with great interest a story that appeared on the Reuters home page this past week, where the authors noted that auto loan delinquencies had reached their highest level in eight years during the last quarter of 2016. Given the number of crises, financial and otherwise, that appear to be rampaging around our nation these days the threat of people not making their car payments on time may seem relatively trivial, but it has a number of disturbing implications, beyond the fact that Americans appear to be spending more than they can afford on motor vehicles yet again…

Regular readers of this blog (assuming I have readers) may recall a story I brought you at the beginning of the 2008 financial crisis about people falling prey to predatory loans, not just on their mortgages or their credit cards, but also on their car loans. It didn’t draw that much attention at the time, and maybe it shouldn’t have – this was a period when people with mortgages they couldn’t afford were choosing to abandon their properties and taking the hit to their credit when the banks foreclosed. But the impact of borrowers using the same tactic to purchase new cars – taking out new loans to purchase new vehicles and leaving the old ones to be repossessed – did not help the ensuing consumer credit situation…

I can’t speculate on the political or legal ramifications of the crisis, but it is possible that too many people failed to grasp the size of the problem. According to the Reuters story, auto debt in America went up by around $93 billion over 2016, which brings the total people in this country owe on their vehicles to just over $1.16 trillion. Yes, I said trillion; we have just caught up to and passed the amount owed on this class of loan at the time the Great Recession started. Of that amount, Reuters is reporting that around $23.27 billion are 30 days delinquent, and another $8.24 billion are 90 days delinquent or more. For comparison, the ruinous student loan debt in this country is at around $1.31 trillion, and total debt is around 12.6 trillion…

Now, you might quite reasonably ask why I am wasting your time with this story, particularly if you are not currently behind on any of your loan payments. Why should you care if the kind of people who spend $80,000 on a car when they make $10 an hour are at it again? I could point out that this type of borrowing behavior is a long-standing predictor of trouble for the auto industry, remind you about the havoc that resulted the last time the Big Three automakers were facing bankruptcy, or even point out that if one or more of these companies does go underwater again, it’s your tax dollars that will be used to bail them out. But what really concerns me about this is the part we’re not seeing – the parts that don’t hit the radar at Ford Credit or its counterparts…

The impact of predatory lending at a local level – the “Buy Here – Pay Here” operations are only one of the more egregious examples – may not have the same impact as GM going into bankruptcy, but the effects on a whole range of people who can’t ask the Federal government to bail them out were hideous. And while our current leadership – financial as well as political – does not like to admit it, if consumer spending drops off because none of our consumers have money to spend on anything except loan payments, none of us are going to like the results…

Not More Hogwash!

It’s still too early to be sure, but apparently Volkswagen may not be the only company that has been defrauding customers – and the EPA – on how clean their diesel engines really are. Last week the US Department of Justice announced indictments of six VW executives involved in the use of “Defeat Devices” that allow the so-called “Clean Diesel” engines to pass air pollution tests despite being as dirty as any other diesel engine the rest of the time. To their credit, the company owned up to the wrongdoing with surprisingly little fuss and appear to be accepting the massive fines our government is hanging on them, although so far they have not agreed to hand over the five executives who are currently believed to be in Germany. Personally, I was very disappointed to learn that the widely-hyped technology that could make diesel engines much cleaner than regular gasoline engines was a hoax; I still believe that we need Clean Diesel, and will need its potential more than ever as alternative fuels become more important. But unfortunately, it seems that things are even worse than we thought…

You can pick up the ongoing story from the Bloomberg site, and I’ll update the link if there are updates. Apparently, the EPA is now charging Fiat-Chrysler with using specialized software in their car’s engine computers to lower the emission levels during testing – essentially a software version of what VW was doing with hardware. There’s no indication as of yet that Chrysler was also using hardware systems to produce false results, but that may just mean that the EPA hasn’t been able to prove anything so far. The other major difference in the stories is that the CEO of Fiat-Chrysler dismissed the allegations as “unadulterated hogwash” when he was asked about the case, and so far the company is stonewalling any attempt to resolve the issue…

Now, we should probably acknowledge right off the top that the US Department of Justice, and law enforcement in this country in general, has not had the highest possible levels of credibility in recent years. It really is possible that somebody at Justice is jumping the gun and attempting to bully Chrysler into confessing to the wrongdoing because they don’t have enough evidence to actually bring the case. And it is important to note that emission-control software isn’t actually illegal in the US; as the Bloomberg article notes, it can be used for a limited time under some conditions to prevent engine damage. But if that software has actually been programmed to detect test conditions and alter the engine’s emissions for the duration of the test from the profile it maintains during normal operation, then that is fraudulent. Whether the charges will stick, or whether anything will be done about the situations if they do, is another matter…

At the moment, the EPA’s enforcement people are saying that it is up to Chrysler to prove that they aren’t using defeat devices, but unless somebody in our government actually has proof that they are using such devices it does not seem likely that the charges would hold up in court. You can’t prove a negative, and you generally can’t ask someone to prove that they aren’t doing something without any evidence that they are, or at least that’s what they taught us in business school. The change in government that is set for the end of next week may also shake things up, since the incoming administration is expected to be much more business-friendly than the outgoing government has been. What remains to be seen is how the customers will react to this – and what impact that will have on sales…

When the EPA called them on it, Volkswagen owned up to their malfeasance and accepted the penalties without much further discussion. This may not make the affected vehicles look any better, but it definitely improved the company’s issue, turning the potential scandal into old news much more quickly than a drawn-out battle of words and accusations would have. By choosing to fight, Fiat-Chrysler is going to keep this case in the public eye for much longer, and if they are eventually proven to have defrauded their customers and the EPA the penalty and the impact on their reputation will probably both be much worse than if they had just come clean…

We should also consider that, if the company does turn out to be innocent of these accusations, then this is the correct course of action and they will have reason to be proud of their resolve once they win the court case. The question there is how much damage this situation will do to their sales and their public image in the meanwhile – and whether they will still be around when the dust settles this time…

Coming Soon to an Auto Mall Near You!

