Archive | March, 2007

Counterpoint: Chrysler’s Not Going Anywhere

By on March 6, 2007 in Editorials

There has been a lot of media speculation about what will happen to the Chrysler group – here’s another writer’s opinion.

By Chris Haak

03.06.07

The Internet – including automotive websites and message boards, financial newspapers, and more – has been buzzing for the past few weeks with speculation about what will happen to DaimlerChrysler’s Chrysler group. I have the advantage of three weeks of news and analysis before commenting on where I think everything will end up, but it’s still pretty much anybody’s guess. I don’t think even Dr. Z knows how this will play out.

The speculation all began on February 14, when DaimlerChrysler presented their 2006 results to investors, and had to explain how they were going to fix the $1.48 billion loss that the Chrysler group had in 2006. CEO Dieter Zetsche said that “all options are on the table” with regard to the Chrysler group’s future. In simple terms, this meant to most observers that any of several possible scenarios could happen:
· Spinning the Chrysler group off of DaimlerChrysler as a separate company owned by DCX – or turning around and selling it to a private equity firm
· Selling the Chrysler group to another automaker (GM later emerged as a front runner and has been one of the few to not deny interest)
· Entering into strategic partnerships with other automakers

The situation appears to still be very much in flux, but at this point, I do not believe that GM or any other automaker will buy the Chrysler group. For GM, who already has too many divisions and too much product overlap (Pontiac G5, anyone?), adding three more to get eleven just makes their problems worse. Furthermore, adding Chrysler’s unfunded pension and retiree healthcare liabilities to GM’s own very substantial total would exacerbate that problem for GM as well. And how would GM pay whatever price DCX is asking for Chrysler? If you haven’t noticed, they have been selling stakes in car companies (Isuzu, Fuji Heavy Industries, Suzuki, and Fiat) and not buying them as they try to conserve cash to fund their restructuring. There would be further tens of thousands of jobs eliminated and a further loss of domestic market share as overlapping models were phased out.

Renault-Nissan actually sounds like a decent match on paper, but Carlos Ghosn and his team already have their hands full with a turnaround of Renault in Paris and is dealing with less-than-stellar Nissan results in the US for the past year. Plus, Renault-Nissan has publicly said that they are not interested, as have Hyundai and Volkswagen.

How about a Chinese manufacturer, using a purchase of Chrysler to get a foot in the US market, with an already-established dealer body, integrated production system, skilled workforce, substantial factory capacity, and a decent existing lineup? They certainly could afford it – but my guess is that Chinese manufacturers will tread more carefully into the US. I’ve read that at this time, they lack the necessary management talent to be players in the global automotive marketplace. Plus, they would probably experience a pretty substantial political backlash working against them

I could see Chrysler going to a private equity group. Cerberus Capital Management – recent purchasers of 51% of GMAC from General Motors – are rumored to have interest, and bids have been solicited from several other large players. According to both Detroit newspapers, both Cerberus and Blackstone Group are meeting with Chrysler to review its finances right now. I still don’t think that private equity is the most likely scenario, however.

Today, the thought occurred to me that all of the talk of selling Chrysler is just an elaborate attempt by Zetsche to gain a stronger hand in negotiations with the UAW later this year. He has made no secret of his disgust with the fact that the UAW granted healthcare cost concessions to Ford and GM, but not to Chrysler. Today, he said, “The union decided to treat Chrysler differently than GM or Ford, as far as health care was concerned, which was a disadvantage for Chrysler,” he said. “That was one fact we had to take into consideration in trying to understand the current situation and the potential options.” To me, that sure sounds like a man drawing a line in the sand, looking for a strong bargaining position.

Instead, the most likely scenario to me would be Chrysler completing its recently-announced restructuring plan under Tom LaSorda’s leadership. They’d hopefully be able to trim some structural costs while rolling out new models that are right for the US market in a time of high energy costs. I believe that we will see collaboration between Chrysler and GM on large SUVs – think of a rebadged Suburban, and possibly on the low end of the market as well, with Dodge selling rebadged Daewoos. Longer term, with the 25-year agreement just inked between Chrysler and Chery, we’ll probably see Chinese-built Dodges; however, Chrysler needs small car sales now, so rebadging Daewoos – which already meet US safety and emissions standards – from GM would probably be a faster solution than assisting Chery in the development of models suitable for the US.

