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Proceed With Caution

Keeping with the relentless negative economic mood of the last few weeks, most OEM sales numbers for August were released yesterday and the headlines trumpeted how far off their sales were from a year ago.  This should not come as a surprise as the sales rate in August of 2009 was over 14 million units due to the Cash for Clunkers program.  General Motors was down 25%, Ford was off 11%, but Chrysler managed a year over year gain of 7%. (Chrysler did not do very well during the Cash for Clunkers program last year.)  The annualized sales rate for 2010, however, improved modestly to 11.6 million units which is in line to support IRN’s current 2010 production forecast.  So is this just typical negative media hype or should industry participants be worried about a downturn in sales and production?  The answer lies somewhere in between.

It is clear that dealer traffic slowed down in August.  There could be a myriad of reasons for this but consumers’ continued concern about the economy has to be at the top of the list.  Retail sales also slowed down, the housing market tanked, and unemployment numbers remain astronomically high.  Until there is some degree of stabilization and hopefully improvement in these indicators, auto sales are going to remain modest.  On the positive side of the equation, the OEMs appear to have gotten religion in terms of incentives and they seem unwilling to sacrifice profitability for volume.  We anticipate the use of incentives will increase if sales remain stalled but we believe they will not be so high as to significantly damage the ultimate profitability of the sale.

While it was viewed as a negative in many media reports, we were encouraged to see fleet sales return to more normal levels in August.  Sales to fleets were estimated at 20% of volume vs. 15% in July.  While these sales are obviously not as profitable as retail sales, they are an important part of sales stability and a 20% level going forward would be a healthy sign.  Many fleets dramatically cut back on purchases in 2009, exacerbating the negative sales levels.  They have a bit of “pipeline fill” that should help bolster sales over the next six months.

So what is a prudent planning approach for the remainder of this year and the outlook for 2011?  We see no reason to hit the panic button yet.  Worst case, sales levels should stay near the 11.5 to 11.8 level, something that will allow production to remain at current levels.  With very rare exception, vehicle inventories are not out of line so production needs to continue to support this level of sales.  What may be at risk is a steady increase in sales and production.  It is possible that will be delayed by a quarter or two as people wait to see if economic trends begin to improve.  Our guess is that won’t happen until the dust settles after the November election.  So assuming a “steady state” for the next 3-6 months is a realistic and conservative outlook.

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Window Stickers: A Casualty of the EV Movement

There is no doubt that alternative powertrain vehicles are changing the landscape of the auto industry as we once knew it. The window sticker, one of the industry “staples” that has gone largely unchanged for some 30 years, has recently garnered new attention. The Environmental Protection Agency in conjunction with the National Highway Traffic Safety Administration is proposing a new format for window stickers to more adequately portray the capabilities of electric and hybrid vehicles. The old miles-per-gallon metric is beginning to lose its meaning as vehicles with alternative powertrains become more common.

There are two proposed formats – one which is an evolution of the current window sticker and another that gives vehicles a letter grade. The latter is causing some uproar in the industry. The automakers are opposed to the proposed letter grading system, as it would apply to the full range of models for comparison purposes, rather than looking at small car vs. small car, for example. In this scenario it is easy to see how larger vehicles have a disadvantage in the grading curve. In fact, the proposed rulemaking includes some hypothetical ratings for 2010 models, and many do not fare well. The Tesla Roadster, given its zero emissions status, would rate in the A category, while many current top-selling vehicles would only rate in the C/C- range. Originally, the sticker for electric vehicles was to contain information on upstream emissions (electricity produced by power plants to charge the vehicle) but that will instead be tracked on a separate EPA website.

The new stickers will not be in place until the 2012 model year, but the battle begins now, with a 60-day window where the agencies will take comments on the proposals. One thing is for sure, this should end up being a pretty heated discussion.

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Brave New World

The Wall Street Journal had an interesting article last week on the ways Ford is using wireless technology on the assembly line to customize vehicles (“Ford Uses Wi-Fi to Customize Cars,” WSJ, 8/26/10 [sub]). The wi-fi technology is available because Ford’s SYNC system enables passengers to use laptop computers in the car, but it was realized that the technology could serve an ancillary purpose of allowing the company to efficiently program radio and phone systems appropriately for the end destination (e.g. US vs. Canada). Looking ahead, Ford and its dealers could use wi-fi to customize certain vehicle characteristics for individual buyers. This would serve both the growing consumer trend of personalization and the automakers’ drive toward reducing product line complexity. It’s very brave of Ford to be going down that road at a time when wariness of electronics in auto applications is high. Is the skepticism and concern at its peak?...

I hope so. There is no question that the transportation field has to continue to embrace electronics and computing technology. The safety stakes are higher than with your iPhone or Android, but consumers need to be realistic about the level of individual danger.  Our expectation is that Ford will test the approach thoroughly in the low-risk infotainment applications and develop appropriate fail-safe mechanisms before using wireless technology to adjust powertrain characteristics, etc. Americans need to get a grip and accept the fact that there is a trade-off between cost and safety, and most of us are not willing to pay what it would take to make every vehicle truly fool-proof. I hope that electronics continue to advance in industry; the benefits vastly outweigh the risks, in my view

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IRN in the News

Former US Senator Bob Dole took some ribbing (mostly good-natured) for a tendency to refer to himself in the third person, and appeared on Saturday Night Live after his loss in the presidential election in 1996 to comfort the actor who had parodied him, Norm MacDonald. "Bob Dole knows how much it meant for you to play me on the show the next four years. And Bob Dole feels your pain," he said in the opening skit of Episode 6, Season 22. For some reason, this popped into my mind when I set out to make today's blog post a compendium of links to recent news articles quoting IRN.  On the assumption that this is not far too self-referential but rather an additional way for you to keep posted on what we are thinking, here is a round-up of recent IRN news bytes in the automotive and business press.  

“Suppliers rewrite contracts to protect against raw material price surges,” Automotive News, August 26, 2010

“Economy will improve, one day,” Detroit Free Press, August 26, 2010

“Why Opel matters,” Automotive News, August 25, 2010

“Lear to produce chargers, parts for Chevy Volt,” Detroit Free Press, August 17, 2010

“GM’s ‘steely’ Dan booted Rumsfeld,” New York Post, August 13, 2010

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Vicious Cycle

With a 27% drop in housing sales this week and lower than expected durable goods purchases in July, suddenly everyone is talking about the infamous "double dip" recession. The stock market has been schizophrenic the last two months but the trend has definitely been steadily downward. And retail sales have been lower than expected the last two months. So how likely are we to fall back into recession?  The odds are a lot higher than just a month ago.

The problem is, the economy seems to be caught in a loop of negative self fulfillment. Companies are hesitant to start hiring again until they see consumers spending more consistently. Consumers are reluctant to spend because they either don't have jobs or are worried about unemployment. So we continue to cycle through the same pattern and the economic recovery remains incredibly slow.

In the near term, the media is back on a relentless focus on the negative side of any new numbers so everyone begins to believe that things are worse than they probably really are. The problem is, perception is more important than reality and if people think things are still negative, they are likely to remain extremely cautious in their spending and hiring practices, thus significantly slowing what should be a much stronger recovery. 

IRN still believes that a double dip recession is still unlikely, but the next few quarters of automotive sales are likely to remain relatively flat and relatively lumpy.

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Consumers Give EVs a Chance

The Consumer Electronics Association recently completed a study called Electric Vehicles: The Future of Driving. The study yields some interesting, and somewhat promising, conclusions relative to consumer acceptance of electric vehicles.

The online survey was conducted over a brief period between May and June of this year, and according to the results, 40% of Americans are likely to test drive an electric vehicle. Also, 42% said they would be likely to follow news reports about EVs. A bit surprising, however, was the fact that only 25% of the survey population said they were familiar with EVs. With all of the media focus on hybrids and plug-in cars these days, it is difficult to believe that one.

Some of the concerns expressed by the survey population mirror what we’ve been talking about all along in terms of the obstacles that the electric vehicle segment must overcome. From the perspective of the survey population, the disadvantages of EVs include: running out of battery power on the road (71%); not being able to recharge when needed (66%); and limited driving range (59%).

For the first time ever, the International Consumer Electronics Show, to be held in January 2011, will feature an extensive lineup of electric vehicles – both low-speed and highway-speed models – displayed by a range of car manufacturers. That is definitely a sign of the electric vehicle times.

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Maxima Effort - Minimal Gain

Nissan recently announced very modest price increases for some of its models.  One in particular caught my attention – the Maxima.  Nice enough vehicle but perhaps its usefulness in the ever-changing automotive marketplace is close to end.  Face it, the Maxima is pretty much viewed as either an upscale, decked-out Nissan Altima or a budget-minded person’s Infiniti.  After all, Maxima’s SV trim level starts at $33,530 while the Infiniti G37 sedan starts at a similar $33,250. From both a marketing and manufacturing standpoint, it seems that Nissan would greatly benefit by “retiring” the Maxima nameplate. Here's why...

Loyal buyers should be willing to move in one of two directions. For those happy with the Nissan brand, they should be more than satisfied with all the options available on a fully loaded Altima 3.5 SR model which prices out around $31,000. Maxima buyers wanting to shift to the luxury market could be happy with the G37. This would also allow Nissan to maximize manufacturing resources and flexibility by reaching a better economy of scale (not to mention the savings in future development costs that could be targeted to more critical vehicle segments). What do you think? 

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Korth at Society of Automotive Analysts 8-25

If you missed the OESA Breakfast Briefing last December, here is an opportunity to fill a gap in your knowledge of the industry context. Attend the SAA Networking Breakfast on Wednesday, August 25th - "State of Raw Material Costs and Strategies on How to Manage." Kim will re-cap the findings of the 2010 IRN Material Pricing Survey and discuss supplier negotiation strategies, and then a panel featuring a Tier 1 supplier and two of the largest global material providers, ArcelorMittal and PolyOne, will continue the discussion. The event will be held at the AIAG offices in Southfield from 7:30 to 10:30 am. To register...

To register, go to www.SAAautoleaders.org or call 248-804-6433. The cost is $49 for SAA members and $89 for non-members. The event is a cooperative activity of the Society of Automotive Analysts and the Automotive Industry Action Group. Panel speakers scheduled to participate are: John Erwin, Vice President of Purchasing, SRG Global Inc.; Gregg McDonald, Global Automotive Marketing Director, PolyOne Corp.; and P.K. Rastogi, Manager, Global Automotive Group, ArcelorMittal.

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Is Aptera Dying on the Vine?

For some time there has been a fair degree of doubt over whether the Aptera 2e will ever make it into production. For some, the doubt began with an initial glance at the vehicle, which is so far afield of a traditional automobile that it could be daunting for many buyers. Nonetheless, Aptera has managed to stick around for nearly four years thus far. But, are their days numbered?

Aptera originally planned to use the XPrize Automotive competition as a forum for validating the concept and design of the Aptera 2e. That, however, did not go so well. For example, one test required competitors to change lanes at a minimum speed of 45 mph (on a straight pass) with no throttle or brakes to control the vehicle. For Aptera, it took 40 tries to complete the test satisfactorily – and on one attempt, a door even popped open. In some of the other tests, the 2e squeaked by at best.

Despite lackluster performance in the trials, Aptera remained a contender in the competition, and put on a smile about the vehicle's launch prospects. There is evidence, however, that their prospects appear to be dimming. The company is still searching for additional funding in order to be able to bring the car to production. Any money from XPrize will not even be a drop in the bucket, and there is uncertainty about the likelihood of the DOE financing that Aptera is hoping for. There are rumblings in the blogs and media that the launch date, which went from 2010 to 2011, will very likely be pushed to 2012. The reservations section of Aptera’s website asks for deposits, but promises only that the company is working hard to make the vehicle available as soon as possible. This series of unfortunate missteps and happenings will no doubt be very damaging to the sales prospects of a vehicle that was already going to require a leap of faith for buyers to accept. Stay tuned.

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The End of American Optimism, Really?

In the August 16th 2010 Wall Street Journal, there was an opinion piece titled "The End of American Optimism" by Mortimer Zuckerman, chairman and editor of U.S. News & World Report. The gist of the article was that the United States has entered a period of much slower growth than we have experienced since WWII and that, for the first time, Americans are beginning to question whether their children will be better off than their parents. While I fully agree that the current downturn is more severe than many people initially thought and that we are still several years away from a return to "normal" employment levels, to suggest that the US is now headed to a European form of cynicism and a belief that the United States' best years are behind them demonstrates a fundamental misunderstanding of the core American psyche.

Mr. Zuckerman filled his article with various statistics that, at face value, seem to confirm that the US is screwed. But if you look closer, the validity of the statistics is in the eye of the beholder. Yes, for example, personal debt reached unacceptably high levels in the last decade and we are still suffering some degree of overhang from those excesses. But to state that it will take 5 years to see real improvement and, by implication, forever to get back to "pre bubble" levels, is more an indication of Mr. Zuckerman's negative world view than it is a data-based projection. Given the fact that he is responsible for a continuously struggling magazine, I guess I can't blame him for being depressed.

So what is a fair depiction of the current state of the economy and the United States’ likely fortunes over the next 10-20 years?

• People ridiculously overspent during the 2000-2008 period and we are highly unlikely to ever go back to that craziness again. But we will return to normal levels of spending, something we are already beginning to see.

• Americans by nature are an optimistic people (thank God) and that optimism will eventually return. As John Kenneth Galbraith put it when talking about the impact of the Great Depression, "Whenever Americans get hit by an economic cataclysm, they vow they have learned their lesson and frugality will rule in the future. It normally takes a generation for them to get stupid again."

• The high end of the economy probably has been moderated for the foreseeable future. That is why IRN believes NA production north of 15 million units is unlikely.

• The Baby Boomer generation (of which Mr. Zuckerman is a card-carrying member) is the most self absorbed and narcissistic in history. It is all about them and if their personal future is diminished, so must be the entire country's.

Don't get me wrong, the current environment is extremely challenging and many people negatively impacted may never recover. But Americans are a phenomenally creative and resilient people and I am not yet ready to bet against their positive future.

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Monday Morning Quarterbacking

A recent poll on our site asked about a report from Neil Barofsky, special inspector general for the Troubled Assets Relief Program. The question read: “The TARP auditor says that the accelerated dealer closings by GM and Chrysler may not have been necessary and were not worth the additional unemployment. Agree?” The poll results showed an interesting spread: 41% said yes, 31% said no, and 28% opted for the Facebook generation’s choice, “It’s complicated.” The article covering this story in the “local” paper, the Washington Post, spawned a similar diversity of viewpoints (“TARP auditor criticizes Obama Administration’s push to close auto dealerships,” 7/19/10) and many, many opinions.

Call me too wedded to shades of gray, but my instinct is usually on the side of, “It’s complicated, but give me some hours to analyze the data and I might share my opinion with you afterwards.” I think it would be interesting to read the full SIGTARP report for starters (that’s Special Inspector General – Troubled Assets Relief Program, www.sigtarp.gov, to you), and at 45 pages in length, that is relatively doable. So I have saved it onto my hard drive for later perusal, although, truth be told, that is a graveyard of good intentions where many other lengthy PDFs have been laid to rest and never seen again. In the meantime, chalk me up in the ‘complicated’ column.

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Things are Hot on the Continent

Our colleague in Stuttgart, Andy Fein, has completed another survey on the price reduction requests of the German and French automakers. One of the areas that he likes to ask about is how the supplier respondents would characterize the atmosphere of the negotiations. He then groups the words that they use by level of intensity or negativity and arrays them in a pie chart. While this is not a scientific model, it yields a picture that is both familiar and striking to the North American counterparts who have even more years of experience with this dynamic.

The pie segments describing a negative atmosphere total 57%, while those that occur in a more reasonable framework total 36%. In looking at the detail by OEM customer, though, it is not unusual to see both extremes represented. For example, different BMW suppliers describe their interaction as ‘demanding, very hard, unpleasant’ and ‘open, constructive, and solutions-oriented.’ Daimler suppliers range from terms like ‘arrogant’ and ‘brutal’ to ‘Very good atmosphere!’ This suggests that: a) there is still variation by individual and the style in which he/she decides to behave, and b) treatment of suppliers varies based on what you make and how much they need you. You may not have an infinite capacity to influence these dynamics. There’s an element of luck to getting the right personality on the other side of the bargaining table, for example. But it is clear, once again, that anything you can do to differentiate your company and increase the customer’s level of need, reliance, and preference for working with you, is bound to help.




The German-language study is now available. Visit Andy’s website to learn more about Hans-Andreas Fein & Associates, and order a copy of the report. 

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Will Anyone Ever Remember It Wasn't True?

While the jury is not completely in yet, it is looking increasingly likely that Toyota will be cleared of any technical problems regarding their infamous accelerator pedal. While tests are still being conducted on the software/electrical infrastructure of their systems to make sure something has not been missed, it appears that all documented cases of “unintended vehicle acceleration” were either a jammed floor mat (as Toyota claimed from the beginning) or driver error.  Do you think Toyota can expect an apology anytime soon from Transportation Secretary Ray LaHood, who said at one point that his advice was “if anybody owns one of these vehicles, stop driving it”?

So, after Toyota’s bulletproof reputation for quality was completely trashed and their Chairman was raked over the coals in front of a Congressional committee, it appears it was a huge media feeding frenzy over nothing.  Toyota became another poster child for the irresponsible and heartless corporation that cared more about profits than customer safety.  This debacle has cost them billions of dollars and deeply tarnished their brand, and at its core, they appear to be primarily innocent of the charges.

What does this say about our current 24 hour media coverage and our propensity to jump to conclusions before all the facts are in (think Department of Agriculture)?  Are there any lessons to be learned from this to help future corporations that will inevitably be caught in the media spotlight?  The primary answer is the way Toyota handled this crisis turned out to be more important than the actual facts behind the story.  If Toyota had gotten ahead of the story from the beginning as opposed to trying to hide the anecdotal evidence of a problem or demonstrating a media tone deafness that was truly astonishing for a company of its size, this would have been a blip in their corporate history vs. an atomic bomb.  While it may be unfair given that the facts now support Toyota’s initial claims of innocence of wrongdoing, Toyota is primarily responsible for this becoming such a huge and damaging event.  The primary lesson to be learned from this is that in the current world we live in, perception is more important than reality.

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Million Unit Months

The last time the US automotive industry enjoyed regular sales of one million units or more per month was way back in 2007.  Remember, that was the year we all prospered with 16+ million sales (or at least we should have!). Even in 2008 the monthly sales average was 1.1 million new vehicles sold – and this was despite the bottom dropping out of the market in the third quarter.  Of the seven months thus far in 2010, we’ve had just three months of million-plus vehicle sales, but two of the other months were only about 17,000 units shy of making the mark. Not too bad, all things considered. The million unit level is significant because many suppliers have adjusted their cost structures over the past 12-24 months to be profitable when sales are clicking along at a 12-million annualized pace.  But it is important to remember that suppliers do not live by sales alone, either.

Suppliers need to constantly monitor OEMs’ sales performance for indicators of future OEM production plans, import strategies, product funding availability, and more.  A great example of this link between sales and supply chain implications is Toyota’s recent decision to speed up the opening of their Mississippi facility. What’s the connection? The Corolla has been doing very well, but Toyota has been meeting demand for the popular model entirely from Japan and Canada since shutting down NUMMI in California this spring. The bad news for Toyota is the foreign exchange impact on profitability, so in order to reduce the number of expensive imports from Japan, it has decided to accelerate the planned return of the Corolla to a US plant by resuming the delayed construction project. For suppliers, the Corolla development could be good or bad, depending on the components you make and your global footprint – did you lose business when the Corolla left? Can you gain business when it comes back? The complexity of the industry means that all kinds of considerations and calculations are occurring. But with sales of at least 12 million cars and trucks this year, it should be easier to figure out how to be a winner.

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Poo Power

I’ve been thinking a lot lately about the new directions the auto industry is taking through the green / alternative movement and how it presents opportunities for unlikely players. Then I heard about the Bio-Bug from GENeco and realized exactly how true that is.

GENeco, a UK company owned by Wessex Water, recently developed a converted Volkswagen Beetle that runs on…are you ready for this? Human waste - more specifically, methane gas that is generated during the sewage treatment process. A process called biogas upgrading separates the carbon dioxide molecules, enabling the biogas to be used as vehicle fuel without affecting the vehicle’s performance. The general manager of GENeco believes the same thing can eventually be done with food waste, thereby utilizing more waste in a sustainable way and reducing the amount that finds its way to landfills.

While the Bio-Bug does sound slightly repulsive, reports say that if you didn’t know the vehicle was powered by human waste, you wouldn’t know it because it performs like any other conventional vehicle. The Bio-Bug is just a concept at the moment, and there are no immediate plans to produce the biogas on a commercial scale. But, what if?

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Webasto - Last Man Standing?

The recent news that Webasto Group will be taking over Karmann’s convertible roof business in the US and Mexico was déjà vu all over again – it was almost exactly a year ago that the company reached an agreement to acquire the convertible roof systems unit of insolvent competitor Edscha Cabrio Dachsysteme. There is some interesting activity in innovative roof features, but the roof market has not supported the number of companies making a run at it. Who’s left, and will winner take all?

