AutoTidbits

Hopes of Cost Savings Fuel Auto Alliance

 

Based on the hopes of driving down costs, two automakers announced an alliance last week. GM and PSA Peugeot Citroën will join forces by both sharing some vehicle platforms and combining their purchasing volumes for increased efficiencies. 

 

This isn’t the first or likely the last time that automakers will cooperate with competitors to strengthen their competitiveness (French rival Renault is closely tied to Japan’s Nissan).  The European market has been difficult for GM for some time. Recently, PSA Peugeot Citroën’s fortunes have not fared much better. Both companies are hoping that cost savings will return their European operations to profitability. 

Most readers are aware of GM’s history, including its recent emergence from bankruptcy and return to profitability, assisted by the US Government.  American readers are likely less knowledgeable about PSA Peugeot Citroën (PSA).  Headquartered in Paris, PSA is Europe’s second largest auto manufacturer behind Volkswagen. The company produces vehicles on a global basis, with plants Asia, Africa, Europe, Russia and South America. Unlike GM, and more similar to Ford, PSA is majority owned by its founders, which in this case is the Peugeot family.

With 30% of the shares and in excess of 46% of the voting rights, the Peugeot family calls the shots at PSA. This means that any strategic alliance will have to be supported by the Peugeot family. In the past, large multinationals such as GM, with a history of high executive turnover, have not done well in nurturing long-term partners. Perhaps to counteract these natural tendencies, this alliance will be governed by a committee comprised of four senior executives from both companies.

While this alliance is broader than most, it should be noted that PSA already has a fair share of partners, including TOYOTA, Mitsubishi and Chang’an for production facilities in Russia and China. PSA also collaborates with BMW in the area of hybrid technologies. 

The first product created through this alliance is expected to arrive in 2016.  Unlike the Fiat/Chrysler partnership, this alliance is not expected to result in either Peugeots or Citroëns showing up at your local dealer.  That is a shame, especially for anyone that enjoys daring automotive designs.  Below are is my current favorite Citroën, the DS 4 R. 

 

Photo courtesy of Citroën

 

Lincoln Moving Towards Dedicated Dealerships?

Ford has been quietly investing resources in the Lincoln brand, hoping to rescue the struggling brand and make it competitive. In a recent interview with Autoline, Jim Farley, Group VP, Global Marketing at Ford, revealed that 2012 will be an important milestone in Lincoln’s recovery. According to Farley, Lincoln will re-launch in the latter half of 2012.

While no dollar figures were disclosed, Ford has reportedly been heavily investing in Lincoln for two years, which includes 180 designers dedicated to the brand. The company recently hired a new ad agency that will aid in the re-launch. 

Perhaps most revealing were Farley’s comments regarding Ford’s vision of the Lincoln brand.  In a desired future state, Lincoln buyers will be “independently minded” and look for a “boutique experience” where dealership staff knows their names.

Two items are noteworthy here. First, is the type of buyer Lincoln would like to attract.  “Independently minded” and presumably luxury oriented buyers was a segment that Saab pursued for many years. This is a sub-group of the larger luxury segment, but is it large enough to sustain a brand? 

The second statement of note refers to the buying experience Lincoln imagines for its customers.  It is difficult to envision such a buying experience in today’s mega Ford-Lincoln dealerships that operate largely on volume.  Farley specifically pointed to the large dealerships of German manufacturers as something Lincoln wants to avoid.  It will likely prove difficult to convince the company’s existing dealer network to heavily invest in additional separate showrooms and upgrades based on the aspirations of the manufacturer, regardless of how enticing the product road map is. 

AutoTidbits is Back

Yes, it's true. There has been a rather lengthy and unexplained lack of activity at AutoTidbits. That is no longer the case. The blog is back in business.

A whole host of life-changing events conspired to keep this blog silent. These included a new family member, relocation and a new job. Suffice it to say, the time I spent not writing, was applied in other worthy pursuits.  Now that life has taken on a manageable routine again, I will once again blog about what interests me most – the automotive industry. I am particularly excited about the upcoming Chicago Auto Show.  

BMW: The Ultimate Misery

via www.bmwultimatemisery.com

The above image, coupled with the slogan "The Ultimate Misery" almost seems to suggest that autonomous, BMW zombie cars are out to crush the average American.  Suffice it to say, that's not accurate.

The facts are as follows. After 30 years, BMW N.A. decided to close a California parts distribution center. The workers at the center are BMW employees and members of the Teamsters Local 495 union. BMW plans to "shut down" that distribution center August 31, 2011 only to re-open it the next day with "outsourced" employees. This particular facility has received prizes from BMW for its efficiency, employs 71 workers and has operated for 30 years without a work stoppage.

