Glenn Mercer

Why GM Is Repaying Bailout Money

Ford cars sell at a similar discount to Toyota and Honda as do GM cars. And Ford I would say is hardly profitable enough at this point to not have a similar profit problem to GM: we only praise Ford because it is less badly off than GM. Look at their debt burden and one can see they need to get price up as fast as possible, too. All I am trying to say is, if YOU were a maker of widgets, and YOUR widget sold for $2,500 less than rivals, but your COST basis was $500 more than rivals', wouldn't you be spending as much or more resources on getting price up (via innovation, new styling, model refreshes, etc.) as on getting cost down? But when I read seeking Alpha posts (for example) I see endless, relentless emphasis on the $500 and almost no mention of the $2,500 (and yes, those numbers are directionally correct in magnitude). I just don't see how Detroit can get back on its feet by pouring effort into the cost lever, which has so much less relative room for improvement than the price lever.


On Nov 17 01:58 PM jebuescher wrote:

> Glenn - Don't forget about Ford when you talk about price comparison
> to Asian model lines. If Ford has figured out how to be profitable
> at the same price points that GM is losing money at, then there are
> still cost issues.
>
> Assume the Cobalt had equal quality/perception to the Civic, if they
> price it higher than the Focus, GM risks loss of sales to Ford because
> there are certain maximum prices consumers can/will pay regardless
> of value.
>
> Furthermore if GM's goal is to increase top line sales I would expect
> prices to decrease further as the only lever they have to get people
> to buy their cars. The question is what is the variable cost to
> manufacture a car by GM compared to Ford, Toyota etc, not the standard
> cost, as the standard cost per car is directly linked to how many
> cars they sell.
>
> My random 2 cents.

Why GM Is Repaying Bailout Money

I think we agree: with current product and current negative consumer attitudes towards GM (founded in years of poor quality), GM CANNOT raise prices. That is why I am saying they must figure out a way to do so in future, via dramatic product improvements. Between now and then cutting cost further is fine, but it will do nothing to claw the price back, and may even hurt brand image further. My whole point is that in Detroit everyone carries a cost hammer and so all problems look like cost. Time to focus as well on PRICE. But yes, they can't just raise price today, with what they have today.


On Nov 17 09:04 AM doubleguns wrote:

> Glenn I see the problem as this. In ten years we will see 10 yr old
> civics, but probably very few 10 yr old cobalts. Thus the price difference.
> People will pay more for quality. GM CAN'T raise their prices. <br/>
>
> Who would buy a cobalt priced same as a civic?
>
> Frankly until they commit to pay back ALL (not just 6.7 billion)
> of the TARP money they borrowed who would buy a GM?

Why GM Is Repaying Bailout Money

I applaud this poster for noting that revenue is as much a problem for GM as cost. For way too long Detroit has attacked the low-profit problem by working the cost lever only. That lever is pretty much used up by now: the problem is LOW REALIZED PRICE. From JD Power we have 2008 data showing similarly-equipped cars and transaction prices:

Chevy Cobalt $15,600
Ford Focus $15,600
Honda Civic $19,300

Now, throw in all the arguments about what is directly comparable and what is not, and what level of options are on or off, etc. etc., the challenge for Detroit is that its products head-to-head sell for thousands less than the Asian rivals. Which means GM must spend heavily and effectively now on improving product. Taking another $500 out of cost is great (with only 20 hours of UAW assembly labor in a Cobalt anyway you'd need a $25/hour wage cut to do that!), but until they can get PRICE UP, all the COST DOWN in the world won't help much.

Cash For Clunkers Datapoint of the Day

Just a non-ideological comment (rare on Seeking Alpha...) remember that, whether arguing for or against CforC, that MPG is a tricky, even flawed, number to use in evaluating impact. Example:

1. Assume I have a big SUV, gets 10 MPG. Now I swap it in for another SUV, gets 13 MPG.

2. Assume I have a small sedan, gets 33 MPG. I swap it for another sedan, gets 43 MPG.

Only a 3 MPG improvement in the first, but 10 MPG better in the second. Average American (not saying Seeking Alpha readers won't be smarter) says example 2 is a bigger improvement. But is it?