Ten years ago, the action was mainly in sunroofs, and the key players were Webasto, Inalfa, Meritor, Aisin, Karmann. (ASC was already on its way out of the OEM space at that time.) Inalfa is still running a strong No. 2, but it had some work to do last year to strengthen its capital structure. ArvinMeritor has been backing away from light vehicles in recent years and just a few days ago announced the sale of its Body Systems unit including the sunroof business; buyer Inteva Products LLC is next up to try its hand. Aisin has expanded beyond its Toyota base to become a significant sunroof system supplier to GM and others, but it is busy nurturing a much broader product line than either of the two leaders, Webasto and Inalfa. Karmann tried at length but could never get enough of a foothold. Magna, in keeping with its predilection to make some of everything, has gotten into this business in the last few years via the convertible side with its acquisition of Dura’s convertible systems business and Porsche’s Car Top Systems.

Will Webasto be able to maintain both its tight product focus and strong market position, or will it turn out that suppliers with broader product lines to offset risk and maximize reward carry the day? Some companies, such as Gentex, have been able to achieve prosperity in a narrow band of product activity, but with a strong dose of technology to add value. It remains to be seen whether roof systems will be sufficiently rewarding, at least for the company at the top of the heap.

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Innovation Comes in Many Forms

I have been up at the CAR Management Briefing Seminars this week in Traverse City and the importance of innovation has been stressed in numerous speeches. While I doubt this is what any of them had in mind, this clip did reinforce the strength of German innovation and the need to slow down in metropolitan areas. Let us know what you think!
 

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GM Expands Alternative Vehicle Interests

Earlier this year, GM formed an investing unit called General Motors Ventures LLC.  Now as it nears the launch of the Volt, GM appears to be expanding momentum in the alternative vehicle segment, with the first funding action of GM Ventures going to Bright Automotive, a start-up plug-in hybrid commercial vehicle company. At the same time, GM’s actions show that the post-bankruptcy GM is much quicker to take action in response to market trends.

The vehicle that Bright Automotive has developed is called the IDEA, a plug-in hybrid electric light commercial delivery van designed  from a white sheet of paper by the company. The van has an electric range of 40 miles, after which it goes into hybrid mode with estimated 36-mpg (these performance specifications are based on an unloaded van, however). Bright developed the van from the ground up, taking a unique approach by listening to customer feedback and focusing on light-weighting, aerodynamics, and the development of a highly efficient powertrain.

GM’s actions underscore its commitment to the alternative vehicle segment and that it is moving quickly to establish a position there. Reportedly, GM Ventures has already provided the funding to Bright, even though the final formal agreements have yet to be signed. Upon finalization of the investment, GM will own a minority stake in Bright, and Bright will in turn have access to GM technologies, including advanced engine / transmission systems. GM may also be able to learn something from Bright’s development of the IDEA van. With GM’s assistance, Bright – which was just launched from the Rocky Mountain Institute in January of 2008 – will be able to fast forward development efforts of its production program to the third quarter of 2010. The tie-up between the two companies is especially interesting given that this is a commercial vehicle rather than another start-up, me-too passenger EV or PHEV vehicle (which are becoming more and more common these days).

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Inventory Sitting Pretty Well

Sitting on the cusp of the next model year, it is always interesting to take a look at how inventory levels are shaking out to see if true bargains are going to be sprouting up for consumers or if the automakers have been able to keep tabs on their production levels in the past several months.  From what we’ve seen, the Detroit 3 have learned a good lesson in their post-bankruptcy days.



Not only are most OEMs sitting in better shape going into the 3rd quarter of 2010, but the Detroit 3 have been managing their inventories better than they did in the past (see chart).  All have done an admirable job in sustaining much lower inventories since their emergence “post-bankruptcy” knowing that this is one of the keys to profitability. While use of incentives has been on the rise, we don’t believe it is only linked to moving metal off the lots in time for the 2011 models, but also to keep consumers interested in brands.

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Woo Hoo for Q2!

The news coming out about second quarter results is evidence that the trickle-down theory is working for suppliers. Higher light vehicle sales are prompting replenishment of the pipeline, and what’s good for the automakers has also been good for component demand. The table below shows who was hurting in 2009, and how they are doing so far in 2010. Among this set of companies, Q2 sales were up anywhere from 15% to 128% over last year. Of course, you have to look a little deeper to know whether a high gain is the result of unusually stellar performance this year or uncommonly poor performance last year, but overall, a huge sigh of relief can be heard from the industry.



American Axle is the outlier at the high end, with the 2010 comparison benefitting from the fact that in 2009 AAM was heavily affected by the extended shutdowns of GM and Chrysler and the drop-off of the light truck segment. Gentex, another high flyer this quarter, enjoys hefty penetration rates in North-American produced vehicles, so the particularly strong recovery of NA light vehicle production (e.g. up almost 75% vs. 13% in Europe and 31% in Japan) serves the company well, along with its drive for increased dollar content per mirror. As Gentex’s COB/CEO Fred Bauer noted, “responding to the rapid changes has not been without its challenges for many companies,” but it beats the alternative.

Other points to note:

Acquisitions and currency effects make their mark: Autoliv’s 51% gain reflects the assets and contracts it gained from former the Delphi business, though it was still up a hefty 40% on a net basis.

BorgWarner is liking what it sees: “Growing demand for our leading-edge powertrain products drove our second quarter results.”

Goodyear could only muster a 21% increase in NA tire sales and a 4% increase in Europe, but on the other hand, it was only down 16% in 2009 from ’08, so it remains on a moderate path with overall 15% growth for Q2.

Industry diversification can seem good or bad, depending on when you ask: JCI’s sales were up 43% for the Automotive Experience unit and 30% for Power Solutions batteries, but Building Efficiency could only muster 2% growth, leading to a relatively modest overall increase of 22%.

All kinds of stories are being told; come back and visit our website again for another status snapshot!

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Hybrids, Lincolns, Pricing, and Trade-Offs

[WEBMASTER'S NOTE: Asked to provide some input for our website on a recent announcement by Ford, Austin Powertrain provided the webmaster with two potential posts. He preferred the first, for its concise expression of his views. It read, in its entirety, “Hi, the Lincoln MKZ Hybrid is awesome. I want one soooo bad! NOT.” For a thorough analysis of Ford’s plan to forego a price premium on the hybrid version of the Lincoln MKZ, see below.]

ARTICLE #2 - THE LONG VERSION
Ford recently touted that the Lincoln MKZ Hybrid, going on sale this fall, will be priced at $35,180, which is the same sticker price that will appear on the conventional gasoline-powered MKZ. Some journalists and bloggers reacted with surprise when this news came out, but my first thought was, "So what? It should be the same price as the regular MKZ."

If Ford had announced that the price of the Ford Fusion Hybrid was being aligned with that of a Fusion equipped with a standard 2.5L 4-cyl engine, then maybe I would have been a little more surprised. The Fusion Hybrid uses a 2.5L engine, which is the same engine displacement available on the $20,000-$24,000 entry-level Fusion. In regard to engines, we can compare apples to apples and it’s obvious that one Fusion with a 4-cyl and another with a 4-cyl mated to a hybrid system should not be the same price. The hybrid technology, along with some upgraded standard features, raises the price to around $29,000. If Ford had announced it was offering a Fusion Hybrid for $24,000, then yeah, I’d have been surprised by that.

I’m not really all that wowed that a Lincoln MKZ Hybrid is available for the same price as a standard gas-powered model, because the base MKZ is equipped with a 3.5L V6 and comes with pretty much all the luxury amenities Ford has to offer.  The MKZ Hybrid will feature the same 2.5L Atkinson-cycle engine as the Fusion Hybrid, and will be handsomely equipped, just like the standard MKZ with a V6. In this case, it’s an apples-to-oranges comparison in regard to engines. The 3.5L will churn out 263hp with fuel economy of 18mpg city and 27mpg highway, while the 2.5L in the MKZ Hybrid will put out just 191hp with fuel economy of 41/36mpg. We have what I consider to be a pretty fair trade-off in horsepower versus fuel economy, and paying the same $35,180 for one or the other seems pretty reasonable to me.

Up to now, hybrids have been able to command a premium from the early adopters of hybrid technology. Let’s face it, people haven’t been buying hybrids to save money on fuel; the extra cost on the price tag means that owners have to drive their hybrids for several years to recoup the additional money they paid over traditional gas-powered vehicles. These people were making a statement when they bought their hybrid. They want to be seen in a hybrid touting how green they are, or to show everyone that they own cutting-edge, advanced technology. There is a lot of ego involved in wanting to own the latest and greatest.

But like computers with Pentium 3 processors, conventional DVD players, and 3G cell phones, technology eventually gets surpassed. The Pentium 3 was replaced by the Pentium 4, the conventional DVD player gave way to the BlueRay disc player, and 4G smartphones are now the most advanced in the market. Goods move down market as they become less advanced. The early adopters of advanced technology move on to something newer and better, and prices for the old technology begin to come down once it can no longer command a premium. The older technology becomes more affordable, because the target market switches from those willing to pay a premium to those who are not.

Gas-electric hybrid systems like those in the Ford Fusion, Honda Civic, Nissan Altima, and Toyota Camry are being overshadowed by more advanced plug-in hybrids and electric vehicles with lithium-ion batteries, such as the Chevrolet Volt and Nissan Leaf (both of which will be available by the end of the year). GM and Nissan claim that the Volt and Leaf will get the equivalent of more than 200 and 300mpg, respectively, and retail in the low $40,000 range. The less advanced Lincoln MKZ Hybrid couldn’t possibly command a price in the same range as a Volt or a Leaf, so its $35,180 price tag seems like a fair market value.

The MKZ Hybrid might be the first example of an automaker foregoing the price premium on a hybrid, but hopefully it’s the start of a trend.  I’m not expecting that all of the current hybrid cars will immediately start to fall in price, but the reality is that most of the automakers are working on more advanced hybrid systems that will be introduced in the next few years, and the price of the current hybrids will need to be adjusted or they face becoming obsolete.

If the current hybrid technology becomes more affordable and hybrids start to catch on with mainstream buyers, the economy of scale could be good for carmakers. Increased volume could help reduce the costs of the hybrid systems and assist the automakers with meeting the stricter fuel economy standards of the future.

OEMs have to get people behind the wheel of their hybrids if they want to achieve market acceptance. To get more people to give hybrids a try, automakers might have to forego the hybrid premiums. Your average buyer needs to be able to justify the purchase price, and it doesn’t equate to a good value if you sacrifice horsepower for fuel efficiency, but never actually realize any savings because you paid a premium when you bought your hybrid. Maybe automakers can get things to the point where buying a hybrid is actually just about trading horsepower for savings at the gas pump. Saving money by buying less fuel is what I thought the main idea behind hybrids has been all along.

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Styling Counts for Charging Technology Too

The development of a charging infrastructure for EVs is taking on a life of its own and styling / design is becoming a competitive differentiator even in advance of the market really taking off. It is becoming clear that the seemingly mundane task of recharging is going to become an area of new opportunity for both vehicle manufactures (at least those that are interested in getting involved in the charging infrastructure segment of the market) and outside companies. Nissan’s heavy involvement in establishing charging technology, as discussed in an earlier blog post, is a good example of this.

There are two recently unveiled charging stations – the WattStation from GE and Ecotality’s Blink – that show how design and styling are going to play an influencing role in this market. That WattStation was created by industrial designer Yves Behar to be a welcoming design that seamlessly integrates into the urban landscape as a regular part of our daily driving routine. The WattStation will be commercially available in 2011 and will enable vehicle charging in 4-8 hours. Ecotality’s Blink, designed by Frog Design, was introduced with a great deal of emphasis on the styling features – the two tone black and white color scheme and the interesting use of shapes, as well as a user-friendly touch screen interface and a cord that remains flexible even in low temperatures.

Even though the market is new and unproven, the competition is heating up. It is interesting that, for these two products that are so heavily influenced by technology, the market hype is as much about how they look as it is about how they function and perform.

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The Importance of Access to Credit - Part II

A few days ago, I did a posting regarding our enthusiastic support of General Motors purchase of AmeriCredit finance.  Our support was based on the importance of the subprime borrower to the automotive industry.  In Friday’s New York Times, Joe Nocera wrote a terrific article entitled, “Credit Score is the Tyrant in Lending.” Here is a point from the beginning of his column: 

“Essentially, a person’s credit score has become the only thing that matters anymore to the banks and other institutions that underwrite mortgages…To make matters worse... clients are having a difficult time just maintaining their current credit scores - even when they have done nothing to merit a downgrade.”

The quote is referencing the mortgage market, but the same problems hold true for access to automotive credit.  While the article focuses on the inaccuracy of most credit scores in establishing credit worthiness and the “Rube Goldberg” way most credit scores are derived, the main message is that millions of perfectly worthy homebuyers (and auto owners) are being shut out of the market due to the ridiculously conservative approach financial institutions are taking to lending.  Nocera relayed his conversation with a mortgage broker interviewed for the column as follows:

“Yes, she told me, she knew that underwriting standards had been way too lax during the bubble.  But to her mind, the mortgage lenders had swung too far in the other direction, depriving perfectly creditworthy borrowers of the chance to get a mortgage at a reasonable rate.”

Our analysis on financing approaches in the automotive industry comes to the same conclusion.  Hundreds of thousands of creditworthy consumers either can’t get a car loan or won’t take a car loan at the rates they are currently being offered.  The only way is this is going to get better anytime soon is if the OEM has access to its own credit arm so it can use more reasonable lending standards.  While there is some danger that they will start to lend to some people just to “move the metal” we are confident they learned their lesson from their own lending excesses of the past and this high-risk lending behavior is unlikely to repeat itself.  Lending to worthy consumers that are currently rated as subprime is an essential step to a full automotive recovery.

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Happy Days for the Home Teams

It isn’t such a great summer so far for the West Michigan Whitecaps, the Class A minor league baseball team affiliated with the Detroit Tigers. With 9 wins and 20 losses, they are running considerably behind their 2009 win-loss percentage of .593. Fortunately, we have other home teams to root for here in West Michigan, and two of them, Gentex Corp. and JCI, reported quarterly financials this week that give much to cheer about.

The nice thing about a horrible year is that it gives you a basis for really great comparables. Gentex is the perfect example:
• Q2 net sales increased by 72% over the same period last year;
• Q2 record income from operations increased by 203%;
• Q2 net income was up 179%.
Gentex also says that it is keeping costs under control in spite of the increased volume, with the result that the gross profit margin is up from 30.5% in Q2 2009 to 36.7% most recently.

JCI reported that in its FYQ3, automotive net sales were up 43% over 2009 and net income swung from a $14 million loss to a positive $171 million. New programs are adding to its engineering and launch costs, but overall, JCI too is reaping the benefits of the crash diet of 2009. Unfortunately for JCI, its overall performance did not meet analysts' expectations, so shares fell even though the corporation more than doubled its earnings. The Building Efficiency segment was the party pooper, with net sales up only 2% over last year and profitability flat. Still, the auto team is doing its part, and we will look for these companies to stay the course through the second half, as light vehicle production remains relatively strong.

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Key Enabler of a Sustained Recovery in Auto Sales

Yesterday General Motors announced the purchase of AmeriCredit Corp. This will re-create a captive finance arm for GM and will allow them to get back into financing a much broader number of American consumers. Both GM and Chrysler have been severely restricted in their lending practices for the last year as they have had to rely on Ally Financial (the old GMAC) whose lending criteria are as stringent as that of a commercial bank. We were very excited when we heard this news as the ability to finance a broader range of consumers is a critical step in a return to normalcy for the automotive industry. So, imagine our surprise when we discovered that most of the press coverage and public opinion is overwhelmingly against the deal.

A typical comment was one posted by a subscriber to the Wall Street Journal who said, “GM is acquiring AmeriCredit so they can make loans to people who are otherwise unqualified for loans. This is on the taxpayers’ nickel. Where have we seen this story before?” This writer obviously hasn’t had notification that his credit card was revoked or been unable to qualify for bank or retail credit during the Great Recession. He and most of the other readers and pundits seem to be oblivious to how many good, pay-their-bills-on-time consumers have been shut out of the auto market for the last two years. We would argue that many of his neighbors, family members, co-workers, bosses, etc. are now falling into the “sub-prime” category. These are reasonable-risk consumers that have been completely unable to get a car loan.

The chart below shows the historical proportion of subprime borrowers running in the range of 13-15% of total new cars sold. The tightening of credit is reflected in the rising average FICO score in 2007 and 2008, and in the fact that the proportion of subprime is now about half of what it used to be. The really interesting fact is what lies beneath the 2010 subprime proportion of about 8%. This is the figure for all OEMs, but for GM, the proportion is about half that, or 4%. Because GM no longer has a captive finance arm, it is not able to go after that segment of the market the way other automakers are.  If we taxpayers who own GM want to get good value for our investment, we should be demanding that they find a way to make a reasonable (not excessive) number of sales to this segment of the population. So IRN would like to be unequivocally on the record saying that the major OEMs’ return to owning captive finance arms is a good thing and absolutely critical to a sustainable recovery of this industry.

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Chevy Volt a Low-Risk Proposition for Buyers

One of the concerns potential buyers have about electric and range-extended hybrid vehicles is the distance that can be driven between charges. But, there is another potential obstacle in the mind of the consumer, and that is the life expectancy of the battery pack and the cost to repair or replace. Most EV companies spend considerable effort touting their vehicle’s range potential, but few have directly addressed the battery issue.

Just recently, however, General Motors announced that it will offer an 8-year or 100,000 mile warranty on the Volt’s lithium ion battery and its 161 components. This is certainly a wise move on GM’s part, as they are eliminating a major source of worry for would-be buyers, and hopefully securing a strong sales position right out of the chute, albeit for a small customer base. The warranty can also be transferred to another owner within the 8-year / 100,000 mile timeframe at no cost, so that could possibly help to keep the vehicle’s residual values strong – at least in the very early years of the vehicle’s life.

GM has reportedly put their battery design through rigorous testing at extreme temperatures on both ends of the spectrum, and the extended warranty offering is a statement to their confidence in the product. At the same time, should the battery prove to be less robust in real-world conditions, GM will not take a significant financial hit, since the volumes are relatively low. Furthermore, the initial launch volume is small, and GM will be able to make improvements as needed based on any warranty claims it might see from the first batch of products out on the market.

So overall, GM made a good decision by offering the attractive warranty – they are eliminating consumer anxiety with relatively limited financial exposure for the company.

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Tempered Growth is Still Good News

With much news lately regarding the continued pessimistic outlook towards economic indicators such as the lack of a speedy jobs recovery or the need for some sort of miracle housing cure, I thought it was time to give a snapshot from IRN’s most recent vehicle production forecast. Given the context of where we have been, i.e. in the economic basement of 2009, things are certainly looking up. Our industry has weathered the worst of what had been unsustainably low volumes and has been steadily restocking inventories ever since. 

Many suppliers we’ve talked to indicate they have reworked their business model to post modest gains at around a 12 million North American industry production level.  IRN’s most recent forecast projects that level will be met in the first or second quarter of 2011 – just around the corner. The chart below shows selected segments - trucks, crossovers and small/mid-size cars – that will all share in the rebound. SUVs, shown by the line at bottom… not so much.

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Kia Alphanumerics - Yea or Nay?

Our recent poll posed the question of whether our readers are fans of the trend toward dropping product names in favor of alphanumerics. This was prompted by the news that Kia is considering changing some names, i.e. making the Optima the K5 instead, re-naming the Cadenza the K7, and the Forte the K3. Hyundai Motor vice chairman Chung Eui-sun says that alphanumerics can increase the strength of an auto brand, but do we agree?

To the extent that letter-number combinations are heavily associated with European and Japanese luxury brands, the answer might be yes. Kia is reaching for that halo effect. IRN poll results suggest that we are not fooled by such superficial moves: 60% of the respondents are unimpressed by a meaningless letter and numeral, while 40%, on the other hand, hear the sizzle and smell the steak. It would have been interesting to get some demographic data to go with the survey results. Is it just crotchety old people like myself and John Teahen of Automotive News that are put off by this? Just how old was the letter-writer who suggested that the alphanumeric idea should be extended to families? “If I were young and starting a family, I would certainly embrace the idea. My first child would be D1, the second could be D2, and on and on.”

Hyundai Group’s US sales are up 21% for the first six months of 2010 over 2009. How much better could they do with names of symbols rather than substance? Perhaps we will find out.

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Fiesta Freightless in Mexico

 According to a Ford spokesperson, substantial damage to rail lines from recent storms in Mexico has left Ford having to reroute shipments of the highly popular 2011 Ford Fiesta.  Ford expects shipments to be delayed up to two weeks, which is quite a shame.  The Fiesta is the ultra-fuel efficient, B-segment vehicle that is being manufactured in Ford’s Cuautitlan facility and already has waiting lists at dealers.  Ford is heavily relying on both this new Fiesta and the upcoming redesigned Focus to continue to lift its 2010 and 2011 profits for the North American region and help fund development costs for additional programs going forward.

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Update on Chrysler

Given the fact that we still get almost daily calls regarding Chrysler, it is probably a good time for an IRN update on their outlook.  The key question we are perpetually asked is “Are they going to survive?” A series of additional questions normally follow such as:
• “We have been actively moving away from Chrysler but we are still seeing new opportunities. Should we change our strategy?”
• “We really like the new regime at Chrysler. Great communication, honest attempts to resolve differences, beginning to feel like the old Stallkamp days. While I hated them during the Nardelli period, now I would really like to see them succeed.”
• “We are seeing a ton of opportunity at Chrysler right now but my boss (or my private equity owner) is very reluctant to support anything relating to Chrysler. Should I change their minds, and if so, how?”