Over the years we’ve discussed a number of the emerging technologies that promise to one day produce cars that don’t require gasoline or other fossil fuels in order to run – including some which are already in use, like the biofuel diesel projects and the Tesla Motors all-electric vehicles. There’s one I keep bringing up which has, so far, failed to produce any street-legal production cars, despite its popularity in science fiction and the fact that the actual technology has been around since the 1960s: the fuel-cell power plant. This is the same device that was used to generate electricity onboard the Apollo missions; a relatively simple device that uses compressed hydrogen and a catalytic reaction to generate power, leaving water as the only by-product. They also have the advantage of not needing large batteries filled with lead and other heavy metals like the electric cars, or using food crops to make fuel, like the E85 projects…

From a technical standpoint, the big problems with fuel cell vehicles have always been the weight and bulk of the units, the difficulty in storing and dispensing pure hydrogen safely, and the cost of making the cells in the first place. From a business standpoint, the much larger issue has always been that no company with the resources to mass-produce such a vehicle has ever been interested in making one, which means there has also never been a financial incentive for anyone to produce service stations capable of refueling one. Tesla Motors has experienced some of the same issues with its electric cars; while they are still developing a network of charging stations, unless there are enough customers to keep such stations in business, no one is going to operate one. So far, there are only a handful of stations that can provide hydrogen for fuel-cell vehicles, all of them in California – but that could be about to change…

A story last week in the Washington Post describes a new offering from Toyota called the Mirai, which is being described as the first production car to use a fuel-cell power plant. This may be a bit of an exaggeration, in that the Mirai is only going to be produced in limited numbers (700 this year and 2,000 next year), but the same Post story mentions that Hyundai has already started producing a fuel-cell version of the Tucson-class SUV, and Honda’s first fuel-cell type will be available next year. If these vehicles perform as well in a business sense as they perform in the physical sense it seems likely that we will gradually see production increase, as it did in the case of the Prius-class hybrid and as it is starting to with the Tesla electric products. And there is reason to believe that these vehicles will take off and sell, given their advantages over all previous technologies…

Some of the advantages are practical, of course. A fuel-cell type like the Mirai will have significantly greater range than the Tesla electric cars, and will require three minutes to recharge, rather than the 30 to 60 needed by an electric vehicle. Toyota is also pricing them at about 70% of what the primary Tesla car is selling for. But the big difference should come in terms of industrial base and infrastructure. I will yield to no one in my respect for Elon Musk and the folks at Tesla Motors, but for all of their technical and financial brilliance, they do not begin to have the industrial resources of Toyota, let alone the Honda and Hyundai corporations, and who’s even mentioned access to capital or distribution channels yet? Toyota has the ability to build up the number of fuel-cell vehicles gradually over time, exporting them to more and more states as the fueling stations to support them come on line. If two or three major competitors are also dumping hydrogen-powered vehicles into the US market, it will very rapidly become economically viable to support and fuel these cars, and the whole cycle will begin to pick up speed…

There are still problems to work out, of course. It remains to be seen if the oil companies will pick up on the opportunity to sell hydrogen through their existing infrastructure (at the moment, most of the hydrogen is being delivered in various hydrocarbon storage media, and could be distributed through slightly-modified gas stations), or how long it will take to educate the public about the potential of hydrogen-powered vehicles. But if production volume starts to rise, and the price continues to drop, fuel cell vehicles might take off in exactly the same way gasoline-powered cars did a century earlier, and for almost exactly the same reasons…

Protection from What?

By now most of you will be familiar with the automobile company that calls itself Tesla Motors; some of you may also be familiar with its products, which are considered to be some of the most advanced electric vehicles in the world. What you may not have realized is that in addition to changing the way cars are designed, built, marketed, and refueled, Tesla Motors has also changed the way cars are sold, operating almost entirely online. There are display locations (the company calls them “Galleries”) in a number of states where you can examine a Tesla vehicle, and the company is working on how to arrange test drives, but nothing quite like the traditional franchised car dealerships used by all of the other companies that sell cars in the United States. As it stands, you can go online, choose all of the options you want in your Tesla product, including color scheme, place your order, and have the car delivered to your door

Compared to the traditional method of selling a car, this new approach has a number of advantages – the largest of which is cost. Tesla isn’t collecting franchise fees from its dealers, which must have some impact on their bottom line, but from a sales standpoint the company does not have the overhead a dealership experiences, either in payroll or physical plant; they also don’t have the dealer’s mark-up to consider. Tesla’s primary products to date have all be relatively expensive, but they’ve been able to offer them for sale at a lower price than any vehicle made for equivalent cost while still maintaining a greater margin than most of their competitors. You might expect the people who own the traditional car dealerships to see this as a direct threat to their business model, control of the market, and way of life, and to take any action necessary to stop Tesla’s sales operations. You would not be disappointed in that expectation…

You can pick up the story on the Bloomberg News site if you want to, but what they’re talking about is a bill that has already been passed by the Legislature here in Michigan, and is currently being reviewed by the Governor’s office, that will ban sales of Tesla products (or any other automobile sold using any channel other than a franchised dealership) within the state. Given that Michigan is home to all three of the major U.S. automakers, this legislation comes at the surprise of absolutely nobody. What I find surprising about it is the grounds the automobile companies and their governmental pawns are using to ban Tesla’s sales operations. “States are fully within their rights to protect consumers by choosing the way cars are sold and serviced,” said Charles Cyrill, a spokesman for The National Automobile Dealers Association, in an email to Bloomberg. He goes on to claim that without competition between dealers to keep the price down, there is nothing stopping the manufacturer from raising their prices…

As so often happens, I’m left wondering if the National Automobile Dealers Association is made up entirely of credulous idiots, or if they think the general public is so constituted. Dealerships do not usually compete with each other on price, because they are working from the same MSRP set by the manufacturer, and because they are working within protected territories guaranteed by their franchise agreements. But even if they did, the primary force holding down the price of a new car isn’t competition with other dealers; it’s the availability of equivalent products. If any giver carmaker raises their price above what the public is willing to pay for their product, all of their customers will just move to a more reasonably-priced alternative. That’s how a free-market economy works – at least, when it’s not being manipulated by powerful business interests through political influence…

