Why are there still car shows?

This is the third in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

...marketing has changed, auto shows haven't...

Shanghai Auto Show

The marketing "world" today is significantly different than that of 40 years ago, but motors shows today are remarkably similar to those of the 1960's. As the Shanghai Motor Show of a few days ago came to a close, it occurred to me that car shows in general seem to have lost much of their original purpose, or at the very least have not adapted to the internet.

First, given the ease with which the cars are frequently discovered before they even make it to the show, the main purpose of showing off vehicles which the public has never seen before doesn't seem to make sense. Take the new BMW X4 – virtually no one was surprised at the design, because it was available on the internet long before the show. Secondly, the argument that the purpose of the shows is to get as much exposure as possible for new vehicles also seems to fail, because the companies could just as easily provide images of the cars (which is what the vast majority of people see anyway, given that most people are not able to attend these shows) via the internet.

Perhaps one could make the argument that the sense of festivity associated with these shows creates publicity that would otherwise not exist, but given the high costs associated with auto shows, that argument doesn’t quite seem to hold water. It seems to me that the PR departments associated with these shows will find ways to show off their vehicles significantly more cheaply via the internet. Unless there is a big piece of the puzzle that I am missing, it seems likely that motor shows will at the very least be scaled down significantly.

Source: autoblog.com of April 19, 2013

...Blake Grady...

The Prof: I think that’s an empirical question. How many people visit? – the big January show in Detroit — formally, the North American International Auto Show — attracts over 100,000 and gets exhibitors with cars many people may never otherwise see up close. Furthermore, people like to kick tires, and an auto show beats schlepping from dealership to dealership, indeed car companies hope it will be a prelude to that. Think of this co-location as a positive externality.

For the big shows, there's another positive externality: having lots of journalists in the same place at the same time, you can get more people to your product announcement than if you did it independently. Part of the attraction is the cars; part is that lots of executives show up and make themselves available for interviews. If you're from the New York Times, as our dinner with Bill Vlasic [and reading his book] made clear, you've got good access to senior management, year-in and year-out. Bzut if you're from a "small" publication — a Japanese car magazine or Polish newspaper – you can't just call up GM's CEO and expect a callback. Finally, there's an auto journalist motto: eat free or die. You don't go thirsty, either. (Thanks to Ward's Auto Dealer I attended the Chrysler [journalist] Christmas party last year, there was clear disappointment that so few execs were in attendance.) The bottom line is that these journalists are all filing stories, lots of newspapers and other outlets highlight the shows and carry reviews. Critically, internet content doesn't just appear out of thin air: the car shows all have their journalist previews a day (or two full days) before the shows open.

Hoopla helps, and is expensive to generate on your own. So as an economist, let’s call this another positive externality.

Are shows crucial to car nuts? No. Yet … the car companies need to get someone to generate the content that car guys seek out. Auto shows have their role.

That said, some shows have fallen by the wayside, when too few auto companies attend and sponsors can't recoup their venue costs. Journalists such as those at Automotive News can attend only so many events, and when SAE (the Society of Automotive Engineers) conflicts with an auto show, well, it's not SAE that gives way.

The competition for transport: room for cars?

This is the second in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

... it's to sell a car in my country!! ...
Guest Blogger: Clara Suong Tran

I had an opportunity to work on the Ford Vietnam account when I interned for a U.S. public relations firm based in Hanoi in 2011. Although my focus was the media and branding side, I also learned a lot about Ford Vietnam's business model. What stood out is how hard it was for Ford to sell a car in my country.

During my 3 months in Hanoi, Ford introduced the Fiesta to Vietnam, opened 2 new showrooms, worked on assembly line expansion and was the subject of a tax scandal on imported parts. The new Fiesta was priced at $27,000 - totally unaffordable for 90% of Vietnamese people. The majority of the population farm on small parcels, which limits their incomes. However, even an urban family in Hanoi or Saigon has an annual income of only $6,000-$10,000. As a result we rely on motorbikes for transportation.

How many cars are there in this picture?

Families that can afford to buy a car usually consider Japanese and Korean brands as their top choices — Ford is a high-end brand in Vietnam. Tourism companies favor Ford Escape 7-seaters, which can carry a family on vacation.

In addition to a small market and competition against the Japanese, Ford (and other brands) suffer from complicated regulations.  Import the whole car into Vietnam and the government will tax you 200%. Companies that assemble their cars inside Vietnam can import parts (but parts need to qualify under a "small" and "separated" standard - this was the reason got Ford into trouble during my internship). All brands suffer from roads inside metropolitan cities that are not wide enough to accommodate cars.

The agency I interned for decided to brand the Fiesta as a lifestyle, fashionable car, targeting young and affluent working professionals age 25-35, who want to look trendy, modern and are also familiar with the concept of taking out a loan for the car. (We have a saving culture there and we pay for houses and cars upfront, for the whole amount, in cash.) So the agency photoshot the new Fiesta with sexy models in bikinis and placed the pictures in fashion magazines. I don't want to get into too much detail of what we did, but 4 months after the Fiesta was introduced, sales reached 1,000 cars. We believed it was a great success!

It is tough to sell cars in third world countries. Toyota last year announced a plan to roll out a number of new compact cars priced around $12,500 in developing nations. Meanwhile, the U.S. is also trying to dump used cars on poor countries. If you want to know more about how hard it is to get into a developing market, try reading the book American Wheels, Chinese Roads by Michael Dunne. (Prof. Smitka assigned this book about how GM set foot in China to my China's Modern Economy class in 2013.) Though time has changed and China is different from other developing countries, it's a good book to read and see why third world countries are both an attraction and challenge to foreign car makers.

...Clara Suong Tran...
editing by mike smitka

The Prof: Vietnam is typical of the ISI (import substitution industrialization) strategy of a high tariff wall around finished goods and lower tariffs on parts. With a 200% tariff (which thus triples the wholesale price), it’s quite profitable to import “kits” at a lower tariff rate and then assemble them, even at very low (and hence inefficient) volumes. In countries that follow the ISI strategy you also get lots of entry, I’m willing to be that everyone in the global industry is present. The only country to step away from that policy in ASEAN is Thailand – and Thailand is the only country with an efficient industry that exports a substantial part of its output.
A sensible policy for a developing country is to import used cars. That ends up using less foreign exchange than importing knocked-down (KD) parts kits. However, it doesn't create the highly visible jobs of a car plant. It also is subject to false invoicing, since it's hard to find an objective standard to make sure importers aren't evading taxes or using artificially high prices to surreptitiously transfer funds overseas. (Many developing countries have foreign exchange controls and a black market for foreign currency.)
Japan has long exported used cars, as domestic regulations encouraged owners to scrap vehicles by their 10th year, even if they were low mileage. That's one reason their brands are well-known in Southeast Asia, and why jeepney makers in the Philippines favor Japanese engines – the lack of a good used car market in Japan makes good used engines cheap. Now the "sha-ken" regulations eased circa 1994, but the used car market remains "thin" so plenty still get exported.