Wednesday, 30 June 2010
In April I wrote a column on the auto industry’s continuation of “push marketing,” despite assertions from the industry acknowledging the ills created by the practice. I wrote the column in the context of Toyota’s public relations and sales challenges. In response to a severe sales downturn, in the wake of the safety recalls and associated adverse publicity, Toyota bought back market share with huge incentives. This precipitated a similar effort by Toyota’s competitors in an effort to keep pace. This effort included the recently bankrupt GM and Chrysler, who had specifically disavowed “puh marketing” as a part of restructuring. The incentives included rebates, subvented financing, dealer “trunk money,” and optimistic lease subventions. In the case of Chrysler there have also been additional payments to consumers who use leasing or residual based financing through credit unions and other independent lenders.
Along the same lines, I am reading a new book, written by ex dealer Mark Ragsdale, entitled “Car Wreck, How You Got Rear-Ended, Run Over & Crushed by the U.S. Auto Industry.” In the book Ragsdale rails against “push marketing” practices employed by OEMs to artificially boost sales. He details how “push marketing” has contributed to the issue of “negative equity” in consumer trade ins and how this has led to increasingly longer term financing, rebates, diminished resale value, and the vicious circle that has rendered a huge percentage of consumers “un-financeable,” even those who are employed.
“Push marketing” strategies also include aggressive fleet sales. Noted automotive journalist, Jim Henry, recently provided input on the most recent June sales figures by noting that “fleet sales for the month were up 59% over the same period last year to just over 200,000 units." To be fair, last year at this time Chrysler and GM were in the throes of their bankruptcies. The Asset Backed Securities market, which had provided financing for most fleet and rental units, was barely functioning. This year the huge increase in fleet volume has been largely due to the replenishment of daily rental fleets due to an increased availability of funding and pent up demand. As I rent vehicles these days, I am no longer provided a beat up 40,000 mile “beater.” While this rental replenishment is a good thing, and indicative of renewed health in the ABS market, it should not be construed as evidence of a real retail resurgence.
There is an underlying weakness in retail demand in the automotive market at a time when real good news is desperately needed. The retail SAAR for June came in at only 8.6 million units, according to J. D. Power. This is down from May 2010. While fleet sales are much more profitable than before for the D3 due to the recent restructurings, it is retail demand that the economy and the auto industry desperately needs. GM and Chrysler are positioning for initial public stock offerings, GM as soon as the first week of July. Used car values are at historical highs, which should somewhat alleviate consumers’ negative equity positions in their trade ins. But the average trade in is a much higher mileage vehicle these days due to consumers, fleets, and rental companies having had to hold on to vehicles longer. The OEMs are able to break even or make money on lower retail sales even while paying huge incentives. The Detroit 3 no longer are required to pay UAW members to stay home and watch Oprah in the case of a plant shutdown. But consumer confidence is still weak and unemployment high. The European financial problems have shaken investors, which has been reflected by the recent drop in the Dow Jones average. This has rubbed off on consumers. Yes, the country's economic recovery is proceeding at a slower pace than expected.
As long as financing for fleet and rental sales is available we might expect to see an even higher sales rate of these subsidized sales. Under “normal” circumstances we might be complaining about how these fleet and rental sales contribute to the rapid depreciation of like model pre-owned vehicles recently purchased by consumers, contributing to their negative equity situation. But in today’s environment, aggressive short term lease subventions and aggressive daily rental recycling just may be the ticket to bolster the industry until other fundamentals have time to fall into place. In addition, the current and future pre-owned market needs the availability of additional pre-owned inventory. As always, it’s a question of balance. Will the industry know when to hit the brake pedal on fleet and rental sales?
Wards July 2010
Monday, 28 June 2010
Where will growth come from, as the stimulus money runs out? – though the construction portion will keep being shoveled out for months to come. The dollar is weak against the Canadian dollar, the yen and the yuan, but not against the euro and has strengthened against the Mexican peso. So exports? – not likely. And exports simply aren't a big enough slice of our economy (about 10%) and are more sensitive to foreign incomes. Good for exports to China, but not otherwise. It keeps US imports low, too, but that's a reflection of bad news, not a source of good news.
What of the consumer? Unemployment remains high, and long-term unemployment is at record levels. Job losses remain high, so there's uncertainty. For the rich, who tend to save, capital gains and dividends and corporate bonuses remain low.
Investment still faces a housing and now a commercial real estate slump. We have, at least for a couple more years, too many houses and too many strip malls and office buildings for our population and income. Manufacturing is ticking upwards, but from a very low base; car sales may be 20% above their bottom in 2008-9, but remain 30% below peak levels.
Then there's government. The city across the valley from me is likely to go into receivership, lose its charter and revert to town status. Northern Michigan, which I just left, remains depressed. The local marina, which for years provided a big boost to city income, has almost no seasonal slips rented; there used to be a waiting list. Transient rentals and fuel sales were nil on some days the past two weeks. And over everything hangs the fiscal situation of California and Illinois. State and local government continue to lay off employees, even as the Federal government has stopped hiring.
So how do you like your cone? We're an obese society; we had an obese economy. Double-dip goes without asking. But there is a triple-dip crowd. You have to beg for a single dip, and we're not doing that.
Congress seems to be (wrongly) spooked by deficit hawks, and may go into reverse mode. Ironically, by prolonging the recession(s), that will leave us in a worse fiscal position, because most of our current deficit is the result of slow growth – falling revenues – and not a burst of expenditures.
Unfortunately post-banking-bubble recoveries tend to be slow, because it is structural distortions (too many houses) that have to be unwound, and short of buying up and bulldozing new developments, there's no quick way to do that. (We also have a growing population, so we will eventually have demand, and when retiring baby boomers can sell their houses, that will spill over even into such examples of excess as Las Vegas.)
A new working paper by M. Miyazaki from the International Monetary Fund makes the (with hindsight!) obvious point that the news is worse than that: revenues tend to grow with the economy, not faster than the economy, and so are very slow to recover to earlier levels. (See In Search of Lost Revenue, which is at the non-technical end of the spectrum of IMF working papers: you don't need an economics PhD to read it.)
Now it's conceivable that we could cut expenditures to speed the process. But we seem to have a proclivity for war, and for getting older. While I'd like to see us change the former, I have a vested interest in the latter, as does everyone reading this. And demand for most of the rest of what the government does, federal, state, and local, is a function of population. The US has a small government, in international comparison, so it's hard to find ways to significantly cut expenditures. Plus the last time I looked, we could cut all non-defense, non-aging related expenditures at the Federal level and still have a deficit.
Let's not kid ourselves: if revenue doesn't recover on its own and since expenditures can't be cut, then at some point we need to enhance revenues. A lot. My preferred alternative would be a national value added tax.
But demagoguery aside, there's no urgency; interest rates remain at record lows, and not just on short-term debt. However, we can't wait a decade before doing so. Hence even if Obama does not do so – it's hard to see that happening – the next president must. It will be a disaster if the radical right trumps conservative sensibility and precludes that presidential campaign from being over how to raise taxes, not whether to raise them.