The CarGurus Blog

John McCain was never noted for being much of an economic analyst. During the 2008 election campaign he famously noted, to the delight of the press, that “the fundamentals of the American economy are strong.” Now the Senator predicts the demise of Chrysler.

“It was all about the unions. The unions didn’t want to have their very generous contracts renegotiated so we put $80 billion into both General Motors and Chrysler, and [if] anybody believes that Chrysler is going to survive, I’d like to meet them,” McCain told The Detroit News.

The Detroit News claims that McCain “clarified” his remark by saying that he meant “any objective observer.” Does he put himself in that category? Rep. Gary Peters, from Chrysler’s Auburn Hills district, has offered to meet with the Senator who, he said, was not only predicting the company’s failure but “rooting for it.”

Now, everyone knows that Chrysler is on the crux of success or failure, and nobody is happy that the government invested some $15 billion which may go down the tubes. But what is served here by another stupid McCain outburst of straight talk?

And then we have a piece today in AutoSpies which quotes the good ol’ boys at the National Taxpayers Union:

“Every time someone in your neighborhood drives home in a shiny new Chevy Silverado, remember that it cost American taxpayers more than $12,000,” said Pete Sepp, NTU Vice President for Policy and Communications. “Between this and GM’s plan to payback their bailout debt with other taxpayer funds, I wonder if all those Americans without work right now could think of any better ways to spend that money. This is a play out of the Bernie Madoff ponzi scheme playbook, and would be the equivalent of paying your Master Card bill with your Visa.”

Thomas D. Hopkins, Rochester Institute of Technology

Mr. Sepp’s comments were made a propos an NTU publication, “The Auto Bailout—A Taxpayer Quagmire,” by Thomas D. Hopkins, which laments the enormous cost of the bailouts, in particular the GMAC subsidy. Like all such critics, Mr. Hopkins doesn’t offer much of an alternative for the government’s actions last spring. He is right, however, about the need for an exit plan and real transparency. The rest of his piece is politics masquerading as economic analysis.

Mr. Sepp seems to say that the $12,000 should go to unemployed Americans rather than purchasers of new GM vehicles. I guess that means he prefers the dole to revitalizing an industry. The auto industry bailout is nobody’s success story, but that doesn’t mean one should hope for its failure.

I really can’t find any justification for Senator McCain’s remark. Can you?

—jgoods

Car Industry News, Car Minded, Car Politics, Domestic Cars, General Chat

2011 Chevrolet Aveo (perhaps)

General Motors released its third-quarter figures yesterday, and the way in which these were reported by the media is pretty interesting. Bloomberg headlined the fact that the company “generated $3.3 billion” in cash; the NY Times said, “G.M., Citing Progress, Reports Loss of $1.15 Billion”; and CNNMoney came out with, “GM to start repaying debt to U.S.” You pays your money and takes your choice.

Well, folks, I am surely no financial reporter, but some things are abundantly clear through the murk of all these numbers. First, these results, the first since the company came out of bankruptcy on July 10, are basically good news. GM’s third-quarter 2009 revenue was $28 billion, up $4.9 billion from the “old GM’s” previous quarter. Cash for Clunkers helped; so did strong sales in China and Brazil.

And the company did start paying back its government loans five years before due. One must note, however, that the anticipated payment of $1 billion to the Treasury and $192 million to the Canadian and Ontario governments is “only a fraction of the $50 billion in help GM received from U.S. taxpayers since the end of 2008,” according to CNNMoney.

At the same time, losses continued overall (down 25 percent) though at a reduced rate. And the company will burn through some $8.3 billion next quarter on debt repayments, restructuring, etc., so the financial serendipity won’t likely continue. GM predicts U.S. SAAR (seasonally adjusted annual rate) as 11-12 million for 2010, which seems to me overly optimistic, to say the least. But U.S. car sales across the board in October were finally out of the red for the first time since 2007.

As if to thumb its nose at GM, competitor Ford reported a third-quarter profit of almost $1billion, along with an improved market share. Anyhow, Fritz Henderson et al. have some reason to be happy.

Do you think GM’s “improvement” will continue? They have tough numbers to face—and tough odds as well.