Since we are somewhat schizophrenic regarding their outlook in our office, we know how our customers feel. I (Kim) have been quite positive on the likelihood of Chrysler’s survival for some time. Tracy, on the other hand, has been quite skeptical. On the whole, however, the entire IRN team believes that Chrysler’s outlook has been steadily improving and their likelihood of survival has improved dramatically over the last six months. A few data points to support this increasing optimism:

• Chrysler North American light-duty sales totaled 671k units for the first 6 months of 2010 – significantly better than the same period in 2009 when they sold 582k units during a disappointing bankruptcy-induced stupor.  June 2010 sales totaled 120k – up over 46% from June of 2009 (82k units). While these sales are still relatively anemic, they now have a cost structure that will allow them to survive at a sales level of 1.4 million units per year. (See chart below.)
• The Grand Cherokee just launched. While it is a little pricey for the segment, we think it will do very well, particularly since it is supported by a new ad campaign that reflects a higher level of sophistication in Chrysler marketing. It will also drive traffic to Chrysler dealers who have been spending the last year significantly upgrading their dealerships.
• Chrysler has been particularly hard hit in the area of sub-prime lending due to the more stringent lending policies of GMAC (aka Ally Financial). They have been working with their parent Fiat to expand their lending options and to allow them to finance more of their buyers. The Cherokee, for example, is offering 0% financing which should definitely help pump sales.

So the bottom line regarding Chrysler? While their outlook is certainly cloudier than that of either Ford or GM, it is looking a lot better than it did six months ago and we are encouraging our clients to actively pursue doing business with Chrysler.

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Too Much of a Good Hamster Thing?

Faithful readers know that we at IRN were quite taken with the original Kia Soul commercial featuring hip hamsters in a hot red Kia Soul cruising past humdrum hamsters spinning on their cage wheels. A large part of its charm was the element of surprise and creativity in making the point that this vehicle was something out of the ordinary. The question now is, 'do the hamsters have legs?' in the advertising sense of the phrase. For some of us, it's time to move on... Watch the latest iteration below and tell us what you think - does this commercial work for you?

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EV Adoption: Will a Community-Based Strategy Work?

Recently introduced legislation, the Electric Vehicle Deployment Act of 2010, lays the groundwork for a community-based strategy for rolling out electric vehicles and increasing their market penetration on a national scale. If the legislation is enacted, there will be between 5 and 15 communities selected to encourage the deployment of electric vehicles through a series of incentive programs, tax credits, and financial assistance initiatives that are designed to bring the financial benefits closer to the point of sale. For example, in the deployment communities the $7,500 federal tax credit is increased to $10,000 and can even be transferred to a dealer so the purchase price of the vehicle could be accordingly reduced. Other examples of benefits afforded the deployment communities include funding for projects to bring a public charging infrastructure online more quickly and an extension of the federal tax credit for installing a home charger (extended through 2016 vs. 2012) among other things.

The rationale behind the community approach is that the lessons learned and best practices adopted can be applied in other communities later on to speed market penetration of electric vehicles nationally. It sounds great in theory, but will it work? A couple of drawbacks quickly come to mind. First, every community is different. What works well in one may not work at all in another, so there is no guarantee that the lessons learned can be seamlessly applied across all regions of the U.S. And, what if the wrong communities are selected for the test cases? Starting in the wrong markets could impede forward progress on a larger scale later. If EVs are met with less than enthusiasm by consumers in the deployment communities and they generate less than favorable publicity, it could ultimately put a damper on consumer acceptance overall. That being said, we have to start somewhere, and maybe a handful of carefully selected test case communities is what the EV industry needs.

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The New Normal

For the last year, IRN has been counseling our clients that the days of relative stability and predictability in the economy are gone and we are entering a period of much higher volatility. The last couple of weeks are certainly a case in point. In terms of the stock market, the first week in July saw the worst weekly decline in the market since the recovery began in mid 2009. With continued worries about the European debt crisis, the mixed signals on the U.S. economy, and several days of hundred-point drops in the Dow before the 4th of July holiday, many people were convinced the market rally had finally ended and we were headed into the dreaded “double dip” recession.  As you know, not only did the stock market stop its decline last week, it had three of the best days in history for stock market performance in July.  Go figure.

Other leading indicators were equally volatile. From less than anticipated auto and retail sales (up but not as strong as analysts had hoped) to better than expected jobless numbers (even with the census hires going away) to worse than expected new housing starts (the loss of the new owner tax credit) - anyone following these trends began to feel a lot like an observer at a tennis match. So, with all of these mixed signals, where is the economy really headed? Toward more of the same. With 24 hour news media coverage and virtually instantaneous transmission of everything, increasingly rapid swings in outlook are becoming the norm. What does this mean to an automotive supplier?

• Get used to much greater volatility in inputs - materials, exchange rates, logistical costs, etc. Anything you can do to protect yourself from this volatility going forward is critical (e.g. material pass through).
• Avoid getting seduced into assuming there will be steadily improving vehicle production and sales. While we do believe we will see a return to more “normal” levels in the next few years, you must look at your numbers platform by platform and vehicle by vehicle. Create a best case/worst case planning scenario for the life of the program and try and keep your fixed costs tied to the worst case.
• The commercial side of program management is as important as the engineering side. Protecting (or improving) your profitability during program launch will be a key attribute of successful suppliers going forward.

Finally, get used to living in a world where the only real certainty about tomorrow is that it will be different from today.

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US June Sales Results

June automotive sales posted a solid 16% gain over 2009 sales but were off by nearly 11% from the previous month of May 2010.  IRN believes that aggressive sales incentives and increased financing offerings in May brought many consumers to the buying table.  While over 5.5 million vehicles have been sold in the first six months of 2010 compared to only 4.8 million in 2009 (the ‘Great Recession’), this year is a bumpy year at best. 

IRN doesn’t expect to see sales hit the basement again like last year but economic factors continue to point to extremely cautious consumers who continue to look for bargains and wait on the sidelines as long as possible.  As a few new models start to peek their noses out into the market soon, sales should perk up for a couple of the OEMs in particular (i.e. Chrysler, thanks to their upcoming Grand Cherokee, and Ford’s Fiesta).  Overall, IRN expects US vehicles sales to top off around 11.8 to 11.9 million light-duty vehicles in 2010.

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So Where Are All Those Supplier Bankruptcies?

During the dark days of last year, many industry participants predicted a massive downsizing of the supplier industry. Some analysts predicted as much as 30-40% of suppliers would not survive the dramatic downturn in sales of the first half of 2009. As many of you know, IRN never believed that was likely to happen (for a variety of reasons) and while there were a large number of bankruptcies and liquidations between October of 2008 and June of 2009, most of the supply base survived. After this massive “cleansing” of the supply base failed to occur, many of these same analysts argued that many suppliers were able to survive by basically mothballing their facilities. The real test, they claimed, would be when production started to ramp up again and weaker suppliers would be unable to get access to credit to support the upturn. We were definitely going to see a second and bigger wave of bankruptcies. So what happened?

These analysts were wrong again! As the Cash for Clunkers program kicked in during the 3rd quarter and production levels rose dramatically in the 4th quarter, suppliers across the board experienced something they had not seen in a long time.  They were highly profitable. Things have only gotten better in the first two quarters of 2010. 




Supplier profitability is the direct result of two major issues:

• Most suppliers reduced their breakeven points by between 20-40% in the first half of 2009;

• Most suppliers based their 2010 forecast on ridiculously low production numbers (i.e. they did not believe IRN’s forecast of at least 11 million units in 2010). With many suppliers planning on 8.5-9 million units of production, profitability improved dramatically as the industry consistently produced at a 11.5-12 million unit rate.

The result? Most suppliers were able to fund their re-start out of their own cashflow vs. having to get access to traditional credit. This has been a huge surprise to the financial community and has allowed many marginal suppliers to survive and begin repairing their decimated balance sheets. 

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Is a Step for Tesla a Giant Step for EVs?

Tesla took another major step forward on Tuesday, with their initial public offering. It was a huge success on a variety of levels. The company was able to raise $226.1 million, and the share price closed 40.5% higher than where it started – on a day where both the Dow and NASDAQ lost ground (-2.65% and -3.85%, respectively). Reportedly, the company increased the number of shares available from 2.2 million to 13.3 million the night before the IPO because there was such a high demand. Not bad for the first IPO of a car manufacturer in over 50 years – and for a company that has only been profitable once since it was founded in 2003.

So, what does Tesla’s success mean for the EV market as a whole? Is the vote of confidence by investors – the overwhelming demand to own a piece of Tesla – also a signal of acceptance for EVs overall? Would investors be beating down the doors if the IPO was for another EV company such as Wheego or one of the many other golf cart-like vehicle makers? My initial reaction is that, while EVs are certainly gaining acceptance, they are gaining acceptance at a much slower rate than Tesla is. Tesla is just one of those companies that has pizzazz and mystique surrounding it – plus they have a well thought-out business strategy and plans for future growth. Tesla has several things going for it that the other EV players do not, including: charismatic leadership, big-name financial supporters, the claim to fame of being first to market, and soap-opera like stories surrounding the management and operations of the company etc. Add a really beautiful car to the mix and you have a formula for IPO success. The other EV makers still have work to do!

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Unenlightening Indicators?

Happy days are here again…Wait, no, make that “The sky is falling!” Over the course of four days at the end of June, the following headlines appeared in major news media: “Consumer sentiment highest since Jan 2008,” “Consumer Confidence Appears on the Mend, [sub]” “Instant View: Consumer confidence slumps in June,” and “Consumer Confidence Tumbles. [sub]” The first two reports covered June’s consumer sentiment index from the Thomson Reuters/University of Michigan’s Surveys of Consumers (76, from 73.6 in May). The latter two addressed The Conference Board’s June consumer confidence index (52.9, down from 62.7 in May). What should we make of these apparently conflicting observations on the state of consumers’ mindsets?

We’re not in a position to evaluate the technical merits of the two surveys. One economist quoted in Reuters suggested the difference reflected a greater labor-intensity in the Conference Board’s measure, meaning that these respondents were more heavily influenced by the recent slowdown in job growth. (Assuming that there really was a recent slowdown in job growth… or was there also a report of acceleration?) U-M Survey Director Richard Curtin noted when releasing his positive June figure that, “Unfortunately, consumers do not anticipate significant declines in unemployment during the year ahead,” so it appears that respondents in the U-M survey were not completely disregarding the job market, either.

We hope that next month supports a continued strengthening of consumer sentiment and confidence, and I am not just saying that as a University of Michigan alumna.  To the extent that there is a ‘virtuous circle’ effect, i.e. good news begets more good news, let’s root for consumer spending, the growth engine for more than two-thirds of the US economy.

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Are Suppliers Worried About Raw Materials?

IRN’s recently completed survey on material pricing indicates that the level of concern in 2010 is much lower than it was during our inaugural survey on the subject back in mid-2008. Two-thirds of respondents expect their purchased raw material prices to rise 1-20% compared to 2009. Only 10% are anticipating increases of more than 30%. Thinking back to the behavior of steel prices, in particular, two years ago, this seems like a much more moderate climate. So we don’t have to worry. Or do we?

Of course we have to worry – we’re in the auto industry! IRN’s analysis indicates that, going forward, we will see much greater volatility in sales and production. The period from the early 1950s to the early 2000s was characterized by cycles within a fairly narrow band of variability, but since then we have seen sharper and steeper changes in the automotive market. This will make it more difficult for suppliers to manage their business, and obtaining the appropriate amount of raw materials at predictable prices is likely to be difficult. For many suppliers, availability is a much bigger issue than pricing. The lessons learned from the past couple of years suggest that suppliers need to stay on top of material price trends and be proactive in addressing these with customers. For more information on what suppliers are doing, purchase your copy of the report Industry Update: Dealing with Volatility in Raw Material Prices by following the link at the top of the IRN home page.

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A Message to Our Readers

I am sure many of you have noticed that we have had virtually no updates to the IRN website for the last two weeks. I want to assure everyone that things will soon be back to normal and we are actually in the process of a site upgrade that will launch later this summer. The reason for the lack of new content is that IRN has been hit by various traumas and disasters almost too numerous to mention. From car accidents, to deaths in the family, to homes being flooded, to several emergency room visits, the staff at IRN has had a very rough few weeks. Oh…and our building was also struck by lightning. We believe we have finally run the negative gauntlet and we are in a position for things to return to at least some level of normalcy. Thank you for your patience during this period.

 

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The Importance of the Sub Prime Lender

As sales continue to improve from their abysmal levels of last year, it is important to remember that we still have a long way to go to get back to the 15-16 million unit sales we experienced during most of the last decade. A big factor in the ability to support those sales levels is the acceptance rate of borrowers when they apply for a new car loan. As the following chart demonstrates, real estate is not the only industry that was severely hurt by the implosion in the subprime segment.


While prime borrowers and near prime borrowers approval rates definitely declined during the “Great Recession”, the decline was relatively modest and the approval rates are rapidly returning to pre-recession levels. The subprime borrowers approval rates, however, fell off a cliff. From an approval rating of almost 70%, they have dropped to a little over 10% for the last 6 months. Why is this important? Because North American sales cannot return to normal levels without access to these borrowers. Approval rates need to get back to at least a 40-50% level to support sales in the 14 to 15 million unit range.

So, with access to consumer credit still extremely tight from traditional sources like banks, how do these buyers get back into the market? We believe the only way to tap into these buyers is through financing from captive finance arms at each of the major OEMs.   Most of the New Domestics kept their financing units and have had a major advantage in providing traditional loans and leases to their customers during the downturn in 2009. We anticipate all of the major players will re-create their captive finance arms over the next 12-18 months as they seek additional ways to support their steadily improving sales. We are also relatively confident that they will not repeat the mistakes of the past by inflating vehicle residual values or providing credit to borrowers that clearly cannot support their loans. With the increased emphasis on profitability by all of the OEMs, captive finance arms can play a critical role in improving OEM performance.

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Wheego Speeding to the Finish Line

For those of us watching the electric vehicle market, things are starting to get exciting, as the launch dates are nearing for some of the anticipated models. The buzz is currently all about the Nissan Leaf (which is going to be a credit to the EV industry) and the Volt (although a plug-in hybrid, it will still compete against EVs). Yet there is another company that is quietly working its way to launching a contender, and it may just make it ahead of the big names.

That company is Wheego. They have been producing very expensive neighborhood electric vehicles (NEVs) for a couple years now, but Wheego has also been at work on a highway version called the Wheego Whip LiFe and, if the stars align, the first batch of them could be rolling off the production line and into showrooms as early as this August. This vehicle will not compete directly with the Volt and Leaf for potential buyers. Being that it’s a tiny two-seater (akin to the Smart), it will appeal to a completely different type of buyer. Families need not apply for this one! What it will compete for, however, is the marketing splash and the rights to say they were “first” to the market.

There are still obstacles in Wheego’s way. There are safety tests to be finalized (the Whip LiFe is based on a Chinese car platform, so we’ll see how that goes) and there is financing to be secured ($5 million needed for the first round of production cars). If the company can pull off those two feats, we may just be hearing about the launch of the Whip LiFe in another month or so. These are two pretty tall orders, however, so I am estimating that their launch will fall closer to the later part of the year similar to the competition.

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Nissan Preparing to Take EV Lead?

Nissan is not only on an aggressive path to launch their first electric vehicle, the Leaf, in December, but they are also taking steps to ensure that EVs overall are on track for success. Some of their recent activities suggest that Nissan is betting on EVs taking off, and the OEM wants to be in the leadership position to take advantage of the growth when it occurs – both in its home market in Japan, as well as the U.S. market.

The company recently unveiled a charging station – an internally developed design – that will be installed at all of its dealers in Japan. In addition, a 49 kW fast-charger will be available at approximately 200 Japanese dealers. Nissan’s goal is to have a charging station available to customers everywhere within a 25-mile radius throughout Japan.

In the U.S., Nissan is taking similar steps to ensure that a charging infrastructure is ready for Leaf customers to take advantage of. Reportedly, the OEM is introducing a similar fast-charger to the one being rolled out in Japan. Only, it will sell for even less here in the states. Nissan is also working with outside groups that are committed to furthering the EV cause in the U.S. The OEM donated $25,000 to Plug in America to support the group’s efforts to speed the adoption of mass-market plug-in vehicles. Nissan is also working with Ecotality to bring over 11,000 chargers to five states: Arizona, Oregon, California, Washington and Tennessee.

So, is Nissan preparing the way for the Leaf to jump in take the EV-world by storm through these efforts? Or will they be paving the way for another EV-maker with a future product? So far, it appears that the company is entrenching itself as a key player in the EV sector. Now, they are poised to take a strong position in the charging market as well, so this provides another avenue for growth regardless of how well the Leaf does (assuming EVs overall are widely accepted).

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Toyota-Tesla: A Good Match

The recently announced partnership between Toyota and Tesla is a wise move for Tesla and a good thing for Toyota as well. The two companies announced on May 21st that they would work jointly on electric vehicle development by developing a team of specialists. Toyota will purchase $50 million of Tesla’s common stock issued in a private placement. Tesla will contribute its EV know-how which could help Toyota bring new electric vehicles to market, and Toyota will share its manufacturing expertise with Tesla.

Tesla gets several things from the partnership. The fact that Tesla has garnered the attention of the great Toyota gives the start-up additional credibility – just further evidence that Tesla is a “real” car company. Tesla also has the opportunity to learn from Toyota’s extensive manufacturing prowess in the early stages of its life. Furthermore, since we now know that Toyota does make mistakes, Tesla can hopefully learn from those as well. As Tesla begins establishing its new production plant for the Model S (the old NUMMI plant in California), hopefully the partnership with Toyota will enable them to set up operations in the most efficient and effective manner from the start, so they can hit the ground running.

Toyota also gets some good benefits from the deal. First, they can learn from Tesla’s deep knowledge about vehicle electrification to advance their own product lineup in that area. The OEM also has the opportunity to witness first-hand the agility and entrepreneurial spirit that Tesla embodies. Toyota Motor Corporation president Akio Toyoda expressed his hope that Toyota employees would recall the “venture business spirit” through the partnership. And finally, perhaps this will give everyone something else to talk about relative to Toyota instead of recalls and unintended acceleration.

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Toyota and Honda - The Fuel Economy Front

Over the past couple model years, Ford, GM, and Hyundai have all invested in engine upgrades, such as adding direct injection, to improve the fuel economy of their lineups. Ford’s aggressive fuel-saving strategy of boosting power to downsized engines via turbocharging will even extend to its full-size trucks when the 3.5L EcoBoost engine is added to the F-150 for the 2011 model year.  New models are being introduced that will challenge Toyota and Honda for leadership in fuel economy. The new Ford Fiesta is now the most fuel efficient car in its class, with an EPA rating of 40 mpg on the highway, besting the Toyota Yaris by 4 mpg and the Honda Fit by 5 mpg. GM says its upcoming Cruze Eco model will get 40 mpg on the highway, which would better the 36 mpg from the non-hybrid 2010 Honda Civic and the 35 mpg from the 2010 Toyota Corolla....

 Ford has a redesigned Focus on the way, and Hyundai is bringing a new Elantra to market, both of which are expected to achieve nearly 40 mpg. Blame it on complacency or whatever you will, but the competition has caught up to Toyota and Honda, and the world-class quality and fuel economy that set them apart in the past might not be quite the advantage it once was.

Toyota and Honda still lay claim to some of the top-selling models in the US, but there are some very well-rounded cars in the marketplace that are well-built, attractively styled, won’t gouge you at the pump, and are ready to challenge Toyota and Honda’s models for your hard-earned cash. The presidents of both Toyota and Honda have admitted that improvements need to be made to their lineups to stay competitive, and it will be very interesting to see what they’ll do to up the ante in the future. I won’t count them out by any means, but it’s hard to ignore the shift in consumer sentiment that once heavily favored the Japanese. I ask you, what brand are you most likely to make your next vehicle purchase from? Has your answer changed in the past twelve months?

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Toyota and Honda - The Quality War

There’s currently a heightened awareness of quality issues and recalls in the auto industry, and while no OEM is immune to them, Honda included, Toyota has turned into the absolute poster child for quality problems. Toyota’s quality issues have been well documented in recent times, and the company is being unmercifully bashed in the media. With the news overflowing with stories of sticking gas pedals, unintended accelerations, and public apologies, the perceived quality gap that the Asian automakers have claimed in the past is quickly eroding in the minds of the American consumer.  In fact, the Associated Press released a poll in April that asked Americans consumers which automakers build the highest quality of vehicles, and the US automakers tallied 38% of the vote while the Asian automakers claimed 33%. That’s quite a difference from the AP’s 2006 poll in which the Asian automakers beat out their US counterparts 46% to 29%.

It appears that quality may no longer be a major differentiator for Japanese automakers, but what about fuel economy? That’s still an ace in the hole for Toyota and Honda, isn’t it? Well, that might be changing too. We'll say more about that in the next post in this series.

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GM - A Steadily Improving Picture

We waited a few days before giving our two cents' worth on GM after the media feeding frenzy over their better than expected 1st quarter earnings report.  As many of you know, we have been quite positive on GM for some time.  We have several reasons for this positive outlook:

• Let’s start with the leadership.  While Mr. Whitacre has a long way to go to earn the rock star status of Alan Mulally, he has certainly demonstrated positive leadership since his arrival.  He has worked to streamline the decision-making process at GM and to significantly reduce the complexity and bureaucracy of the organization while simultaneously empowering some of the rising stars of the middle ranks who are the future of GM.  He also has made it clear “what success looks like” for his management team (e.g. per vehicle profit, recapturing market share in North America, etc.) which drives organizational alignment, something GM has been missing for years.

