Of War and Cars

This year marks the 90th anniversary of the end of World War I. My Father's older cousin died in that conflict, along with another 9.5 million soldiers and 10 million civilians. The "war to end all wars" did not of course end all wars, and sadly, this horrendous show of man's callous inhumanity is quickly fading into the past.

If you look at the scratchy, grainy movies and photographs of that conflict you may be struck by the fact that there are horses and carriages used to transport man and materials, and most men appear to be on foot. It was the conflict that saw the invention of the tank and armoured car (the latter supplied, for the British by none other than Rolls Royce! The British have always had class). Toward the end of the war, trucks and motorized ambulances were used.

The problem with motorized vehicles of course, was the terrain. Muddy fields and rough terrain are not really suited to heavy, underpowered, wheeled vehicles. The early tanks themselves had difficulty in the ubiquitous mud and steep bomb craters.

After the War, people widely believed that the automobile was here to stay. Henry Ford had been cranking out the Model T since 1909, but in Europe, it was still regarded as a rich man's oddity until thousands if not millions had had the chance to actually ride in one. It is hard to imagine the astonishment of a young French farmhand recruit, accustomed at most to a horse-drawn cart, first riding in a vehicle that had springs and required nothing more than a few cranks of a handle to get going at a speed much faster than he or any of his ancestors had been in their lifetime.

In less than a century, the automobile has given billions of people a mobility and independence that their grandparents could not imagine. Today, suburbia would be an impossibility with out the internal combustion engine (or as Churchill famously called it, "The infernal combustion engine").

If ever there was a silver lining to the most terrible of obscene tragedies, perhaps the development and acceptance of the automobile and its liberating effect on humanity, might qualify.

Chrysler and GM: The Folly Continues

The papers are still rife with stories about a possible merger between Chrysler and GM. As I have said in the past, this merger makes almost no sense from a model line up point of view, and this was confirmed by a source who recently reported that the new company would consider selling some lines off, like the Dodge Ram pick up line. Naturally. They have completely overlapping and competing line ups in this fast shrinking market.

This kind of shallow thinking is what got Detroit - and especially GM - in trouble in the first place. Firstly, Dodge has just launched a brand new (and vastly improved) lineup of Dodge Ram pick ups. The Chevy/GMC pick ups were redesigned about two years ago. But sure, sell the newly designed models.Who will buy the Dodge Ram product lineup? Not the Japanese. Toyota is still nursing a gunshot wound to the foot that it took by launching the new full size Tundra pick up amid rising gas prices and a declining economy. Nissan launched the Titan in the same segment some time ago. The Koreans have their hands full. Kia launched a full sized SUV last month (need I say more?) and Hyundai, try as it might, has trouble being seen as an upscale car maker.

The Europeans are unlikely ever to want to get into the full size pick up segment in meaningful quantities. So, I ask again: who will buy the Ram line? Indians? Maybe. Mahindra and Tata are itching for an "in" into the North American market, but Tata has already bought Land Rover and Jaguar, and will have its dance card full trying to fix these brands in the US for the near future at least.

So while selling a vehicle line sounds wonderful on paper and makes a great sound bite, it is little more than that.

GM is really in a desperation samba, looking for cash at any price and Chrysler's stash looks tempting. But the cost of integrating the two companies would eats most - if not all - of that cash in the medium term. Cerberus of course, is still the big winner if this comes off, having washed its hands of Chrysler and gained GMAC to boot.

GM needs clearer thinking and some calm. Current management seems lost and desperate, and has lost sight of the real problems, which include years of product and quality neglect and attention only to profitable lines, while failing to turn unprofitable products into winners.

Only a herculean effort by a competent management team can save GM at this point, along with a healthy bailout. As of today, it has neither.

The Little Car That Could.

As you drive along the nations Interstates and main roads at rush hour, it is always interesting to see who is driving what as they go to and from work.

The days of commuting alone in a huge SUV are looking so last year. Then there are the sports cars whose 0 to 60 times are less than the time it took you to read this sentence. Of course, the average speed at rush hour is about 15 MPH and the constant changing of the heavy-duty manual gear box have given your legs a version of carpal tunnel syndrome. There are the spartan econoboxes that are increasingly being driven by smug middle management types, who look like they are doing their thing for the environment - and want you to know it. There are the luxury imports that have all the amenities, including the stiff sport suspension, ideal for the off ramps.

