Just to Clarify

The New AutoObserver is Live

You can check it out at AutoObserver.com.  I will still be posting, but future posts will at  http://www.autoobserver.com/commentary/author/jeremy-anwyl/.

There are still a few bugs, but the site is a huge improvement.  At least that is my opinion.  More importantly, what do you think? 

 

Learning from Lessons of the Past

Another week, another trip.  This time to Washington DC to speak at a SAE conference tied to the Washington DC auto show.

I have been asked for recommendations on how to craft effective policy to reach the President’s clean air goals.

It is a distinctly Washingtonian type of topic—where the answer to everything is assumed to be enlightened policy.  Putting this aside, it seems to me that a good place to start would be to look at—and learn from—the mistakes of the past.

Think back for a moment to the Sixties and Seventies and the wave of regulation that washed over the auto industry.  Safety, environmental and fuel economy rules pushed and prodded vehicle designers and engineers in sometimes conflicting directions. 

When crafting these regulations, regulators paid scant attention as to what was technologically feasible.  The domestic automakers howled that they couldn’t meet that mandate, but were ignored. 

In the end, the automakers did meet the requirements of regulation.  Their earlier claims that it couldn’t be done cost them decades of credibility; something that haunts them even today.

They did meet the regulations, but the automakers were not entirely wrong.   The required trade-offs resulted in a generation of what were often truly awful vehicles.

To be fair, well-intended regulations were not the only cause.  Executives with a good sense of finance, but no feel for automobiles certainly helped.   

The pace of regulatory introduction slowed in the Eighties, but wasn’t until the Nineties that vehicles from the domestic automakers started to slowly regain a competitive footing.

Let’s look at Cadillac for example.  1978 saw their best year ever.  But over the next few years, Cadillac brought to market a 350 cc diesel engine (sourced from Oldsmobile) that could be counted on for a meager 30,000 miles.   The 1980 Cadillac V-8 used an advanced computer (for its day) that mysteriously would shut down the engine.  In 1981 we saw the introduction of the 8-6-4 cylinder deactivation system.  Technology that is commonplace today, but back then was not ready for commercial use.  It was replaced in 1982 with the HT4100 Power System, a powertrain with a flakey transmission and a “pavement shredding” 135 hp V-8.

Even worse than this series of not-ready-for-prime-time technologies, post oil embargo America was returning to its love of larger vehicles.  But Cadillac continued to downsize.  First with a very thinly disguised Chevy Cavalier, the Cimarron, then with the Deville series and finally the Eldorado/Seville platform.  Mercedes and BMW couldn’t have scripted things better.

Last week, the President, in his op ed piece in the WSJ called CAFE an example of regulation that worked. 

Yes, vehicles have become more efficient.  Was this because of CAFE?  For the sake of discussion, let’s say yes.  On that 2 dimensional scale, CAFE worked.  But it also forced automakers to build vehicles that the market did not want.  These must then be sold at a loss, creating a dynamic in which small cars are subsidized in order to earn the CAFE credits needed to sell large vehicles at a profit.

Taken as a whole, the impact of policy and regulation—although well intended—can be seen to have contributed to the massive reputational damage and financial instability that finally ended in a couple of notable bankruptcies.  (One reason I am reluctantly supportive of the auto bailouts is that the trouble the automakers found themselves in was not entirely of their own making.)

There are two lessons from all this:

1/  Regulation should acknowledge the limits of current technology.

2/  Regulation should not ignore the consumer.

I have pointed out some of the unexpected outcomes of policy.  But there is an even bigger issue to consider.  In a society that putatively values freedom, shouldn’t regulation be a last resort?  Rather than direct regulation, wouldn’t it be better if the playing filed were tilted slightly towards the desired ends, while still preserving individuals' freedoms?

Take the environment, for example.  The issue is that when consumers make choices today, they do not take into account what economist call “externalities."   Specifically, the price of fuel includes exploration, drilling, refinement, transportation, storage and retailing, but not the cost of cleaning up pollution.

This brings us back to the idea of a fuel tax I raised last year.  Raise the price of gas and the playing field tilts.  Consumers will start making free choices that also help save fuel and improve the environment.

No increases in CAFE required.

Moving Day is Thursday

Looks like the new AutoObserver site is almost ready.  This blog will officially be moving Thursday to the AutoObserver site.

How to Really Cut Regulation

Earlier this week, President Obama took the remarkable step of penning an op ed piece for the Wall Street Journal. His topic was regulation, or more pointedly, the risks of unnecessary or contradictory regulation. 