• They have an excellent product line up with a number of key new product launches over the next 12-18 months.  The best example is the new Cruz.  While the Volt will get all the media attention, it is the likely success of the Cruz that will speak volumes about the future success of GM.

• It is truly astonishing the improvement in supplier relations for GM. While this is not true across the board (e.g. there are still old school purchasing types in the lower ranks whose behavior has not changed), most suppliers have nothing but good things to say about how GM is treating them.   From a willingness to negotiate points of disagreement to the quality and consistency of communication, to earlier involvement in the design phase, GM is finally beginning to sound like their old Saturn slogan “A Different Kind of Car Company.”

• Finally, they have been amazingly consistent in their production scheduling of late and they appear to be seriously trying to move away from the product push manufacturing strategy that was so destructive to the company the last ten years.

Our one concern in saying anything nice about General Motors is that they have a history of letting short-term success go to their head.  One of GM’s biggest shortcomings has been their organizational arrogance and their track record of declaring victory way too soon.  Our hope is that GM realizes that this recent improvement is like doing well in the first mile of a marathon, not winning the hundred-yard dash. 

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Are Toyota & Honda Losing Their Competitive Edge?

If I were playing a rousing game of Family Feud and the survey question pertained to the top reasons Americans have had for purchasing cars from Japanese automakers, I know for certain that my top two responses would be quality and fuel economy. I think it’s a pretty safe bet that a lot of people would agree and that I’d rack up some serious points with those two answers; after all, Japanese automakers such as Toyota and Honda have been hanging their hats on quality and fuel economy for the last three decades. Now, I wonder how many points I’d score if my Family Feud answers were bold design, pizzazz, or sportiness?

I don’t know if I’d strike out with those answers, but I have a sneaking suspicion that my score would be a little on the paltry side. I feel pretty safe in saying that Toyota and Honda have mostly followed the way of function over form. I’ve heard the designs of both Toyota’s and Honda’s cars described as bland, boring, and even soulless.

My point is, Toyota and Honda have paved their road to success by doing a couple things extremely well, and that has more than offset their weakness in a few other areas. But what happens when their competitive advantages of quality and fuel economy start being challenged and the rather uninspiring designs of their cars are getting outshined by flashier new models from their rivals?

Major players like Ford, GM, and Hyundai have made great strides in narrowing the gap in quality (both real and perceived). Ford‘s Fusion and Taurus, GM’s Malibu and Lacrosse, and Hyundai’s Sonata are all well-styled cars that are capable of giving the Toyota Camry and Honda Accord a run for their money, and that hasn’t gone unnoticed by Toyota.

In a statement appearing in Automotive News, Toyota president Akio Toyoda expressed concern about the future direction of the Camry, the company’s top seller in the US. Toyoda said, “Look at the Ford Taurus. It may be making a comeback. GM also has Camry fighters. And they’ve been done with a fun-to-drive touch. And Hyundai is coming up, and they’re looking good. So we have to start asking, ‘Can we just keep doing the Camry like this?’”

In addition to concerns about the Camry, the fact that Toyota’s US market share fell from 16.3% in Q1 2009 to 15.1% in Q1 2010 must also be a cause for concern to Toyota’s president. He’s not alone, however; Honda’s president, Takanobu Ito, has concerns about his company as well. In the same period, Honda’s US market share fell from 10.5% to 10.1%, and it was unable to capture any of the market share that was lost by Toyota. At the Beijing Auto Show, Ito said that he wasn’t satisfied by the decline in market share, that Honda had grown “complacent,” and that the company needed to renew its focus on improved products and marketing.

It’s pretty eye-opening to hear the heads of both Toyota and Honda candidly admitting their concerns about how their respective companies’ cars stack up against the competition. OK, so Toyota and Honda have some concerns about their product portfolios, but they can still best the competition with the superior quality they’ve always been able to lean on, right? Maybe not. Check back for the next post in our series on this question.

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EVs and Economic Recovery

The economy is getting back on track and consumers are showing more interest in buying cars again. So, what is the likely effect on the EV segment? If consumers are in a better financial position, will they be more interested in paying the premium that often goes along with these types of vehicles? Or will they be less interested in EVs now that fuel prices have moderated and / or they are less concerned about fuel economy relative to finances in light of better economic times?

Two pieces of data could help provide some clues as to what will happen. Since we do not have a good base of historical information on EV sales to look at, we must instead turn to the next closest thing, which would be hybrid vehicles. As the data from hybridcars.com shows, sales of hybrid vehicles during 2009 declined only 8% over the previous year. This compared to the fact that light vehicle sales overall fell by 21% during the same year. This suggests that fuel economy indeed plays an important role during difficult economic times. Further supporting that point, year-to-date hybrid sales through April are up 8.2% over the same period last year, according to the data from hybridcars.com, while overall automotive sales year-to-date through April are up 16.7%. So, now that the economy is stronger, traditional vehicles are selling at a faster pace than hybrid / alternative vehicles.

Another relevant source of clues is Ward’s Fuel Economy Index, which tracks the fuel economy numbers for all of the new vehicles purchased in a given month. The index for March and April showed the smallest ever year-over-year improvements to date. This is a good indication that consumer demand for more fuel-efficient vehicles is waning.

While EVs are clearly a different market segment than hybrids and traditional fuel efficient vehicles, the data does give an indication of consumers’ interest in fuel efficiency. EVs still have additional challenges to overcome, beyond just a price premium, so this is certainly not an apples to apples comparison. But, for what it is worth, it looks as though the recovering economy may put somewhat of a damper on the enthusiasm that has been gathering around the EV sector. 

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Philosophizing About Pricing

Not to get all egg-headed academic on you, but there’s an interesting article in the May issue of the Harvard Business Review [sub], called “How to Stop Customers from Fixating on Price.” The article argues that price-based competition, aside from damaging brand equity and eroding profit margins, dulls the customers’ sensitivity to marketing and innovation. The solution, paradoxically, is to use price to persuade them that they have a meaningful decision to make. The research is geared toward the consumer market but it is interesting to think about whether it can be incorporated into some areas of the auto industry as well.

Four strategies are recommended in the article:

1) Use price structure to clarify your advantage. The key example here is Goodyear, which found that pricing its various tire models on their expected mileage life enabled customers to understand and value the implications of its premium products. GE changed its airline-engine pricing to deliver “power by the hour.”

2) Willfully overprice to stimulate curiosity. If customers see a coalescing of product around a particular price point, a higher priced model can motivate them to take a closer look to understand the difference and potentially buy. The article cites the bearings company SKF as an example that commands a 30-40% price premium over its emerging-market competitors.

3) Partition prices to highlight overlooked benefits. The interesting point the researchers make here is that people are unlikely to factor a benefit into their choice unless an explicit charge is made for it.

4) Equalize price points to crystallize personal relevance. When a company sells a range of options is available at the same price, customers will work to decide which is right for them, vs. looking for ways to shed features for a lower purchase price.

Maybe an outcome of the recent economic downturn will be more judicious purchasing by consumers, which does not necessarily mean buying the lowest-priced option, but being more deliberate about those decisions.

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Not All Credit is Created Equal

With news that GM wants to get back into the financing business, it seems timely to highlight how consumers have fared over the past couple of years in this tumultuous credit sea.  Beginning around Q2 2008, car loan approval rates began to slip for individuals with any type of credit history.  According to CNW Research, purchasers can be categorized into three basic loan applicants based on their credit history; prime (with a credit score of at least 750), near prime (with a credit score of 620-749) or sub-prime (with a credit score below 620). The chart below shows their respective approval rates.

Several factors have contributed to the fact that sub-prime borrowers have not felt the “recovery” that prime and near-prime borrowers have in recent quarters.  With banks and credit unions feeling the pinch themselves, more stringent lending standards have been put in place requiring lending institutions to be more selective (i.e. take fewer risks) and bypass the majority of sub-prime borrowers.  Additionally, both GM and Chrysler have exited the captive finance business in the past couple of years, meaning that consumers have fewer low-cost options to finance their new vehicles.  Lastly, the combined foreclosure crisis and high unemployment levels have affected some consumers’ ability to maintain a stable credit score, effectively locking them out of the new vehicle market. 

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Welcome News from GM

GM announced yesterday that Joel Ewanick has been hired as the new vice president of U.S. marketing. He was the man behind the very successful owner reassurance program launched by Hyundai last year and was briefly head of marketing at Nissan before coming to GM. Ewanick is replacing Susan Docherty who will remain with GM but it is not clear in what capacity. Readers may recall that while IRN has been positive about the long-term outlook for GM since coming out of bankruptcy, we have been very concerned about their ineffective marketing which appeared to be continuing under Ms. Docherty's leadership. This suggests GM may be finally serious about significantly improving their approach. They have very good product but their marketing is a holdover from the 1990s.

Concurrent with this announcement, GM is also leaving their longtime advertising agency Campbell Ewald. We never understood how GM could continue to use the same firm that did the ads during their hemorrhaging of market share through the last decade. While it is too early to judge how well this new approach will work, we can say unequivocally that anything is better than what they were doing.

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Magic Monthly Number

I had heard the term a couple of weeks ago: $400 a month.  Seems that the recession has had an effect on buyers in that they want value delivered via their monthly payments too.  So I decided to find out exactly what the current “average” monthly payment is for most consumers right now and where that target has been over the past couple years.
 
According to data generated from CNW Research, consumers have been steadily relying on longer automotive leases since about 2004.  The average was somewhere between 4 and 5 year leases for most people but by 2006 that average had jumped to over 5.5 years and quickly moving to 6 years (or 72 month terms). 

The dramatic switch in early 2004 can be seen as the early warning sign of consumers wanting (needing!) to lower their monthly vehicle finances accordingly.  This is verified by the fact that consumer’s “preferred lease term” (or the amount of time they would rather lease the vehicle instead of the lease duration they agreed to or were financed for) remained relatively flat (it averaged 35.7 months between 1998 and 2009).  IRN would expect to see this type of price-consciousness continue in the near future as well impact how the OEMs and their dealer-base work with consumers to generate profitable results in this tough market.

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Tesla Continues to Create Traction

Reports keep cropping up about potential snags for some of the EV hopefuls (recent examples, Fisker’s possible launch delays, Aptera’s difficulty with the X Prize moose test to name a couple). Tesla, however, keeps moving forward and continuing to establish itself as a credible player in an up and coming industry.

First, Tesla is aiming to create a world-class network of dealers that will offer potential customers individualized service and attention to help them select the product that is right for their needs. A key part of this strategy is that Tesla will allow no privately-owned dealerships, thus enabling the company to maintain control over the dealership experience. CEO Elon Musk wants to model the Tesla dealership network after the concept used at Apple stores, where product specialists with deep knowledge of the products assist customers in the shopping experience.

Another characteristic that will make Tesla ultimately successful is their plan for growth. The company is not relying on a single product, as many other EV manufacturers must do because of limited resources. Rather, Tesla is planning a range of vehicles that will target a customer base outside that of the luxury premium Roadster model. For example, the Model S sedan (priced at under $50,000) is on track for launch in late 2011 or early 2012. Beyond that timeframe, Tesla has plans for a Roadster replacement, a crossover vehicle, and an all-wheel-drive variant.

This is an interesting company to watch, and Tesla has a unique opportunity at its fingertips. Not only is it a start-up automotive company with the ability to build its future without the burden of legacy costs and past mistakes, but it is also pioneering the way through a new industry segment at the same time.

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Honda - Happy to See Q2

We had good warning that overall industry sales would be fairly strong in April compared to last year’s tepid results but we thought it might be a good idea to get a better temperature reading from an OEM that is known for having a good grasp on managing both their operational and product management skills. Our questions really focused around whether any of the Toyota fallout changed how Honda has been approaching the US consumer and are Honda’s results significantly different from what we might have expected for the first quarter of 2010?

Honda and Acura’s use of incentives are down versus a year ago but up in March compared to February and January thanks to Toyota – our guess is that will continue indefinitely but far more sporadically and in regional pockets where competitive fever strikes to win isolated battles.  Honda’s product strategy has been extremely disciplined with several key models’ volume controlled into the marketplace to help support their brand image and value. 

Overall, Honda/Acura has seen its 2010 Q1 sales results up 11% from the same period in 2009 while the US industry average was up 16%. 

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April Showers

Early indicators of April’s light-duty vehicle sales indicate we should see at least a 20% jump over last year’s faint results. Of course, not every OEM can expect proportionate winnings at the sales trough.  Based on industry estimates, it is projected that of the Detroit 3 Ford will see the strongest results (surprised?) with gains of over at least 25% from their April, 2009 performance.  Chrysler is expected to be up nearly 20% but analysts expect pretty dismal results from GM (gains in the neighborhood of only 4-5%). 

So what would that kind of position put the Detroit 3 in at the end of the first four months of 2010?  Despite making gains in individual vehicles, GM as a whole is still battling the stagnant brand image. Ford’s solid gains remain that – solid – but continue to face fierce pressure from its formidable non-Detroit 3 opponents.  As for Chrysler, well, perhaps the pullback in the incentive “gravy train” from days past has at least shown us all where their “true” market value is today.   It will be interesting to see next week the reaction from the various players and how they intend to position themselves for a VERY competitive second and third quarter.

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The Foreclosure Shoe

If you have been a follower of IRN’s view of the world, you know that we have long tracked the housing market as an indicator for the automotive industry outlook. The fall-off in new home starts that began back in 2007 presaged a looming correction for US light vehicle sales, as the chart below shows. So there is good news of a sort in a recent Wall Street Journal article saying that Barclays Capital has lowered its estimate of bank holdings of foreclosed homes (“Foreclosure Estimate Falls,” 4/28/10) [sub]. The revised figure as of the end of February is 480,000 homes compared to more than 600,000 under the previous calculation. That’s the good news.

The bad news is that the foreclosed home inventory is expected to continue to rise through early 2012 and then decline gradually, so that ‘other shoe’ is still dropping. We will probably continue at a level of 30% of all home sales in 2010 and 2011 being distressed properties, vs. what Barclays says would be 6% in a normal housing market. The foreclosed homes keep downward pressure on housing prices, which contributes to a dampening effect on consumer spending. But after the trip we have been on over the past year and a half, we are grateful for an economy that is moving in the right direction.

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Market Share 2010

The chart below shows what a difference a year has made for some of the major automakers. Of the Detroit Three and Toyota, only Ford is exhibiting signs of improved health over last year. Its relatively balanced product portfolio is helping it capture sales across the spectrum, and the company is still experiencing the favorable halo effect from having avoided a public bail-out last year.

The gray lines with markers indicate share of 2009 US sales year-to-date for each automaker, while the solid color lines reflect 2010 performance. Ford is a couple percentage points above last year, the only company among these volume makers to have gained share in the first quarter.

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Is Fisker Really Ready?

Some of the latest buzz surrounding the Fisker Karma embodies a hint of doubt about whether the vehicle will actually be launched in 2010 as the company plans. Two recent articles bemoan the fact that very few, if any, people outside the company have actually driven the vehicle or even seen a glimpse of the powertrain. The Karma should be hitting the showrooms in the third quarter of this year…will it make it?

There are some mitigating factors that help to quell the doubts. We must keep in mind the sizable loan that Fisker received from the Department of Energy ($529 million). Furthermore, the company’s founder has been very successful at raising capital from other sources as well. In order to get that kind of backing, the concept and the plans behind it would have to be solid – more than just a drawing or a clay model. In addition, the company has been able to secure a number of deposits from prospective buyers – many who have never even seen the vehicle in person.

The company recently announced that the Karma would be embarking on a national retail tour beginning on April 27th – similar to what Tesla Motors has done on a couple of occasions. The tour will provide visibility to the Karma and allow people to see it up close. Unlike the Tesla tours, however, there will be no test drives. While this is slightly curious, perhaps Fisker is trying to maintain an air of mystique and exclusiveness around the Karma. The price tag, after all, puts it out of reach of most “average” car buyers.

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BMW - Strong as Ever

With more than enough troublesome news from Toyota these days, I was doing a quick scan to see how other automakers have fared during the first quarter of 2010.  Should I not be surprised that BMW is going strong with sales up 20% in March over last month and over 7% ahead of where they were at this time last year?  So where is this sluggish recession that is supposedly hitting white-collar workers and deeply impacting consumers’ ability to purchase big-ticket items?

I believe (as usual but more strongly today) BMW’s sustained success resides in the concept of “perceived value.” BMW is known as what some may consider an expensive vehicle but others consider the unique driving experience well worth the investment. Hence, the difference - BMW has long been happy to remain volume-low, profit-centric all while delivering great “perceived value” to their core audience. Of course, it helps to really understand and know their audience. BMW spends a great deal of time and money translating consumer preferences into deliverable product at just the right time (I mean, would anyone really have thought they would have ever dreamed of offering a 1-Series in the mid-90’s?). While it is easy to knock Toyota these days, I believe these concepts are also rooted deeply at Toyota and Lexus, but they are just as difficult (if not more so) to execute on large volumes globally. 

I expect to see continued strong performance by BMW in the US market during a time when most might expect to see sluggish sales, because BMW markets to an audience that believes in “value” now more than ever.

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Chrysler Skeptics Abound

Visitors to this site are skeptical about the power of Chrysler’s planned product refreshes to shore up the company until new products are launched. An IRN poll question last month asked, “Will the 2010 refreshening of Chrysler’s products be enough to turn sales around?” Thirty-two percent of respondents went right to the most negative option of ‘Very doubtful’ and 28% were almost as concerned, choosing “Outlook not so good” from our range of Magic 8-Ball answers. Only 24% lined up as true believers, saying “Signs point to yes.” Readers of the new report on Chrysler from Bernstein Research in London might have looked for “Not convinced of survival” among the inscrutable Magic 8-Ball's floating answers. As reported in Automotive News, the report cites…

...Chrysler LLC’s limited new product development, skimpy product portfolio, and very limited synergies between Fiat and Chrysler as supporting evidence for concerns that Chrysler cannot survive in its current form. Bernstein Research argues that the most realistic exit strategy would be to slim it down to Ram, Jeep, and a US production base for Fiat. We are still hoping for better answers for Chrysler and Sergio Marchionne, as is evident from previous posts on our site. Maybe the 16% of IRN poll respondents who chose “Better not tell you now” feel the same way.

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Your View on Toyota

In an earlier IRN poll on how our readers view Toyota’s situation, responses were spread across the set of answers. There was an even split (27.5% each) between two of the choices we provided - attributing the debacle to “The effects of an electronic/software issue” and attributing it to Toyota’s own “Inexperience in crisis management.” A smaller but still significant group of respondents (22.5%) called it the result of “One part technology, nine parts consumer hysteria.” Recent follow-up on some of the incidents suggests there is something to this theory. Finally, 17.5% agreed with the company that it was “A failure of mechanical design” in at least some instances. Thanks for the input!

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A Step Beyond Zero Emissions

Nissan is not the only car company promoting the Leaf. Chinese automaker SAIC is introducing a concept vehicle called the Ye Zi (literal meaning, Leaf) at the upcoming Beijing Auto Show. The vehicle is an interesting study in multiple uses of renewable energy sources for transportation purposes. Furthermore, it is not just another zero emissions vehicle - the Ye Zi produces negative emissions!

The Ye Zi gets some of its power from solar sources via a large leaf-shaped photovoltaic unit on the roof. In addition, there are small wind turbines on each of the wheels so the vehicle gets an extra boost of  power from wind energy. But, one of the most interesting and innovative features on this Leaf vehicle is the body, which features a metal organic framework. This material mimics the natural photosynthesis process found in nature, and it actually absorbs CO2 and water to generate an electric current.   

Obviously, the ideas here are a stretch even for those that accept electric vehicles as the way of the future, and there are no plans for actual production. It definitely provides food for thought, however, and shows that the auto industry’s horizons can and will continue to expand into cleaner and more efficient technologies.

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Toyota Trying to Stay on Its Feet

It has been about a month since a Toyota post appeared on this page, so let’s take stock of the situation. Fodder for late night comedy shows? Check. Damaging details from internal documents? Check. Lawsuits on lost value, wrongful death, personal injury? Check. Government leaping into the fray? Check. Sales falling off a cliff? Che… well, wait a minute.

Humorists are looking for angles that are safe - CBS’ Late Show with David Letterman has been featuring an actor portraying Toyota CEO Akio Toyoda who starts each skit with a sincere apology and disintegrates into a fit of anger in Japanese with subtitles. Andy Borowitz has found plenty of material for his fake news stories, e.g. “Toyota Says Cup Holders Still Working Great; Rest Your Beverages With Confidence, Says Carmaker.” But the US Department of Transportation isn’t laughing – it announced last week that it would levy a $16.4 million fine against Toyota for failing to promptly notify the government about the potential safety defect in its pedals, and it has not ruled out additional fines. The more than 70,000 pages of documents turned over to NHTSA include injudicious intra-company communications. The U.S. Judicial Panel on Multidistrict Litigation consolidated more than 200 lawsuits filed against Toyota to be handled by a federal judge in Southern California.