—jgoods

Car Industry News, Car Minded, Car Politics, Domestic Cars, General Chat

We know how you much you gurus love tax increases, especially when it comes to activities that impinge on cherished freedoms like driving your high-powered, high-consumption Camaros and Mustangs. Well, get ready to pay more for those freedoms, because higher gas taxes are coming. It’s inevitable, because gas has been artificially low for many years – pegged, if you will – and the time to pay the piper is almost here.

There are two reasons for this—the country’s short-term and long-term needs. First is the necessity for federal highway funding. The system has been short-changed for a long time, and the condition of the country’s roads, bridges, and tunnels is scandalous. The present 18.4-cents-per-gallon gas tax is inadequate to fund even present maintenance levels. Sen. Richard Durbin (D, Ill.) has put the handwriting on the wall. A new highway bill will be adopted, possibly by spring of next year. Somebody has to pay for it.

States like West Virginia are considering imposing their own gas taxes, as their infrastructure crumbles. With the economy stumbling and people driving less, gas tax revenues have declined everywhere. Plus, revenues get reduced as more fuel-efficient vehicles take to the road.

Which leads to the other, equally powerful, long-term exigency: The government must support in some fashion the electrification of the car industry and the infrastructure to serve it—or that brave new world simply won’t happen. There has been much written on how federal government should or should not fund industrial policy, but without it you can kiss oil independence and a clean environment goodbye.

A lengthy, interesting, and mostly convincing article in Inc. explains how the Chevy Volt (unskinned, above) and other EVs represent “connected vehicles,” cars built on a principle of networked systems requiring a new way of conceiving and building automobiles. Vertical integration, the industry’s traditional pyramid approach, is fast disappearing.

Today, however, car companies look less like pyramids and more like hubs and spokes connecting product teams: teams networked across the globe to one another and to myriad suppliers, a little like open-source software designers.

Makers of EVs will not only require new components, both hardware and software, but will need to face the enormous challenges of developing energy distribution and the grid. At the same time, there is and will be an explosion of great business opportunities. The future belongs to those who can network these new opportunities.

The auto industry will never again be a land of giants like GM but a landscape of small-business innovators. And it will be the government’s business to encourage and support these efforts at the outset. Funds will come from your pocket, once again, and higher gas taxes (in some form) are surely in your future.

Are you ready to pay higher gas taxes next year? Why or why not?

—jgoods

Car Industry News, Car Minded, Car Politics, Domestic Cars, Gas for your car..., General Chat, Green Updates, Hybrid Cars

2010 Opel Astra

GM has reneged on a deal that was almost closed, choosing not to sell Opel/Vauxhall and leaving the Germans angry. The latest chapter in this complicated story came after a Tuesday GM board meeting in Detroit that put forward the new corporate strategy. The company has pledged to pay back about €1.1 billion in bridge loans from German sources.

GM’s move is a setback for Magna, the prospective buyer, and the German government, which reacted predictably, and the German unions, which have offered to strike. As we last reported, the decision comes on the heels of European Union officials questioning the deal and workers in Opel factories in other countries protesting possible job cuts.

The decision came about because the company’s fortunes have been recently improving. European sales across the board are better, and GM’s U.S. sales were up 4 percent last month—no great shakes but the first increase in 21 months. (Ford saw a 3 percent increase; Chrysler a 30 percent decline.) Also, as one commentator said,

GM decided they just couldn’t envision a future without their German subsidiary, which provides most of their presence in Europe and is the main source of their fuel-efficient global vehicle platforms.

The company desperately needs these platforms and needs to be part of the global playing field. Restructuring Opel will cost some $4.4 billion—less, the board figured, than they would have had to pay out under the Magna deal, even with help from Germany.

The case for the renege also rested on keeping the company’s Insignia and Astra cars away from the competition in Russia (Magna’s interest was financed by a Russian bank). But GM is in no way out of the woods. Paul Horrell of Top Gear put it this way:

GM needs to have a solidly profitable European arm. So difficult days await the 55,000 workers in Britain and the rest of Europe, because factories will have to be shut to make sure that Opel and Vauxhall have a cost base that’s realistic for the number of cars they can sell. And more political battles will affect the result.