Forcing Tesla to work through traditional dealerships would have no impact on the invoice price of the car – what it costs to buy one from the factory – it will only impact the price the customer has to pay for one, since the price differential is the dealerships’ only source of income. It has some benefit for the public, in the sense of creating jobs for franchise owners and car salespeople, but none whatsoever for the customers. In fact, the only real winners in this scenario are all of the other automobile dealerships and their franchising companies, who will have an easier time competing with Tesla on price if their newest competitor is forced to incur the same price structure under which everyone else labors…

How anyone manages to state with a straight face that such a bill represents anything other than blatant protectionism for the companies supporting the lobby group is beyond me, but perhaps that’s why Mr. Cyril chose to put this howler in an email instead of actually saying it in person. And while I’m sure we can all appreciate the U.S. auto industry’s efforts to protect consumers from more efficient direct sales channels, I highly doubt if anything this heavy-handed is going to help their public image – or keep Tesla from taking away still more of their market share…

Bet on the Man

I’m not usually considered an early adopter of new technology; it’s the skeptic in me that keeps making me question whether the “next big thing” really is the next big thing (like the iPod or Face Book) or just looks like it could be (remember the Newton? how about the Lisa computer?). In recent years I’ve been skeptical about hybrid and fully electric vehicles, not so much because I don’t believe in the technology as because the inertia built into the automotive industry and its allies in the petroleum industry. Put simply, there are too many rich and powerful people who are too invested (often literally) in keeping things the way they are now for us to imagine any large-scale change happening in this sector. To even challenge the status quo you’d need not only cutting edge technology, but also visionary leadership, superior product design, exceptional marketing, impeccable public relations, and a truly brilliant strategy to tie everything together…

I was therefore very interested to read about the new gambit from Tesla Motors last week. According to the statement issued by Elon Musk on his personal blog, the company is now offering an 8-year, unlimited-mileage warranty on the battery pack and power train on all of its vehicles. That would be amazing enough, but according to the note they will also be extending the new warranty retroactively to cover all of the units in each of these designs that have already been sold. Warranty agreements that offer as much as ten years are common, as are offers of 100,000 miles or more, but as far as I can tell this is the first such offer to include unlimited miles as part of the deal. But when you consider the implications of the offer, it rapidly becomes apparent that this is more than just a selling point for the product…

One of the biggest problems for any new technology is that people are going to see it as unproven – even if, as in this case, the technology in question is actually very old. It turns out that electric cars have existed for over a century and actually predate most of the current internal combustion technology that everyone thinks of as being proven and reliable. It seems obvious that by offering unlimited mileage on its warranty, the company is effectively saying that they have no concerns about the durability of their products; they are effective both challenging people to try driving one of their cars a spectacular number of miles over eight years of ownership, and calling their entrenched competitors on the fact that none of their supposedly “proven” and “mature” gasoline-powered cars has anything approaching this level of coverage…

Then there’s the specific perception of electric-only and even hybrid cars as needing new battery packs every few years, and that the manufacturers are unable to handle disposing of the old batteries. If Tesla is offering a complete warranty on their drive systems and battery packs for eight years they clearly aren’t expecting to have to replace any in three or five years – and they can’t be that worried about having to dispose of bad units when that becomes necessary. You would also expect excessive use to shorten the service life of both the power pack and the associated drive systems, but Tesla is clearly not concerned with that, either. Some consumers may still view the purchase of these cars as something of a gamble, but it is apparent that if that’s the case, the company and its ownership (including at least one entrepreneurial legend) are going to take that risk right along with you…

And if that wasn’t enough, there’s also the matter of getting more vehicles onto the road. The only way for Tesla to become a mainstream brand – not some new, exotic, possibly ephemeral technology toy – is for the sight of its products to become commonplace; for the sight of a Tesla roadster in the next parking space to become no more remarkable than the sight of a Ford on the other side. If this can boost acceptance and purchase of the vehicles – and the company is already operating at full manufacturing capacity and building a new factory to increase that output – then they just might make it out of the Introduction phase of the life cycle and into the Growth phase. Once they can convince more than just the Early Adopters to purchase their product they’re off to the races…

Stay tuned, folks. This is starting to get interesting…

Seriously?

Every once in a while the tone of this blog will get much darker than I really like, and I will end up reminding my readers (assuming I have readers) that I’m really a business teacher and not an Internet comedian after all. I have similar issues in my personal life, as I sink deeper and deeper into middle age and start catching myself acting responsibly and making mature decisions. At such times I will generally go out and do the most juvenile I can think of that won’t get me shot, arrested or fired (into which category, alas, running around pelting people with cream pies and yelling “Ya-HA! Ya-HA!” does not fall), and when I feel the blog is getting too dark I will try to find you a story about something completely stupid. There was a story about a botched refund this week that should do the trick…

According to the story from the local ABC News affiliate, a woman in Jacksonville, Florida was having trouble with a used car dealership that was failing to honor the warranty they had sold her. So she reported them to the State Department of Motor Vehicles, and after due investigation the dealer was ordered to refund her the money she had paid for the repairs. So they did – in loose change. Specifically, it was about $85 in pennies and the rest in $1 bills…

Now, I’m not going to dispute that pennies or dollars are legal tender, or that the dealership had a legal right to pay the refund in whatever fashion they felt was appropriate. My questions are why anyone would risk venting their spleen – and making themselves look even worse to potential customers – by pulling this sort of prank, and also where a car dealership got 8,500 pennies in the first place…

In the Internet age, most businesses that want to be successful are very careful about their public image, and in particular about their online reputation. We’ve already seen people threatening to sue online review sites like Yelp and Angie’s List for damaging their reputation, and there are persistent reports of various companies large and small paying people to leave positive reviews about them and artificially improve their online rating. By the same token, if you’ve done something as blatantly stupid as playing games with the small print on a contract and then getting called on it by the State government, I would think the last thing you would want to do is create a funny story that will get you mocked by thousands of scruffy bloggers around the world…

The second part of the question is why anybody would go to such lengths to pull such a prank in the first place. Car dealerships aren’t normally cash businesses, and unless this one also doubles as a bank there is no reason for them to have 8,500 pennies around in the first place. That may not sound like a lot, but that’s around 50 pounds of coins. If you wanted to roll them it would be enough for 170 rolls of pennies, but these were apparently just loose in a couple of bags. Unless the dealership also doubles as a strip club it shouldn’t have had 215 loose $1 bills lying around either, but I think we can probably conclude that the owner went to the bank after deciding to be rude to his customer…

Okay, so this story isn’t an atrocity. The customer in our story can almost certainly roll up the pennies and take them to her bank, and she can probably use the dollar bills to buy coffee or pay tolls or what have you. And it is possible that the owner of the dealership believes that there is no such thing as bad publicity, and is laughing all the way back to the bank. But I prefer to believe that it’s a prank gone wrong, a customer’s multi-media revenge, and a cautionary tale for anyone who might have been planning a similar stunt – or anything else that will bring you to the negative attention of the public…

Car of Tomorrow?