What is missing from this picture? What is the holy grail of the driving commuter? Well we can start by saying that everyone likes a quiet interior. A decent sound system with Bluetooth? Certainly! Room for four without the folks in the back having to chew their knees would be nice. An economical four cylinder engine that is responsive at the same time is a must have. A decent top speed with quiet refinement, please. A trunk that fit the groceries or the bags of the missus, the kids and I for a weekend. Oh, and it must be fairly compact for those small parking spaces at work. It does not have to have a top speed over 95 MPH because if you ever go faster than that you won't need a car for quite some time, where you will be going. However, 0 to 60 in about 6 seconds would make this a great ride for darting around in traffic.

To make the American consumer to purchase a car like this, it would have to have some cachet, a certain badge snobbery, so we are talking Lexus, Infinity, Cadillac or Lincoln - at least. The point is this. There are millions of people in this country who drive sedans that go way faster than they will ever need, cost way more than they can really afford and consume too much gas for their budgets. These cars can come with suspensions that would be great at Le Mans but are pretty hard for Le Butt, and will never be put to good use. They come with many systems that look cool (like voice activated anything) that most of us will never use regularly.

So the bottom line is this: if someone fairly prestigious would come up with a semi-luxurious vehicle that was easy on the eye, ear and wallet, was economical and had a dash of class, they might have a winner.

There are some promising signs in this direction. Both Ford and GM are allowing four cylinder versions of their mainstream sedans (I am thinking Fusion and Malibu here) to be equipped up to the eyeballs with features previously available only on the six cylinder versions of these cars. But what we really need to have the manufacturers look toward Europe, where many of the attributes I have listed have been a given for years,and see what we can do to bring style and utility back to the daily commute.

Food for Thought from the WSJ.

This weekend's Wall Street Journal has an excellent article by Paul Ingrassia entitled "How Detroit Drove Into a Ditch". If you are interested in the automobile industry this is a must read.

Kerkorian and Ford: The Gambler Takes a Hit.

In the last 24 hours, much has been made about Mr. Kerkorian selling Ford shares. Why? He is a big investor. Note I did not say a savvy investor, however. And I did not say a huge investor. This week he cut his owners hip from 6.43% to (gasp!) 6.09%. It represents a huge sum of money and he took a bath, but it does not mean he is selling anywhere near a majority stake in the company.

So what makes his exit from Ford a harbinger of doom? I have no idea. Remember this was the man who donned his cheer leading sweater and megaphone and pushed for the Chrysler / Daimler deal when he had a large stake in Chrysler. Then he bought into GM and pushed for GM to merge with Nissan/Renault. He failed to get the GM management to see his point of view and went into a huff and walked away. Now he is walking away from Ford, because....who knows? Clearly he is no success story when it comes to investing in Detroit - perhaps it is a good thing that he is walking away now so that Ford executives can keep their focus (pun intended).

Mr. Kerkorian made his millions in the gambling industry and he is now having to dig into that fortune in order to dig himself out of an automotive hole. There is a lesson for all of us in this: Stick to what you know unless you are willing to give yourself a very expensive education.

Car Supermarkets Far Off and Far Out?

No and yes, respectively. GM's continuing fascination with a merger with Chrysler which this blogger has strongly criticized has now spread speculation that the companies could consolidate dealerships. This is of course tacit recognition that the car market has become, in many segments, comoditized. It is only a question of time before someone wakes up to the fact that selling cars in exclusive dealerships is a luxury fewer and fewer manufacturers can afford and more and more shareholders should question. Besides which, the old argument that specialized dealerships "know the product and are loyal to the brand" is bull excrement. Any person with a modicum of research in their head can walk onto the floor of any showroom in the nation and instantly confound the sales person with a few rudimentary questions about the vehicle on the floor. I once visited a Ford dealership in Cincinnati here the salesman had difficulty in identifying a Ford Escape versus a Ford Explorer. Dealerships are going to have an increasingly hard time justifying their existence.

Let's look at the car purchase rationally. If I am in the market for say, a minivan, does it make sense for me to spend days wondering around different dealerships, haggling with different sales people and financing companies, or does it make more sense to go to "Joe's Mini Van Market". There under one roof I can see a series of minivans, from several companies and compare them. I can see features I like or don't like and quickly choose the one I like best.As the idea catches on, soon "Joe's Market" will have a minivan department, a pickup department, a sedan department, etc. All under one roof. Paradise!