Despite the furor the decision has caused and will cause, I think it makes sense for GM to keep Opel. What do you think?

—jgoods

Car Industry News, Car Minded, Car Politics, Foreign Cars, General Chat

We learned today that GMAC has been looking for a third round of bailout money from the Treasury—and they may have gotten it. The latest news is that the company has just put $2.9 billion of junk bonds (rated by Moody’s “two notches above default”) on the market. However, these bonds are backed by the Federal Deposit Insurance Corporation, thus giving them a triple-A rating. And because of the FDIC backup, these bonds will sell!

This is but the latest in a series of sand-bagging moves on the part of the Feds to make the levee hold. GMAC Financial Services, the lending arm for both GM and Chrysler dealers and customers, is really the lifeline for these companies. The government has already put $12.5 billion (35 percent ownership) into GMAC, which may have become a bottomless pit. Here are the problems, as I interpret them out of one messy situation:

1. The company was made a bank earlier this year so that it could gain access to the FDIC’s loan guarantee program, the one being used for the new bonds issued today. As a bank, it failed the government’s stress test and couldn’t raise investor capital, posting a $3.9 billion second-quarter loss. Treasury concluded “it needed to raise $11.5 billion more in capital by mid-November.”

2. GMAC also operates a mortgage lending business, Residential Capital, which has experienced enormous losses in the housing market. Its commercial successor, Capmark Financial, just filed for bankruptcy. Most of the second-quarter losses came from real estate. GMAC also has an online banking company, Ally Banking (formerly GMAC Bank), which has come under fire for offering very high rates for deposits, since they’re guaranteed by the Feds!

3. These financial tie-ins to the struggling car business and the disastrous real-estate loans are bound to result in collapse—unless Treasury keeps pouring money in. Since GMAC is now the primary financing source for both GM and Chrysler, dealers for Chrysler are in particularly big trouble, according to Freep.

Chrysler Financial, which Treasury has demanded go out of business by the end of 2011, is asserting its first-lien rights on loans to Chrysler dealers. At the same time GMAC, due to its capital shortfall, has asked those same dealers to pay additional collateral on the vehicles they order from Chrysler Group. Many of those dealers borrowed $10 million or more to expand their showrooms, and can’t sell the property for anywhere near what they owe Chrysler Financial.

The true reason for this revolving bailout is that, in a credit economy, somebody has to front the money to buy cars. The banks aren’t doing it, consumers aren’t doing it, so you the taxpayer will have to do it. The craziness is that taxpayers are lending money to themselves in hopes that the industry will finally earn a profit to pay them back.

Is the spiral endless? Are we in a financial Catch-22? Lay your thoughts on us in a comment.

—jgoods

Car Industry News, Car Minded, Car Politics, Domestic Cars, General Chat

Call it a triple play for Ford.

The Wall Street Journal reports that Ford is on the cusp of turning a profit while market share is rising and resale values improve.

Doesn’t get much better than that in the car world, does it?

The WSJ says,

Another positive sign could come in a report expected to be released soon by auto guide Kelly Blue Book. Two Ford vehicles will appear on the list of 2010 model-year vehicles projected to retain the greatest amount of their original retail price after five years of ownership, said a person familiar with the matter. Last year, no Ford car or truck held a spot on the 2009 model-year list.

Naturally this has PR flacks at Ford in the mood to pat themselves on the back and promote the WSJ article on the company’s Facebook page. But Ford’s work is only just beginning. In fact, this article on BNET says it’s too early to jump on the Ford bandwagon:

So far so good in my opinion, but where I continue to be skeptical is whether Ford can keep it up, unless overall demand recovers more than it has.

Plus, I’m skeptical because I keep reading that consumers are supposedly rewarding Ford for not going bankrupt and taking a government bailout, or conversely that consumers are avoiding Chrysler and GM for the opposite reason.

Whatever the reasons for Ford’s success, consumers are flocking to the company’s vehicles while GM and Chrysler seriously struggle. But good things are on the horizon for both those companies, too. Fiat’s influence will bring a European flair to Chrysler, while GM continues to promise its vehicles are as good as or better than anything else on the market.