I do wonder sometimes if people from other professions get as fed up with conspiracy theories, popular beliefs, and idiotic fiction and screenplays as I do. Certainly, I’ve seen lawyers and paralegals of my acquaintance get annoyed when movies and television programs misrepresent the law and portray behavior so grossly incompetent and completely unprofessional that if any real attorney did them being disbarred would be the least of their worries. I’ve also known healthcare professionals who get infuriated by the idea that all diseases could be cured in an afternoon if a sufficiently brilliant doctor had to save his love interest in time to end the movie on an up note, and public health researchers who get outraged by claims that such cures are being suppressed by various power blocks. For my money, the defeatism is even worse than the paranoia – saying that we will never have vehicles capable of driving 300-plus miles on a gallon of gas because the Oil lobby and politicians who take money from them will never allow it to happen, rather than working to bring the Volkswagen XL1 to North America…

I’m not going to link to the original far-left ranting site; you can go to the Volkswagen site and download the brochure and press package for yourself if you want to. One quick glance over the specifications will help to dispel all of the ranting, although it may also disappoint the reader (assuming I have readers). It turns out that the XL1 isn’t a magical supercar that gets its power from the mad genius of Volkswagen engineers; it’s a one-cylinder diesel-electric hybrid with an 8.4 horsepower engine and room for two people and a bag of groceries. Two relatively small people, and a very light bag of groceries, at least. The fuel economy is very impressive, although it’s closer to 250 miles on a gallon of diesel than 300, but none of this changes the fact that this vehicle is closer in size and concept to the old EV-1 electric car or the Honda Insight hybrid, and I can’t use either one of them…

The payload data isn’t included in the download from the VW site, but in the case of the Insight, its payload is so small that while it would be able to transport me (assuming I could fit in the driver’s seat, which I can’t) any theoretical companion travelling with me would have to weigh 80 pounds or less, or the car would not be able to move. And that assumes that neither of us had a small bag of groceries – or a briefcase or purse – with us. Clearly, there will be a limited market for such a vehicle in the U.S., where we like our cars to be powerful and roomy – or at least able to leave the curb when loaded. Even worse, at least from a consumer standpoint, the price given for the production model is in the $150,000 range, or about twice what a Tesla roadster (which is street legal in the U.S.) costs. In fact, it’s almost three times what the much-maligned Chevrolet Volt or the beloved Toyota Prius cost…

As to why they aren’t available for import, Volkswagen is only building 250 of these things, exclusively for sale in Europe, and has not made them available for safety testing anywhere else. Given the limited supply and high price point, it seems likely that the company is using this small fleet as a proof of concept. That many units will provide enough data to determine if the machinery is reliable, if the car is safe on the road, what happens to the vehicle (and the passengers) in the event of a crash, and so on. If the company can prove that the product is safe and reliable, they will probably be able to bring it to North America – where it won’t sell, until and unless they can bring the price down by a factor of at least four or five, and double or triple the payload. For the moment the XL1 is basically a concept car right out of an auto show, and conspiracy theories about this vehicle are completely asinine…

If Volkswagen can overcome those technical problems, however, it isn’t hard to imagine this “Super-Efficient Vehicle” (or SEV) doing to all of the current American car companies exactly what its beetle-shaped ancestor did to the industry in the last Century. If that happens I expect we will be hearing about a lot of new conspiracy theories – and a lot of unemployed auto workers. I’m not sure our domestic companies can survive another fiasco on that scale…

I’d Buy That For – Actually, No, I Wouldn’t…

There’s a new product coming out this winter from GM that has great potential, both in bringing the company into new product categories and selling a lot of units, but about which I find that I’m dubious. All hype aside, it’s basically a Cadillac version of the highly controversial Chevy Volt hybrid – with all of the elaborate body-styling, leather interior and other optional extras that implies. But the guts of the vehicle are virtually identical to those of the Volt, including the troublesome (and occasionally incendiary) battery pack, performance should be similar in all categories, and without the Volt’s hatchback the design may look better, but is significantly less practical – all of which is a problem given that the Cadillac version is priced at over twice the MSRP of its Chevy progenitor…

You can read the Wired online story about it if you want to, but they’re not that positive about the car either. For one thing, the $75,000 GM is asking for the Cadillac ELR is high enough that you could purchase a number of highly-regarded competitors for the same money, including the Tesla Model S, the Mercedes-Benz E-Class Hybrid, the BMW 5-Series Hybrid, the Acura NSX and the Porsche Cayenne Hybrid instead. For another, the ELR has a number of optional features that remain unreliable, even apart from the power plant, like the CUE entertainment system. But mainly what they are questioning is whether adding the Cadillac nameplate and logo will be enough to double the price people are willing to pay for the vehicle – and there is historical justification for questioning that…

Some of our older readers (assuming I have readers) may remember a product called the Cadillac Cimarron from the 1980s’ – it was the compact car in the Cadillac line at that time, and the company had difficulty selling them because the Cimarron looked almost exactly like the Chevy Cavalier of the same period, only with some chrome bolted on and double the purchase price. This was, of course, because that’s exactly what the Cimarron was; the majority of the car’s parts were interchangeable with the Chevy and Pontiac versions (the Sunbird, in the later case), only at twice the price or higher. The ELR has all of the same problems, including the legacy of cars like the Cimarron to muddy the waters, but from where I’m sitting it has at least one problem that is even worse…

