Paul Meisel

UAG and Chrysler Team Up To Bring Smart Car To U.S.: Will Americans Buy It?

"But then again, I thought the Aztec was a great looking vehicle when I saw it in GM's design center...."

And the lead designer on the Edsel thought he had a winner too.....

Auto Retailers Should Approach the Vendor as a Resource Center

This thought spurred my thinking: The tradition of having 60 or 75 days of inventory for customers to shop from originated in the days when A) most dealers were one store operations B) there were a higher percentage mix of small dealers compared with larger dealers C) there were no good information systems to know where a car that you didn't have, and a customer wanted, might be available.

Given the business changes, with more multi-location and large dealers, good information to allow you to leverage inventory between locations and to some extent with other dealers, wouldn't you expect the business to carry less inventory?

Further, since the OEM's now produce most of their product based on the order bank and schedule their supply base with real orders back to tier 2, if the OEMs could tie into sales at the dealer level in "real time" -- let's say daily six days a week -- some reasonable collaboration could cut the amount of capital tied up in inventory by 50%. For the North American industry that would be something close to $15 billion of capital released. That is about the market cap of Ford, isn't it?

Now how this windfall would be shared is another question.....

Chrysler Extending Plant Closures Over Christmas in Bid to Shrink Inventory

I believe the comparison of days' inventory may be flawed. The "Big 3" include in this inventory all ex-factory in-transit vehicles on their way to dealers -- typically about 15 days of supply. This has been standard practice for decades and is done for state and local tax reasons. The Japanese automakers on the other hand include dealer inventory, but exclude units held at their distributions centers (I know this is Nissan's practice and believe it is true of all Japanese based automakers).

The difference arises from different business models in the days when almost all Japanese autos were imported and they had no domestic production base, and is not an attempt to influence or manipulate anybody -- but the data are not comparable. I would like to hear more from the dedicated auto analysts on this.

Chrysler's Attempt to Lower Inventory Hits Roadblock

The auto industry term for building a vehicle a dealer has not previously ordered is "build against the fence", and after the gluts of the 70s I thought all the US automakers had stopped. The US model of distribution usually has the sticker routing the car to the dealer applied at the end of the assembly line.

This of course is not practical for vehicles built overseas due to long shipping times, and these companies have used a more traditional wholesale-retail type distrbution model.

Detroit Gets it Right This Time

The basic analysis of leasing here is very good. I would like to add a few points:

Many (not all) dealers count on the ignorance of customers to improve margins. They can use the magic of more numbers to manipulate (down payment, security deposit, financing rate, residual value, lease term) to get a customer to pay a higher price than they would on purchase while seemingly offering a lower rate... or making some of the margin back in financing fees.

If you want to have some fun next time you buy, ask the salesman to quote you the deal as a buy, with price, payments, etc. all written down... then ask him to quote it as a lease, with all the numbers written down... then keep both pieces of paper and tell him you need to discuss it with your significant other. Watch his face (still not very many women in car sales, don't know why, they should be good). If you want to cause a stroke tell him your significant other is a CFP or CPA or works for the Better Business Bureau. If you can't get the numbers on paper just go to another dealership, there is a reason you can't get them.

Second -- used car residuals are notoriously volatile, for many reasons other than gas prices. When lease returns and trade-ins run high (often due to new car sales promotions) those cars have to go somewhere and they get dumped on the market. When this flow slows, used car sales move up again. New cars, 2 year old cars, 4 years old cars, etc. all compete against each other in a market filled with many smaller used dealers, e-bayers, etc. ------ The point of all this is that the projection of the residuals at the point of lease is nothing more than an intelligent guess. A conservative projection may result in a higher lease price that could lose sales -- an aggressive one main gain sales and lose money on the end of the lease. And the auto companies are considering this closely as they make their pricing and discount decisions. Whether the risk is borne in the financing entity or by the automaking entity makes little difference to a stockholder who owns both, or to the customer.

Further -- that volitility of used car prices also has a regional component, depending on local markets and conditions, and although cars can be transported the expense of that is significant, so your local mileage may vary.

Why Japanese Cars Earn $2400 More Profit Each

The following I received by e-mail from a conservative business man and engineer I know:

"Think of the benefits EVERYONE would have if we had a single payer plan similar to Medicare but everyone would pay based on their income.

The current system of; insurance company / employer controlled health care is a TOTAL mess and a tremendous waste of time and money.

Every time I visit a doctor I make it a point of discussing with them the fact that for every 15 minutes of time I spend with them, I spend at least an hour or two reading paperwork and statements etc. ... or on the phone with the insurance company trying to get the cost coverred or trying to find out what they will/will not pay. The doctors complain about the current system as well and how it wastes their time. Add to this all the time the doctor's staff has to spend on this insurance crap and then just try to picture all the clerical time, mailing, paper work etc that is going on behind the scenes at the hospitals and insurance companies and it becomes pretty clear that the "medical" time spent between you and the doctor is minimal compared to all the cost put into the system by the insurance companies themselves.

A Federal program, available to all, single payer, pay based on your ability, is the only way to go."

Whenever we look at US competitiveness, health care is the moose head in the middle of the table that no one discusses.

Why Japanese Cars Earn $2400 More Profit Each

I didn't see this report yet, but it makes sense for a couple reasons:
1. Laurie is one of the best informed industry observers and has good insight into the data
2. These variances are roughly the same in order of magnitude as they were 20 years ago when I worked on these studies.

The sad fact facing auto industry management is that they have known about this problem for 20 years and have been unable to impact them -- because of shrinking share, inability to significantly change their labor contracts, and a national unwillingness to address the health benefits issues.

Combinations of existing companies won't fix the problem. In total, there are too many factories, too many employees, too many retirees, and health costs are too high in the US.

Will Bigger Incentives Bear Fruit this Labor Day for Auto Co's?

The days supply number is a tell of the trouble the domestics are in.

The traditional industry benchmark was 60 days, to give the dealer adequate inventory for customer choice. For older, smaller dealerships that sold 500 cars a year, this made some sense. Now, with more mega-dealers and on-line inventory checks of sister dealerships, even that number is probably excessive.

Someone -- dealer or manufacturer -- has to finance that inventory, creating profit squeeze and pressure on margins with a need to move the stock.

Ford had an internal plan a few years back to reduce the time from order to sale, which was intended to improve the flexibility to respond to market demand in mix, which in turn would give dealers confidence to carry less inventory. It apparently hasn't worked.

90 days -- 4 inventory turns a year -- isn't a recipe for making money.