For the manufacturers it means tremendous efficiencies as parts are shipped to Joe's Market based on computer models that show how many vehicles he has sold, and what they are likely to need in the first, second and third year of warranty. Prices would be have to be competitive and the whole archaic process of dealer incentives, hold backs, etc. would go away in favor of a fixed commission for Joe, with perhaps bonuses for vehicles sold. Saturn's idea of "no haggle pricing" would be a welcome innovation, with sales at different periods of the year. It would be Joe's headache to deal with salesmen and the public could easily opt for the best vehicles at the most competitive prices, with a margin for personal tastes, thus making manufacturers more efficient by being able to rapidly hone in on what the public wants versus what they are selling.

If this sounds like it makes sense, it does. It is essentially what happens every time you go to a supermarket or Best Buy or Sears. In fact, the question arises, why has someone not thought of this already? Well, for one, the middle man, the dealership, has a legal leg to stand on, against the manufacturer, if they opt to abandon their dealership network in this fashion.

But how exciting would it be to see Chrysler and GM started selling their vehicles through open markets like the one described above? How exciting would it be to walk onto a showroom floor with competing vehicles side by side?

If you hold shares in an American car company, it may time to start asking questions about how much the dealer network actually costs you as a shareholder, and to ask "why are we insisting on using a sqaure wheel when every other consumer product has already invented a round one?".

Has The Era of European Luxury Sedans in the US Ended?

There will always be a market for luxury European vehicles in the US. However, the recent downturn in the economy and the prices of these vehicles, fueled by unfavorable exchange rates, have got me thinking.

In fact, what I predict is that demand for the lower end of these vehicles as well as their SUV's will begin tapering off as younger buyers begin to realize that some Asian brands, while not as exciting to drive, are in fact just as good, and have fewer negative compromises (more comfort less handling rather than great handling and rock hard suspensions for example). And let us not forget the domestic brands, that, while not having the cachet, have produced some very fine automobiles, of late.

Yes, Dad, owning a BMW is great but as I drive to work, I don't want to count expansion joints and potholes with my rear end. And I don't need a car that will rocket me from zero to eighty in 8 seconds, if my average commute speed is 25 MPH. And I don't need another ticket, as I test out the top end on the Interstate. All this comes under the title "nice to have" when money is short.

Small is In, Prices Low, Don't Buy Now.

The Wall Street Journal reported today that car makers are increasing discountes on smaller cars. Clearly a sign of the times, since if any car is going to move off the lot, it will likely be a small, gas sipping, low cost model. People simply are not going back to the big SUV's and if the current economic problems persist, they may decide to stick with what they have or, if they are feeelong flush, snap up a decent used car at a great price - there are acres of good used cars at fire sale prices right now.

If you ask me if now is the time to invest in a new car, I would still say no. Here is why:

- If you think that dealers are discounting 2008 models now, wait until February. They'll practically pay you to take the car.
- There are a host of new models, some of them substantial improvements over the current vehicles, coming on line in 2009-2010.
- You absolutely want to avoid debt right now. If you have cash, and have to buy a car NOW, go and look at a used, low mileage model. With a warranty.

Actually, if I needed a new car right now, I would lease one for 2 years (if I could find a lease) or buy a used vehicle that will get me through until 2010. At that point, the market will be flush with new models, hopefully we will not be in a depression (!) and you will be able to choose a model substantially improved over what is available on the market today.

GM & Chrysler to Merge? Chry-Mo!

A reader contacted me late last night to give me the news that appeared in Today's Wall Street Journal, about the talks between GM and Chrysler about merging. I spent the last 12 hours ruminating about this, and, between irritation and laughter, I decided I had to jot down a few ideas about this rather fuzzy idea.

First, why do companies merge? The idea that you merge with an equal to produce a company twice the size has long since been discarded. You can merge to take advantage of synergies, improve finances for both companies, increase competitiveness, pool resources to make R&D more cost effective....you get the idea. Not everyone will agree, but I think you have to have at least 3 of the above good reasons in order to merge.

Now, lets look at some of the fundamentals, which, in the automotive industry begin and end with the product line. Both Chrysler and GM have developed Johnny-come-lately retro muscle cars to compete with the Ford Mustang, which has been a big hit.So right there, you have two products on which you have spent good cash developing, competing. Chrysler is in the process of rolling out its redesigned line of Dodge Ram pick-up trucks, and GM invested heavily doing the same thing almost 3 years ago. In the SUV world, nothing is selling, but GM has a better lineup of full size SUV's and they both have recently launched a slew of small crossovers. All that development money would be lost because if you merge, some - if not most - of those vehicles will have to go. In the sedan lineup, there are synergies, if only because Chrysler made such a mess of the Sebring/Avenger launch, with a sub-par product. Still not convinced? Look at Hybrids. Both companies have rushed hybrids of their big SUV's onto the market. Now go see how similar the technology is. Certainly not identical. Now think about how much money has been spent and how you would decide about which technology to adapt and how to service these vehicles. Inventory costs for the new company, which will have to continue to service all of the current lineup, will be staggering.