Assume in both examples the owner drives 100 miles per year (yeah, I know, but bear with me). In example 1 by swapping vehicles the owner saves 2.3 gallons (10 gallons down to 7.7). In example 2 he or she saves only about 1 gallon (3.3. to about 2.3).

My point is, small changes to MPG when MPG is low are more impressive than the metric indicates.

If in the second example the car is swapped for an incredible MPG star, that gets... gasp!... 100 MPG .... it saves only 2 gallons over the year... same as the big ol' SUV swap.

This is why in Europe they use liters/100 km traveled, makes comparisons simpler!

eBay and GM Call It Quits

Note that the GM/eBay deal was not (in my mind at least) a "true" auction in that you could not see the current bid price and were not guaranteed to "win" the car if your bid was highest. You could either buy it now at the set price or essentially email a dealer a price you'd like to negotiate on. Hardly seems like an auction?

Toyota Offloads Financial Arm

Sethmcs: I believe they are NOT selling their captive finance arm, but that the captive finance arm of Toyota is selling its securities brokerage unit. So the captive will still be intact to make car loans and leases... they are just getting out of the securities brokerage business.

Overcapacity: The Auto Industry's Big Little Problem

I agree entirely but, after being in this industry for about 25 years and seeing this issue persist throughout, I don't see much hope ahead. Overcapacity persists for individually-rational but collectively-irrational reasons. For example, if I close my plant and thus reduce supply, I pay all the costs of closure, while my rivals benefit from any price rise generated by reduced supply. For example, governments are all too willing to fund plant investment (every politician wants to stand in front of a new factory that employs 5,000 people!), so cost of new capacity is very, very low. Then there is pricing: in the auto industry marginal price becomes average price quickly (that is, I don't mind paying $200 more for a Gucci bag at Nordstrom's even though I know it is less at Dollar Tree (okay, bad choice of stores!)) but if I am buying a $35,000 car I make darn sure I am getting a good price. Thus if demand is for 99 units at $100 ($9,900), discounting the 100th one to $90 cuts overall revenue to $9,000, for a true loss of $900, not $10. Conversely (to continue this boring lecture) if demand turns out to be 100 instead of 99 the bonus from having the extra unit of capacity is $900. Thus there is always this incentive to overbuild and go for the extra unit. Another way of viewing this is pull versus push of course. Anyway, I don't think excess capacity will ever go away...

Debunking PHEV Mythology

As far as I can see you hold resale value percentages fixed for all types of car. I don't have a problem with using this leveling assumption, because these things are very hard to forecast, but I should note that a) resale value percentages DO vary a lot in the real world, and that b) probably in a fuller model one would adjust resale values as gas prices fluctuate, both on an absolute basis and on an options basis. That is, on the absolute basis: as gasoline prices rise so would resale values for more efficient vehicles, and perhaps quite sharply (since one still gets the same dollar savings on fuel with a used HEV (e.g.) but by buying a used car pays much less in capital outlay); and on an options basis: if I think oil prices will possibly spike, buying a Prius now to "cover" myself later has some (probably minimal) option value, given I might think if oil goes to $200 a barrel Toyota will sharply raise the price of a new Prius. So I am not criticizing the model per se, but pointing out that in the world of cars the resale-value loop is a key factor to take into account (some would argue most of Toyota's market share gain over the last 30 years has been due to the logic of "I pay more for it upfront but I claw it back on resale").

GM: Are eBay and a $4,000 Car Enough to Turn Things Around?

Note that the GM cars on eBay are NOT actually auctioned. One can buy a car at the advertised price or submit an offer to a dealer. The dealer can accept that or not. Does not sound like an auction to me (where, once reserve is cleared, the seller "must" accept the highest offer, and where bidders can typically see what the current bid is). To me this looks more like "GM is now listing inventory on eBay as well as on its own dealers' websites," not actually moving to a new sales process.