This would seem to be a part of his recent pivot towards the political center. The topic plays to the business community who struggle with regulation every day. His tone was reasonable, which plays to how we all want our President to sound. And it was rich in symbolism—even the placement in the WSJ was carefully crafted. In terms of currying favor with independents, the piece was probably a success. These voters will read articles about the piece—or even the piece itself—put a tick in the credit column and get on with their lives. But is there more there than just a political feint?  The President has identified a real problem.  And his call for a government review of regulations sounds like a good idea. The question I have is this: Who in government is conducting the review? This is important as regulatory agencies view their job as crafting and enforcing regulation. Asking these very same agencies to now offer up regulations for sacrifice will require super-human levels of self-reflection. In other words, it ain’t gonna happen. There is a solution. Establish an independent, bi-partisan commission—along the lines of the deficit reduction commission—to look into the issue, solicit suggestions and make recommendations. This just might work. It is something the President should try if his op ed piece is to be more than soothing noise.

A Leaked Memo, a Helpful Comment and a Conference

Today I am flying to San Francisco for an interview.  On the flight, I ran across an article in the WSJ on a background memo that has surfaced from the House Energy and Commerce Committee.  The memo—among other things—suggests that the reaction to last year’s response to accidents involving Toyota vehicles was “overblown.”

I am sorry—is there anyone left who doesn’t think the response was overblown?  After all, we are talking not one, not two, and not three—but fully four Congressional hearings devoted to getting to the bottom of things.  (Which they never did.)

Reading the article further though, it seems this isn’t fully accepted by all.  Congressman Jay Rockefeller used the leaking of this memo as an opportunity to helpfully remind us “Safety must come first.”

Of course, politicians love this kind of issue.  It is easy to argue about war, taxes and other weighty issues, but who can argue safety is not a good thing?

Oh, if only good intentions led directly to good outcomes life would be so much simpler.

But good intentions most definitely do not lead directly to good outcomes.  And because safety is important, Edmunds is going to try something different:  A conference to really look at the issue of automotive safety.  With experts from within—and outside -- the auto industry.

I will have more on this soon, but to give you a small taste, tomorrow I am interviewing Don Norman. (Don is a noted author and expert on the overlaps between humans and technology.  You can check him out on Amazon here.)

The idea of the conference is to avoid slogans and over-simplifications; to dig deep, look at safety from a fresh perspective; to hopefully learn some things and most importantly to emerge with fresh ideas.

We are holding the event in Washington to make it easy for legislators and other policy shapers to attend, and will publish insights and video footage of the experts online for everyone to view.

Stay tuned for more soon…

Another January Sales Update

The sales figures coming in this week show that weekly sales forecasting can be a hazardous thing. 

Last week I reported that sales were surprisingly high—for a Januar—with an overal SAAR of 12.8m.  This week, the data coming in still shows January coming in above December’s pace, but the lift will be more modest. 

The retail pace has slowed slightly to around 702,000 units, or a retail SAAR of a bit fewer than 10.6m.  Assuming 17% fleet, we get to overall sales of 846,000 sales, or an overall SAAR of 12.72m. 

In terms of winners and losers, BMW is off around 18% from their unusually strong December pace.  Honda is off around 7% and Hyundai and KIA are up (again!) around 14%

A couple thoughts:  As I noticed last week, these numbers are unusual.  Typically, January starts strong as the market recovers from the December sales events.  This year, it looks like the pace is slowing as the month progresses.  (I would expect the opposite.)  This raises a big question mark about how the month will end.  Will the pace continue to slow, or we will see the pace turn around?

The one very big question mark is fleet.  Fleet is a lousy measure of consumer confidence (obviously), but it can contribute to automaker profitability, so is important to monitor.

Last January, fleet made up fully 25% of overall sales.  This year, we are assuming only 17%.  (In line with recent months.)  Last January saw unusual levels for restocking and possibly local governments ordering new fleet vehicles with stimulus dollars.  So I don’t think 25% is something we will repeat anytime soon.

But 17% seems low, as fleet sales are typically front loaded with a new year.

We will get fleet sales guidance form the OEs next week, and will have better visibility on the likely percentage then.  Right now, I would bet there is room here for additional upside.

So, January is still looking better than December.  But remember, there are still plenty of selling days between now and the end of the month. 

I Will Soon be Moving

Just a heads up that sometime in the next week or so, we will be launching a new and very much improved AutoObserver site. 

I will give you more details closer to launch, but when you see the new site I am sure you’ll agree that AO has really grown up.  (One of the most exciting features will be a self-service data center where you can pore through the raw numbers from Edmunds and other industry sources.)

As part of this launch, my blog will be moving.  (This platform was only planned to be temporary anyway.)

The earliest the switch will occur is next week, but I will give you a few days notice when we know for sure.  If you subscribe to my twitter posts, there is nothing you need to do to stay updated.  I think this will be the case with Linkedin as well. 

Of course, we will post a redirect on this blog when we have the new URL, as well. 

Some Clouds on the Horizon

Last week, Detroit.  Today I am travelling to New York.  This allows me to catch up on my reading and one of my favorite weekly reads is The Economist.