Consider the traditional customer demographic for the Cadillac line. Developed by GM specifically to create an up-market product for people who had grown too successful to drive Pontiacs or Buicks, the Cadillac has always appealed primarily to older customers from higher income categories, both as a demonstration of wealth and because they can afford the extra comfort of the car’s optional amenities. In recent years the brand has met with increasing popularity in several other segments, notably including the rap music community, because in addition to the established prestige associated with Cadillac, the vehicles can be easily customized to conform to the owner’s vision of status, showmanship and visibility. What I question is whether either of these groups will be interested in a small, cramped, under-powered and very expensive vehicle whose primary selling points are high gas mileage and low environmental impact…

There are environmentalists in both of these communities, of course. And we can easily imagine that at least some Cadillac buyers might find the idea of lowering their gas bill by as much as 75% to be intriguing. But such individuals have had access to other hybrid models for nearly a decade now, including the highly successful and relatively prestigious Toyota Prius; it’s difficult to imagine that anyone who is motivated by either lower emissions or higher gas mileage wouldn’t already have migrated into the hybrid market. If the ELR proves to be the equal of the Tesla, Mercedes or BMW offerings from a mechanical and efficiency standpoint it might be able to complete on value, but the company as a whole has been having difficulty competing for the luxury sedan market for some years now, and the questions about whether the bugs have been worked out of its systems will not help. Unless Cadillac can reach a new customer demographic with this product, or somehow convince their existing customers to start accepting the ELR’s strong points as being worth switching to, it’s difficult to imagine this ending well for GM…

Caution: Fragile

I was reading a story off on the AP by way of the Seattle paper about one of Tesla Motor’s cars catching on fire and burning into slag when one of the later paragraphs caught my eye and it occurred to me just how fragile a new business really is. There’s no indication yet that anything was wrong with the vehicle; the crash investigators on the scene said something about debris from a crash getting into the battery pack and starting a fire, but there’s no indication that the driver or the design had anything to do with it. Cars do, after all, crash sometimes, and gasoline-powered cars catch on fire and burn down to their chassis every day in America. No one was hurt in the incident, the car didn’t explode, there were no toxic spills mentioned or innocent bystanders placed in jeopardy. No, what makes the story so surprising is that Tesla’s stock price dropped by 6% almost immediately after the story broke…

You can pick up the story from the Seattle PI web page here if you want to, but the basic story is a fairly routine traffic incident. If the car involved had been any conventionally-powered model, or even one of the newer “clean diesel” or E85 “Flex Fuel” types, this wouldn’t have rated more than a few lines in the traffic news section on page 47 of the paper. But because the Tesla Motors products are so new, and so expensive, and so exotic – and because the company has gone to such lengths to tout its products as exceptionally safe and reliable – this story was everywhere in a matter of hours, and the investors who were already uneasy about a new and unconventional company in a troubled industry began to edge away toward the exits while trying to look innocent…

This is hardly the first time this sort of bias against an unorthodox company has appeared in the media, and it certainly won’t be the last. The reading public – online even more so than in the real world – loves some schadenfreude, and all of the people who didn’t pay $120,000 for a car, let alone one that has huge batteries made out of toxic chemicals we don’t know how to dispose of safely and apparently sometimes catches on fire, can get a warm feeling of being smarter than those rich, trendy, early-adopter types who have. What struck me as remarkable about this – and the reason I’m wasting your time calling it to your attention today – is that this isolated incident, which so far does not appear to involve anything wrong with the product or the company that produced it, has immediately resulted in people who should know better bailing out on the company…

Now, it’s possible that all of the investors in this story have other reasons for going sour on Tesla Motors, and this incident and its attendant bad publicity is just what pushed them past the tipping point. It’s also possible that the negative publicity really will lower public acceptance of the company’s products, or just lower sales, enough to damage their business prospects and make the company less attractive as a long-term investment. But none of that changes the fact that all of the decisions are being made, at least in part, because of a single traffic event in Washington State that, as far as I can tell, has had no significant consequences for anyone except whatever insurance carrier was covering the driver…

It’s enough to make you wonder how any start-up company offering any innovative or unorthodox product manages to stay in business long enough to achieve mainstream acceptance. And while I can’t say for sure that this is a fundamental cause of the decline in the American manufacturing sector over the past few decades, it certainly goes a long way towards explaining why no one has successfully launched a new car company in the last 50 years…

Two Words

There’s a classic joke where somebody will say “I’ve got a great idea! Two words:” and will then proceed to tell you the worst possible combination of words (if not actual ideas) they can think of. It’s a take-off on the Hollywood standard of pitching an idea for a new movie or television show in as few words as possible (“Wagon Train – in Space!” was the one for the original “Star Trek,” for example). The basic concept is that if you can express the idea in less than even one full sentence and it still makes sense, then it is probably a good idea. In real life, of course, we know that only a handful of all movies released ever become commercially successful, and only a handful of the movies produced are ever actually released for public viewing. The sad truth is that it takes more than just an idea you can summarize into a couple of words to make a successful motion picture, and the same can be said for most other business enterprises. Unfortunately, somebody out there apparently thought “Lamborghini SUV” was a good idea…

You can pick up the original story from the (London) DailyTelegraph website if you want to, but the headline pretty much says it all: the Italian supercar manufacturer is resurrecting a concept it originally launched in the mid-1980s and tooling up to produce a four-seat, four-wheel-drive vehicle predicted to feature a V10 engine developing about 600 horsepower. The automotive writer at the Telegraph also notes that both Porsche and Bentley have successfully entered this segment in the last ten years, and since SUVs are the largest-selling class of automobile it isn’t unreasonable to find other high-end companies trying to get in on the action. All of which is true, of course, but the last Lamborghini SUV only sold about 300 units over seven or eight model years, and give the rise in gas prices and general malaise of the economy the super-luxury market is not particularly healthy at this time. An even bigger issue, at least from where I’m sitting, is who exactly is going to buy an SUV that costs as much as seven or eight full-size American-made units – and what would you use it for if you did?

