Notable Quotables From May's Light Vehicle Sales Report

Maybe the biggest take-away for both of our industries in all this, is that we need to be open to the business opportunities that technology offers.

Like many 'mature' industries, the auto industry has traditionally tended to be pretty cautious and deliberative. Correct me if I'm wrong, but I believe the newspaper business may share these traits, as well.

Clearly, we can't do that any more and expect to keep up in today's world.

The rapid and relentless advance of technology in our business, and in yours, requires that we get in the game. . . go with our best ideas. . . learn every day. . . and modify our course as we go along.

In both our businesses, if we get in the game and play hard, we have a chance of winning. If we sit on the sidelines. . . we lose

Rick Wagoner, CEO, General Motors (GM) (05/08/07) speech to the newspaper industry: "Re-invention in a rapidly changing world"

"Re-invention in a changing world" - Exploring Outsourcing in the month of June
Today's opening quote begins with a speech GM's CEO delivered a few weeks ago to the newspaper industry. The title of his piece was "re-invention in a changing world."

I could not agree more with Mr. Wagoner's statement. Mature industries tend to be slow to change. So becoming more adaptive (so you can better fill a need) is important. But every good CEO makes statements like this.

The challenge that every company and management team faces, however, is how do you create a culture that thrives on this change and adaptation? Without going too far where the company just makes change for the sake of change. And the challenge, particularly with the ability to adapt, seems to get magnified at larger, more mature organizations.

Time and again, bureaucracies build up in an organization that makes it difficult to create a culture of change. Because the change may very well mean the elimination of an individual job or reduced power with a department heads' fiefdom (something over which one dominant person or group exercises control ala dictionary.com).

Sure at one point it made sense for company XYZ to have a large IT (information technology) help desk staff. But maybe now automated help technologies no longer require such a large help desk staff. Or maybe they don't need the help desk at all (just a hypothetical example). In these situations, how easy does it become for the IT department to downsize? Or the head of IT to reduce his/her power base/fiefdom (often times judged by number of employees) by a third?

Now I have long advocated the solution to this dilemma is to de-emphasize the organization (company) and focus instead on its mission. If the mission (of fulfilling some need) remains at the forefront of every decision (versus the preservation or growth of the organization) then you will probably end up making the best resource allocation (investment) decision.

I know this sounds like philosophical nonsense and people don't really understand what I mean about investment dollars needing to shift all the way down to the mission (cap-x or public and private equity). Maybe one way to begin to illustrate my point is to ask you this: 70 years ago do you think people would believe the employee could make more than the Chief? I tend to suspect the concept was rare if not unimaginable. "The head of the company, the person in charge makes the most." Someone might exclaim as common fact or knowledge.

Today, employees make more than the CEO all the time. Athletes are perhaps the best illustration of where the star employee may be more important than the head. Who was more important to the Chicago Bulls, Michael Jordan or Doug Collins?

This was actually one of the challenges I observed large banks initially ran into when they would acquire brokerage houses. "How could this investment banker make more money than the CEO?" A large bank CEO might say to him or herself. But if they tried to lower investment banking compensation plans, all of a sudden turnover would go up, deal flow would go down. And now the accretion and synergies expected with the lofty multiple paid for the brokerage house by the bank was for naught.

The bottom line is the individual is becoming more important than the organization. So trying to follow previous investment models of finding the best organization or developing growth strategies for the organization becomes very challenging. What we really need to invest in are the individuals and the mission. Otherwise we'll find ourselves constantly buying companies/stocks stuck in a growth for the sake of growth dilemma (or worse a mature company trying to "cost cut its way to prosperity.")

But once again, what do I really mean by this? What does it mean to be entirely focused on the mission of the company? My goal for this month is to examine and make this concept a lot clearer.

For starters, and something you have all heard me say a number of times, it begins by making sure as heck you know what the mission is. This is why I am often going back and reviewing the need being filled by a company. If you can't easily identify the need and how the company is trying to fulfill that need, you've got a BIG problem. I don't care how good the return metrics are or how "cheap" the stock (or any investment) looks.

But once you've identified the mission, I think it then comes down to a simple question: do the majority of the people involved fulfill the mission? And I am not talking about indirectly. Does the employee or department directly fulfill the mission of what the organization is trying to accomplish (i.e. meet a customer's new vehicle, used vehicle, automotive part or repair need?)

Does it really need accountant JoAnn, or could they use some outsourced (online) bookkeeping company? Do they really need to hire someone to clean all of the cars, or could they outsource this to a detail service?

Often times when you just crunch the numbers, the costs may support keeping a function internally. But do you wake up 5, 10, or 50 years later (like many "mature industry" companies like GM) with a whole bunch of bureaucracies that struggle in adapting and being at the forefront of delivering the best value to the customer?

On the other hand, there are legitimate reasons to do things internally at times. For example, last week I quoted Monro's (MNRO) CEO Rob Gross who explained that by internally sourcing the company's auto parts versus buying them from parts distributors (stores) like AutoZone, Advance or NAPA (like most repair shops), they are able to get the parts for half the price. I suspect this approach also helps Monro meet their customer needs better (with greater and more consistent parts availability).