The bankruptcy memories will fade into the distant past, and then we’ll have a clearer image of which company’s vehicles are the bigger hit with consumers.

This news, though, from Automobile Magazine, could keep GM’s bankruptcy memories fresh a while longer:

Consulting firm AP Services charged the old General Motors, otherwise known as Motors Liquidation Co., $23 million for three months of work as the company prepared and filed for bankruptcy. The article says,

To finish such a large restructuring in only three months, AP Services had a team of 153 people working on GM’s bankruptcy case. Some team members charged up to $835 an hour in June when the whole company was in bankruptcy. In July, however, the team’s hourly rates dropped as creditors and government officials complained there would not be enough money to cover all the claims. Al Koch, head of AP Services and was GM’s chief restructuring officer [sic], alone made over $455,000 in the three-month period.

One guy made almost a half-million bucks from GM in three months because of the bankruptcy? Wow. Maybe there is a clear reason why folks are flocking to Ford.

Is Ford succeeding because of its vehicle quality, or because GM and Chrysler went bankrupt? Which company would you rather buy from?

-tgriffith

Car Industry News, Car Magazines, Car Minded, Car Politics, Domestic Cars, General Chat

Carmakers sold nearly 17 million cars and light trucks in the U.S. in 2005. As of September 2009, reported figures are 9.2 million.

If you think sales are ever going to come back to that earlier level, I’ve got a used Pontiac Aztek I’d like to sell you. Americans are buying fewer cars for a number of potent reasons, and the NY Times recently traced some of these: Younger buyers have less cash, older buyers are moving back to the city; all groups seem to be downsizing (in both vehicle size and number of cars per family); environmental concerns are growing; and, not insignificantly, the emotional charge of buying/owning/driving a car seems definitely on the wane. These trends, I think, are only going to continue.

For manufacturers, it’s the most difficult of times. How are they going to anticipate demand in such a fluid environment? Figure out what kind of vehicles to build? Determine whether, as the Times said, they are in the car business or the transportation business—and not end up like the cigarette companies?

Comes the government into the picture, and many are still trying to figure out whether it is savior to the auto industry or inoculator of a new form of social disease. For many Americans, the man of the hour is Kenneth R. Feinberg, the Treasury’s pay czar. He told reporters Wednesday that there would be big, big cuts in cash and stock compensation for execs at the seven companies—including AIG, Citigroup, Bank of America, GM and Chrysler—that have together received a total of $300 billion in taxpayer (TARP) funds. Details, particularly concerning the auto firms, are here, and a lot of people are cheering, even though it is still generally business as usual on Wall Street.

To get some handle on where things are headed, it’s necessary to know how we as a nation got here. Steven Rattner, who headed the Obama auto task force, has written for Fortune a short history of how his team came to terms with the crisis that unfolded last winter in the industry. It is fascinating reading and offers a few unforgettable insights into the key players, like Rick Wagoner and the President himself, as they reacted to the course of events.

Both GM and Chrysler, says Rattner, were in a state of denial.

At GM’s Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).

This isn’t Michael Moore-type commentary, since most of it has to do with the financial rescue and the decisions that led to it. For car gurus, this should be required reading.

If GM, Chrysler and Ford (not to mention the transplants) are facing much-lowered expectations, how will they execute in the coming years? Do you see major successes or failures ahead?

—jgoods

Car Industry News, Car Minded, Car Politics, Domestic Cars, General Chat

Volvo S60 Concept

Both Ford and GM are experiencing problems selling off their foreign carmakers—Volvo and Opel, respectively. One of the reasons is concern about intellectual property.

For 10 months, Bloomberg reports, Ford and Geely (China’s largest car company) have been trying to finalize the transfer of Volvo, but they’re stuck over whether and how Geely will assure Ford that its technology and new-model blueprints will be kept secret. As we all know, some in China have little regard for patents and intellectual property rights.

Fueling this fire is the October 14 arrest of former Ford engineer Xiang Dong Yu, accused of stealing over 4,000 Ford documents in order to get himself a job with a Shanghai auto firm.

