Conspiracy Theory and Push Marketing

After the taxpayers took ownership in General Motors and Chrysler there have been a couple of interesting conspiracy theories take arise. The first was the assertion that the Democratic administration singled out Republican dealers for termination. I haven’t heard much about that one recently. It might have been because it was determined that the majority of auto dealers self identified as Republicans in the first place. The second was the assertion that the government had sat on information that Toyota had experienced a raft of sudden acceleration occurrences and had only brought it to light recently to give the domestic manufacturers, including the two owned by taxpayers, the opportunity to gain ground on the industry leader. Talk show host Michael Savage seems to be the only one talking about that these days.

Toyota hasn’t taken their problems lying down and has launched the most aggressive incentives in their history in an effort to stem their recent loss of market share and volume. Their sales results were up 41% from March 2009. Toyota’s incentives, valued by Edmunds.com, averaged $2,256 per vehicle. This represents a record high for Toyota.

In an effort to keep pace the other OEMs, including the Detroit 3, have also launched aggressive incentives of their own. These “push marketing” strategies include some dramatically sub vented leases which include residuals that most likely won’t “come true” at lease end. This practice allows an OEM to avoid a large up front rebate that immediately comes off the corporate books in its entirety, in exchange for a real number dictated by whatever the market dictates at lease termination down the road. While OEMs may set up some reserves in anticipation of future losses, it is quite likely the end result is that current quarterly results will look better than they should.

As GM is aiming for an Initial Public Offering this year to buy out the taxpayers, there may be some additional motivation to shape current quarterly results.

In the case of Ford, the UAW is selling a large block of Ford stock to fund it’s VEBA (Voluntary Employee Beneficiary Association). Ford intends to sell additional stock this year to produce cash to reduce their debt load. This dilution of Ford stock could reduce it’s stock price, which is considered to be fully valued in the range of $12.00 to $13.00 per share. Showing healthy profits now, while gambling on a minimal loss down the road in an attempt to maintain the current stock price, might also be a part of Ford’s strategy. Ford is promoting extremely aggressive short term leases, in particular on select Lincoln models.

In the meantime, Chrysler is just trying to maintain whatever market share they can until they can bring new products to market.

The industry was up 24% over March 2009. Before the exultation begins, let’s recall how horrible March 2009 was. But the news from March 2010 was mostly favorable. But the bottom line is the results were largely incentive driven. Are we back to full bore “push marketing?” The upshot? Downward pressure on the value of late model pre-owned vehicles which impacts consumers who own them, rental car companies, and fleets. Brand image suffers. And it becomes increasingly likely that the projected residuals will fall short of projections.

“Push marketing” sells new vehicles, produces lots of tax revenue, and creates jobs. OEMs might add over time to their schedules, put on additional shifts, and/or call back laid off workers. If GM and Chrysler launch even more aggressive incentives it might spur the other OEMs, especially the ones who manufacture in the U.S., to follow suit. There might even be a reopening of shuttered assembly plants. The impact would ripple through the supplier base. States and municipalities would welcome the additional sales tax revenue. And the administration could show a decrease in that bothersome unemployment statistic in an election year. That's my conspiracy theory.

The D3 has shed enough cost through the Chapter 11 bankruptcies, and subsequent concessions to Ford, that they can actually make money at aggressive rates of incentives.

The long term incentive situation is further fueled by the fact that OEMs, in particular the ones partially owned by taxpayers, have made a major commitment to smaller more fuel efficient vehicles. The near term CAFÉ requirements will mean aggressive incentives on those vehicles if consumers don’t buy them in large numbers in the face of steady fuel prices.
We have mostly been on the incentive drugs since Joe Garagiola hooked us in 1975. Given the fact that the government could, in theory, "encourage" GM and Chrysler to return to even more aggressive “push marketing,” what are the chances?
Or will the Toyota recall situation, which fueled the current round of aggressive incentives, die down and allow the industry to let normal demand dictate production and sales, protecting the value of consumer’s vehicles?

written by David Ruggles for Auto Finance News

Fiat to the Rescue?

Chrysler, heavily dependent on light trucks (jeeps, minivans, pickups), was whipsawed by the spike in gasoline prices in summer 2008. Then came the credit crunch; when its access to lease financing disappeared, it lost 20% of sales overnight. As cash drained, it attempted to work out a deal with its many creditors, and failed. Assuming the firm emerges from Chapter 11 – rather than collapsing into liquidation as dealers and other creditors play "chicken" in hopes of a bigger slice of a rapidly shrinking pie – what will it need to survive?
First, Chrysler has neither the cash – nor after a mass of white-collar buyouts, the people – to develop new cars. It strikes me as unlikely that it will receive an infusion of cash and the stability to rebuild its famous design and engineering capabilities. Fiat doesn't have the money. Nor does it have the people, because it has no expertise in large cars, SUVs and light trucks to supplement whatever remains of Chrysler's historically famous but leanly staffed product development organization. Chrysler thus faces a long 2 years, until new product arrives via Fiat.
It will then face the challenge of selling Fiats. The new product will consist almost entirely of small cars, because as a company firmly rooted in southern Europe and strong in Brazil and other developing markets, that is Fiat's core strength. But neither Chrysler, nor any other company operating in the US, has been able to make a go of that on a consistent basis.
On paper we have policies to encourage a domestic market for small, fuel-efficient vehicles: CAFE, or Corporate Average Fuel Efficiency requirements, in place since 1977. Under CAFE, in order to sell a large car, firms must sell small cars, or they will exceed the average "mpg" standards that legislation imposes. The problem Americans have not bought into that policy: they want power. Given separate, less stringent standards for trucks, the entire market shifted towards light trucks (which for CAFE includes jeeps and minivans, and not just pickups). Small cars remain a small slice of the market, but in 2012 Chrysler's jeeps and minivans and pickups will be dated; small cars will be the only "new" product they will have on offer.
Absent a polar shift in American politics, to enable a stiff gas tax, Chrysler will not survive to 2015.
Now in the longer haul they need to not just survive, they need to gain back at least a modicum of market share. To stay in the auto business will require the cash to continue funding new product develop. That is in itself not an insuperable barrier. But in the background firms also need to be able to fund supporting research and development so that they can bring a range of new technologies to market, particularly electric vehicles (whether they run off of batteries, small "hybrid" engines or fuel cells). At present Chrysler is wholly incapable of doing that by itself. Fiat is probably too small as well. A beefy combination of the two might be another story, particularly as a smaller company has greater leeway to buy technology from independent suppliers. (Larger companies want to withhold core technologies from larger rivals, but Fiat-Chrysler may be viewed as a way to leverage their own investment, rather than as a threat.)
That too appears unlikely. Over the past 15 years vast improvements in engineering tools -- computer design and simulation, specifically -- have enabled car companies to spin off vehicles from their core platforms more quickly and at lower cost than ever before. And the U.S. market is so large that it supports a plethora of firms -- 14 at last count. From how many varieties does a consumer need to choose a minivan? Or mid-size car? Or whatever type of vehicle? Hundreds of models are on offer. There is no reason to assume Chrysler cars will improve so markedly that they will be able to pull away from the field and secure more sales than the company does today. Or that they will make money: given the competition, profits were falling across the industry even as sales boomed. There's no reason to think they'll recover.
And no sales pitch from President Obama will change that.

Thanks to JJ and DR for the back-and-forth behind this.