I don’t think the Germans will get the price they want for Chrysler – analysts have pegged the value somewhere around $5 billion (excluding liabilities), which is about one-seventh of what Daimler-Benz paid for the company in 1998. Whatever happens, only one thing is certain…it’s going to be a bumpy ride for the next few months.

You can contact Chris Haak at chaak@autosavant.com

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The Price of Gas and Your Next New Car

By on March 6, 2007 in Editorials
By Brendan Moore
03.06.2007
Within the context of buying a new car or truck, people often ask me whether I think gasoline will be $4 a gallon or $5 a gallon soon. In case you have the same question, here is the general answer I give them:

Oil is being depleted steadily while demand worldwide continues to rise. There are no indications currently that any new oil reserves in any significant amounts will be suddenly available in the future. There are no indications currently that demand for oil will do anything except increase dramatically in the next 20 years.There may be hiccups in the price of oil that manifest themselves as price plateaus such as the one we had recently, but the long-term forecast is for oil prices to continue their steady trajectory upward over at least the next two decades.Oil prices will drop when there is less demand for oil. That condition is extremely unlikely in the foreseeable future. You should prepare yourself for higher oil prices, and therefore higher retail prices of gasoline until substitutes are found for one or both. To not prepare yourself for this pricing environment is to delude yourself.

So, the summing up is this: If you’re in an income range where it doesn’t really matter how much gasoline costs, then buy whatever you wish without regard to future price increases. If you are in an income range where paying $4 a gallon of gas would take up too much of your after-tax income, then I would suggest you do the math based on gasoline being $5 a gallon (it’s not that unlikely within the service life of the vehicle) and buy what you can afford to buy gas for at that price per gallon.

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Check Your Mirrors

By on March 4, 2007 in News
Odds and Ends About Cars and the Car Business
By Brendan Moore
02.20.07

AUDIOPHILES, rejoice! Sirius Satellite Radio and XM Satellite Radio have announced that they will merge in a deal that give each company a 50% stake in the other in a combined new company worth $13B USD. Now you will be able to buy one car audio system that gets all of the satellite radio stations instead of having to make a choice between two competing broadcast systems with sometimes-exclusive deals for certain things like Major League Baseball, etc. Provided, of course, that they get federal approval for the deal.

FORD employees are increasingly losing faith that Ford can turn itself around. Only 47% of Ford’s employees have confidence that Ford can right itself, according to an employee survey Ford itself commissioned. Only 38% believe Ford has the right product in place. And that number only got to 38% after Ford conducted a series of in-house presentations in December 2006 of their future product pipeline. Before the showings, it was at 34%. A 4-point rise after giving employees a sneak peek at future product is not exactly a vote of affirmation that you have the right cars and trucks in the queue. I hope Alan Mulally is not a guy who needs eight hours of sleep every night. Ford has a couple of years of Herculean effort ahead of it just to get to where GM is right now, a year after GM’s own near-death experience. I say this because Ford is in desperate, desperate need of good and great product.

2007 Peugeot 207 GT

PUEGEOT recorded a stunning 83% drop in net profit for 2006. The company pointed to weaker auto sales, the increased cost of complying with new EU pollution standards, higher raw materials costs, restructuring costs, and said the company has a comprehensive plan for dealing with all of these issues. PSA Peugeot-Citroen SA is Europe’s largest auto maker behind Volkswagen. Peugeot promised its new products planned for between now and 2010 would bring the company back to high levels of profitability. Peugeot produced 3.36 million vehicles worldwide last year.

MASERATI will show its new coupe in March at the Geneva Auto Show. Pininfarina designed the coupe and preliminary reports are that it is a stunner. Maserati expects the coupe to propel it to profitability, a condition Maserati has not experienced for 15 consecutive years. Look for it this summer.

