Originally posted May 14, 2013 by Oliver Liu on the W&L Economics 244 Web Site and paralleling one by Marybeth Benjamin. Modest additions by the Prof.
Saturday, 22 June 2013
Do Suppliers Now Drive Technology?
Wednesday, 12 June 2013
Has Auto Racing Outrun Its Usefulness?
This is the first in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.
...road cars have been a reflection of racing...
Since the beginning of the automobile industry in the late 1800s, auto racing has been pivotal in the technological progression and proliferation of the modern motor vehicle. Developments often taken for granted in modern cars are attributable to innovations originally intended to shave seconds from a lap time. Advances in transmissions, engine efficiency and power, aerodynamics, suspensions, and safety technology are examples. Racing not only contributed to technical progress, but also to the car's social perception. As the old saying goes, "what wins on Sunday sells on Monday." Customers enjoy owning cars with racing pedigree. Even if your base Chevy Malibu will never enter itself in a road race, it feels a little more special because its (somewhat distant) cousin is currently dominating the NASCAR circuit.
But has auto racing seen the end of its useful life? Has technology reached such a point that advances in racing technology are no longer likely to trickle down to our mundane road cars? Have racing cars distanced themselves so greatly (for safety, speed, and regulatory reasons) that they no longer contribute to a culture of people buying cars because they perceive them as winners?
Take for example Formula One, what many would consider to be the pinnacle of automotive performance. Formula One race teams spend enormous sums of money in order to develop and produce their cars; Red Bull Racing has an annual budget somewhere north of US$296 million. Its cars are capable of speeds over 225 mph and 5 g's of sustained cornering force (about 5 times what your road car can hope to achieve). While technologically impressive, one has to wonder if the cars have diverged so far from their road-going counterparts that their innovation and sales boosting potential have been diminished. For example, tire technology has advanced to the point that Pirelli, the official supplier of all Formula One tires, intentionally engineers its tires to fail rapidly and unpredictably, so that pit stops and "tire strategy" become a bigger factor in races. Instead of innovating in a way that could benefit road cars, the focus is now on ensuring the sport remains entertaining.
NASCAR is another example of racing's departure from pedestrian vehicles [pardon the image!]. Up until the mid- to late-1960's NASCAR (National Association for Stock Car Auto Racing) literally involved major manufacturers racing stock cars, upgraded slightly for power and safety reasons. A Ford Mustang that you could buy off of the showroom floor was not all that different from what you saw the superstars of NASCAR racing on the weekend. Gradually, the cars began to employ non-stock chassis, engines, and eventually even bodies. Today, all NASCAR cars share a common "body template." A Toyota Camry race car shares the exact same body dimensions as a Ford Fusion (only the stickers differ). Your showroom floor Fusion now has about as much in common with its NASCAR brethren as it does a NASA space shuttle. As a result, one has to wonder, does a "Fusion" sticker on the front of a NASCAR vehicle really lead to increased Fusion sales?
As an auto enthusiast and an avid racing fan (a Lotus F1 fan here!) I want auto racing to continue to be a source of innovation and inspiration for the auto industry as a whole. However, at this point in time I can't help but wonder if auto racing has run its course. Shaving even one second from a lap time is becoming exponentially more expensive as more exotic and expensive materials and technologies are required.
Luckily, one bright spot of racing innovation remains: weight reduction. The process of making a vehicle of the same size and physical strength weigh less is a major focus of racing teams. Materials like carbon fiber and advanced aluminum alloys not only make cars faster, but also more fuel efficient. As auto manufactures struggle to meet fuel efficiency standards, weight reduction is a major emphasis. A lighter vehicle, all else equal, will consume less fuel. Materials like carbon fiber are incredibly strong and light, but until recently were both difficult and expensive to produce. [Joining them to the rest of the vehicle also requires advanced adhesives, which have migrated to regular production vehicles.] Luckily, economics of scale and technological developments have made materials like aluminum, magnesium and carbon fiber more feasible to use in your average road car.
These advancements match the current needs of the auto industry. With the ever rising cost of fuel consumers no longer need the 400+ horsepower "muscle cars" of the 60's and early 70's that barely achieve 10 miles to the gallon. Maybe auto racing does still serve a role, but that role has changed. As the requirements placed on the modern automobile change, so do the requirements placed on the race cars.
Road cars have been a reflection of racing. No longer!
...Tyler Kaelin...
with editing by Mike smitka
Comments by students and by the prof, edited for brevity
Andrew Shipp: Auto racing in the sense of technological inovation may have jumped the shark. However, the sport and skill of the drivers are still present and thriving. It may not come down to who has the best car any more, but this fact opens the arena to who has the best skill. This may give scientific data to help worse drivers improve their skills on real roads.