Now, I realize that no one goes around purchasing supercars of any style for functionality or utility. If you had that level of disposable income you might do so because you love the aesthetics of the design, or because you are fascinated by the workings of high-performance exotic engines, or even because having the words “I have way more money than you, neener neener neener!” spelled out on your clothing in handfuls of diamonds is considered in bad taste – but you still wish to get this message across. If you live in a place like Los Angeles, or certain parts of Europe, owning such a vehicle might confer instant status on you – although whether that would be worth the 2,000% price markup or the attendant danger of carjacking would be up to you. What I question here is whether the cost of setting up production of this specialty model will be worth the return the company can expect in purely economic terms – because anything else is just scruffy blogger snark, and not real business analysis…

In the long run, it doesn’t matter what you or I think about the new Lamborghini Urus – unless you are one of those very unusual people who not only has several hundred thousand dollars of disposable income but is also willing to spend it on an essentially disposable product (cars have a five-year depreciation, and a supercar typically has a lifespan of 25,000 miles or less). I’m being dismissive of the idea because I don’t see where the added value to the purchaser will come from, and because the previous attempt by the same company to enter this market segment was unsuccessful. But I acknowledge that the people at Lamborghini have sold a lot more cars than I have – and they thought this pitch was worth a try…

Are You Winning?

I was very amused to notice a story online last week about Charlie Sheen being signed to endorse the newest version of the Fiat 500 in the company’s next television commercial. Regular readers of this space (assuming that there are any) will recall my post some time ago regarding the Jennifer Lopez spot for this same vehicle, and the scandal that erupted when it came out that the star of the ad had never actually driven a Fiat 500, having filmed her part of the commercial on a soundstage in California while a look-alike drove the car in New York City. It doesn’t seem like that’s going to be a problem this time – according to the CNN Money site the Sheen ad was filmed on a set from the beginning, and doesn’t attempt to present the footage as anything other than an amusing bit of television – but even so, I have to wonder if this particular approach is actually a good idea…

The problem with the Fiat 500 series is that very small cars have never sold that well in the United States, where our love affair with huge, gas-guzzling machines has been very well documented. You can attempt to sell these vehicles on the basis of fuel economy and its attendant savings of both money and the environment, or you can emphasize their convenience, engineering and manufacturing quality, and unexpected capacity and utility, but most of the Fiat’s competitors are already doing that. Fiat will therefore have to overcome the first-mover advantage Toyota has secured for the Prius and BMW has gotten for the Mini, while at the same time dealing with the company’s horrible reputation in the United States, where its product are widely believed to have the mechanical reliability of a two-dollar supercomputer. This is certainly possible – Toyota once had the same sort of reputation in the U.S., and they appear to have gotten over it – but it’s going to take more than just clever positioning of the product, as the people behind the Smart car could already tell them…

Fiat is trying to establish a new image for the tiny car by hiring a celebrity whom they hope will be considered “edgy” and “fun” by people in the car’s target demographic; the implication being both that the car will remind you of Charlie and also that if you drive it you too can be edgy and fun, just like Charlie. They’ve also been working on the old automobile marketing trick of getting the viewer to associate the car with an attractive woman – in this case by using a spot in which an actual woman turns into a Fiat. But even if you like the idea of your car turning into a celebrity (or being a celebrity), I’m not sure if this is the one you would choose. Personally, if I’m going to purchase a car on the basis of its resemblance to a celebrity, I’d be inclined to select a celebrity who is somewhat less likely to accidentally drive the car off of a cliff…

Of course, that’s kind of the point – unlike the previous ad spot, Fiat isn’t asking you to take the Charlie Sheen ad seriously. You already know that it’s somewhat unlikely that a well-known actor drives a subcompact car in the first place, and even if he did he probably wouldn’t be driving it around inside the house. I wouldn’t give much for this commercial’s chances as an endorsement, or as a standard advertising pitch to give the product (or its owner) the characteristics of the spokesman, but as comedy – as a spot that attempts to cut through the clutter of advertising noise through the use of humor – it has possibilities. Whether the product has a future in the U.S. market remains to be seen, however…

The Ethics of Window Stickers

In the court cases we considered this week where Honda was being sued by various customers who had purchased hybrid Civic models, only to find that the cars didn’t quite live up to the promised miles per gallon, one of the most surprising facts to come up was that the company had never anticipated being sued at all, let alone by classes of thousands in Superior courts and clever individuals in Small Claims. It turns out that like most auto makers, Honda has just printed the EPA estimates for its car’s average performance on the window sticker without further comment. Since those ratings are sanctioned by the U.S. government, and since there is no law requiring any further elaboration, the company had just reasoned that they had no responsibility to offer anything more…

In the event, neither court saw things that way; it remains to be seen if future court decisions or appeals will concur with Honda’s position. But in reviewing the story, I thought it brought up an interesting question in ethics. The use of EPA ratings as a basis for comparison on car window stickers is accepted as the industry standard, and complies with the relevant Federal laws; most auto makers assume that this makes them bulletproof and that anyone who is harmed by the assumption that those estimates are correct will have to sue the EPA first. But even if that is correct, and even if the company is safe from legal actions (a supposition not supported by the facts of the case), there remains the question of what the company’s ethical responsibility was in this case…

On the one hand, the fact that the hybrid Civic does not actually get 50 miles to the gallon under many common operating conditions (e.g. running the air conditioner, driving in city traffic, playing the radio) could have a serious financial impact on the owner. While it is true that EPA estimates are intended only as a basis for comparison, and all purchasers need to be aware of disclaimers like “your mileage may vary), the fact that the company knew there were major discrepancies (40% less than the window sticker under some conditions) and made no effort to disclose them sounds questionable. This is especially true in cases where the withheld information would have affected the purchasing decision. Since there were many alternative vehicles that could out-perform the hybrid Civic under those conditions (including, we should note, the regular non-hybrid Civic), the withholding of that information could be seen as fraud…

On the other hand, the EPA itself cautions users that its performance numbers are not intended to be absolute measures of any car’s gas efficiency, and should only be used for comparison. If Honda had printed lower fuel efficiency numbers on its window stickers, or even added warnings about efficiency under specific conditions, they would have been accepting a massive disadvantage in marketing their product versus the competition. The company has a responsibility to its stockholders (to make money), to its employees (to maintain their jobs) and even to its vendors and creditors (to maintain their businesses) – and there is no indication that printing such information would help the consumer anyway. All of the other auto makers could continue using the EPA estimate numbers, even if those numbers were just as bad as the ones on the Civic hybrid, and go on making money at their customers’ expense…

So the question appears to be, does the company’s ethical responsibility to provide complete and correct product information to potential buyers outweigh its responsibility to its stockholders to make a profit, or its responsibility to its other stakeholders to stay in business? Especially if doing so would bankrupt the company and damage all of the people who depend on it without giving any benefit to potential buyers, who would probably still be getting incorrect information from all of the surviving car companies? I’m sure that we all agree that honesty is the best policy, and that every company has a duty to provide the most accurate consumer information possible, but what happens when fulfilling that duty will destroy the company and all of the people associated with it and do no good whatsoever?