TATA of India is getting help from Fiat regarding a low-cost car aimed at the emerging-economy sectors of the world. Tata Motors, the largest auto manufacturer in India, said the car would be smaller and less expensive than the minicars currently on sale in those countries. In India alone, small cars account for 70% of the market. According to Booz-Allen Hamilton and McKinsey Consulting, India’s car market is expected to grow to 2 million units per year in the four years and to 3.5 annually million by 2015. The recent availability of consumer installment auto loans has helped drive auto sales up considerably in the last 24 months. Until the recent surge in auto lending, almost every new car purchase in India was done on a cash basis.

PRIMEDIA is going to sell its automotive enthusiast magazines, including Motor Trend, Hot Rod and Automobile. The sale will also include the related internet sites, television shows, branded products, etc., attached to the different magazines. The “auto buff book” segment showed revenues of $500 million USD in 2006. Primedia Corporation said it use the proceeds from the sale to pay off outstanding debt.

HONDA dealers in the United States are pretty happy people generally, with a never-ending supply of repeat customers that generally don’t care how plain the cars are as long as they have that famous Honda quality. That faith in the product shows up in the retail prices dealers get for those new Hondas, with every car going over the curb for close to MSRP. And cars don’t linger on the lot at a Honda dealership – the turnover is very brisk. Life is awfully good if you own a Honda dealership and frankly, it’s been awfully good since the 1970’s. Can it get better? Well, apparently it can – the most recent data out regarding sales per dealership shows that Honda dealers sell an industry-leading average 1,238 new vehicles (cars and trucks) every year. Compare that, to say, the average Ford dealership in the U.S, which sells 696 new vehicles annually, and most of those at considerable discount. Since the Honda and Ford dealership have approximately equal operating costs and pay the same per unit for capital financing (vehicle floorplan costs), you can do the math in your head pretty quickly and come to the conclusion that the average Honda dealership is far, far more profitable than the average Ford dealership. That, by the way, is the correct conclusion.

2006 Nissan Tsuru

EVER wondered what the top-selling vehicle in Mexico was in 2006? Sometimes I do, and I found out that it is the Nissan Tsuru. The Tsuru is a B13 Nissan Sentra, which to normal people, translates as a 1995 model Nissan Sentra. There is a factory in Cuernavaca, Mexico that still churns them out. The Nissan Tsuru moved 66,243 units last year. The second-best selling car in Mexico was the Chevrolet Chevy C2, a small de-contented Opel Corsa B hatchback/sedan. It’s actually a pretty good little car. On the other end of the car market, both in sales and price, Ferrari sold 28 units in Mexico last year. The number one selling truck is the Nissan Pickup, with 42,292 units sold. These are the small Nissan pickups of the last-generation bodystyle sold in the U.S. The full-size Ford F-150 and the Chevrolet Silverado were right behind, with 32,779 sales and 29,461 sales respectively. Getting back to the Nissan Tsuru, it is not unusual for Mexico (and other countries in Central and South America) to get tooling for an older model, start production, and keep going with that production for a very, very long time. Long after the tooling costs have been paid for, the car gets cheaper and cheaper to produce, and that is reflected in the selling price. So you have the option of buying the most current model and the older (but sill a new car) model being sold right beside it. Might seem weird to Americans, but a very successful market strategy in a lot of other countries around the globe.

2007 Aston Martin DBS

EGYPT’S Naeem Capital, a unit of an investment bank out of Egypt, is one of the final bidders for Aston Martin, sources say. Ford is expected to reap about 670 million Euros ($880 million USD) from the sale of Aston Martin. The final cut also includes Scottish equity group Doughty Hanson and an individual, Simon Halabi, a Syrian-born real estate magnate in the U.K. Ford says that Aston Martin is coming off strong 2006 results, having increased sales over 50% last year, and showing an excellent profit margin. Frankly, if the forecasted purchase price proves out, the buyer of Aston Martin is going to get a very good deal. Ford stated months ago that it would sell Aston Martin and use the proceeds to fund Ford’s turnaround.

CHERY, one of China’s largest auto makers, plans to build a plant in Russia in 2009. Construction will start in late 2007. The proposed plant in Kaliningrad will knock out a projected 200,000 vehicles a year, says Chery. Some of the vehicles produced at the plant are scheduled for export, company spokesmen say.