So who the heck would buy a Toyota these days? Plenty of people - 40.7% more buyers than in March of 2009, even with all the news over the past five months about potential safety defects. Toyota’s March US sales were also 20.8% higher than in February 2010. The buyers are people who rate the risk as low when looking at complaints as a percentage of total Toyota sales, and consumers who love a bargain (and who doesn’t?). Toyota made it worth their while, with a March Sales Event offering 0% financing for up to 60 months, low lease rates and a complimentary two-year premium maintenance program for buyers who already own a Toyota. The incentives were scheduled to end April 5th, so we will see how Toyota fares going forward. We expect a decline in share for Toyota for a period of time, but it will be back for sure.

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Not All Technology Created Equal

Occasionally, we think it is important to point out that the automotive industry has made great strides in technological advancements through the years that have made even the shortest trip in the car far more pleasurable than in previous days.  When it comes to windshield wiper blades, in our office we often have heated discussions whether it is worth the extra investment to purchase the “all-weather” blades.  But in the attached video from the EPICFAIL website, we’re sure you’ll agree that ANY set of blades would be an improvement!

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A Turn in Market Development for Carbon Fiber

Recent news reports say that BMW will partner with SGL Group to build a $100 million carbon fiber manufacturing plant in Washington state to supply parts for a new electric vehicle. The plan shows an interesting twist. Carbon fiber is not rolling out in quite the way that the players were anticipating when we did a study on the subject about eight years ago.

Based on our interviews in 2002 with OEMs, material suppliers, and researchers,  “There was no disagreement among the industry participants we spoke to that carbon fiber applications will first appear on high-end, low-volume vehicle programs. The motivation behind this is partially to promote the image of being on the cutting edge of technology. It is also, and more importantly, a strategy for the OEMs to test and prove the new technology in an environment where cost constraints are not as critical.”

But while Formula One racing vehicles and high performance sports cars were getting the early applications, the driver that seems poised to push carbon fiber into volume production is environmentalism. Luxury automakers are using their long-standing interest in carbon fiber to the benefit of small electric vehicles, BMW with its Mega City Vehicle and Mercedes with its Project 50. Will the volumes of these vehicles enable cost-effective production of carbon fiber parts? SGL and BMW think so. Time will tell.

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Hybrids a Bridge to EVs?

The official word is that EVs will not be a significant part of the automotive market for many years to come. We’ve said it here, and others are saying it too. There are many reasons that EVs will take a slow path to mainstream status, and a major obstacle will be getting consumers to accept this new paradigm in vehicle ownership.

One analogy that I have heard to support this is the growth history of the hybrid sector. As the argument goes, we have been talking about hybrids for more than ten years now, and they still only account for less than 3% of the market. That may be true, but EVs and hybrids are joined together in a loosely categorized segment called alternative vehicles, which basically encompasses any kind of passenger vehicle that does not contain a traditional internal combustion engine. What the “hybrid argument” above fails to take into consideration is that hybrid vehicles may have actually paved the way for electric vehicles. It would have been a huge leap for the average car buyer to even consider a vehicle with no gasoline engine if they had not been hearing for many years about hybrid powertrains, a bridging technology between the two ends of the spectrum. Hybrids are now established in the market, and there has been no major negative press (save the unintended acceleration debacle, which of course was not limited to the Prius). Thus the idea of alternative vehicles is not an entirely new concept for consumers. Furthermore, the price premium is likely a major reason why hybrids are only 3% of the market rather than the novelty of the technology.
 
As we get further into 2010, we are nearing the launch of some high profile alternative vehicles, namely the Nissan Leaf and Chevy Volt. What effect will these programs have on the alternative vehicle segment and the prospects of the larger pool of additional EV manufacturers? Maybe we will find that it only takes a few successful programs to really light the fire in the area of consumer acceptance.

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Nissan Designs - Your Cup of Tea?

Okay, I’ll admit it…I seem to have a personal preference for Nissan and Infiniti vehicles.  Probably because their designs are more stylistically pleasing of all the Asian brands available and their interiors/luxury quality levels have been fairly steady in recent years.  They are far from perfect – just ask me about my brand new transmission!

As we often state, Nissan's Japanese brothers have fallen down in the style department and it would be great to get some exciting new models from the likes of Honda and Toyota into the everyday product stable.  Nissan likes to push the boundaries of fun and extreme in our staid market, but it does come with risks.  Arriving this fall is the new Nissan Juke – an edgy, small crossover that will either be loved or loathed by the intended market.  Remember the Aztek or Flex?  Personally, I love it….unique is great!

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BorgWarner - Lucky or Smart?

BorgWarner has been sitting in the catbird seat for much of the last decade. Its major products benefit from the global drivers of fuel economy, emissions reduction, and performance. Its customer base is diverse, with VW the largest at 16% of sales, and its geographic mix is unusual for a US-based supplier, with 50% of sales in Europe and the rest evenly split between the Americas and Asia. Sales between 1998 and 2008 rose at a compound annual growth rate of over 11%; gross profit followed at a CAGR of 8%. Operating profit was on a CAGR of 13% a year between 1998 and 2007, before a hit from restructuring and goodwill impairment charges in 2008 that were part of the company’s response to the burgeoning economic crisis. How did it do in 2009, and do we think it has been lucky or smart?

Since we’re consultants, you know we are going to say “Both!” Core to the company’s success is its product line, and here we think the company has been lucky in having roots in powertrain that extend back to 1928. On the other hand, it has been smart over the decades in staying within a specific field. It has not confused its success as a signal that it should become all things to all OEMs. BWA has also been smart in recent years to position itself for a variety of outcomes in the powertrain development, e.g. increased electrification.

BWA revenues were down year-over-year in 2009 by 25%, which at first glance might not be surprising in the context of a NA production decline of more than 35%. Considering the global nature of BWA, though, it seems to have suffered a bit more than it should have, since global production was only down 13% (since European sales were propped up by government incentive programs and emerging markets outperformed developed nations). On the other hand, BorgWarner was able to avoid a loss for the year, unlike many of its peers, so it obviously was effective in right-sizing its cost structure. We continue to have a great deal of respect for the company. Lucky and smart is the best of all possible worlds.

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Hyundai - Global or Multi-Regional?

A recent article in The Korea Times discussed a common problem for many OEMs these days – how to handle customers’ vehicle quality concerns. The issue centered on corrosion of sub-frames on certain Hyundai vehicles in the US and Korea. A Korean consumer purchased a recently-introduced luxury vehicle late in 2009 and, in the first winter of driving, experienced what he felt was serious corrosion of the stainless steel sub-frame. The company refused replacement, saying that the part was of sound quality, that salt used to combat the unusually snowy winter may have accelerated rusting, but that this would not cause any serious malfunction of the model. Yet halfway around the world in the US, the Sonata was recalled last fall due to excessive corrosion of front sub-frames in areas of the US known for heavy use of salt to treat winter road conditions. 

The article suggested Hyundai’s position is comparable to Toyota’s recall problems. The comparison greatly oversimplifies Toyota’s situation, which involves inconclusive findings and complaints that are not reproducible. Corroded sub-frames are a low-tech issue, on the other hand, and we expect that Hyundai truly does need to evolve in its thinking on how to service customers in multiple regions. Clearly, the expectations in its home market have risen.

While we are big proponents of the hamster ads and new Sonata, it is apparent that Hyundai-Kia products do need their 10-year warranty for those of us who live in the so-called “salt states.” After all, Hyundai-Kia is a relative newcomer to the OEM global playing field. And when it comes to having developed the type of efficient response systems sophisticated consumers (and governments) demand these days, even Toyota has proven it has a long way to go.

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Obstacles for EVs Falling Away

Aside from the cost of the batteries, one of the biggest obstacles blocking the forward progress of electric vehicles is consumer “range anxiety” combined with a lack of public charging infrastructure. The unveiling of a pay-at-the-pump charging station at the New York Auto Show - by PEP Stations, LLC and Ricardo - may make the latter less of a daunting issue. While the conventional wisdom says that most EV owners will charge their vehicles overnight at home, the availability of convenient and reliable public charging stations will definitely give the EV sector a much needed boost. PEP offers a 220-volt charging station that accepts credit cards and can be installed at various commercial places. The company plans to begin production of the units early in the fourth quarter of 2010.

There is also the issue of the potential damage that fast-charging can do to an EV’s power electronics and battery. Enter another new technological advancement announced earlier in the year at the Washington Auto Show. (The PEP station is not a fast-charging technology.) EnerDel, battery supplier for the THINK City car, developed a new battery that was built to withstand the harshness of fast-charging. In fact, THINK, EnerDel, and AeroVironment proved that the EnerDel battery can be charged from 0% capacity to 80% in only 15 minutes. THINK plans to incorporate the fast-charging technology into all cars that roll off their production line in Elkhart, Indiana.

As these technologies and others like them come to fruition, ownership of EVs will start to become a possibility and a consideration for more and more consumers. Now that the price of oil has again started to rise, consumers will once again be looking for better fuel economy, so this could not have come at a better time.

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Alternative Powertrains - No Worries

In an earlier poll, we asked how potential growth in alternative powertrains might affect our readers. The results were spread across the board, depending both on how significant you think the growth will be, and what part of the component/system market you play in.

One-third of respondents expect to benefit from the trend. This likely includes companies that are developing modifications to their components in order to be able to maintain the intellectual capital for their product area and continue serving all their customer’s needs.  Another third do not expect to be affected one way or the other given the nature of their product line. No one expected to be hurt by increased sales of alternative powertrain products, but 25% said the potential effects are still unknown. Only 8% challenged the basic premise by selecting the carefree response of “What potential growth? ICEs rule!”

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Increased Volatility

Over the past several months, many suppliers have seen a steady rise in prices for key commodities like steel and copper. Unfortunately, these materials are likely to continue rising as the global economy improves and material producers do a better job of managing supplies to keep prices higher. What about the most important commodity for the automotive industry, oil? 

As the chart below demonstrates, since the massive rise and fall in oil prices in 2007 and 2008, oil has gradually risen to $75-85 per barrel. This translates to $2.50-3.50 per gallon of gas at the pump. The main question is whether oil prices will remain relatively stable or whether we will see the significant price increases we experienced in 2007. I have participated in numerous conferences over the last month including a major commodities conference two weeks ago and the consensus answer from industry experts is that oil should stay in the $75-85 range for the next few years. That would be good news for the automotive industry as that would support the projections for a steady recovery in vehicle sales.

There was, however, an outlier to industry consensus on oil prices. An analyst from Goldman Sachs believes there is an above average possibility that we will see oil prices in the $125-150 barrel range by 2011-12. She thinks financial speculation (e.g. futures) will drive prices to that level. At this point, IRN is more in line with the consensus that oil prices will stay fairly steady. But if inflation starts to take off in 2011 and China does not experience a slow down in their growth, all bets are off. Monitoring the trend in oil prices is a valuable leading indicator for the short to medium term health of the auto industry.

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Ford's Challenging Pricing Competitor - Itself!

I attended one of our many industry dinner events the other evening and the gentleman I dined next to brought up a very interesting point about the Ford Taurus. We agreed that the vehicle offers significant upgrades to the previous generation and gives new breathing room to Ford at a time they desperately need it, but for the money does it really hit the mark?

There are certainly lots of options a consumer has regarding different vehicles they can choose in the market today, but for the sake of simplicity, let’s go with the fact that a consumer is really gung ho about purchasing a Ford product. They are attracted to the all new design of the Taurus and saunter into the showroom. There they discover they have several trim options (listed in the box outlined below) with various fuel economy ratings and price points. But, when they start adding the various “creature/feature comforts” to the vehicle, they realize that the vehicle is getting a bit pricier than what they wanted to spend – especially in today’s economy (and compared to their last Ford product).



So they start taking a closer look at the next best Ford product – the Fusion. When all is said and done, this consumer realizes they can get a comparably equipped (albeit slightly smaller) Fusion for about $5,000 less than the Ford Taurus (see specs below for Fusion trim levels). Granted, IRN expects the number of consumers purchasing the high-end V6 Fusion to be limited, but our expectation is that while the economy is still a bit slow, the Taurus could be suffering from little brother blues.

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Materials on the Rise

Now that vehicle production volumes are on the upswing and other markets are showing signs of life, attention is returning to the behavior of raw material prices. In the supplier survey that IRN conducted last August-October and published in the report Industry in Transition: The Dynamics of Supplier-Customer Power, we asked whether respondents anticipated any significant increase in their primary raw material price over the next 12 months. The results were spread fairly evenly – 39% said yes, 28% said no, and 33% were uncertain.  News reports seem to be lining up on the side of those who said yes, at least if steel is their main ingredient.

One such report, “Steelmakers Eye Big Increase in Raw-Material Costs” [sub] in the Wall Street Journal (2/25/10), attributes the rise to higher costs, at least 40%, for coking coal and iron ore, for reasons including China-led emerging market demand and conservative capacity management. In the US, the pipeline of steel service center inventory is being rebuilt, so the market is tight even before we start seeing higher vehicle production in Q3 and Q4. Steel analysts predict a year of contentious negotiations. Oh boy.

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Tesla: On the Right Track

Of all the electric car companies trying to make a splash in the market, I have to say that I admire Tesla Motors the most. This company has been a true pioneer for the EV industry. While I stated in an earlier post that the company has a challenging road ahead of them, they certainly seem to be doing the right things to ensure that they are ultimately successful.

Tesla is very savvy when it comes to PR that generates interest and attention for the company. For example, prior to the North American International Auto Show representatives from the company participated in a cross country road trip from Los Angeles to Detroit in a Roadster. At various stops along the way, Tesla made opportunities for customer appreciation events, test drives, technical forums, as well as even some recruiting in college towns. Their more recent PR event is a world tour with a specially-designed TAG Heuer version of the Roadster. The “Odyssey of Pioneers” tour will visit 15 major cities and 150 smaller towns, charging the batteries throughout the journey using only existing infrastructure. The intent of the tour is to prove that the world as it exists today is ready for electric vehicles.

And, a recent announcement from the company, suggests that things are indeed moving in a positive direction. Tesla had originally indicated that production of the Roadster would cease as the company prepared for the changeover to build the Model S. However, a change of plans now calls for production of the Roadster to increase by 40% and continue through 2012. Sales of the model are also expanding into new countries.

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If Alan Mulally Had Chosen a Different Path

As part of the monthly forecast process, IRN’s Automotive Intelligence Team conducts extensive data and scenario analysis. After about the first ten hours, it must be admitted that we sometimes get a little punchy and the scenarios get pretty creative before we bring it all back to reality.  A “news” story from The Onion archives offered a scenario we had not envisioned and gave us a good laugh. It also seems particularly appropriate now that Toyota’s possible issues with rogue electronics could make consumers long for the good old days. Consider this brief article on how things might have been different for Ford and its many constituents had Alan Mulally chosen a much different fork in the road:

Ford Reintroduces Model T Line That Made It Great
September 12, 2007 |
DEARBORN, MI—Still reeling from a $12.6 billion loss last year and a steadily declining customer base, the Ford Motor Company announced plans Monday to invest its entire third- and fourth-quarter manufacturing and advertising budgets into reintroducing the Model T, one of history's best known and most innovative car models.
…
"Frankly, I think we've gotten so concerned with adding frills like GPS navigational systems, seat belts, and exhaust pipes that we've forgotten what really matters: open-air bench seating," Mulally said. "We promise that each Model T that comes off the line will last much, much longer than today's cars. Face it, we just don't make them like we used to."

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Happy Friday

The sun has been shining quite a bit this week, and we are inclined to wrap up Friday on a positive note. We offer this compendium of headlines as a snapshot of things to feel good about heading into the weekend…

March auto sales up; highest rate since cash-for-clunkers cited
By BRENT SNAVELY
Posted: 11:03 a.m. March 19, 2010
Detroit Free Press 

G.M. Has ‘Reasonable Chance’ of Profit This Year, Its Chief Finance Officer Says
By NICK BUNKLEY
Published: March 17, 2010
New York Times

Ford Stock Price Climbs to New Highs; Going Higher?
March 15, 2010
Edmunds AutoObserver.com

Chrysler Starts Production of New-Age V6
March 19, 2010
Edmunds AutoObserver.com

MSU's Delvon Roe expected to play, despite more knee, wrist pain
Eric Lacy / The Detroit News
Last Updated: March 19. 2010 2:29PM

UConn Women Make History Again
THEY'VE GOT GAME • UConn women continue to dominate, play with flair
March 11, 2010
Hartford Courant

 

 

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A Sense of Optimism at Chrysler

One of the questions we are most frequently asked is “Will the Fiat/Chrysler entity survive?”, to which I admit we do not have a universal answer in our office. We have one camp that is more pessimistic and skeptical given the enormous deterioration in market share for Chrysler the last few years and the lack of talented resources to pull off a highly ambitious agenda of significant product refreshes and new product launches. I am at the other end of the spectrum for a number of reasons:

First, the more I hear Sergio Marchionne, the more impressed I am by his grasp of the business and his focus on a very reasonable and comprehensive turnaround plan. You have to love a guy that is capable of quoting Bruce Springsteen and Nietzsche in the same speech (in Detroit earlier this week). His combination of deep intellect and ability to articulate complex matters is a real rarity in car company leadership. As an example, when asked about the low market share of Chrysler in January, he responded “Our numbers reflect what the market will bear for a non-drug-induced (i.e. incentives) market demand.”  While that might sound like spin, he made it clear that he is committed to moving toward a demand pull vs. production push business model. He also reiterated his concern that the continued economic recovery would seduce both OEMs and suppliers into not addressing fundamental flaws in their business designs. “Recovery is the opiate of a dysfunctional industry.”

Second, if you have interacted with any members of the Chrysler leadership team in the last few months, you can really feel the passion and commitment to make Chrysler a success again. These guys (and they are almost universally guys given Mr. Marchionne’s one apparent character flaw) are excited about what they are doing and exude a belief that all of their efforts are going to work. While much of this new behavior has yet to reach the lower ranks of the organization (where most suppliers interact), it is clear Chrysler is headed back toward the “Stallkamp days” of partnering with suppliers and away from the highly destructive Nardelli period. 

Lastly, it doesn’t take a lot of improvement for Chrysler to stabilize their market position and buy themselves time to integrate the Fiat Chrysler lineup and transform their North American “go to market.” For Chrysler, 1.2 to 1.5 million units in North America is a very reasonable expectation as the overall market returns to levels of 12-14 million units. That is why I am recommending to our clients that they return to viewing Chrysler as a viable customer target and they take them off the no bid list. Chrysler needs good suppliers to survive and they are increasingly demonstrating they deserve the support. 

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Black Clouds Over Aptera

Back in November, I wrote of Aptera and their quest to have 100,000 of their quirky-looking airplane-like vehicles on the road by 2015. After already shifting their launch schedule once from October 2009 to late 2010, the future of the 2e vehicle is again in question. There are rumblings that Aptera will have to push it out yet another year. There will be a press conference next month during which Aptera will discuss their plans for the future. This is expected to include an update on the launch schedule, as well as an introduction to the production ready version of the 2e. But will Aptera be around long enough to see the car launch?

The major obstacle right now, is that Aptera reportedly does not have sufficient capital to actually produce the cars. They are, however, continuing to seek sources of additional funding. In addition, the company plans to use the Auto X Prize competition, in which they are an entrant, to validate the production version of the vehicle.

Combine the moving target launch schedule with the management shake up that Aptera tried to cover up (one of the founders has actually left vs. taking an extended vacation as initially reported) and you have the makings for a credibility problem. Aptera needs credibility to convince potential investors to provide financing and also to convince potential customers that they should buy the 2e. A glance at some of the postings on an Aptera discussion forum indicates that some potential buyers are starting to get fed up with the current management of the company (or lack of) and consequently the vehicle is losing some of its luster in their eyes. The bottom line is a company like Aptera that is trying to promote such a strange and unique design in the unproven market segment of electric vehicles cannot afford to have their credibility in question.

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BMW - Profitable Even in a Down Year

Luxury carmaker BMW recently revealed that last year was its least profitable since 1999. BMW said that net profit shrank 36%, from $451 million in 2008 to $287 million in 2009, after luxury car sales around the world tumbled as a result of the recession. Total BMW group sales, which include the company's compact Mini and premium Rolls Royce brands, came in at 1.29 million units last year, down 10% from 1.43 million in 2008. Considering the context, they made out fairly well. How did BMW limit the damage of the economic meltdown?

Increased demand from emerging markets helped compensate for sharp declines in key markets, such as the U.S. and Europe. Demand grew 38% in China, 24% in India, and doubled in Brazil, but sales in BMW’s home market of Germany declined by 9.4%, with U.S. sales dropping by 20%.

BMW's full-year pre-tax profit of $565 million was actually up 18% over 2008, beating analysts’ expectations.  Company chief Norbert Reithofer expressed modest optimism about the outlook for BMW in 2010, indicating that the company is anticipating group retail sales to grow by a single-digit percentage rate to more than 1.3 million vehicles as the global economy recovers. China and Brazil, as well as the launch of new and refreshed models, will help drive sales growth.

Refreshed models will include the X5 and X6 crossovers, which will both feature 4.4L twin-turbo V8 engines mated to ZF 8-speed automatic transmissions. Some upcoming new vehicle launches include a redesigned 5-Series, a new Mini Countryman SUV, and a redesigned X3 crossover.  The all-new X3 launches in Europe in 2010, but Jim O'Donnell, president of BMW of North America, announced late last year that the U.S. introduction of the redesigned X3 would be delayed until 2011 so BMW could launch a custom-order system designed to encourage buyers to configure the specifications of their vehicle.

The auto industry learned last year that the luxury segment is not immune to economic conditions, but we think BMW is riding out the storm pretty well.  

