Glenn Mercer

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...

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....