NISSAN is offering workers at their Smyna, Tennessee assembly plant and their Dechard, Tennessee engine plant $45,000 buyout offers. Also included in each offer are $500 payments for each year of service with Nissan. The offers are good until March 13 and the worker must leave Nissan by June 30. The assembly plant builds both car and trucks, and the engine plant builds four-cylinder, six-cylinder, and eight-cylinder engines. Nissan states the buyouts are being offered because the plants have become more efficient while at the same time demand for light trucks has dropped, thereby reducing the amount of workers needed. Approximately 300 workers at the two plants are expected to accept the buyout offers.

RETROMOBILE started a few days ago, and it looks even bigger and better than the fine event last year. What is Retromobile? It’s held every year in Paris, and showcases a tremendous amount of stunning old cars, old trucks, and old motorcycles from every aspect of motoring; racing, consumer cars, development mules, show cars, etc. The car manufacturers in Europe are huge participants so you can see cars together at Retromobile that you will never see in one place anywhere else. The show is massive, well-coordinated, and a lot of fun. Some of the displays are incredibly well-thought-out and obviously took a tremendous amount of time and money to put together. If you ever get a chance to go, don’t think twice about it – just go and have a blast.

TESLA has chosen a manufacturing site in Albuquerque, New Mexico to produce their all-electric 4-dr, 5-passenger sedan. Telsa Corporation says it will produce at least 10,000 cars per year in the plant with the first cars scheduled to roll off the line in 2009. Tesla states that the car should cost between 50 and sixty thousand dollars (USD), and travel at least 250 miles between charges. Governor Bill Richardson of New Mexico stated that the manufacturing plant will cost around $35 million dollars and provide about 400 jobs. Facility construction will start in April. Production of the Tesla Roadster, a very fast two-seat sports car, is currently on schedule in England for this year.

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The Chrysler Guessing Game

By on March 4, 2007 in Editorials

By Brendan Moore

02.16.07

Ever since the news broke a few days ago that DaimlerChrysler would consider cutting Chrysler loose, the speculation has raged regarding just where Chrysler would end up if DaimlerChrysler decided to part ways with its American mass-market subsidiary.

Many industry analysts believe that the best (and by far the easiest in terms of neotiations) thing for the parent company to do is simply to spin it off as opposed to trying to sell it to another manufacturer. This scenario would have an investor group buying Chrysler, perhaps taking it private for a few years so it could regroup without a lot shareholder pressure, and then making it a public corporation again in order to reap the rewards of their restructuring efforts. But this would take awhile and be quite a distraction for Daimler.

The quickest way for DaimlerChrysler to shed Chrysler would be to sell the whole company to another automaker, but these negotiations would be very tough and might exact a higher volume of concessions on DaimlerChrysler than they wish to accept. Chrysler has a tremendous amount of outstanding liabilities around union and healthcare commitments. The again, Daimler may want Chrysler to go away as soon as possible, and therefore would be willing to take it on the chin vis-à-vis sale conditions in order to make a deal with another automaker possible.

The potential buyers? Everyone from Nissan-Renault to the upstart Chinese manufacturers to PSA/Peugeot-Citroen, and as of this morning (surprisingly), General Motors.

Nissan-Renault tried to cajole GM into a merger last year, but was unsuccessful, and one would have to assume they’re still interested in a North American partner. PSA/Peugeot-Citroen could use the volume and the North American base, but has shown no interest so far. That brings us to the Chinese.

If Chrysler is offered up for sale, I would not be surprised if one or more of the Chinese auto companies (Nanjing, Geely, SAIC, etc.) are fiercely involved in the bidding. The allure of being able to buy their way into the U.S. market (and an established dealer network), as well as getting technology and design on the cheap through purchase, AND, getting a couple of recognized brands in the bargain would seem to be an very attractive proposition for those companies. Frankly, I don’t see how some of them could resist such a scenario. For any Chinese auto maker – the price would be very low, they have a lot of cash on hand, and the purchase would dovetail very nicely with their long-term strategies.