So this is the topic I would like to explore in the month of June. . . Outsourcing. Who is doing it? What are they outsourcing? And when does it make sense to outsource functions versus do them internally?

If you have any thoughts on the topic, please feel free to shoot me an email.

May 2007 U.S. Light Vehicle Sales: Important Data Points

Source: Company releases, Company Conference Calls, AutoNews, Wards, Efficient Insights LLC

*Efficient Insights Estimates For May 2007 Industry-Wide Inventories

May 2007 U.S. Light Vehicle Sales: Memorable Quotes

General Motors

So overall as we look at where we are at. Again, I would say on the positive side I would say we saw no deterioration in the month of May. May 07 looks a lot like April. And it is very similar to what we saw last May when we were also grappling with $3 a gallon at the pump. That is somewhat the good news story.

The challenging news story is the fact that we are tracking slightly below 17 million units and as I will touch upon in a moment we are also wrestling with the mix shift that go along with the run up in gas prices. . .

So for us overall it is this mixed bag in May. And as we try to balance the good news and challenging new story, we're probably ending up pretty close to where if we had all perfect information we probably thought we ended up, we just kind of took an interesting path to get there.

Going forward we are modestly reducing our outlook for the industry in 2007, just to give you our latest guidance, we are expecting the industry to come in at about 16.8 million units total, that's just under 16.5 million units light. This downward revision is not a surprise given the headwinds affecting the industry in the Spring selling season and given what we anticipate will be the effects of the housing correction through q2, q3,and probably lingering a bit into q4.

Source: Paul Ballew, GM head of industry analysis May Sales Conference Call

Commentary
The only thing I would point out was the fact that GM plans to build more vehicles in the third quarter of 2007 versus the third quarter of 2006, despite lowering the company's 2007 vehicle sales forecast.

I didn't really understand management's explanation for the higher production. Mr. Ballew said something about it due to recognition of where current inventories were at, and the ramp up of some key programs. Instead, maybe another hint about the higher production plans came when John Stoll of Dow Jones asked if they try to build inventories heading into the labor negotiations? Mr. Ballew simply said: "no comment."

Ford Motor Company

So Crossovers as they have in past months continue to pace our retail performance. And while our overall retail performance just fell 3% shy of the year ago levels, somewhat less than I had expected earlier this week. It was still the best retail comparison that we have posted for all of 2007. As background through April Ford's retail sales to individual consumers were off 11% compared with the same 4 month period a year ago.

Now overall sales, including sales to fleet customers, declined by 7% in May compared with a year ago, and that reflects a 24% reduction that we have planned since the start of year continuing through May and into the summer months in the daily rental channel. . . The commercial and government business was roughly equal to a year ago.

Source: George Pipas, Ford (F) head of sales analysis May Sales Conference Call

It might surprise some of you to know. It surprised me actually to find out that in the month of May, the mix of business at the retail level had reached a milestone of sorts. Cars and car based utilities, those products that we have referred to as crossovers, accounted for 52% of our retail sales in the month of May. And just 3 years ago in 2004, cars and car based utilities the crossovers accounted for just 30%. So, when was the last time it was over 50%?

. . . I have to believe that probably it was in the 1980s before the boom in sport utility vehicles and growth in pickup trucks that we had a month in which trucks and SUVs accounted for less than 50% of our retail volumes. So probably it hasn't happened in two decades. And I think it in part accounts for the fact that our retail share over the last several months seems to have reached a level, a consistent level. That would appear to be the case in May. That our May retail share of retail market is fairly consistent with what we saw in April and the months preceding to that.

So we have been saying that our goal is to become profitable at lower volume and a changed model mix. And our Ford and Lincoln Mercury showrooms certainly have been pretty dramatically transformed in just 3 years time.

Source: George Pipas

Commentary
I find Mr. Pipas comments encouraging. But it does leave me worried about how Ford dealers are stocked. Because given the demand shift to Ford cars versus trucks, the Ford dealerships may be stuck with too many vehicles no one wants.

What do I mean? Ford ended the month of May with its dealers only having about 60,000 cars in their inventory, but 394,000 trucks (according to Mr. Pipas during the call).

Chrysler Group

In conclusion, the Chrysler Group had another solid month in May based on strong retail performance. Our retail sales were up. We continue to reduce our fleet sales. With new product offerings continuing our success and gaining traction and additionally all new models to come later on in the year we are extremely optimistic for the months ahead.

In May, we also proceeded to deliver on our promise to reduce inventories significantly to a level that our dealers are comfortable with. May inventory is down by more than 110,000 units to last year and our production plans are more than 90% covered by dealer orders, which ensures that our dealers get the vehicles they want and need.

Source: Daryl Jackson, VP of Sales, Chrysler Group (DCX). May 2007 Vehicle Sales Conference Call.

Commentary
Given how well Chrysler management makes it sound like their dealers are doing I still do not understand why Lithia (40% Chrysler) is struggling so much. There is a disconnect somewhere.