BMW will hand over the operational control of this distribution center to an unaffiliated third party.  One the face of it, this does seem quite capricious. According to the Teamsters PR efforts, BMW made this decision to cut costs on the backs of American workers. What we don't know is what led up to this move. Presumably, the contract negotiations between the two parties broke down and BMW decided to let the contract expire. We don't know that because BMW has been very tight lipped when it comes to this issue. We do know that the Ontario site is not the only one undergoing this change.  Officially, BMW wants to focus on "core competencies".

The union has been effective in shedding light on this issue. It has managed to garner the support of Senator Barbara Boxer and the Los Angeles Times. "Eroding the Middle Class" is the familiar refrain. Just as predictably, the comments to the LA Times piece are dominated by anti-union sentiment, mixed in with anti-government rants, and sprinkled with sensible economic discussions.

There are two aspects of this that are problematic for BMW. First, eliminating middle-class US jobs that include benefits is tough to reconcile for a company that has been playing up its investment in America. Second, BMW is not a financially struggling company that is saddled with union contracts that threaten to break its back.  A press release dated July 7 stated the following:

"Based on the considerably improved outlook, the BMW Group now expects to achieve an even greater improvement in pre-tax earnings than originally predicted."

If a high-margin manufacturer like BMW decides that paying reasonable wages and benefits (reportedly $25/hour plus benefits) is too expensive, where does that leave the rest of the industry? The old "focusing on core competencies" argument is disingenuous. If that were the case, BMW would focus on product design and marketing and it would outsource all of its manufacturing and assembly work to third parties.

Companies cut costs where they can and that is to be expected. This country's anti-union bias is enabling the steady erosion of decently paying, manufacturing jobs. The US job market is becoming more stratified, possibly leading to a time when earning $50,000 or above is reserved for office workers with college degrees.

White House Floats 56.2-MPG CAFE Plan for 2025 - AutoObserver

via www.autoobserver.com

Yes, you read correctly. If the Environmental Protection Agency (EPA) and the National Traffic Highway Administration (NHTSA) get their way, the "average" car in 2025 will get 56.2 mpg. That sounds pretty good, if somewhat unrealistic.

In the US, the federal government regulates the efficiency of the fleet of vehicles each auto maker sells. On average, a manufacturer's fleet must meet certain fuel efficiency standards. This is called the Corporate Average Fuel Economy (CAFE). The key term here is average. Certainly, not every vehicle will have to attain 56.2 mpg in 2025. Some will be much less efficient, such as trucks, sports cars, SUVs, etc. That also means that some will have to be more efficient to bring up the average.

Currently, the Toyota Prius gets the highest combined fuel rating in the US, returning 48 miles of travel per gallon of gasoline consumed. That means, that the Toyota Prius will have to increase its fuel efficiency by 16.7% until 2025 just to be average. This sounds like a tall order.

Here is where it gets tricky. To make things more interesting, the numbers the EPA uses to calculate CAFE differ from those found on the window sticker. (For a detailed explanation about what is on those stickers, see my prior post). Apparently, per an AutoObserver analysis, these CAFE numbers equate to about 41 mpg combined on the window sticker. That's better and less alarmist.

Still, it's worth noting that hybrids currently only comprise about 5% of US auto sales. (It's also worth noting that the Toyota Prius accounts for 50% of those sales.)  That will have to change if these CAFE numbers are enacted. Will this usher in the golden era for diesel in the US? Probably not, but it won't be long before enthusiasts will try to make their case, mostly to each other. If the market demanded them, they would be for sale. Years of trying to educate the US market by  German manufacturers have shown little result.

On a personal level, the idea of legislating fuel efficiency strikes me as counter-productive. Why force manufacturers to build expensive and highly efficient vehicles that most consumers don't want. Instead, let's do the sensible thing and increase the price of fuel. High fuel costs will spur market demand for more efficient vehicles. It would also raise more tax money for public roads and reduce the regulatory burden on auto manufacturers.

Measuring Fuel Cost & Efficiency

Based on the gas guzzler tax, this should be a fun ride.

The old miles-per-gallon (mpg) measurement is losing its effectiveness. For one, environmental concerns are gaining in importance, and they key metric measuring environmental impact is not mpg but the amount of carbon emissions per distance travelled. In the US, that means CO₂g/mile. The common European measurement is CO₂ g/km. For another, the emergence of electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), hydrogen fuel cell vehicles (FCVs), and compressed natural gas vehicles (CNGs) makes comparing the cost of operating such a vehicle, and associated efficiency very difficult.