General Motors buying Chrysler is a more perplexing situation. GM is just coming out their own near-death experience and their past and current problems are the same ones Chrysler has. Do they really want more problems just like the ones they have? And if so, what about the obviously overlapping product? What happens there? If the new entity starts cutting brands and models, then lots of jobs go away as well. Is GM prepared to weather the rough seas of public opinion in that regard? Or do they plan to keep the parts of Chrysler they want and broker the rest out to any car manufacturer that might be a buyer? Finally, if one of the reasons (stated or unstated) for purchasing Chrysler is simply to maintain their global No. 1 status over Toyota, then that itself should provoke some intense self-analysis at GM – are bragging rights any kind of reason for taking on Chrysler? To me, the scenario of General Motors buying Chrysler doesn’t make sense. And yet, German newspapers and television are reporting that GM is in active discussions to acquire Chrysler as soon as possible.

Now, on the other hand, if DaimlerChrysler decided to sell Chrysler and sold it off piecemeal, that is, put Dodge up for sale separately, Jeep up for sale separately, etc., then all bets are off in terms of potential buyers. There might be one specific part of Chrysler that a lot of companies want, including in that group GM, Toyota, Nissan-Renault, etc. As well as, of course, the Chinese companies previously mentioned.

Just as a sidebar, one interesting thing to think about is that any buyer of Chrysler gets a lot of brands and nameplates in the deal – Willys, DeSoto, AMC, Plymouth, etc., and for the nameplates, model names like Rambler, Fire Arrow, Jeepster, Valiant, Hornet, etc. And Chrysler owns a couple of other nameplates that they bought outright from other manufacturers – e.g., Chrysler owns the “Scout” model name, which they bought from I-H a couple of years ago, but have never put on anything.

How is this going to shake out? Here’s my prediction: General Motors will acquire Chrysler. They are the first ones to the negotiating table and have the upper hand over any other would-be buyers. DaimlerChrysler wants it to go away so badly, and so quickly, that they will basically just give the company to General Motors, write off Chrysler as a bad dream and walk away. I don’t think it’s the best thing GM can do with their resources (time and money) right now, but I have a feeling that this is how it will be when the dust settles.

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Should The Federal Gas Tax Be Raised?

By on March 1, 2007 in Editorials

By Brendan Moore

November 1, 2006
(Reprinted March 1, 2007)

Your first reaction is probably one of disbelief. Then perhaps anger. Then again, maybe your reaction is bewilderment relating as to why this would be on a site devoted to auto enthusiasts. Whatever it is, it’s probably not positive.

But, I’ve been pushing for an increase in the gas tax for almost three decades, and although mine was a voice crying out in the wilderness of public opinion for most of that time, apparently some others have now come around to the same point of view. I have noticed an uptick in articles on the subject recently, and authors have been become bolder in their efforts to convince others. The suggestions for the size of the increase generally range from $1 to 2$ extra tax per gallon of gas, phased in over anywhere from a period of five to ten years. My personal preference is for an increase of $2 to be implemented over the next ten years. I realize that it might be difficult to reconcile my push for higher gasoline taxes with the fact that I like to drive so much, but, in this instance, I’m willing to pay more to play.

The reasons for not raising the gas tax are well-known, so there is no reason to devote space to those reasons here. Instead, let’s take a look at some of the reasons people are putting forward to justify a raise in the tax. In no particular order of importance, those reasons are:

Our physical safety – In order to buy all of the oil we need, we currently pay huge amounts of money every day to people that regard our nation as satanic and evil. It doesn’t stop there. There are millions of people in a sub-group of this group that would relish the opportunity to kill as many Americans as possible. Every dollar we send to them gives them greater opportunity to exercise savagery against the United States. Less gas consumed means less barrels of oil bought from people who wish to use the money they get to destroy our country.

The increasing budget deficit – As many noted economists have pointed out, we’re going to be in a very bad way as more and more baby boomers retire and start receiving social security and medical benefits. It will be the equivalent of a slow fiscal cancer, wasting away the country’s health bit by bit. We cannot keep doing what we’ve been doing from a tax perspective and expect everything to turn out OK. It is an economic impossibility. Either taxes have to go up, or benefit payouts must be drastically cut. Most economists agree that even a $1 gas tax increase would result in an extra 100 billion dollars annually, thereby providing some measure of relief to future budget shortfalls.