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Low Cost Countries - Each Has Their Attraction

For those of us who peruse multiple newspapers and journals daily, the “modern day press” can seem to be absolutely brutal on the automotive industry – especially lately. At times, I have to agree we give them plenty of fodder, but not all of it is deserved. Furthermore, it seems that, except for one major Asian vehicle manufacturer recently (why add to their grief), most stories often focus on domestic automakers as the ones who fall critically short of having the strategic vision and long-range planning that is necessary to lead this ultra-competitive industry.

A recent article from Spiegel Online highlights Volkswagen’s difficult position with their volume producing subsidiary Skoda, based out of the Czech Republic. Not only are many of Skoda’s vehicles attracting better quality and market reviews, but Volkswagen intended their brand to be more entry-level and inexpensive than their VW counterparts – hence, not supposed to compete directly. Sound familiar GM? To make matters worse, the “low cost country” allure of Eastern Europe is quickly beginning to lose its shine, as the country is moving to a higher cost of living (and demanding nicer vehicles too).  This is causing the cost pendulum to shift, making VW executives realize they have to offer consumers cost-competitive, appealing, and feature/value vehicles in every region profitably.
 
This example underscores Volkswagen’s North American expansion production rationale for their Tennessee facility. They have realized that utilizing cost-effective, flexible manufacturing locations that take advantage of other local factors is the key to their global expansion by region, instead of trying to import from ultra low-cost nations.

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EVs Could Help Advance Goals for ICEVs

Although the alternative vehicle segment is not expected to reach a stage of critical mass for the foreseeable future, it is possible that the extreme level of interest in the technology behind them could help to further some of the goals that the mainstream industry is working toward for internal combustion engine vehicles.

For example, weight reduction is a key area of focus for traditional OEMs in order to meet the increasing fuel economy requirements and emissions standards. Automakers in the emerging alternative vehicle segment are working on similar goals, but for different reasons. A joint study released in late 2009 by The Aluminum Association and Ricardo indicates that the use of advanced aluminum structures could save up to $3,000 per vehicle, as well as extend the driving range between battery charges. One of the most costly elements of an electric or plug-in hybrid electric vehicle is the battery. By eliminating weight through the use of a lighter aluminum structure, less stored energy is required, which means the battery can be smaller and therefore the cost is reduced. At least two of the higher profile EV companies are already using aluminum in their vehicles. The Fisker Karma plug-in hybrid features a highly advanced aluminum spaceframe that rivals any automotive structure in the mainstream industry. Similarly, the Tesla Roadster has an extruded aluminum chassis.

So while EVs are quietly working their way to mainstream status someday, perhaps in the interim they will serve a similar purpose as concept vehicles do now. Maybe some of the interesting and advanced applications of new technology will help advance the fuel economy and emissions goals for all of the vehicle industry.

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Toyota Goes on the Offensive

While I am confident you are growing tired of the “Toyota Story”, there have been some developments over the last few days that I think are worthy of comment. In numerous publications, and in some of their own public statements, Toyota has indicated that they are tired of being attacked from all sides and they intend to begin “aggressively fighting back”. Their main areas of concern are:

•    Much of the feeding frenzy of negative publicity around Toyota is unfair, and they need to start laying a foundation for why they believe most of the unintended acceleration stories are driver error and not problems with Toyota product performance;

•    Most other OEMs have had similar recall issues and safety concerns, but they have not experienced the same degree of governmental and public scrutiny;

•    Toyota is a very large employer in the United States, and they need to start taking better advantage of this fact.

All of this is true and, in the current environment, none of it matters. Toyota needs to understand that, fair or not, they are the current “Tiger Woods story” and they are going to have to give the media time to get tired of it and move on to the next big subject. Taking an aggressive and highly visible public stance will only prolong the interest. Toyota needs to be very careful to not make a bad situation worse. By way of example, I was interviewed by a major Japanese newspaper after Mr. Toyoda’s congressional testimony, and they asked me if I thought he had helped Toyota’s cause in the U.S. To which I replied, “That was not possible. He was in a lose-lose situation, and the only thing he could hope for was to not make the situation worse.” Nothing has changed. The best thing that could happen to Toyota is for the public scrutiny on this issue to begin to lessen so the company can quietly start rebuilding their image and their brand. If they push back in a way that is viewed as insensitive or arrogant, they could do severe and permanent damage to their sales and brand in the U.S. So, while lashing out at critics may be a cathartic experience for Toyota (and something their lawyers want them to do to set up a legal defense against their growing list of lawsuits), we believe this would be a huge mistake.

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GM Switches Gears

As many of you may have seen this weekend, General Motors announced that they are reinstating approximately 660 of the 2000 dealers they planned on cutting as part of their government bailout.  In a good overview of the situation, an article in Saturday’s Wall Street Journal (“GM Reverses Cuts,” WSJ, 3/6/10)[sub]  these dealers are part of the approximately 1100 dealers that appealed their closing to GM when it was first announced last summer.  We think GM did an about face for a number of reasons:

• Many of these dealers were sustainable businesses that could survive long term.  They clearly got caught in a mathematical model that set an arbitrary number of dealer closings as part of GM’s bankruptcy process last summer;
• GM needs more dealers than they have currently to retain, let alone grow sales share in the U.S.  As the article points out, GM CEO Edward Whitacre Jr. has made growing sales in the U.S. a major part of his strategy and it would be very hard for GM to do that with the current reduced set of dealers.
• Many of these dealers are in areas where the competition is not as intense as in highly concentrated suburban regions and GM was basically abdicating sales needlessly.

The one danger in this announcement is that GM loses sight of the main reason they agreed to the drastic downsizing in the first place.  They need to get to a dealer ratio that allows them to compete on something other than price.  If you have multiple dealers selling the same product in a relatively small geographic area, all they do is compete with each other on price.  GM has to get away from this model, particularly for its premium brands like Cadillac.  In addition, as this article pointed out, Toyota has 1,452 dealers with average sales per dealer of 1,219.  GM currently has about 5,500 dealers with an average sales per dealer of 376. That differential puts GM and their dealers at a terrible profit disadvantage to many of their New Domestic competition.  The $64,000 question for GM management is what level of sales per dealer makes sense for GM?  With their much broader mix of rural small town and suburban/metro dealers, an arbitrary goal of matching Toyota doesn’t make a lot of sense.  (Besides, the smart aleck in me believes Toyota is doing a great job reducing their sales per dealer with their current safety nightmare.)  Given the management changes that have happened at GM under Mr. Whitacre’s leadership, we are modestly optimistic that GM will successfully figure this one out.

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Supplier Performance in 2009

Now that public companies are reporting their 2009 full-year results, we took a closer look at ten of them, from A to V, to see how they fared. Everyone had a decline in net sales, of course, by percentages ranging from 16% at Goodyear to 44% to wheelmaker Superior Industries. But some are finding silver linings.

Production volume reductions and unfavorable foreign exchange were the curse of 2009 for these large automotive suppliers. The fourth quarter showed a glimmering of hope, though. Seven of the companies saw improvement from Q4 2008. BorgWarner sales were up 29% Q4 YOY. Visteon was up 27%, and TRW up 20%, while Tenneco, Federal-Mogul, Goodyear and Lear were up single digits. American Axle had its second consecutive profitable quarter at the end of 2009. The strengthening of the market is underway, and the rising tide is lifting most boats.

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EV Market Breeding New Opportunities

We are always telling our clients to look creatively for ways to take advantage of market trends and create new products around them. Here is an example of a company that is working on doing that. MTC Transformers, a supplier of precision engineered transformers and rewind services, is rechanneling their core expertise in another direction to capitalize on the emerging EV market.

In 2009, MTC Transformers founded a subsidiary company called Evatran, which is developing a hands-free EV charging system known as Plugless Power„·. The system works on the very old principle of inductive power transfer – electrical power flowing into a primary source causes current to flow into a secondary source. Evatran anticipated problems and inconveniences that could be associated with plug-based systems. The Plugless Power system is simple and works based on proximity between the charger and the vehicle. The vehicle itself has to be equipped with a specifically designed adapter, and from there EV drivers simply have to find a Plugless Power equipped parking space and the charging occurs with no further intervention from the driver. According to the company, this method of charging does not take any longer than a traditional plug.

According to the company’s website, field trials for Plugless Power are being carried out during the first quarter of 2010. Evatran expects to reach production capability by late Fall 2010. That target will nicely coincide with the planned introduction of several new EVs like the Nissan Leaf and Chevy Volt, to name a couple. Pricing has not been finalized as of yet. I am curious to see how the market receives this product, since it solves a “problem” that really doesn’t seem like that much of a problem in the first place. Is it really that much of an inconvenience to plug something in?

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Trade Agreements Do Matter - Just Ask Mexico

It’s probably been at least six to nine months since Nissan reorganized their Mexican operations with the intent to make them more focused and bottom-line driven for their small-car segments in North America.  I must admit that IRN’s forecasting team was initially skeptical when we first got word of Nissan’s plans for some of the sub-compact vehicles like the Micra (also known as the March in Asia).  We set the volumes quite low as we didn’t anticipate very many consumers in the US would lap up these ultra-small vehicles.  But we’ve since been educated in the ways of Nissan (or at least we think we have!). 

Nissan has announced it is planning on manufacturing the Micra in Thailand, China, India and Mexico.  It remains to be seen whether the last manufacturing site will be Brazil or England.  Given the cost structure, our bet is that Brazil will be given the odds as the favorite and that Mexico's favorable trade agreements will be used to leverage as much volume as possible for all other nations.

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House Hearing Ordeal, Take #2

The second Toyota hearing this week, before the House Oversight Committee on Wed. Feb. 24, was similarly unproductive in its effort to address complex issues in a highly simplified public hearing. At least Akio Toyoda’s use of an interpreter slowed the pace and made it slightly more difficult for the committee members to bowl over the witnesses. That said, the only substance at the hearing reiterated the written testimony of Akio Toyoda and Yoshimi Inaba, so reading those will give you the gist of the almost 2.5 hour handling of Panel 2. During the first panel, Transportation Secretary Ray LaHood was in the witness seat from 11:10 am to 2:05 pm, and he behaved in a way that only a former congressman could.

In blustery fashion, Secretary LaHood defended his department, said that NHTSA has the necessary expertise, and replied “I’ll get back to you later for the record” any time specificity was required. Unlike the corporate witnesses, he was largely treated with courtesy and deference as a former fellow congressman, and even allowed himself the luxury of sarcasm, as when Rep. Darrell Issa (R-CA) asked NHTSA to provide data on how effective recalls are in terms of the number of vehicles that actually get brought in to be fixed. “Of course we will, but we are a little busy right now so I hope you’re not going to stipulate [within] 24 hours,” LaHood responded. (News stories that followed the hearing reported that Secretary LaHood repeated his assertion that recalled vehicles are not safe, but his point was more that consumers need to follow through on recall notices and get the repairs made.)

Panel 2 - Toyota Motor Corp. President Akio Toyoda, and President  & COO of Toyota Motor North America Yoshimi Inaba

The two Toyota executives expressed deep regret, and explained that: the company had gotten its traditional priorities of Safety, Quality, and Volume confused; had not done a good enough job of keeping the customers’ perspective at the forefront; and had lacked sufficient communication between regional operations. They outlined organizational measures taken to prevent such problems in the future. Mr. Inaba also described the recent recall measures, noting in his testimony, “In both of these cases, Toyota thoroughly and carefully evaluated the technical aspects of these issues. However, we now understand that we must think more from a customer first perspective rather than a technical perspective in investigating complaints, and that we must communicate faster, better and more effectively with our customers and our regulators.”

Both men reiterated that there has been no indication of problems in the electronic throttle control system. When asked about Dr. Gilbert’s testimony from Tuesday (see Wednesday's post ‘Impressions from the Congressional Hearings’), Mr. Toyoda expressed a willingness to have an open forum to work together and Mr. Inaba said they would be glad to listen to his input, but that it appears it involved cutting into the circuitry and manipulating it.

A sampling of questions from the committee members:

What Did You Know and When Did You Know It?
• When did Toyota first learn it had a problem with unintended acceleration and why did it take almost a year to bring it to the attention of regulators and even longer to report it to the public?
• Did your good reputation make regulators less inquiring or make you less demanding of yourselves?
• How do you say to your customers that they can trust you now when it seems there is no end to the series of promises that come short of reaching the goal of safety?
• [Regarding the presentation from Toyota’s Washington office citing favorable outcomes] This is one of the most embarrassing documents I’ve ever seen. Can you assure the committee that this will not be the approach of the company?
• How did Toyota lose its way? You say the company grew too fast. Some smart lawyer gave you those words.

Clueless Questioners
• Problems were detected sooner in Japan and Europe. Are you giving the American market the same level of attention as the Japanese or European markets?
• If you have one pedal mechanism that is resulting in problems and another that is not, going in the same vehicle, why not put the good pedal in all of them? Why don’t you have the same specifications?

Crazy Expectations of Mid-Hearing Commitments
• The Attorney General of New York announced an agreement with Toyota today that if a customer is afraid to drive his vehicle, the dealer will pick it up, repair it, and reimburse the customer for related charges like taxis. Will you commit to doing this for customers nationwide?
• Dealers are taking care of customers, but what about the families of people who died, will you assume their medical and funeral costs?
• I drive a Camry hybrid. Can you assure me that it will never be recalled, for any reason?
• Do you agree that the government should require all automakers to report total malfunctions, all incidents, no matter where in the world they occur? Yes or no?

At this point, we decided to forego watching the last panel, consisting of advocates and victims, which began at 5:36 pm.

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Your Friendly Iron Ore Oligopoly at Work

Recent consumer price data released indicates that inflation remains in check – which is a good thing for those of us wanting to purchase a vehicle, right? But not such great news for suppliers and automakers trying to recoup any “extra” costs that inevitably go into putting that vehicle onto the dealer lot. There’s a trend on the near-term horizon that appears likely to throw a steely wrench into the mix as well. 

According to an article in the Wall Street Journal [sub] today, just three miners of iron ore (one of the chief raw materials required to manufacture automotive-quality steel) shipped about 70% of the iron ore in the world in 2008 (those companies being Vale, Rio Tinto and BHP).  The global economic softening in 2009 tempered the steel market (and its related raw materials), which saw some relief from the strong demand of 2007/2008. Renewed growth from up-and-coming nations such as China, Brazil and India will cause tight demand for steel in 2010, though, and soon.  Because the iron ore mines are operating at or above capacity, they have the ability to set their own prices. Traditionally they have set them each April, but starting this year, they are evolving toward a practice of wanting shorter contracts (or “spot buys”), allowing a more market-driven price. 

Sticker shock - - industry experts are estimating anywhere from a 40 to 80% increase in raw materials could be seen in 2010 as annual steel contracts become a thing of the past.  So the next time you see your purchasing manager, you might just want to give him/her a hug… they could be in for a long year.

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Impressions from the Congressional Hearings

We are keeping an eye on the hearings taking place this week on Capitol Hill before the House Committee on Energy and Commerce (Tuesday) and the House Oversight Committee (Wednesday). It is an exhausting experience to watch, never mind testifying! A re-cap and some impressions from yesterday:

Tuesday, Feb. 23 –
First hour taken up with 3-5 minute opening statements by members of the Subcommittee on Oversight and Investigations and selected members of the full committee on Energy and Commerce. Lots of posturing and formalities, little illumination or value. Panel 1 witnesses sworn in at noon.

Eddie and Rhonda Smith testified about her 2006 runaway experience on the highway in a new Lexus ES350 with 2,728 miles on it. A coherent and compelling tale that included her vehicle accelerating to 100 mph while she had both feet on the brake and tried putting the car in every gear, finally leaving it in Reverse, to no effect, until it spontaneously started to slow six miles later. Very unsatisfactory handling of their situation by Lexus and Toyota personnel, and NHTSA. (Toyota's Jim Lentz later said that he was embarrassed to hear all that.)

Sean Kane, Safety Research & Strategies Inc. – Kane is president and founder of a firm that provides research to attorneys, engineers, corporate and government. Obviously skilled in expert testimony and advocacy, as evidenced by his repeated use of key phrases with inflammatory wording. Some House representatives were irritated by his style, and I think it ultimately limited his effectiveness. Rep. Steve Buyer (R-IN) was the most friendly to Toyota throughout the hearing and he eventually went after Kane regarding the payments he gets from attorneys representing Toyota owners.

Dr. David Gilbert, professor, Southern Illinois University Carbondale – Added to the witness list at the last minute, Gilbert drew the most time during the lengthy Q&A (Panel 1 took 2 hours total). His report “Toyota Electronic Throttle Control Investigation” is available at the Safety Research & Strategies Inc. site. His key finding was that he was able to introduce a fault within the electronic system that should have been detected but that did not produce an error code, leading him to conclude that the diagnostic strategy of Toyota’s systems is too wide a window. He was careful to say that this did not prove a cause for sudden unintended acceleration, but showed it was possible that electronics problems are occurring but are not reported.

Rep. Steve Buyer again brought up the issue of payment to Dr. Gilbert by Safety Research & Strategies and suggested that this tainted his study. It was also brought out that Toyota’s outside technical expert firm Exponent had, since receiving Dr. Gilbert’s study the day before, duplicated his tests. It stated that what he had done to introduce the fault was not something that could occur in real world conditions and one of the congressmen characterized it as sabotage. Jim Lentz in his later testimony was very careful not to criticize Gilbert and to express interest in obtaining more information about his tests.

Panel 2 –
Jim Lentz, president of Toyota Motor Sales USA was sworn in at 2:15 and spent about 2.5 hours responding to questions, to the extent that the congresspeople allowed him to. It was a no-win situation – they wouldn’t give him time to look in his notes for answers to factual questions (Rep. John Dingell, MI was the worst) and any time he tried to describe a new measure, the response was, “That’s nice but why didn’t you do it sooner?” Overall, he handled it extremely well, with great sincerity and appropriate humility. Some committee members expressed frustration that Lentz was not able to answer detailed questions on manufacturing and quality issues. The pressure on Toyota’s Japanese officials increased, since it became clear that decision-making on recalls remains in Japan.

Panel 3 –

Secretary of Transportation Ray LaHood was sworn in at 4:40 and gave his opening statement before the hearing was recessed until 5:30 so that representatives could go vote. His Q&A session went until 6:54 pm. He is before a different House committee today answering similar questions, with the same bluster and elevated voice volume, although the congresspeople definitely handle him with more deference, since he was formerly one of their own.

 

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Yet Another EV Coming to America

BYD Auto Co. is another aspiring auto / EV-maker hoping to make a splash in the U.S. electric vehicle market during 2010. The interesting twist is that BYD (Build Your Dreams) is a Chinese company. Their plan to begin selling their electric e6 in California by the end of this year would make them the first company to sell Chinese-built vehicles in the U.S. Even more interesting is the fact that the company does not, as of yet, have an established network of dealers and, as of early January, they were still studying whether or not to enlist U.S. partners to help them sell the vehicles. Their initial strategy is to launch the e6 in a specific region and sell a few hundred units so maybe they can do this without a sophisticated sales network. The late 2010 timeframe is ambitious and sooner than what BYD had originally planned.

The company admits that the price of the battery used in the car is too high, but they are hoping that consumers will be drawn to the e6, regardless, as the economic situation improves or if gas prices begin to rise. The $40,000+ e6 is a five-passenger crossover-ish vehicle which BYD says is capable of traveling 200 miles or more on a single charge. The styling of the vehicle is decidedly bland, and there are concerns of others in the industry that the vehicle is not solidly designed (an unnamed auto exec was quoted as saying it was half-baked). The company also seems to have a bit of a shaky track record regarding the launch and availability of its plug-in hybrid, the F3DM.

So, the later part of 2010 will be really interesting, as we watch to see how many of the EV targets (the e6 included) really make it to market. It will be especially to check back in 2025 to see if BYD has indeed become the world’s largest automaker as it has announced it intends to be. Stranger things could happen…

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The View of Toyota from Europe

As we gear up to watch the Congressional hearings on Toyota today and tomorrow, we checked in with our colleague Andy Fein, of Hans-Andreas Fein & Associates Management Consultants in Stuttgart, Germany, to see how the story is playing out in his neighborhood. The difference in perspective is interesting.

The big stories in the US are the political and regulatory scene, as Congress and the Department of Transportation try to get their licks in, and the questions that are being doggedly raised and denied about the possible role of electronics in sudden unintended acceleration. In Europe, coverage of Toyota’s crisis has a different focus, according to Andy.

One angle getting a lot of scrutiny there is the issue of Toyota’s reliance on one pedal supplier, CTS, for its major NA programs. The single-source strategy is being called into question for the vulnerability that it creates for an automaker. That issue has been mentioned in the news here, but only in a minor way, perhaps because of CTS’ insistence that it is a design rather than a manufacturing problem, but more likely because it has been eclipsed by other issues that are much more compelling to the general public.

The other lead story in Germany is the implications for the battle between Volkswagen and Toyota. Volkswagen has stated that it wants to replace Toyota as the world’s largest automaker by 2018. Currently at No. 3 with 6.3 million vehicles sold in 2009, VW thinks 10+ million by 2018 is doable, given its market share in Europe, dominance in China, strong position in Brazil, and expanded footprint in North America. The fact that Toyota appears to be heading in the wrong direction makes this the news of the day in the ongoing Automotive Olympic Games.

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Honda Sells Bonds - Why Should You Care?