To provide consumers an easy way to make an informed buying decision, the EPA and DOT have created new fuel economy and environmental impact labels. The new labels will be mandatory staring with the 2013 model year. The most obvious change here is the addition of "environmental impact" as part of the sticker. The other major change is that there are now ten different types of labels.

• Gasoline Label
• Gasoline Vehicle with Gas Guzzler Tax
• Flexible Fuel Vehicle: Gasoline-Ethanol (E85) Without Driving Range
• Flexible Fuel Vehicle: Gasoline-Ethanol (E85) with Optional Driving Range
• Diesel Vehicle
• CNG
• PHEV (Series)
• PHEV (Blended)
• EV
• FCV

That should clear things up nicely.

All kidding aside, these new labels do provide much more granular information. Just as not all auto buyers are AutoTidbits readers, not all auto buyers understand or want to understand the technicalities underlying their new vehicles. To make things easier, the new labels provide two savings numbers that should help, an annual fuel cost estimate and an estimate of how much the vehicles consumers (in USD) compared to the average vehicle over a five-year span.

Perhaps more in spirit with the new labels, this car will have low operating costs.

 

Auto Manufacturers Bullying Auto Dealers?

The disconnect between auto manufacturers and auto dealers isn't getting any smaller. The manufacturers want dealers that sell what they make, ask few questions, and toe the line when it comes to branding and messaging. The dealers want products that bring in customers, heavy promotional spending, cheap financing and as few restrictions as possible. It's a business relationship aimed at making both parties successful. That doesn't mean that they have to like each other.

Ideally, each auto manufacturer would like to own its distribution channel, up to and including the dealership. That would afford them complete control over branding, messaging, and "the customer experience". When it comes to a brand, image is very important. That becomes even more important for luxury brands, regardless of industry. It's difficult to control that image when you don't control the actual interaction with the customer. A national advertising campaign can only go so far. Does that message get reinforced by the dealership experience? Does the local dealership personify the sophisticated and modern feel of the brand that most luxury brands rely on?

One way to prod local dealers into "compliance" with corporate branding is to encourage them to upgrade their buildings. It's tough to sell someone an $80,000 car from a facility with plastic chairs, stained tile ceilings and laminate floors. The customer experience is much different in any modern luxury dealership. These buildings are dominated by sleek glass, steel and concrete architecture. They offer their customers cappuccinos while lounging on modern leather furniture. Everything gleams and sparkles. The atmosphere exudes wealth and sophistication. Just the thing every Audi, BMW, Lexus, Porsche, etc. is looking for.

Image courtesy of Lance Mueller & Associates

Unfortunately, these palaces of capitalism are quite cost prohibitive, costing many millions of dollars. Naturally, dealers don't care for the practice of forced upgrades and are exercising their political clout in Colorado in an attempt to minimize the practice. House Bill 1188 was introduced to shift the power in the franchisor-franchisee relationship. As originally written, the bill would have "banned auto makers from requiring upgrades of $250,000 or more to dealerships more than once every 10 year" according to the Denver Business Journal.  Through successful lobbying on its part, the auto manufacturers have been able to reduce the dealer protection equations. 

Demand Based Pricing All the Rage

Demand based pricing has been the Holy Grail for marketers for some time. The idea is fairly simple. It's not new either. The concept aims to more accurately take the actual, local supply and demand atmosphere into account when pricing goods and services. This pricing scheme results in variable pricing for goods based on current demand. Put another way, things that used to cost a certain amount for all customers at all times would cost more or less, depending on the customer and the time of the transaction.

Much of this has existed for millennia and on the whole, we as a society accept this. For example, gas prices rise in the summer due to supply factors (summer formulations) and demand factors (holiday travelers). This is not new.

A new facet of this would be to add timing to the price mix. Perhaps gas is priced differently throughout the day and the week. As it stands currently, gas tends to be cheaper early in the week and during non-peak demand times. Frequent intra-day price changes tend to be used only by stations with electronic price boards.

We could add another pricing variable into the mix - buyer's urgency. This is the Holy Grail I mentioned earlier. Imagine a gas pump that could automatically analyze its customers and decide that it is vacation time, your car is fully loaded, you have an out-of-state license plate and that your tank is almost empty. How badly do you really want the gas?

Those aren't all achievable right now, but we could get there. The seller just needs more information. I was first introduced to the concept in college. A marketing article applied this concept to soda machines.  It would be quite simple to install a computer in the drink dispenser that would read the ambient temperature and adjust pricing accordingly. Somewhat more futuristic, but still not beyond the realm of possibility, would be the machine's ability to "guess" the potential purchaser's level of interest. This could be accomplished by infra-red heat monitoring and perhaps the sweat level of the buyer's fingers as he selects his drink.