Two things in this week’s issue caught my eye.

The first is that are advocating that Europe’s most indebted nations default.  (Ireland, Portugal and Greece, to start.)   This is a radical idea, but they cite compelling data showing that debt levels are simply not serviceable and defaulting sooner is better than later.

It struck me how similar sounding the logic was to the situation with the Detroit car companies two years ago.  Even the idea of a “managed” default sounds like a “managed” bankruptcy. 

‘Course the difference is that we had a Roman style dictator in the form of Steve Rattner to help the GM/Chrysler bankruptcies along.  (The Romans didn’t view the term “dictator” as a pejorative.)  Nothing like this seems politically in the cards for Europe. 

The other piece was a look at commodity price inflation.  The point was that commodity prices usually peak when demand is highest—at the high point of the economic cycle.  It is unusual to seem prices rising this soon in a recovery.

Some blame can be placed on speculators who are anticipating increased demand as the global economy continues to recover and investors seek returns.  But apparently this is not a primary driver of higher prices. 

A stronger argument can be made that this is part of a longer-term cycle triggered by growth in emerging markets.  This growth is putting pressure on existing supply, pushing up prices.  This also suggests that prices that can only go higher as economies recover.

I mention both these pieces as they are connected. 

Last week I posted about encouraging January vehicle sales.  But these two articles point out the other side.  There are still huge risks out there.   A default could send interest rates sky high.  Raising commodity prices will pull money from consumers that could be spent elsewhere. 

Either (or worse still) both could easily derail the tentative recovery that is already being held back by housing and unemployment. 

So is the glass half empty or half full?

A January Surprise

January is a tricky month for forecasting.

First off, most years there are year-end sales events in December.  These events wrap up New Years Day weekend.  This year, this was January 3^rd.  Not surprisingly, sales over this weekend get reported in December to take advantage of the special offers. 

The result is that this January effectively consists of 28 days instead of 31—at least from a sales perspective.

Because of the year-end sales events, the first couple weeks in January tend to be slow—after all, if you wanted a new vehicle, why wouldn’t you buy in December when it was on sale?

Much of this is baked into the SAAR algorithm, which assumes that January will be the slowest month of the year in terms of unit sales.

So the data that is starting to come in is at least a little surprising.  Shopping activity on the web site is “strong.”  (I put this in quotes, because this is a relative thing.  Strong as compared to activity over the past couple years.) 

Add to this the sales data we are seeing—which also looks robust—at least for January.  And remember, this is before the 15^th, when sales typically start to pick up.

So here are our best guesses for January:

December momentum is continuing.  The data points to retail sales of 706k, or a SAAR of 10.62m. (Compared to 949k or 10.36m SAAR in December).   If we assume the same fleet mix (17%) as December, we would see total sales of 851k, or 12.8m SAAR.  (Up from 12.5m)

Retail-share-wise, compared to the same period last month, BMW is down about 10%, while Hyundai and Kia are up about 8%.  Everyone else is relatively stable.

Note how the overall sales are much lower, but the SAAR is actually higher than December.  As I said, SAAR assumes a slow January.

What will be really interesting is the next 15 days.  Will we see a typical sales uptick?  Will this be enough to push SAAR over 13m overall?

Don’t know.  What is clear is that consumers are out shopping and buying.  Not a bad way to start the year.

Detroit and Vehicle Electronics

A final thought from the Detroit Show:

It is clear from the piling on of announcements that automakers are finally noting that in-vehicle electronics are important to their customers.  (Wow, really!)

My view is that this is an area where car companies have consistently been far behind the curve.  When consumers were adopting cassettes, car companies where rolling out 8-tracks.  When CDs were being introduced, cassette players were finally offered.  And so on.

Even today, on a vehicle supposedly as advanced as the new Bentley Continental, we are only now seeing proper iPod connectivity.

Some tardiness is blamed on long production leads.  Some on vehicles tolerating only bug-free software.

In fairness, this is an area that the automakers have been dabbling in for some time.  OnStar has been around for decades.  The best system offered today is Ford’s Sync and it has been steadily improving for years.

But there is still a long way to go.  Connecting smartphones via Bluetooth is fraught with glitches.  And often usability is awful--you would swear many systems were never tried out in the real world before being launched. 

So the news these days is that consumers often make a vehicle selection based on the electronics available rather than traditional differentiators.  (Something we have seen for years as consumers navigate information on Edmunds.)

Even as automakers get their acts together this area, there is a big elephant in the room.  The features consumers value highly can negativity impact safety.  Already, the Honorable Ray LaHood has been offering up thoughts in this area, as noted in a recent Holman Jenkins column on the WSJ.  (Which you can read here.) 

This is an important subject.  Sorting out the benefits of advanced in vehicle technologies and balancing the safety risks will be one of the themes to be explored at a conference Edmunds is hosting in Washington this May.

More on that later.