Glenn Mercer's Comments

Why GM Is Repaying Bailout Money

Wed, 18 Nov 2009 07:35:33 -0500

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

Tue, 17 Nov 2009 11:32:42 -0500

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.

>
> 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

Tue, 17 Nov 2009 08:47:08 -0500

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

Wed, 11 Nov 2009 09:39:26 -0500

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

Thu, 01 Oct 2009 11:11:56 -0400

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

Mon, 28 Sep 2009 10:28:41 -0400

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

Fri, 18 Sep 2009 10:04:43 -0400

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

Sun, 23 Aug 2009 12:50:20 -0400

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?

Wed, 19 Aug 2009 13:22:23 -0400

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

Thu, 30 Jul 2009 10:44:05 -0400

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

Sun, 21 Jun 2009 10:33:15 -0400

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

Sun, 26 Oct 2008 11:34:30 -0400

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?

Tue, 21 Oct 2008 10:59:29 -0400

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

Fri, 05 Sep 2008 11:56:13 -0400

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?

Fri, 22 Aug 2008 13:05:25 -0400

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....

Is There Any Hope for the Big Three Auto Makers?

Wed, 02 Jul 2008 10:01:56 -0400

Beats me how my one comment got printed several times! Sorry about that, it was not THAT profound a statement!

Is There Any Hope for the Big Three Auto Makers?

Wed, 02 Jul 2008 09:59:13 -0400

Much as I hate to say this, it may be time to redefine what we mean by the Big Three. Maybe the Big Six?

Is There Any Hope for the Big Three Auto Makers?

Wed, 02 Jul 2008 09:59:12 -0400

Much as I hate to say this, it may be time to redefine what we mean by the Big Three. Maybe the Big Six?

Is There Any Hope for the Big Three Auto Makers?

Wed, 02 Jul 2008 09:59:08 -0400

Much as I hate to say this, it may be time to redefine what we mean by the Big Three. Maybe the Big Six?

Is There Any Hope for the Big Three Auto Makers?

Wed, 02 Jul 2008 09:59:06 -0400

Much as I hate to say this, it may be time to redefine what we mean by the Big Three. Maybe the Big Six?

How I Plan to Trade My Depressed GM Stock

Fri, 27 Jun 2008 10:21:38 -0400

One more thing to think about. Yes, we all know "Product is king." Agreed. If GM can turn out great new product, a turnaround will ensue. But the question in my mind is, "How fast?" Consumers do NOT, when shopping for a car, write down all their options and then rank order them and buy whatever is in spot #1. Just like when, for example, you and the spouse choose a restaurant to dine at, you do not look up all eateries in a 10-mile radius and rank-order them. You choose from a pre-selected and proven list of familiar favorites. Same in cars. If X has owned three Hondas in a row and they were fine... and one hapless Pinto way back in college, X has precious little incentive to now consider Ford again. Over time, as they hear better and better things about Ford, see positive reviews, talk to a neighbor who owns one, they will re-consider the brand. But this takes time: years. J D Power reports that about 40% of the American public will not even CONSIDER a Detroit product. To drive consideration up, GM has been pulling out the stops: free over-the-weekend test ownerships, side-by-side comparos with Toyotas, contests for just stopping in the dealership, etc. These are all the exactly right things to do. The question is, will Detroit's cash run out before the consumer tide slowly, slowly turns? Remember, a car company's "conquest" vehicle is not this year's new car, it is the car they made 8 years ago, and consumers' memory of that vehicle. With the average age of a new car buyer at 45, most of us are buying used for years before we spring for the new beast, and so we are basing our choices on experience with Detroit's "bad old days," not today's great new products. Can Detroit change our minds fast enough?

Is Anything Worth Owning in the Auto Industry?