On an international scale, I do concede that Chrysler has struggled to gain a relevant foothold anywhere but the North American market. In this sense, GM's worldwide operations might benefit the Chrysler side. But GM is in trouble in Europe, and car sales are slowing everywhere.

Of course you will produce a smaller company, but the hope is that by some miracle, all this downsizing will produce more cash and a more efficient operation. It's a bit like a zoo deciding that since they both eat meat, it would be more efficient and cost-effective to make the crocodile and the lion share a cage. Neither will be very happy. I doubt if more people would pay to watch them just because they share a cage. Yes, the zoo will have temporarily lower costs, but eventually one or both of the animals will die, and you have nothing to show but an excuse to the tune of "it seemed a good idea at the time".

Finally there is the slew of legal issues that will arise. Chrysler still uses a slew of Daimler Benz technology which our surly German friends will be most reluctant to hand over to Chry-Mo. The dealers will be in endless squabbles about who gets what and how much.

I am sorry, I just don't get it. Who would a merger benefit and how? Under the details leaked, GM would get Chrysler and Cerberus, the current masters of Chrysler would get GMAC, the much weakened auto lender that recently dabbled in mortgages.Nice timing GMAC. Cerberus would be the big winner. They would get a quick and clean exit from the car manufacturing business, which they should never have dabbled in so heavily anyway, and will go into turning around a large financial venture. As venture capitalists, they have the expertise to try this in a credible fashion. GM on the other hand, would be landed with the problems of sorting out not only their own headaches, but Chrysler's as well. Since the current management of GM has done such a sterling job of sorting out GM's situation, why not add in another car manufacturer? Surely that will make things better? Sure. Now, about buying that Brooklyn Bridge....

This merger benefits only one party, Cerberus. If they can convince everyone else otherwise, and pulls this off, I might ask, check book in hand, if they need more investors.

Chrysler Comes a Cropper

"Coming a cropper" in English slang roughly translates to "taking a hard fall". Indeed Chrysler has taken a hard fall, some of it through no fault of their own.

Take for instance, their purchase and then sale by Daimler Benz. In theory it was a marriage made in heaven. Mercedes could give Chrysler access to engineering technology and Chrysler could give Mercedes the sharp design language it was lacking. What ended up happening was a Vaudeville farce, with Mercedes building the (then) all-new ML in the US (instead of using Jeep's proven expertise in this area) and Chrysler proving itself achingly slow to adopt new engines, engineering and forward thinking. All this run by a heavily mustached German who insisted on making appearances in their advertising as a kind of humorous German grandfather figure, which is kind of creepy.Both companies suffered, although Daimler came out of the deal with a less scathed reputation.

Now that Chrysler has been bought by private equity, there was, for a while, hope that Chrysler could be turned around. With the current economic woes, however, this is increasingly less likely. Yet some of the attractions that led the current masters to close the deal are still there:
* Chrysler arguably has the leading edge in minivans, which they invented. Their products are stylish, comfortable, innovative and affordable.
* Jeep still has an attractive halo for a variety of demographics and some are actually used (by a few) for what it is best at: off-roading.
* There a couple of very decent sedans in the lineup (the 300 and the Charger)and a very nice coupe, the Challenger. The rest are frankly unattractive.

There have been serious efforts to improve quality, notably with the interiors, but the poor quality and dowdy interiors of the past will take years to be erased from the minds of the buying public. Add to this a shortage of new vehicles in the pipeline, and the future is less than rosy.

So what can be done? If I were the owners of Chrysler I would be looking hard at selling the company off piecemeal. Jeep, for example, would make a wonderful partner for Land Rover in the US. Both make products aimed at being as capable on-road as off, and both have failed to penetrate each others home markets in any significant way. In addition, the dealer network for Jeep would be a great way to get more Land Rovers out in front of consumers. Tata Motors take note.

Volkswagen, who is just beginning to build a minivan using Chrysler minivans as a base, might be interested in buying the minivan business. After all, although Chrysler invented the minivan, it was Volkswagen, with their rear engined bus of the 50's and 60's that planted the seed. This would link Volkswagen back into a market it once dominated: people-moving vans.