Automakers: Forget America, Think China and India

I think the author is 100% correct but glosses over the margin issue a bit too quickly. The vast majority of Indian and Chinese cars sold will be fairly low-priced models. Forecasters have shown that the OECD markets will be equal in REVENUE to the emerging markets for years to come, even as the latter pull way ahead in UNITS. Then, margins are wildly nonlinear in cars: Toyota was lucky to net $300 on an Echo, and easily bagged $15,000 on a Lexus LS. So the Indian market (which considers a Fiesta a "large" car) will probably not match an equivalent developed market in profit potential until it both enriches mix greatly and exceeds unit volume dramatically. Note that Tata itself has said the bottom line margin on Nano may be only $200... not sure I want to chase that market!

Rewarding the Ecologically Irresponsible with Taxpayer Dollars

Remember that the bill, at least as I understand it, requires the person who trades in the clunker to show paperwork (e.g. a registration) proving that a) he or she has owned the vehicle for at least one year (thus in theory blocking people buying clunkers just to cash them in) and b) that the vehicle was road-worthy (thus in theory blocking the dragging in of rust buckets that were up on blocks for the last ten years, which would erase the environmental benefits). I don't know if enforcement of all this will work, but at least these issues seem to have been addressed.

Chrysler Makes a Poor Fit for GM

One thing omitted (as far as I know) from all discussions about a GM/Chrysler merger is... who would actually execute it? After years of shedding white-collar executives at both firms (not that they didn't need to do that), who is left to do the heavy lifting of putting all the different pieces and parts together? Both firms have skeleton staffs now, with no bench strength left to carry the deal out. I recall years ago an (anonymous) Toyota executive telling me his reaction to the Daimler/Chrysler deal: "Whether it works out for them or not I have no idea, but they will be dead in the water for at least 2 or 3 years while they put it all together, and we will gain market share in that time, by just sticking to our knitting." Amen.

Will Chrysler Crash?

I also agree that labor (the UAW) is not the problem. I believe Chrysler has a revenue problem (not enough people want to buy enough Chryslers at high enough prices) not a cost problem. Is there anyone in the USA who dreams of acquiring a Nitro, if only it were $400 cheaper? I don't think so. REMEMBER (and this is a fact) Toyota is now paying the same wages (in total $/year/head) at its Kentucky plant as the UAW gets at the Big Three. Stop fighting the old UAW battle... the problem now is after years of weak product not enough people will even consider a Chrysler... and if they do, they won't pony up for it.

On the Need for Better Auto Sales Metrics

I cannot say how much I agree with this post. Does Wal-Mart report unit sales of socks each quarter? Does Armani seem doomed because it sells only 1% as many suits as Value City? The auto industry, with its fascination with units, lumps a Maserati with a Mazda and a Maruti as all the same thing. Thus we get frenzied pursuit of developing markets, which represent "all the growth." In units, yes, but GM itself has forecast that ten years from now in REVENUE terms the developed world's share of total automotive sales will have hardly budged at all, even as its UNIT share falls. I'd rather be selling 50 Porsche Turbo's a year than 50,000 Tata Nano's...

Will Hyundai's Luxury Car Be Like the VW Phaeton?

I think the big difference here is the lack of a new dealership channel. It is hard to sell a $70,000 VW, a $50,000 Toyota, a $40,000 Hyundai, etc. in general: but to sell them in the existing dealerships is very very tough. When one is selling an upscale vehicle it is crucial to reassure the buyer that he/she is making a very smart decision, that he/she is now one of the elite club, etc. Thus a BMW dealer's muted lighting, soft music, pile carpets, and espresso machines. How does one sell a $45,000 Genesis in a dealership characterized by (sorry for the exaggeration here) linoleum floors, soda vending machines, and nervous buyers waiting outside the F&I office to see if they qualified for the loan? Surveys have shown that as one spends more on a car the dealership matters more and more, relative to the car, and for Hyundai to not launch Genesis in a separate store, or VW not to launch Phaeton in a separate store (versus what Lexus did), really means one starts with two strikes against you....