It’s only fair from a cost perspective – The U.S. federal government has spent and still spends a lot of money ensuring that the oil keeps getting pumped out of various places in the world. This money is spent in the form of wars waged (1991 Iraq War, current war in Iraq, etc.), massive foreign aid to non oil-producing countries that we wouldn’t otherwise care so much about in oil-producing regions (Egypt, Israel, etc.) in order to have an ally and/or influence in those oil-producing regions, and various government subsidies and tax breaks to the oil industry and it’s collection of vendors and suppliers. If all those costs, which are borne by all taxpayers, regardless of their personal consumption of gasoline, were accurately imputed into the costs of gasoline, gasoline would be far more expensive.

Less pollution – Mother Nature is allergic to the stuff that comes out of a tailpipe. Less of that bad stuff around helps all of us here on this planet.

Less traffic – Less people driving means the ones left on the road can go faster. This is good.

It won’t cost as much as you think – As N. Gregory Mankiw, the noted Harvard professor and former chairman of The Council of Economic Advisors, stated in a recent Wall Street Journal article regarding gas taxes, there is something called tax incidence taught in every freshman tax analysis course. Tax incidence states that every tax cost is shared by both producer and consumer. The short version as it applies to this situation is that as a higher gasoline tax drives down consumption, market demand will subsequently fall, forcing oil prices lower. Just like magic, the actual purchase price of gasoline would increase by less than the tax because the cost of the major ingredient would be decreasing at the same time. More beautiful magic – as a practical matter, oil producers like Iran, Venezuela, Russia, and Kuwait pick up some of the cost of our increased tax gas.

It will produce a long-term solution to our oil addiction – As gasoline becomes more and more expensive, alternative fuels and alternative power modes become progressively more attractive and economically feasible. As a bonus, some of these alternatives are better for the environment, i.e., the Tesla, a very fast, very attractive sports car powered by ion-lithium batteries with a 300 mile range, and built by the brand-new Tesla Corporation in Silicon Valley.

It helps the auto manufacturers – Crazy talk? No. Reducing the importance of currently onerous regulatory oversight (fuel mileage requirements) by replacing it with market forces and increasing market certainty (American consumers will want fuel-efficient vehicles in ever-increasing numbers) is a dream come true for car companies, particularly the domestic ones. It is an oft-told lie that the domestic manufacturers cannot make any good vehicles except trucks and SUVs; the focus has been on those products in recent years because that’s what a lot of Americans wanted to buy, the vehicles themselves were highly profitable, and frankly, the domestic manufacturers needed the money. This was without a doubt a short-sighted strategy in retrospect, but one that never would have been followed in an environment of steadily rising gas prices with no possible return to cheap gas. With such market certainty, what’s left of the domestic auto manufacturers will quickly embrace production of high-quality fuel-efficient vehicles as well as alternative fuel vehicles. Don’t believe it? Well, when you have Bob Lutz of General Motors stating recently at the Paris Auto Show that one of the best things that could happen in the U.S. would be a gradual increase in the price of gasoline to the same levels currently in Europe so GM can just get on with the business of making fuel-efficient cars, then you know just how important market certainty is to the automakers. Since most astute people in the car business believe that the U.S. market will look very much like the market in Europe in the future (smaller, more profitable shares of the overall market led by a couple of market leaders), gas prices going up would simply accelerate the ability of Ford, GM, and the Chrysler part of Daimler Chrysler to focus on the future. By the way, in order to achieve price parity with Europe currently, gas prices in the U.S. would have to increase more than $3 per gallon. Tomorrow.

So, good reasons all, but let’s face it, the chances of this happening are pretty slim. No matter how logical it all seems. I am a realist. Instead of planning for the inevitable, most people in the United States would rather put off any sacrifice until change is forced upon them. Most people would never agree to us raising gas taxes on ourselves. But, hey, you never know. . .

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