It’s worth thinking about…

Lawsuits per Gallon

A few weeks ago I recall reading a news story online about a Honda hybrid owner out in California who had decided to opt out of the huge class-action lawsuit against Honda and sue the company in Small Claims court instead. If you’ve been following the larger case in the news you already know that the plaintiffs were successful, and each member of the class stands to receive a $100 to $200 payment and a voucher good for up to $1,000 on their next Honda purchase – which seems absurd when you consider that the lower gas mileage (the hybrid Civic gets significantly lower gas mileage than the manufacturer claims it does) will cost each owner somewhere between $4,140 and $16,560 per year. It could even be argued that this judgment does the defendants more good than the plaintiffs, since it encourages the plaintiffs to purchase additional Honda products in the future. The company is well pleased with itself for the class-action case outcome, as well they should be – but the Small Claims case appears to have them worried…

In a Small Claims action the plaintiffs are limited in the amount of damages they can seek – in California the cap is set at $10,000 – and neither party is allowed to have legal representation, which lowers the costs involved. Most people use these actions to settle personal and small business disputes which would cost far more to litigate than the total amount they’re arguing over, but there is no reason you can’t use such a suit against a giant corporation – especially if the alternative is “winning” a week’s worth of gasoline and a discount coupon for a car from a company you’re probably going to avoid from now on anyway…

Most people don’t bring product lawsuits in Small Claims court because of the low awards cap; if you drive 12,000 miles per year (normal for Los Angeles) and your gas mileage is 30 instead of 50, and gas is $3.45 a gallon, each year you own the car it will cost you $16,560 over what the sticker MPG suggested. That’s $6,560 more than the Small Claims total, just in the first year; if you own the car for 5 years the total will be more like $82,000, or $72,000 more than the total possible in Small Claims court. But while $10,000 doesn’t sound like a good compromise over $82,000 that somebody owes you, it’s only fair to note that this is 50 to 100 times better than you would do as part of the class action lawsuit, assuming that you don’t want to purchase a new Honda in the next year or so…

From the company’s point of view, the problem is that while a single $10,000 settlement is no big deal, and spending $100 to $200 per customer when there’s an excellent chance of getting them to buy another car is practically a loss-leader, a thousand customers filing $10,000 Small Claims actions quickly turns into $10,000,000 in losses – and there are considerably more than 1,000 owners of Honda Civic hybrid models who could conceivably get into the act. Even worse, if the traditional defense of just putting the EPA estimate on the window sticker and then blaming the EPA for any differential between the sticker and your actual mileage is no longer valid – and it wasn’t accepted in this case – there’s no telling how many other customers, hybrid or not, may successfully sue the company using this logic…

My father told me once that the only people who ever get anything out of a class-action lawsuit are the lawyers – and in this case, unless there are more than 50,000 plaintiffs in the class, the $8,500,000 the lawyers are getting out of the settlement is more than all of the actual plaintiffs put together stand to receive. And while the company can use lawyers to appeal the Small Claims case, assuming that they do, this could backfire on them badly in the courts, let alone in public relations terms. I don’t know much about legal strategy, and I don’t even pretend to advise people on legal issues – but unless this issue is much more complicated than it appears, I’d have to suggest that the best business strategy here would be to just change the window stickers…

And They Call ME a Cynic…

Suppose for a moment that you were watching television and an ad came on where an A-list celebrity was driving a sub-compact car through the South Bronx. Let’s further assume that the actress in question has cultivated the persona of being connected to this neighborhood (her home town), and in fact has lines in the ad talking about how she draws inspiration and energy from this place. Now, knowing nothing else about the production of the video, the endorsement deal between the actress and the car company, the contract between the car company and the ad agency, or the product itself, how much of this would you accept just from seeing the commercial?

Unless you are a very innocent and trusting person, you probably don’t actually believe that a random film crew happened by as the celebrity spokesperson was driving around the Bronx; you would realize that people who get paid tens of millions of dollars each year probably don’t drive around in vehicles that cost less than $20,000 (if they drive around at all). Obviously, this is a paid appearance in which the car company is paying the celebrity to use their product in a television commercial in order to convince her fans to purchase similar products – or to convince people in general that they can be like the actress if they buy the product…

If you’ve ever learned anything about advertising or television production you would also realize that even elementary action shots will require dozens of technical people, lead and following vehicles, cooperation from local authorities, police escorts and traffic control, and enough lawyers to field an entire football team, armed with enough contracts to build a stadium. In fact, if you’ve ever seen a film crew working – or seen any one of dozens of “behind the scenes” shows over the years, you’re familiar with the idea that even something as simple as a 20-second commercial takes thousands of person-hours of field work alone. You will probably also recognize all of the clichéd images in the spot (it’s practically a catalog of images you’ve seen in movies and television programs about New York) and realize that even as an effort to establish an image or a brand it’s not a very good one…

You’d have to be a complete cynic to see this piece and wonder to yourself if any of it was actually real; if the ad agency had a production company film a woman of the same approximate size and shape driving the car around the Bronx, stage some scenes and images that scream “New York!” to people who have never been there, and then photograph the actress on a soundstage in Hollywood and CGI her image into the film, replacing the image of the stunt driver. Unfortunately, if you read this story on the Smoking Gun website, it appears that this is exactly what happened with the Jennifer Lopez spot for Fiat…