The Dodge name holds little cachet in the market, so their products would probably be difficult to pass on. For years they have been trying to revive the name as a muscle car legend. The new Challenger is a credible step towards this goal. The problem is, between the high gas prices (temporarily low due to current hardships), poor economy and frankly The Grim Reaper, who is slowly robbing the client base of people who remember the muscle car era, this strategy may be irrelevant. Toyota, which has lacked a serious sports car in the US for some time, might be interested, if they could figure out a way to sell the vehicles with Toyota street cred., i.e. quality.

Ford, who has lacked a credible large sedan for some time may want to integrate Chrysler's outstanding rear wheel sedan platform into their lineup, but they do have a certain lack of, um, moolah.

All this would hardly make a dent in the price that was paid for Chrysler. But at some point, someone will ask the fateful question: Do we cut our losses now, or wait and take our chances? I know what I would do.

Why Ford may Make It

In all this turmoil we are currently suffering, and government backed loans not withstanding, there are real concerns about the future of the big three. The private equity company that purchased Chrysler is fast finding out that running a car company is pretty complex and difficult. They also should have done their homework regarding the product pipeline and the consumer perception of Chrysler vehicles. It is fixable, but not any time in the next 12 months.(Chrysler will be the subject of a future blog).

Ford, however, is different. They are currently doing well outside of the US, which indicates that they have some pretty good, market-specific vehicles in other countries. Ford is planning on bringing some of those vehicles here in short order. The 2010 Ford Focus is a fine car, and the Focus line in Europe has been selling briskly. The other vehicle to appear soon is the Turkish-made Ford Transit van.

Ford is making itself a very interesting niche in the market. Young people will love the 2010 Focus (some of the features on this vehicle - such as Sync, a Ford/Microsoft developed mobile entertainment and communications software - are already available on the current US Focus, and are a hit with young consumers). It will not be seen as "so 20Th century" to be seen in a Ford product. With the weakness of the US Dollar, imported vehicles from Europe are still cool but increasingly out of reach for this demographic. Chalk one up for Ford.

The Ford Transit is a vehicle whose time has come. Small businesses will simply have to wean themselves off full size vans that get 10-15MPG in the city (the same goes for pick-up trucks by the way). The vast majority of small businesses will be able to get by with a stylish, small and fuel efficient van. They will have to - current decreases in oil prices are still making for comparatively expensive gas, and the business owners will soon discover the advantages of smaller engines in a recessionary economy.

The basic question facing the big three is do they have enough cash to last until their new vehicles are available? Ford has a good chance. They have some profitable operations overseas which makes them, in theory at least, a good candidate for outside investment. Ford however, is doing something very clever. They are getting out of the commodity business. By introducing niche, different vehicles popular elsewhere, they are going after a clientele of savvy consumers who want something different that is cool, and in the case of the Transit will save them substantial amounts of increasingly scarce money. They are, in short, betting that there are educated, savvy and cool consumers out there who will buy a product that is good value for money, cool and has a certain flair. If you want a vehicle that answers that description stop by a Ford dealership - next year.

Has General Motors Finally Hit Paydirt?

GM has long been casting about for a formula that will get people to actually think about wanting to buy their cars, instead of buying them because they are being discounted. It may be that they have finally hit paydirt.
Witness the new Malibu and the Traverse. Fairly attractive design on the outside, right? Not quite "same as next" and sufficiently different to pique your interest in the traffic that is America. The interiors, where the buyer/driver will spend most of his/her time have made quantum leaps over vehciles produced until recently. Tasteful chrome accents and materials that indicate more than a few moments went into their selection make for a good basis on which to at least visit a showroom if you are in the mood for a new car.
The question is, of course, will it be enough? Having finally figured out the road to the heart of consumers, there are still long journeys to be made on the road to perfection. GM is running low on cash (although the automotive industry guaranteed line of credit that Congress approved will help somewhat) and time will be needed to change consumer perceptions. GM does'nt have much of that either.
For this blogger, GM will need to reduce the number of models it offers - fast - and concentrate on making the current models American favorites by (gasp!) talking to consumers and grasping the fact that buyers want nice interiors and exterior styling that at least say "I have taste". Unless I see that in the existing lineup (excluding the Malibu and the Traverse) I would say look elsewhere if you want a car that will come from a company that has a future as long as the car warranty.