Fri, 27 Jun 2008 10:11:28 -0400

A few comments:
1. Re Prius's looks, I was unaware anyone was buying the car for its styling. Leaving aside opinions about looks, the car has the fastest inventory turns in the USA at present, staying on dealer lots just long enough to be washed, prepped, and delivered. About one day. Love the Prius or hate it, it is a sales homerun for Toyota.
2. Conversely, while I think the Honda product line has a lock on success for the foreseeable future (after all, knocking off the F-150's sales crown is stunning!), Acura is arguably in some disarray. Only one of the Japanese upmarket brands has broken into the "Tier One" luxury segment, and that is Lexus (with a vengeance of course!). Acura continues to languish somewhat and arguably has been passed by Audi.
3. A key asset every Japanese company has, that is often overlooked, is the reservoir of high-mpg models they have "back home" that can be brought to the USA quickly if fuel prices stay high. Thus Toyota did not need to develop Scion from scratch, but just adapt domestic models for USA sales. Nissan brings its Cube here next year. Etc. Chrysler has no such reservoir; Ford could tap Mazda for small cars but to date seems not willing to do so; and GM has Daewoo in Korea, which should be able to deliver the goods (though the Aveo has been a real dud, I will admit). Unfortunately for the Big Three, the flow does not reverse: there is really no market anywhere in the world desperate for large pickup trucks.

Can Battery Technology Save GM?

Thu, 26 Jun 2008 10:14:58 -0400

Just one small comment re the battery technology issue. One thing to keep in mind is that whether we pick battery chemistry A or B, whether the Volt works or not, whether Toyota can sell Lexus hybrids or not... for the next 5 years anyway any car company's fortunes will be driven overwhelmingly by their internal-combustion product line. Even for Toyota the Prius is a minor part of the line up: a crucial part, a growing part, but in the big picture Camrys and Matrixes (Matrices?) etc. drive the profit engine. So as regards GM, even if Volt is wonderful (and I hope it is!) the PR and image impact will DWARF the bottom line impact for a long long time. Look again at Toyota: the Prius battery packs are so hard to make that even after years of output they still got caught short this year, and cannot easily ramp up.

Market Share Doesn’t Matter; GM Mortgages Its Future

Thu, 26 Jun 2008 10:04:16 -0400

I would agree but take this further: note that when OEMs fret about market share they measure it in UNITS. A Maybach is the same as a Mazda is the same as a Mini. Toyota passed GM in revenue long before it did it in units, and no one even noticed that. As long as OEMs target vehicles rolling out the door they will be hard pressed to think rationally about profits..let alone revenues. If units matter so much, how can Porsche afford to take over VW, and Ferrari be worth more (usually) than Fiat?

GM and Ford: Still Easy Shorts

Sun, 22 Jun 2008 12:02:14 -0400

Frankly I liked "gamelan" better than "gameplan" anyway (grin).

Hummer Sales Down as Gas Rises

Tue, 10 Jun 2008 11:32:43 -0400

I never understood the appeal of a vehicle named the slang term for a sex act! (grin) Might have been better to call it Tonka...

Will Toyota Lose Its Edge?

Tue, 22 Apr 2008 10:13:34 -0400

Labor cost is of course important, but I would assert that you are looking at this through Detroit's lens, which is that "all problems are cost problems." If a Toyota has higher resale value than a Ford, then a Camry buyer will pay more for it upfront than for a Ford, as he or she gets the value back upon resale. The higher price allows Toyota to earn better profits or even pay its workers more. That is a simplistic point, but for decades Detroit ignored it. Look at the Sebring, with its cheap interior. Cheaping out the interior implies a belief that "Someone really wants a Sebring, so if we can cut $400 out of it, we'll sell more." The problem is, there is no huge untapped demand out there for a Sebring that costs $400 less. There MAY be untapped demand out there for a Sebring that is a nicer car. Thus Detroit may save $500 in labor costs on a car, but have to give up $2,000 in price cuts to sell it. Detroit has finally gotten the message and is now focusing on trying to raise value and thus price, not just keep squeezing costs. Toyota certainly has to watch its labor costs, but they will always do better to worry about price as long as Detroit is still fixated on costs.

Will Tata Motors Deal Show Ford The 'Way Forward'?

Mon, 31 Mar 2008 10:36:41 -0400

If I were Tata... I'd keep Land Rover (profitable and brings AWD technology complementary to Tata's, and is a "rugged" brand more in keeping with Tata's expansion in emerging markets) and sell Jaguar to Middle Eastern funds ASAP. Jaguar is losing money and brings Tata little AND I am sure there is a "package deal discount" in here: Ford's desire to sell the two together I am sure depressed the price. And while I am sure few people want to own ALL of Jaguar, I bet there are many who would like to take a flier on 20%. Jaguar thus sold off might recoup a lot of the cost of buying LR. Of course, all this may be blocked by covenants in the Ford sale agreement, but I look to the Aston Martin story for inspiration here.