Now, no one is suggesting that celebrity endorsement are (or even should be) real; most people understand that these are paid representatives of the company who have been chosen specifically to help cast the product (and sometimes the business behind it) in a particular light. There’s even a parody of this in the movie “City Slickers,” where the owner of an ice cream company is asked why he has attractive male models portray him and his partner in the company’s television ads (he replies “If it was us, could you eat?”). I just find it amusing to learn that even my characteristically skeptical view of such offerings was actually less cynical than the work actually produced by the ad agency – which produced an anthem to the Bronx using a woman who may call herself “Jenny from the Block” but won’t actually set foot in the place…

Not Again…

Somebody told me once, years ago, that the definition of insanity was doing the same thing over and over while expecting a different outcome. I’m not sure that’s true, but I’ll admit that I can’t think of any other explanation for a story I saw in the Los Angeles Times online about the so-called “Buy Here, Pay Here” auto sales companies. If you’ve never encountered one of these operations, they’re defined as used car dealers who require customers to finance the vehicles they purchase (no cash sales; they literally will not do business with you except on credit) and also require the purchaser to come to the dealership each month and make all payments in person. They’re notorious for offering people who couldn’t get credit any other way payment plans at interest rates two or three times higher than credit card interest – and repossessing the cars on the first missed payment…

If this is sounding familiar, it’s almost exactly the same business model that resulted in the housing collapse of the past few years. Mortgage offers of this type are generally referred to as Predatory Lending, and the principle is the same: sell people property they can’t afford on terms they can’t possible pay, then foreclose on them and sell the same property to the next sucker in line. In real estate many of the buyers rationalized these decisions as “investments,” believing that they could “flip” the houses and make money on the deals, and many of the lenders assumed that if the original buyer defaulted there would be dozens of other gullible, credulous or greedy customers who would purchase the foreclosed property and start the cycle over again. But as silly as this all looks in hindsight, what really took down the economy was the process called “securitization” of the mortgages…

When future historians look back on our time, I’m not sure how they will explain how otherwise sane people could have believed that speculation in packages of loans was a good idea in the first place. Granted that companies buy up loans all the time – it’s how you start out with a car loan from GMAC and wind up making your payments to Chase, the way I did – you’d still expect someone associated with the process to question if packages of mortgages that the borrowers couldn’t possibly pay off were really investment-grade securities before buying millions of them. The fact that loans secured by real estate have traditionally been relatively safe is no excuse; history tells us about any number of artificially-created bubbles like this one, and all of them have ended exactly this way. But while the securitization of these loans was idiotic, and the classification of them as anything other than junk securities was inexcusable, neither of them really compares to doing the same thing less than four years later with property that depreciates every mile you drive it…

I know it’s hard to believe, but as far as I can tell the Times story is correct; companies are actually bundling up dozens or hundreds of these crap-level car loans and trading in them as securities. I could understand trading shares in the used-car operations themselves; the companies may be scummy, but there’s no question they’re wildly profitable. And, as previously noted in this space, if Congress ever outlaws making money off the gullible, the economy will probably collapse. But these aren’t consumers or inexperienced newcomers; the companies involved are the same ones who caused the collapse of 2008 with exactly the same greed and stupidity. Except that, unlike a house (which may return to full price years or decades down the line) a car is going to end up in a junkyard in a few years – if the next buyer doesn’t just abscond with it and never pay off their loan…

So is it madness, or just short-sighted greed? I’m not sure how we could tell the difference at this point, but I worry about what will happen to our economy if we have a few more economic disasters like the last one. You think there’s unrest in the streets NOW – what do you think will happen if the bubble pops again?

North of the Border

I was badly disappointed a few years back when GM discontinued the Saturn line of cars and shut down the plant in Spring Hill, Tennessee. I’d been following the progress of the Saturn division from the beginning, and it’s probably fair to say that I wanted it to succeed as much as anyone who wasn’t a major stockholder did. Saturn was General Motors’ attempt to apply all of the advanced management techniques that the competition had been using to gain various advantages over them for years to their own production lines. If successful, Saturn would have proven that an American company could not only adapt to new conditions and new strategies, but could actually compete with newer and more technologically advanced organizations on their own terms. Unfortunately, it didn’t…

Now, I’m not going to re-open the arguments for and against closing down product lines that are not turning a profit; we’ve covered that concept in this space often enough, and the simple fact is that while closing down the Saturn line was unfortunate for the people who worked there, and for the communities where they lived and all of the businesses that either supplied the line or were supported by the employees, it isn’t reasonable to expect GM to continue operating the plant at a loss. Even with the best will in the world, the company would only be able to keep going for a limited time before they went under, taking out all of their remaining factories and bankrupting their employees as well as their investors. Even if General Motors was some kind of idealistic crusade (and it’s not; it’s a business) there would be no point in harming millions of people in order to help a few thousand – especially if those few thousand would still experience the same results in the end…

So the company shut down the Saturn division, moved as many of its people as it could to other facilities, and began cutting costs wherever it could, including some highly unpopular ideas, such as using the NAFTA provisions to shift production of some parts to Mexico. It has been a bad time for a lot of folks in that industry, and not a good one for a lot of companies and their suppliers. So I was very pleased to stumble across a story in the New York Times business section about GM planning to re-open the Spring Hill facility. Part of it is just that the company is going to re-tool the factory to produce two new midsize designs, which will keep them from having to disrupt any of their current assembly lines and save on delay costs and similar issues, and part of it is that the new union contract allows for multiple tiers of employees, making it more economical to employ Americans in Tennessee than Mexicans in Mexico…

How all of this will work out – or whether it will work out at all – remains to be seen. The past year has seen some remarkable improvement from GM, and if they use the Spring Hill facility to produce vehicles with some of the new technologies they’ve been talking about (especially clean diesel, biomass diesel, plug-in electric hybrids, or hydrogen fuel cell technology) this could be the beginning of a new revolution in the industry; the 21^st Century equivalent of the rise of the original General Motors corporation. But if they can’t learn from the events of the past two decades, I’m very much afraid that they will be destined to repeat that same history at least one more time…