Honda recently went out to the financial markets and sold bonds backed by auto-loan payments.  Doesn’t sound so unusual, does it?  Well in the “old days” the answer would be no but in today’s tight and jittery financial situation, finding investors to even consider anything in the automotive world is quite a feat. Here’s why Honda’s bonds are a great sign of things starting to come around (even just a bit)…

Almost all of the bonds were sold OUTSIDE of the Federal Government’s TALF (Term Asset-Backed Securities Loan Facility).  Long name for a program dating back to 2008 that provides federal funds so investors can borrow at very low interest rates.  The program came into existence when the banks literally shut their doors to loaning any money to the investment community which stopped the flow of commerce around the country. 

Without selling bonds (where investors assume some risk in exchange for an agreed-upon profit return) companies can’t invest in new capital equipment to design new cars, build new manufacturing lines, update facilities, etc. When companies go bankrupt, bondholders rarely get paid anything for their original investments - - so the more bankruptcies and negative business growth environment, the more skittish bond buyers (investors) become.

So the fact that Honda could attract enough investors out in the regular market while only relying on the TALF program for a portion of their offering is a darn good sign that people are starting to feel that cars (and car loans) are a solid investment again.  

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You Know You are in Trouble When...

While the Toyota story has a long way to go before it finally plays out in the media, we have been much more concerned about the broader implications to the consumer’s view of electronics on vehicles. My worst fear has just been confirmed. I live in a small town in Western Michigan and was thoroughly depressed when one of the lead articles in my hometown newspaper was, “Like it or not, tech is taking over your car.” The article started out with a reference to “2001: A Space Odyssey” (never a good sign). For those of you who are under the age of 50, this is a movie where a computer named HAL took over a spacecraft and killed most of the crew. The article went on to talk about the increasing dominance of electronics on vehicles. It referred to the explosion of semiconductor use in vehicles and the fuel economy push that encourages automakers to replace heavy mechanical assemblies with electronic modules. 

Michael Robinet of CSM apparently attempted to convince the reporter that people should not be so upset about this issue, “…what we have seen so far in terms of bringing electronics is just the tip of the iceberg and recent glitches need to be taken in stride.” He went on to say, “There are always going to be some bumps in the road along the way, but the public should bear in mind that it’s just the nature of the beast.  We’re talking about machines that have 3,000 parts working to come together in harmony.” While I know what Mike was trying to say, unfortunately he only reinforced the reporter’s worst fears, i.e. “Gee, that’s comforting… so the chances of Toyota or anyone else actually permanently fixing this problem is zilch.” So how should suppliers and other OEMs address this continuing story?

• Suppliers and OEMs need to start emphasizing the positive performance and safety attributes of the increased use of electronics. Right now, everything is focused on their increased usage as a way to save cost and weight (i.e. cheapen the car). There are many other reasons electronics are being substituted for traditional mechanical assemblies, including improved safety.

• OEMs that are not in the hot seat yet should explain their use of electronics and all of the additional safety features they can bring (e.g. sensors to monitor performance and safety). The consumer is hearing nothing but the negative side of the story at the moment. 

• Suppliers of electronic components and modules should start developing user-friendly ways to describe what their product is doing and not assume the OEM will do a good job of explaining it to the end consumer.

The primary message is that industry participants need to start getting ahead of this story vs. reacting to the latest media report.

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OEM-Supplier Relations: 2009 & Beyond

Check out our latest column in Automotive Design & Production magazine.

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The Leaf Inches Closer to Reality

Toyota’s timing of the Prius recall is impeccable for others in the alternative vehicle segment, particularly Nissan, which is building PR momentum for the Leaf. Some interesting developments recently occurred. The three-month Leaf Zero-Emission tour – 63 stops in 24 cities - came to a close last week in New York City and paved the way for the start of the actual sale process. Nissan announced that it will begin taking reservations for the Leaf in April. Unlike some of the other more upscale electric vehicle makers (Fisker, Commuter Cars etc.) Nissan is requiring a $100 deposit that is fully refundable. Interestingly, the final pricing will not be announced until after the reservation process has already begun. It has finally been clarified, however, that the price of the vehicle will include the battery pack – rather than consumers having to purchase or lease them separately as the original plan had been. Actual rollout of the vehicle will begin in selected cities in December 2010. A complete national rollout will take place in 2012.



Another important development for Nissan was the announcement by Hertz that it would begin offering Leaf models (do we call them Leaves?) at some of its rental agencies in the U.S. and Europe starting next year. It is expected that the vehicles will be equipped with fast-charging equipment so that Hertz can ensure optimal availability. Perhaps this will expose more consumers to electric vehicles sooner and help build a loyal following?

The momentum for Leaf is certainly building. If the pricing is right, the Leaf could make things difficult for other companies introducing new EVs – including the Volt. It will be interesting to watch this play out in the market.

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Evidence of Ford's Tough Road Ahead

We have previously blogged about the seemingly endless opportunities that Ford netted by distancing itself from the Detroit Bankrupt 2.  Who could have imagined that leveraging everything Ford owned with the bank and bondholders vs. the government would have paid off so handsomely (especially with consumers and the public in general)?  But that type of conservative financing has its downside as well. 

One of the continuing problems facing all of the Detroit 3 is the funding obligation for their employee pension funds.  As of the end of 2009, GM’s pension was underfunded by $18 billion, Ford’s shortfall stood at $12 billion and Chrysler’s last reported figure was $3.6 billion as of 12/31/2008.  Additional reporting by GM and Chrysler this spring should give analysts a better idea of how much additional funding those OEMs need to contribute to adequately shore up their pension funds. 

Ford recently reported its pension shortfall had grown in 2009 by an additional $500 million.  The fund averaged a 14% rate of return on its assets in 2009 compared to the S&P 500 average of about 23%.  That discrepancy means that Ford’s fund could continue to face a shortfall due to low interest rates  - - this will cause Ford to increase its contribution to meet funding requirements (unless requirements are relaxed…and that’s NEVER happened before, has it?!).  This is what they call those pesky “legacy costs” that Chrysler and GM just went to court to REDUCE.  It will be interesting to see what Chrysler and GM report about the status of their pension funds later this spring.

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The Chrysler Watch

Chrysler’s US vehicle sales in 2009 fell 36% year over year, the worst of any major automaker and worse than the overall market drop of 21%. One reason was that Chrysler didn’t catch a break with Cash for Clunkers – its bankruptcy filing and plant shutdowns meant no inventory during the stimulus program. It has kept that tight rein on inventory management, with December days-on-hand of 35 for cars and 68 for light truck – slim and trim. Early evidence from January illustrates minor progress –sales were down only 8% compared to January 2009 when more incentives were in play. Inventory and incentives are two areas that make us inclined to root for CEO Sergio Marchionne and what appears to be his level-headed, prudent approach to the re-making of Chrysler.

You have to appreciate a CEO who says it straight – sales won’t look better until June because we used heavy incentives in early 2009 and we aren’t going to do that anymore. Marchionne’s phrases like “the cheap practices of volume acquisition” are a neat way of denouncing both Chrysler’s past strategy and some of its current competitors.

The company will have to make do with only a small number of new programs this year – the Jeep Grand Cherokee in Q2 should put a spring in the step of buyers in that segment, but after that it’s going to be a long wait. Most models will be getting cosmetic refreshes but they don’t typically draw a crowd. Not a problem, says Marchionne. An Associated Press story points out that Chrysler has $5-6 billion in cash reserves and is being frugal, and quotes Marchionne as saying, “You know the concept of hibernation Canadian bears use?” when asked how it would survive this dry spell. At least they will have the Fiat 500 and the next generations of the Dodge Charger and Chrysler 300C kicking off production by the end of the year.

Making money on what it’s got, stretching a dollar, not overproducing, being creative… makes good management sense. Like Ignacio Lopez’ lieutenants switching their watches to their opposite wrists as a signal of change at GM in the ‘90s, we’re betting on seeing more black sweaters at Chrysler.

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A Cultural Reminder From China

While we at IRN are in complete agreement that China remains the land of opportunity from a business and growth perspective, and is likely to remain the top growth area in automotive,  we also periodically remind our clients that China is still very different from the US and Europe. As most of you know, if the positive development of China continues, it will be the first time that economic freedom came before political freedom and the change succeeded. While we normally use economic and political arguments to make our point, a brief reference in the print edition of the Wall Street Journal last month (1/9/10) says it all.... 

To help celebrate the Year of the Tiger in China, visitors to the Siberian Tiger Park in Harbin in northern China can buy food to feed the animals. If you were thinking food pellets, think again. If you look closely at the picture below, you will notice that in the upper right hand corner, a live chicken has just been thrown to the tigers. We can only imagine what the chicken is thinking on the way down (“..what the hell?...oh…damn”).



Apparently, if you really want to celebrate, you can throw them a live calf. I can just imagine the reaction in a zoo in the United States. A mother and her small children are walking through the zoo and suddenly hear the screams of a small cow being ripped to shreds by the tigers. Think what Nancy Grace, host of CNN's legal analysis show, would do with this story. So the next time you hear a prediction on the future domination of the Chinese culture, just remember that it could be quite a culture shock for the West.   

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Electrification: A Sign of Things to Come?

Maybe this will give the electric vehicle industry more credibility. On January 29th, Tesla Motors filed a preliminary Form S-1 with the SEC for its Initial Public Offering. The intent of the IPO is to raise $100 million for the development and production of its upcoming Model S, a premium sedan which is supposed to be more mainstream and affordable than the elite Roadster that is currently being produced.

Tesla is clearly taking a step closer to the big league with their IPO. They are still miles away from competing on the same level as the traditional automakers, but this certainly sets them apart from the bazillion other start-up companies out there trying to introduce and secure funding for electric vehicles. I believe that, while Tesla does not have the deep pockets and engineering resources that some of the larger automakers do, their smaller size enables them to be more agile and flexible, and their entrepreneurial foundation will carry them far. 

Interestingly, some of the risk factors that Tesla lists in its S-1 highlight the reasons why the electric vehicle segment is not completely taken seriously (yet). A few of the biggies:

• We have a history of losses and we expect significant increase in our costs and expenses to result in continuing losses for at least the foreseeable future
• Our future growth is dependent upon consumers’ willingness to adopt electric vehicles
• We are dependent upon our ability to fully draw down on our loan facility from the United States Department of Energy, which may restrict our ability to conduct our business
• We anticipate that we will experience a decrease in revenues and increase in losses prior to the launch of the Model S

It sure sounds like they have a tough road ahead of them. The success of the IPO for Tesla will likely be a good indicator of the trajectory the rest of the electric vehicle sector will take over the next few years.

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Probing Electronics

Ronald Reagan is famously quoted as saying "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" One wonders if a similar sentiment is shared by automakers and suppliers now that the National Highway Traffic Safety Administration is talking about increasing its understanding of vehicle electronic systems and the risks of electromagnetic interference. Is NHTSA likely to be a help or a hindrance in the process of returning the market to the culture of ‘better driving through technology’ that has marked the industry over the past twenty years?

Past testing by NHTSA has not shown any link between unintended acceleration and electronic control systems, but there are lingering questions about whether this is a solid conclusion or a failure of testing. Stung by criticism that it, too, was lax in addressing complaints from Toyota owners, NHTSA is gearing up a broader investigation [sub].

In a recent Wall Street Journal article [sub], Toyota spokesman John Hanson said that Toyota is very supportive of NHTSA’s plan to further study electrical interference. He said that Toyota has done “exhaustive testing” but has yet to find any evidence that such a problem could lead to unwanted acceleration. This public comment suggests that the additional resources leveraged by a government agency would be a benefit in getting a more definitive answer to an industry-wide concern. We also appreciate that the government is embracing the concept of getting the facts before leaping into more regulation – hopefully NHTSA can keep Congress from indulging in a kneejerk reaction that adds cost and obstacles rather than facilitating what we all want – safe, affordable vehicles that fully leverage the progress of science and technology.

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Poor CTS Corp., Too

You have to have a little sympathy for CTS Corp. these days as it struggles with the public relations nightmare that has engulfed Toyota. This week’s press release titled “CTS Not a Supplier of Pedals for Prius or Lexus Models” is evidence of an effort to limit the damage in the court of public opinion and its shareholders. CTS has said it built its parts to Toyota’s specifications but other sources say it was an RDDP program (Request for Design and Development Process). RDDPs are functional parts that are separable and are designed fundamentally by the suppliers (as opposed to either a ‘design-in’ which takes place interactively at the Toyota Technical Center, or a build-to-print part). With RDDP, Toyota provides only basic specs and relies on the supplier’s expertise in its field to complete the design and development for a specific vehicle program. Eventually, blame for unintended acceleration will undoubtedly be affixed and apportioned, but right now, the attention of the parties is appropriately focused on the fix. What’s ahead for CTS in this storm?

In its investor presentations from last year, CTS shows as a great example of a healthy, strategically sound company that is positioned to benefit from external trends. At 28% automotive, it has desirable market diversification as well as customer diversification – no single customer accounts for more than 10% of sales, and the Detroit 3 combined are 5% of sales. Through the course of 2009, the company reported at least $200 million worth of new contracts for its electronic throttle control accelerator pedal modules and other automotive applications. Regulatory initiatives driving tougher emissions standards and better fuel economy were expected to yield double-digit sales growth for the company’s sensors and actuators business over the next 3-5 years.

The imperative for CTS now is to limit the damage from spreading to other customers or other products. What happens to its projected $82 million in sales of accelerator pedal modules, sold to 10 major customers in North America, Europe and Asia? Toyota issued a statement supporting CTS and citing shared responsibility as the pedals were designed jointly, but the fact remains that the problems appear to be limited to vehicles with CTS pedals and not those with Denso-built pedals. We hope that rational inquiry and effective communications will serve the participants well, but in these days of the dramatic 24-hour news cycle, it’s hard to be optimistic.

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Poor Toyota

While I was very critical of Toyota's handling of this crisis only two days ago, I am now beginning to be very sympathetic to their increasing "Sucks to be you" position. First, they did a much better job on the PR front starting on Monday. They gave a detailed and what appeared to be a very sincere apology in multiple ways and did a nice job of stressing that they pride themselves on their quality reputation and will do everything possible to keep their customers' trust.  Numerous dealers have also helped the cause with Toyota customers by reiterating that they are doing everything possible to fix the vehicles as quickly as possible. The problem is, they apparently dragged their feet before understanding the gravity of this situation and succeeded in ticking off NHTSA and the Department of Transportation. Numerous media outlets reference department officials "needing to go to Japan to remind Toyota of their legal obligations".  Ouch!

Much worse, it appears Ray LaHood, the Secretary of Transportation, has sensed an opportunity to take center stage and set himself up as the protector of the American consumer. He told a press conference today, "If you own one of these vehicles, stop driving it and get it to a Toyota dealer to get it fixed." While he has since referenced this as a mis-statement, the damage was done.

This media feeding frenzy is not good for anyone in the industry as it keeps another negative story about automotive going and does major damage to one of the most revered companies in the world - a company that critics need to remember employs a significant number of American workers and is still one of the best companies in the world. We should all hope that Toyota starts to get ahead of this story and that the Obama administration tempers its tone a bit.  Otherwise, the fallout could be a lot broader than Toyota.

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Crack the Whip

Hard as it is to tear one’s attention away from Toyota’s travails these days, we wanted to highlight a recent article in the Wall Street Journal concerning a pattern to anticipate in 2010 (“’Bullwhip’ Hits Firms As Growth Snaps Back,” WSJ, 1/27/10 [sub]). Caterpillar Inc. is used as an illustration of how the need to replenish depleted inventories is likely to create a production jump even if overall demand (whatever the product) remains flat. Given Caterpillar’s projections for growth in 2010, it has launched an organized campaign to prepare for ‘the bullwhip effect.’ We think this falls into the category of ‘good problems to have,’ but the article describes the challenges that OEMs and suppliers face in coping with a significant swing in orders, and the measures that Caterpillar is taking to forestall potential snags in the supply chain.

Caterpillar estimates that it will need to raise production at least 10-15%, but suppliers would see increases in the range of 30-40% as they help Cat restock inventories in addition to meeting the base level of ongoing demand. The challenges and concerns for suppliers faced with these sudden shifts are many - will they be able to finance the purchase of raw materials; should they re-hire workers yet; if they can’t get credit should they just say no to new orders, etc. – and the effects travel up and down the supply chain. Caterpillar has seen it all before, so it has launched a campaign to absorb the whiplash. Steps cited in the article include:

• Visits to 500 major suppliers around the world accounting for 80% of purchased goods and materials to present their forecasts and discuss preparations;
• Instituting a program to allow suppliers to borrow money from a bank against their receivables at a favorable interest rate within five days of delivery of goods to Cat, vs. a typical 60-day wait;
• Requiring suppliers to prepare a detailed written plan for each part produced on how it plans to respond to the bullwhip on that part;
• Committing to a freeze period as it transitions to growth, where Cat will not change an order for a three-month time span, so suppliers and their banks can plan with greater assurance;
• An internal risk-assessment team that meets weekly to rate and monitor suppliers’ viability.

Caterpillar’s deliberate and proactive approach is laudable and it’s encouraging to look forward to the coming upswing in heavy equipment and other industries. We had to grimace a little over one point in the article, though, when a company that supplies metal tubing for engines and hydraulic systems was commenting on its experience. The article says, “The company [Morton Industries LLC in Morton, IL] is also adjusting to probing questions from Caterpillar. “They asked us things like, ‘How much affiliation do you have to the auto industry?’”… says Steve Leitch, an account manager.” Although it is discouraging that automotive exposure can be seen as the kiss of death in certain circles, we are confident that well-managed supplier companies will succeed in any of these transportation equipment sectors.

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Electrification: If It Sounds Too Good to Be True

... hopefully it's not! I am really excited about electric vehicles, and, despite the fact that a rational thought process says they won’t be a significant share of the market for a long time, I sincerely hope that a technological breakthrough comes along quickly and shatters that line of thinking. And, with all of the development work and investments being funneled into this area, there is a small part of me that believes it will happen and soon. There are companies out there that are so close to making the viable electric vehicle a reality! Take Saba Motors, for example….

The company’s Carbon Zero roadster is a plug-in electric that will be available in the second half of 2010. According to Saba, the vehicle has a low-manufacturing cost, can be easily ramped up to production volumes, is affordable, offers high-performance, and costs an average of $7.04 per week to charge and operate. The Carbon Zero can go from zero to 60 mph in five seconds, with a top speed of 105 mph, and has a driving range of between 120-140 miles between charges.

Saba’s product certainly sounds too good to be true. But, the Carbon Zero made it onto the list of final contestants for the Progressive Automotive X-Prize. This is significant, because the X-Prize foundation applies very strict and rigorous selection criteria and only vehicles that are truly viable are selected for the final phase of the competition. The vehicles must be available for the spring competition and testing events and they must be production capable. The winners of the competition will be selected in September 2010. Saba Motors is still looking for additional investors – any takers out there?

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Slug Bug Campaign 2010

With Super Bowl 44 fast approaching, it’s been a tough year for automakers to decide whether to enter the expensive commercial fray or not.  Certainly it would be considered unwise to waste taxpayer money for Chrysler and GM.  But perhaps it signals another change going on in the industry as other automakers are shaking things up and dipping their toe in the proverbial beer bowl.  Volkswagen is going to premiere a 30-second ad in the third quarter of the game.  This will be the first time in nine years that VW is airing during Super Bowl game time. 

The campaign (subtitled “Punch Dub”) is based on the concept of Slug Bug – when you would see a VW Beetle you would call out “Slug Bug” and then slug your friend (yeah, nice friend, I know).  VW is bringing this concept alive again but based on any Volkswagen model and will expand the ad campaign to social media (Facebook, Twitter, etc.) as well.  Here at IRN we don’t see this as an isolated fun little ad campaign that starts in the second half.  This is a sign that VW is roaring back with a new campaign designed to play on historic strengths, current vehicle line up and rev up more business to assure both their Chattanooga and Puebla plants are kept humming along.  After all, Volkswagen’s sales were only off 4.3% in 2009 from 2008 levels - - not too shabby considering the industry average was down over 20%.

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How To Make A Bad Situation Worse

If Toyota's initial public relations campaign that started this weekend is any indication of how they will approach this crisis, the company is in more trouble than I thought. In case you missed it, there were two things that happened. Chief Executive Akio Toyoda, grandson of the founder of Toyota, was at the Davos economic conference in Switzerland and he was caught briefly by reporters where he was quoted as saying; "I am deeply sorry...about the recall." He then disappeared from view for the rest of the conference, skipping out on all the major functions to avoid having to talk to the media again. He appears to have the same apology skills as George W. Bush so avoiding the media was probably a good idea.

Then, there was the beginning of the media campaign this weekend. In full page ads in most major newspapers, Toyota started communicating with customers and the American public. To say it was not an auspicious start is an understatement. I actually was turning the page of the Sunday New York Times before I realized it was their ad. It was typical Japanese minimalism as it showed a giant pause button to start the explanation of why they had stopped production at many of their North American plants. It went on to say that in the next few days it would start telling customers what Toyota was going to do to fix their accelerator problem. It then listed a website you could go to for more information. This ad was wrong on too many levels to count. First, the general public and your customers don't give a rip about stopped production at your plants!  They care about the fact that their trusty Camry accelerates out of control periodically and kills people. Second, it attempted to say it was a relatively limited problem but they were being extra careful with the massive recall. And lastly, did I miss even a modest apology?  The ad actually made Mr. Toyoda's "deeply sorry" comment look good. And you paid for someone to help you develop this ad?