The Prof: As a judge for the Automotive News PACE supplier competition, which recognizes innovation, we used to see things coming out of racing into high end vehicles and then migrating towards mass market cars. Now we see examples of the opposite, innovations first launched on volume vehicles and then diffusing to niche markets but not making it to racing vehicles. Furthermore, I can't recall an example from recent years of the PACE competition where the innovation originated in racing. To give an example, turbos began in the racing arena, but with the downsizing of engines are now commonplace in cars. In PACE we continue to see innovation in turbos, but these are implemented first on production vehicles and not on racecars. So this is a very interesting thesis.
The Prof: No one ever "needed" 400hp! And while the price of gas is higher than in the recent past – corrected for inflation, gas prices during 1986-2003 were the cheapest in history – it's not clear prices will rise further. However, weight saving will remain a priority, due to CAFE (corp avg fuel economy) standards in the US and CO2 regulations that exert comparable pressures in the EU and Japan.
Sunday, 3 March 2013
- BorgWarner with its compact brushless actuator for emissions control
- Brose with its kick-to-open hands-free rear lift gate opener
- Continental with its LocSync tire pressure monitor system that uses software rather than additional sensors to associate the correct tire gauge with the correct location
- Visteon with its MSF zero-leak HVAC connector
Sunday, 20 January 2013
Velocity Overdrive, the Road to Reinvention
Dale Pollak’s third book, “Velocity Overdrive,” is another winner and is must reading for dealers and any student of the auto business. That includes auto manufacturer executives.
Dale’s ability to put into words the changes the industry has been experiencing has helped hundreds, if not thousands, of auto dealers, both new and used. He has rightfully pointed out that the delivery of information via the Internet has brought “efficient market” economic principles to the pre-owned business in particular, compressing available “spread.” New data driven management methods that are based on rapid inventory turn at lower, but real world gross profit for the specific market, actually produce considerably higher total gross profit through higher velocity, a concept difficult for some to grasp. In some areas of retail the benefits of sacrificing margine to increase inventory turns is commonsense. Automotive retailing is catching on: Daily, market realities are making believers out of skeptics.
My favorite chapters include 8, “Dealership Department Silos,” and 14, “The Extra Mile in Reconditioning.” In these chapters Pollak dares to challenge long and stubbornly held beliefs that the pre-owned department exists to be pillaged by the fixed operations departments. After all, it was thought, sales people and managers sell from their cost, not based on any kind of rational retail market value. And gross profit booked by charging retail prices for internal reconditioning, or “retail recon,” is retained regardless of what happens to the used vehicle, they thought. There are dealers who have followed this “retail recon” policy for another reason. They would rather pay management compensation based on fixed operations rates than sales manager rates. The Internet has changed all of that. Dealers still in denial on the issue especially need to read this book!!
In my mind, the idea that “you can’t manage what you can’t measure” has cost dealers a lot of money. What one could have gotten, should have gotten, but didn’t get, is never quantified. In “econo speak” that means “opportunity costs,” or opportunities unrealized. Figuring opportunity costs is hard, sloppy comparisons and the failure to dig up relevant data abound. There's less excuse for the following common errors in our internet world: Trade-ins under bid and/or units wholesaled instead of retailed because of “retail recon” cost money that can’t be totaled. And many dealers remain oblivious of this fact. My own piece on this blog on the issue can be found here.
The pre-owned business has long been a combination of art and science. The science side has become more important than ever although some old dogs like me might think things have gone overboard in some cases. For example, I’m not thrilled about managers failing to walk around a vehicle and actually drive it before hanging a number on a trade-in because they are relying on an appraisal tool. But then neither is Pollak. Some managers think all they need is their technology driven appraisal tools.
As far as science is concerned, Pollak has already conceived and implemented the most essential and highly used technology tools in use in the industry. His company, vAuto, now offers a new technology tool called Provision®, an inventory management tool. It distills market data into management metrics that dealers and used vehicle managers use to easily and quickly understand the risk and rewards inherent in every vehicle.
Looking forward, Dale dedicates a chapter to trends that will result in further margin compression for dealers. Younger buyers are more internet enabled then older ones and they have different values than older generations. They don’t think in terms of the value a dealer relationship offers them. They tend to be ruthless in their pursuit of the best price, using the internet to obtain it. Unfortunately, in the middle of this generational driven trend OEMs are pressuring dealers to build ever more expensive facilities in an era when consumers are less willing to pay for them. Increasing fixed costs when margins are falling does not lead to a happy ending. Pollak cites Glenn Mercer’s comprehensive study on the subject on behalf of the National Automobile Association (here on the NADA site).
This book is well worth the investment even if a dealer only reads the chapter, “A Peek Inside Dale’s Crystal Ball.” Dealers who ignore Dale’s advice do so at their own peril. Increasingly, the “efficient market” that is the auto business will tend to leave only the leanest operations standing. For a Dealer in search of significant ROI, buy the book and read it.