Price gouging you say? Yes indeed. That is the basic purpose of demand based pricing. That and “aligning scarce resources and reducing inefficiency in the market.”  Sometimes we're ok with it and other times we are not. Increasing gas prices after a natural disaster could be perfectly legitimate or blatant profiteering.

Recent automotive related instances of demand based pricing include "congestion pricing". This is the plan in Dallas, where I-635 is being rebuilt. The system would include toll and non-toll lanes. According to the Texas Department of Transportation (TxDOT), the pricing on toll lanes "could vary with the level of congestion, time of day, occupancy or vehicle type."

Another recent demand based pricing scheme that caught citizens off guard affects those parking their vehicles in San Francisco. The San Francisco Municipal Transportation Agency will institute what it calls "demand-responsive pricing" in a two-year study. Sensors will feed data to apps and signs that guide drivers to open spots. The sensors also determine which parking spots areas are most appealing and increase the prices for those spots. The hourly parking fee can range from $.25 to $6.00 per hour.

Existing pricing and taxing schemes will likely change as more transaction related information becomes available. After all, we already have car insurance companies that install electronic readers in their customer’s vehicles to determine their insurance rate based on actual driving patterns. Stay tuned for more.

Italy's Return to the US Market

While attending the local Cars & Coffee this Saturday, I found myself speaking with the rep for a new, local Fiat dealership. Yes, Chrysler franchisees that want to sell the new Fiat 500 and any other Fiat for that matter are building separate dealerships.

The rep "let slip" that the Fiat dealership will also start selling Alfa Romeos in the near future. According to him, that would take place in late 2011. While the time-frame is unlikely, Fiat has confirmed the return of Alfa to our shores. Technically, Alfa has returned already since it's been selling the 8C supercar. I've seen one - once.

To support the mainstream market re-entry, Alfa is not relying on one of its existing vehicles. Instead, the company has debuted an all-new model at the 2011 Geneva Auto show, the 4C.

Courtesy: Alfa Romeo

It's certainly pretty and sporty. Perhaps that's what the company is going after. It's difficult to change customer perceptions. Entering the market after a 17 year absence gives the company a chance to completely re-position itself. Sport and sex-appeal may be a winning combination. Not exporting some of its lesser models makes sense as well.  While US enthusiasts love the idea of Alfa Romeo, that's mostly due to their design. In Europe, the enthusiasm for the brand is more tempered, due to reliability, handling and weight problems of its current models.

UAW Seeks International Alliances

Courtesy of United Auto Workers

In a confusing turn of events, the UAW is reaching out internationally in order to strengthen its domestic business.  The union appears to have a two-prong strategy.

First, it's attempting to unionize auto plants located in the South.  This has been a goal for some time.  Automakers have so far outmaneuvered the UAW's attempts to unionize its southern plants.  Key aspects of their winning strategy include the following:

• locating plants in economically depressed areas where well paying jobs are scarce and anti-union sentiment is high
• working closely with state lawmakers to resist any union-friendly legislation
• closely monitoring any organizing attempts
• suggesting that a successful union drive could cause plants to move

While not exemplary, compared to other companies and industries, these tactics are tame and perfectly legal.

To get around these obstacles, the UAW created the "Global Organizing Institute" which trains interns from Asian and European countries who have auto plants located in the South.  After six weeks of training, these interns are supposed to take what they learned and apply pressure to those companies in their home countries.  Presumably, they will argue that foreign (US) workers are treated worse than domestic (Asian and European) workers.

Cost is the number one reason for carmakers to locate plants abroad.  Those costs are multi-faceted and consist of foreign currency risk, regulatory costs, cost of input materials, plant and equipment  and the cost of labor.  Considering that companies such as BMW have had production facilities in the US for some time and no German autoworkers are at risk of losing their jobs because of that, I suspect this type of argument will not gain traction.

The second approach the UAW is taking is to create a global solidarity movement by forging close ties with autoworker unions in other countries.  The aim of this tactic has not been clearly explained. One paper, quoted Mr. Holifield, UAW vice president, saying the aim is to help "the companies that we all represent be that much more prosperous" and "to provide a forum that will aid in finding common ground." What does that mean? Perhaps it’s as simple as learning from the Italian unions just how exactly Chrysler and Fiat CEO Sergio Marchionne managed to reduce their bargaining power so the UAW doesn't suffer the same fate.