We can only hope that starting with an interview on the Today show this morning, Toyota understands that learning how to say "we're sorry" in every way imaginable is their only hope of not suffering significant long term damage to their brand.

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Weighing in on Toyota

The Toyota recall story has been moving so fast and furiously, it has been hard to keep up.  Given the amount of ink that has been used (and media air time) on this story, we were hesitant to jump into the fray but we also didn’t want people to think we were ignoring the story.  For those of you that have been on another planet the last week, Toyota has recalled over 2.3 million vehicles in North America and another 2 million vehicles in Europe over a faulty accelerator pedal.  While Toyota has been bearing (and will continue to bear) the brunt of the consumer backlash over this issue, it surfaced this week that the primary suppliers for this part are Denso and CTS, based in Elkhart, Indiana.  Numerous sources yesterday confirmed that the faulty parts appear to be confined to CTS.  While it is hard to address this issue in any kind of meaningful way in a short blog posting, here goes:

Impact on Toyota
•  Profound but still “fixable” if they handle it correctly.  Profound because their bullet proof reputation for quality is gone.   They had declining consumer quality ratings for the last few years and with this recall they will have successfully thrown themselves under a bus.  Too many front page stories of teary eyed drivers stressing how terrified they were when they lost control of their car;
•  Fixable if they can convince consumers that taking this massive approach to the problem is what a quality/safety oriented company would do.  The only problem is they apparently have known this was an issue for a long time so they may have a tough time explaining why they didn’t do anything before this.  They also need to convince NHTSA that this approach is acceptable.  If they have to replace the entire pedal assembly, the cost and damage to their brand could be astronomical;
•  Further evidence for critics that Toyota has continued to cheapen their components in an attempt to reduce their cost structure (probably trying to improve their position against Hyundai).  They were heavily criticized (and we agree), for example, for cheapening their interiors on most of their vehicles displayed at the recent Auto show;
•  A huge present to Ford, GM and even Chrysler.  Couldn’t have come at a better time for the Big 3 as they seek to recapture lost market share.

Impact on CTS
•  Contrary to their current bravado, they will be lucky to survive without a “significant financial emotional event”.  In their earnings call this week they claimed this would not have a materially negative impact on their earnings this year and besides, Toyota only represents 3% of their sales.  Really?  No major impact? I am frequently referred to as optimistic but this appears to border on delusional.

Impact on OEM Parts/Supplier Strategy
•  Could lead to some serious re-visitation of parts commonization.  Our guess is that there will be a greater attempt to balance the cost advantage vs. the risk;
•  Could seriously reinforce the OEMs taking back design responsibility for some modules and components, particularly those that are safety critical.  This could have the most long lasting effect of all.

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Electrification: Will EVs Help the Environment?

On the surface, it seems like EVs are the answer to the auto industry’s prayers – no fuel required and they do not contribute greenhouse gases to the environment. But what about the pollution that goes along with electricity generation? When EVs eventually reach a point of critical mass in the future, will we simply be trading one source of pollution for another? And, do we have the electricity-generating capacity to accommodate the new demands this will place on the system? These are issues not often discussed as part of the intense media attention that the electric vehicle sector receives. Part of the answer to those questions, it seems, is dependent upon the direction and developments that take place in the alternative energy sector. If wind, solar, or nuclear power are able to increase their share of domestic electricity production then there could be a net positive effect on the environment. At present, however, coal is responsible for roughly half of the electricity produced in the U.S. So where does that leave us?

Researchers are busy looking into this issue, and the Argonne National Laboratory has developed a model to measure energy use and emissions for different types of vehicles. The GREET (Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation) model, as it’s called, takes the entire cycle into account – from well to wheels. Recent studies from Argonne estimate that EVs would reduce greenhouse gas emissions by approximately 26% compared to gasoline vehicles, even considering the fact that the majority of our electricity is still created from coal. Other federally-funded studies have also indicated that if EVs are charged primarily at night, there would not be a need for new power plants. Furthermore, EV charging could take advantage of excess energy generated from renewable sources when it is available.

So, assuming all of the other variables (price, technology, consumer acceptance etc.) fall into place for EVs, we could indeed see a cleaner environment even without major strides in alternative or renewable energy sources right away.

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What a Difference Six Months Makes

In September of last year, I did a posting that reinforced that IRN was one of the only automotive analysts that believed in a reasonable recovery in 2010. As many clients will remember, I referred to the forecast scenarios using the following terms:

• Best Case Scenario=Production Sucks
• Probable Case Scenario=Production Really Sucks
• Worst Case Scenario=Production Really, Really Sucks

At the time, our production forecast for 2010 was 11.3 million units which we referred to as the probable scenario. A brief reminder of what I said at the time:

It’s Lonely Believing the Economy Will Actually Recover in 2010 …it is very difficult to find anyone that doesn’t think 2010 will still be a very tough year with a modest recovery if we are lucky in 2011. That is, anybody but IRN.  Our outlier position was really brought home in a meeting last week where the current automotive production forecasts from the major forecast services for 2010 were compared and we were a million units higher than the next closest forecast and almost two million units higher than the most pessimistic forecast.  My initial reaction was: • “I sure hope we turn out to be right because we will look brilliant compared to everyone else” -and- • “I sure hope if we are wrong, we are not too far off or we will look stupid compared to everyone else” Yes, I admit it.  It was a shallow initial response.  But the more I thought about how many times I have been referred to as being optimistic relative to the economy and the outlook for the automotive industry in the last six months, I realized that we need to make sure our clients understand that our realism is thoroughly supported by data and history and is not just a positive reaction to the continuous chorus of negative attitudes.

 
So yes, I am taking this opportunity to suggest that while we may not be brilliant, we are clearly really smart.   We have brought our forecast down a bit since September (we are currently projecting 11 million units), but most other analysts have been gradually or rapidly bringing their forecast numbers up. At this point, there is less than a 500,000-unit difference in projections from the various analysts for 2010 with most falling between 10.8 and 11 million. While I have some caution that we are less than one month into 2010, barring some unseen catastrophic event, production should be near 11 million units with clear potential for a higher upside in the second half of 2010. After having been perpetually referred to as way too optimistic throughout 2009, I am definitely taking this opportunity to say “I told you so.”

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Nissan - 2010 Trend-Setting

If you have always been an early adopter, on the cutting edge of fashion, you’re going to have another opportunity to shine again. Nissan is launching its all new electric vehicle, the Leaf, late this year.  The Leaf is considered a plug-in hybrid vehicle.  Plug-in hybrids run on batteries that are recharged using electricity from the wall plug and can be driven on electricity alone for a range of at least 20 miles.  The gasoline engine acts only as a back-up to the electric motor and battery system.  Nissan claims to get 100 miles from a single charge.



Nissan’s Leaf won’t be rolling out to dealerships until 2012 but Nissan is testing the vehicle in five major metropolitan markets throughout the US starting late this year.  This is a follow-up to their already extensive testing conducted by in-house teams.  Expect Nissan to spend a great deal of attention on fine-tuning consumer preferences and needs between now and production launch.  It will make the difference between a lackluster entrant and clear brand differentiator in what will be a quickly crowding market space. 

Most industry analysts, IRN included, do not expect fully electric vehicles to reach any sort of critical mass for at least ten years. As we have referenced in other posts on this topic, savvy suppliers, however, will develop a strategy now.

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Power and Product

We posted on Jan. 19 about the question in the recent IRN study Industry in Transition: The Dynamics of Supplier-Customer Power which asked suppliers how their power relative to that of customers had changed over the last few years. Fifty-seven percent of the survey respondents felt that their power had increased. On Tuesday we looked at these respondents arrayed by company size. Today our inquiring minds wondered how those who are feeling powerful look when arrayed by product area. The chart below shows the distribution of the Powerful vs. the overall survey respondents.



Product areas where those who feel increased relative power are more numerous than their overall presence in the survey are: Body Exterior; Electrical/Electronics; and, most strongly, Powertrain. Suspension suppliers were equally represented in the overall survey results and in the set of Increased Power, while Interior suppliers and those in the Other category were slightly less likely to be feeling the surge. But the good news is that suppliers appear to be regaining their footing regardless of where they operate.

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Hyundai Seen in the Crystal Ball

For those of us who have recently been enjoying the Detroit Auto Show, it’s hard to ignore all the attention that Ford has been receiving especially with winning both Car and Truck of the Year Awards. But here at IRN we are pretty intrigued by what we see as ‘shifting sands’ of loyalty. Consumers have evolved in their idea of what comprises a “value vehicle” vs. a “solid investment.” Value traditionally meant lower price AND giving up features they desired.  Investment tended to focus on warranty and reliability. Hyundai entered the US market with a phenomenal warranty offering that blew competitors out of the water but still competed in a price-sensitive market. Honda and Toyota have always focused on the long-term vision of offering solid designs (albeit stodgy by some) and limited price variances to maintain brand integrity. Here is where Hyundai is carefully intensifying their branding footprint into the critical mid-size sedan market…. 

The redesigned 2011 Sonata that is starting to arrive in dealerships now is causing headaches at Toyota and Honda (and it should). With 35 mpg, it beats all of the competitors in its class. Stylistically, it’s spot on – with European flare that the Japanese have been lacking for years and Americans will gravitate to. Hyundai will be offering a hybrid and turbo version later this year. The IRN crystal ball suggests that this vehicle will be winning Car of the Year at next year’s Detroit Auto Show….

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Honda's 2009 Market Share Gain

Do you remember as a kid dreaming of when you would be big enough to sit at the “adult table”? And then when you finally make it, you learn it has its good points and bad. That’s probably how Honda is feeling right now. One of the downsides of maturity is that your days of making progress by leaps and bounds are behind you. We see evidence of this in the recent news about 2009 industry results; Honda gained just 0.2% in U.S. market share for the year. By contrast, the newer kid on the block, Hyundai/Kia gained an impressive 2% year-over-year, picking up a couple hundred thousand units of sales. Honda’s days of easy expansion at the expense of the US Big Three may be over, but on the plus side, it now has time to refine and reap the benefits of the highly flexible and focused organization that it has built.

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A Bump in the Road for Volt?

The much hailed Chevy Volt – GM’s entree into the alternative vehicle segment – has hit a snag, it appears. Just recently, Ed Whitacre was quoted saying that the Volt would be priced in the low 30s, and furthermore it would be profitable for the company. Up to the point of Whitacre’s comment, the Volt’s price target had always been around $40K. So, the $30K announcement no doubt raised some eyebrows. The rumor was put to rest almost immediately, with a separate announcement from a different GM spokesman who said that Whitacre’s comment was misleading. The $40K price tag still holds, but GM is hoping for a $7,500 tax credit from the federal government to help bring the price down into the more palatable low 30s. The conflicting information certainly was not flawlessly executed PR for the Volt.

As if that isn’t bad enough, IEEE Spectrum magazine, in their annual piece on technology winners and losers, rated the Volt as one of the losers for 2010. Why? Price was a major factor – because most consumers just won’t be willing to shell out $40K for the car. A further obstacle relative to the pricing issue was highlighted in a recent study published in Energy Policy journal. According to the study, the savings on fuel costs for Volt customers will not offset the higher sticker price.

So, for now, it looks like the Volt (as great a concept as it may be) will remain in the low volume ranks along with many of the other fledgling EV companies and models.



Source: www.chevrolet.com
 

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The Size/Power Relationship

One of the questions in the recent IRN study Industry in Transition: The Dynamics of Supplier-Customer Power asked, “Compared to three years ago, do you feel the power of your company relative to that of your customers has increased, stayed the same, or decreased?” Fifty-seven percent of the survey respondents felt that their power had increased. We were curious about whether it was more likely to be larger companies feeling more powerful. Interestingly, that is not what the pattern showed.



As the chart shows, 31% of those who felt more power relative to their customers were the smallest segment in our survey population, suppliers with less than $50 million in annual sales. Being a smaller company certainly does not preclude an ability to expect equitable commercial relationships. In fact, this pattern of responses closely parallels the total survey population when arrayed by size, so it appears that company size is not a determining factor in a company’s sense that it can stand its ground relative to customer demands. We will take a look in future blog posts at what does seem to make a difference.

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Technology Fail

If you have any contact with teenagers these days, you are probably familiar with their use of the one-word commentary “fail” to deliver a concise assessment of anything that seems to deserve an ironic putdown. A website popular among that set features many examples, such as the one below showing a decidedly inefficient approach to vehicular air conditioning.



And one more showing what happens when an employee is not fully engaged in the work…

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GM Highlights from the Auto Show

Some commentary and photos on what we are seeing from GM at this year's North American International Auto Show: First, the Buick Regal/Regal GS concept – GM is trying to reshape the image of the Buick brand, which is considered rather stodgy. They did well in bringing some character and flair to the redesigned 2010 LaCrosse, and now GM looks to continue the rejuvenation of Buick with the 2011 Regal, which is essentially a rebadge of the European market Opel Insignia.  GM is displaying the Regal GS concept to show that a Buick can feature fun-to-drive performance. In place of a large V-8, the Regal GS has a turbocharged 4-cylinder engine producing an estimated 255 hp, mated with a manual transmission and an adaptive all-wheel-drive system.  The Regal goes on sale in the first half of 2010, but will be imported until production begins in North America in 2011.
Regal GS concept

Chevy Aveo RS concept – The sporty Chevrolet Aveo RS concept hints at the styling for the next-generation Aveo, due in 2011. The next-generation Aveo will be built at GM's plant in Orion Township, MI.
Chevy Aveo RS concept

GMC Granite: The Granite is GM’s attempt to aim GMC at a new demographic of young, urban buyers. GM compares the Granite to Toyota’s Scion model.
 
GMC Granite concept

Cadillac CTS-V Coupe – GM pops the 556-hp supercharged 6.2-liter LSA V8 from the CTS sedan under the hood of the coupe variant. According to Cadillac, the CTS-V coupe will do 0 to 60 mph in 3.9 seconds.  Look for further refinement to Cadillac interiors in upcoming models as well.  In fact, GM has been spending a great deal of time and effort in differentiating and upgrading the look and feel of their interior spaces.  Perhaps not all will be “wins” but there will be significant progress in coming months.

Cadillac CTS-V concept

Chevrolet Malibu and Cruze – For as much press is given to the Volt, two other looming launches could be far more critical to the future success of GM. In the highly competitive C- and D-segments GM will be bringing a redesigned Malibu to market and introducing the Cruze as a replacement for the Cobalt. The loss of the Pontiac G6, Saturn Astra, and Saturn Aura from GM’s lineup means the new Cruze and Malibu will need to exceed the volume of their predecessors if GM is to maintain market share. These two vehicles represent a massive amount of potential volume to GM, so they are critical to GM’s effort to turn its fortunes around.

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Impact of Consumer Electronics on Vehicle Design

One of the most striking messages that came out of the Consumer Electronics Show was the growing impact of telematics and consumer electronics on future vehicle design.  While the displays at the show itself were still quite traditional and still showed a strong delineation between OEM and aftermarket product offerings, there were clear indications that the OEM and aftermarket channels are starting to mutate.  The reason?  The portability of personal electronics, from smart phones to personal computer tablets (one of the “big new things” at the show) to movies and television, which are all starting to move with the individual vs. the individual going to static locations to access technology.  In other words, in the future, people will not “go home to watch TV” they will take TV with them wherever they happen to be.  So what does this personalization of technology mean to vehicles?

• Vehicles will become much more “plug and play”.  There will still be lots of technology in a vehicle (e.g. video displays, complex sound systems, etc.) but they will be designed to support passengers’ technologies of choice, not compete with them.  As a designer from Toyota told me, “Vehicles that cannot accommodate the growing range of consumer portable electronics will look increasingly dated.”
• As the car interiors become more seamless and intuitive, vehicle instrumentation is going to change a lot. Look at some of the concept cars at this week’s auto show to get a feel for where vehicle cockpits are headed.  You don’t need as much individual instrumentation when the vehicle is electronically synced to home and office.

The interior of the vehicle is going to look very different in the future and it is quite possible the key suppliers for interiors may change as well.

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The Polarizing Effect of Electrification

The slow, but steady emergence of the electric vehicle segment presents an interesting case of extreme polarization. On one hand, there is a flurry of activity going on both in terms of research and development, as well as plans for new facilities and actual production. As I referenced in my post last week, there are even some cities that are working to develop electric vehicle manufacturing clusters. Top that off with generous grants and loans from the federal government to start-up companies that are working to launch battery powered vehicles (Fisker, Tesla, etc.). The number of companies – both established and fledgling – that have a battery-powered vehicle either in production or under development continues to grow. Then consider the “Electric Avenue” avenue display at the North American International Auto Show this week.  This exhibit features 37,000 square feet of space in which there are around 20 vehicles on display from both established automakers and start-up entrepreneurial companies. Overall, there is a lot of energy and effort being devoted to a concept that has yet to hit the mainstream.    

From what I have seen in actual practice, however, the attitude toward electric vehicles is decidedly more skeptical. I have been in meetings recently where the subject of electric vehicle manufacturers as potential new customers has been discussed and the response ranges from chuckles to dismissal of the possibility. It is probably true that initially the electric vehicle sector will offer slow movement and low volumes. But with all of the activity and attention this emerging market is getting, can any serious auto industry player really afford to write it off as just a fad? If indeed it is a fad, it is a very well-funded one. I believe, however, that eventually technology will eliminate range anxiety, consumers will start to take the vehicles seriously, prices will come down and the EV sector will be a viable market in its own right. Will that happen in the next five years? Ten years? Maybe or maybe it will be longer. But one thing is certain and that is that EVs are not going away anytime soon and this segment of the industry should receive at least some consideration in the long-range plans of any company that calls the auto industry home.

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The Other Big Show

While all of our industry is consumed with this week’s Detroit auto show, an equally important event just closed on the other side of the country, the Consumer Electronics Show (CES) in Las Vegas. I spent several days at the show and will be doing a series of postings on things I saw that I think would be of interest to players in the automotive industry.  To give you a sense of scale, while the show did not close until late yesterday, there were an estimated 130,000 people flying out of the Las Vegas airport on Sunday.  It is one of the largest trade shows in the world and the whole show certainly reinforced our theory that the walls between automotive OEM, aftermarket, and consumer electronics are beginning to crumble. 

For years we have told our clients that if you really want to get a feel for the future of the automotive industry, go to the CES show.  Probably the best evidence of the increasing importance of electronics to the automotive industry was the fact that Alan Mulally, CEO of Ford, was the keynote speaker for the opening of the show. Talking primarily about  the next generation of Sync technology (more about that in a later posting), Mr. Mulally stressed the increasing importance of electronics to the future design of automobiles and how Ford was committed to stay on the leading edge of this transition.  The message all industry participants need to get is that the automotive business model is going to look a lot more like the electronics one over the next five years - significantly shorter product lifecycles, more personalization, lower price points.  And, probably most importantly, new technology will increasingly be introduced directly to consumers and pulled through to the OEMs (vs. the push model of the last twenty years). It is a completely different way of doing business and if you are not ready to transition to that model, you probably will probably have a tough time surviving long term.

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Ford's Strong 2009 Finish - Outlook for 2010

Here at IRN, we often ask people “what would success look like at the end of the year?” In the automotive OEM world, it clearly would have been Ford. You couldn’t have asked for a better balance of the right products at the right time, self-destructing competitors and innovative leadership exactly when it was needed. Their success has resulted in pricing and market share gains as well as structural cost reductions. 2010, however, could prove more challenging (and therefore at risk to profitability) for Ford in several ways.

For Ford, the pace of cost savings should slow up (possibly dramatically) due to the UAW’s rejection of the proposed contract amendment. Substantially lower European sales volumes are anticipated as clunker subsidies wane. And as we move another year into the product lifecycle for key vehicle such as F150, Taurus and Focus, the company loses some of the accompanying boost of new models. With the announcement today that Ford vehicles have been named the Car and the Truck of the Year (Fusion Hybrid and Transit Connect!?), the company is continuing its run of success breeding success. Of course, we also remember the days when Ford under Jacques Nasser was considered the most strategic automaker. Virtually all of his moves have been undone in recent years. So stay tuned.

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Delphi's New Focus

Every supplier would probably love a chance to prune their book of business and get rid of all the jobs that are low-margin (if not outright money-losing) pains in the neck, but there are often reasons that this cannot be done. There are probably a good number of companies that would even like to take the shears more broadly to their product portfolio and re-make themselves for new industry conditions, but that is inherently more complicated. So, ‘to envy Delphi, or not to envy Delphi?’ - that is the question.

As we noted in Wednesday’s post, Delphi emerged from Chapter 11 with a greatly condensed product set. In the years following the 1999 spin-off from GM, Delphi had proven definitively that the combination of its vast product line and untamed cost structure did not make for a sustainable, profitable automotive supplier. Through the rigor and expense of the Chapter 11 restructuring process, Delphi was granted the opportunity to redefine itself, decide on a focus, and cherry-pick the appropriate elements from its previous life.

The focus, in a word, is ‘electronics.’ Its new listing of core products features the application of electronics to controls & security, entertainment & communications, powertrain systems, and safety. These areas are variously characterized by accelerated technological advancement, high consumer interest, legislative and regulatory activism, or some combination thereof. With conditions like that, it seems like the sky’s the limit for suppliers, but there are also plenty of challenges to capitalizing on the potential opportunities. Delphi needs to figure out where each of tho