Check Your Mirrors

DRIVING done by American drivers dropped in 2005, for the first time in 25 years, according to Cambridge Energy Research Associates, a consulting group based in Boston. The main reason says CERA, is the same reason that sales of gas-hungry SUVs dropped in 2005 and continued to drop in 2006 YTD – the price of gasoline. As an interesting sidebar, average miles per vehicle also dropped in 2005 from 11, 946 to 11,856, but CERA attributes that to three reasons; one, the aforementioned price of gas, two, many households have more than one vehicle per driver, and three, the fact that the percentage of elderly drivers in the U.S. increased.

VW now says it may not make a profit in North America until 2009. VW says this is due to continuing unfavorable foreign exchange rates and the weakening United States economy. While this is undoubtedly true, the additional reason left unsaid by VW is that their current product lineup is not doing as well as hoped. This omission is made apparent by the statement by VW that the way the company will return to profitability in 2009 is by the presence of several new models, including the compact SUV Tiguan, the new Scirocco, a new minivan shared with Daimler-Chrysler, and 50-state compliant diesel versions of several of their current models like the Golf, the Jetta, and the Passat.

VISIONARY VEHICLES, the firm owned by auto entrepreneur Malcolm Bricklin, has been saying in a loud voice for a couple of years now that it would bring Chinese-made Chery cars into the U.S. as soon as possible. In fact, the original date for sales to commence was 2007. Bricklin says now that he’s not going to do that anymore, the deal with Chery is off, and that Visionary Vehicles LLC is going to design and engineer vehicles in the United States with production occurring in China. In effect, Visionary Vehicles proposes to be a virtual auto manufacturer, with design and engineering occurring in one place, engines and transmissions sourced from various manufacturers throughout the world, and all of this coming together in low-cost China for manufacture and assembly. The finished cars will then be sold in various markets internationally, including the home market of Visionary, the United States. Of course, if you are not familiar with Bricklin’s history as an automotive entrepreneur, it’s worth mentioning that Malcolm Bricklin has something going on somewhere almost all the time, and everything Mr. Bricklin does is going to be big, big, big. Just ask him, he’ll tell you. But, all commentary aside, I hope he pulls it off, because he wants to put out the best product possible, and more market competition is never a bad thing.

NEW car affordability is important to consumers and therefore to car companies, auto dealers, and banks. Comerica Bank out of Detroit says that, as of third-quarter 2006, it takes 23.6 weeks of average family income to purchase an average-priced new vehicle. That is a decline of almost two weeks from the average amount of time it took in 2005. The affordability index is based on an average cost of $26,500, which includes the loan finance charges accrued on such a purchase. This amount is down approximately 5% from 2005. Conversely, average family income has increased approximately 5% in this same period. All of these factors contributed to a new car being easier to buy this year.

ELECTRONIC parallel parking systems could be the next big thing, with Lexus offering one currently in their flagship LS 460, and Hella, an electronics manufacturer, selling one to an undisclosed car company buyer in Europe for use on its cars in 2009. The Hella system is simpler and cheaper than the one Lexus uses, and also has the ability to determine if your car will fit in the available space, something the Lexus system cannot do. Simpler, cheaper, and more features are all good things when you’re competing in any market, so Hella’s prospects look good in that regard, but the test for the mass market will be getting the retail cost down to a price point where the consumer says, “okay, that’s worth it”. Just off the top of my head, I would guess that you might get 25% of car buyers at $300. And some sizeable percentage of drivers are not going to be interested at any price for quite some time, either because they generally don’t have to parallel park, or, parallel parking is not something that is difficult for them to accomplish. An illustrative example is air conditioning in cars in the United States. When it was first offered in the 1950’s, it was so expensive compared to the price of the car that most people considered it a ridiculous extravagance, akin to having a fur-lined sink or chrome pajamas. As the price came down, buyers in areas where it was hot most of the time (Florida, Arizona, etc.) embraced the technology first (1960’s), with people in Minnesota and Vermont coming along years later (1980’s, 1990’s). Now, no matter where you live, it’s very difficult to get a new car without air conditioning standard. We’ll see what happens with the parallel parking systems.

VOLVO believes it will turn around their sales numbers in the U.S. with four new/redesigned models in 2007 – the C30 hatchback, the V70 wagon, the XC70 wagon, and the S80 sedan. Here’s a word of advice for Volvo – go big on the C30, and sort-of-big on the XC70 (as long as you support it with marketing that emphasizes the AWD).

U.K car companies are thriving, but government over-regulation is threatening production, says the Society of Motor Manufacturers and Traders. The SMMT, which represents domestic and foreign manufacturers as well as suppliers, states that more commitment from the government there regarding the importance of their operations would be a positive sign, and would also send a clear signal that future growth in the industry would be welcomed in the UK. The largest auto producers in the UK are Honda, Nissan, Toyota, Ford, and GM.

GM had to be happy to get rid of Kirk Kerkorian, but the bigger question is how his departure will affect the stock price of GM, and inextricably connected to that, the investor and consumer confidence in GM’s turnaround plan. Kerkorian voted on his faith in GM’s ability to right itself with his stock and bailed out of his huge investment in GM. Similarly, GM’s employees recently voted with their feet, with 35,000 leaving GM last summer in the employee buyout plan executed by General Motors in an attempt to get their worker costs down. My opinion is that GM will make it, albeit as a significantly changed company with some different measures of success in the overall market. Their costs are coming down, and they’ve got some very good product here now and in the pipe for later. But I am a scribe, not an investor – the stock market will make its own assessment of GM’s efforts in reinventing itself.

HOW many people would be stunned to hear that a Hummer H3 is actually far better for the environment than a Toyota Prius? CNW Marketing Research has spent two years painstakingly researching what they call the ‘dust to dust’ analysis of various cars, which includes an assessment of all of the energy needed to design, build, sell, drive and recycle/dispose of a vehicle from genesis to junkyard. CNW says their study imputes all energy costs, thereby arriving at a ranking of the total environmental impact of a vehicle while it exists on this earth. Instead of focusing on one area of environmental impact (fuel mileage), the study calculates attributes like vehicle longevity, size and shape of steel panels used (recycling ease), materials, transportation, chemicals used in production, inert chemicals in the car itself, and just about everything else you can think of that happens when you make a car, drive a car, and then subsequently scrap a car. Interestingly, the one of worst mass-market cars for the environment, according to this study, is the Toyota Prius. The absolute best car for the environment, says CNW, is made by the same company, Toyota, and is a Toyota Scion xB. The worst vehicle sold in the U.S. from an environmental standpoint, says the study, is a Maybach.

SEAT is looking more and more like an orphan under the future VW boss Martin Winterkorn. Seat, the Spanish subsidiary of VW, has been navigating choppy waters lately in the market, despite making some great vehicles, and it is said that Winterkorn wants it to go away as soon as possible. Look for the Seat company to be sold soon after he takes the helm at VW.

MOVING up the recently ended L.A. Auto Show a month did wonders for the press coverage accorded to the event, since the show is no longer so close to the massive Detroit Auto Show in January. And it was a much better show this year, with more production models and concepts present, with a greater percentage of those vehicles possessing greater importance in terms of automakers’ future plans. That said, it’s still not quite there in terms of the big boys, the aforementioned Detroit show, the shows in Paris, Tokyo, Frankfurt, etc. Don’t get me wrong, it was far better than what you’d see in other large cities like Houston or Miami or Washington D.C., which are just basically large dealer showrooms with a couple of the obligatory concept cars from one or two carmakers, but it wasn’t the show spectacle that is Detroit.

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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