Because Volvo is “completely integrated into Ford’s product development,” said one analyst that Bloomberg quoted, selling it is “like selling a room on your house. You can’t separate it easily.” Back in July, General Motors rejected an offer to buy Opel because a Chinese company couldn’t provide design and technology safeguards to its liking.

Opel Astra, Frankfurt 2009

And there are still snags to the Opel-Magna deal being worked on in Germany. Last week it looked like the European Union and its Competition Commissioner were pressuring GM to reconsider its sale to Magna. The €4.5 billion in state aid offered by Germany to promote the sale appeared to them to be, well, a bribe—or maybe we should say “an improper inducement.” But today, the Commission backed down, saying they would not oppose a sale. They just want to be sure all the rules are followed. Mmm, right.

GM’s troubles aren’t over yet. Spanish Opel workers have just turned down Magna’s latest offer and scheduled a four-day strike. It’s about job cuts, of course.

If Hummer finally went out the front door to China, Opel is having a very tough time making it through the various political minefields set up by the Europeans.

Is it right for the EU to insert itself in a deal between a U.S. corporation and a Canadian-Russian combine for a German car company? Let us have your opinion, please.

—jgoods

Car Industry News, Car Minded, Car Politics, Foreign Cars, General Chat

For the auto industry, the economics of going green will be very costly indeed, and the costs will come in areas that have hardly been looked at so far. The obvious big-bucks expenses will be in retooling, converting production, developing new-fuels infrastructure, and reinventing dealerships—not to mention the marketing-education efforts required to convert buyers to efficient cars.

I haven’t found much worthwhile analysis of any of these things. We seem to be too busy promoting newer, bigger, more powerful cars. In other words, conducting business as usual.

But as government intervenes (properly or not) to create standards and promote greenness, other even less-noticed costs—sometimes hidden, sometimes not—will be added. The Detroit News has written recently about how newly evolving state and federal standards will change vehicle design and add cost—lots of cost—in order to achieve worthwhile environmental goals.

The paper came down hard on the California Air Resources Board for its “cool cars” rules that require new windows for cars by 2014 to keep out 45 percent of the sun’s energy, thus requiring less air conditioning and less fuel. One problem is that the proposed metal oxide coating interferes with cell phone and GPS use, along with “ankle bracelets for parolees,” of which there are plenty in California.

The initial standard will cost $111 over the life of a vehicle; the 2016 standard will add $250 to the cost of each vehicle. California says it will take five to 12 years for consumers to recoup the costs from reduced gasoline use.

The good part is that by 2020, the Board predicts 700,000 metric tons of CO2 will not be put in the air. That’s the equivalent of taking 140,000 cars off the road for a year. Regarding the communications problem, the Board says let ‘em use antennas.

The new federal fuel standard is going to cause even more problems but, again, with big benefits down the road. Expect lots of opposition from the auto industry. The detnews.com’s first paragraph makes it pretty clear where they stand:

The Obama administration’s proposed standards for fuel efficiency and tailpipe emissions will raise vehicle price tags by more than $1,000, depress sales by 58,000 and cost more than 5,000 auto industry jobs in 2012, a government analysis said Tuesday.

However, the EPA tells us that fleet standards of 34.1 mpg will be required by 2016, tailpipe emission standards will be fixed for the first time, 950 million fewer metric tons of greenhouse crap will not go into our air, and car owners will save some $3,000 in fuel per vehicle. The big number: $60 billion over five years for the industry to implement these regs.

EPA thinks that the plan

will eventually boost auto sales by 65,480 vehicles through 2016 and add 5,795 auto jobs because [of] stronger consumer demand for fuel-efficient models—especially if fuel prices rise. The agency acknowledged, however, that “the possibility exists that there may be permanent sales losses” because consumers may keep vehicles longer as a result of higher prices.

The jury, of course, is still out, and the industry will have its chance to comment (and soften) the proposals. But you can bet they will be enacted in something like their present form. The problem is, as with the healthcare legislation being proposed, nobody can offer a clear, convincing analysis of the cost/benefit equation. We just don’t know enough.

So it seems to be a question of which side has the more compelling case: controlling big costs in the short run or gambling that the long-run benefits have to be worth it. Where do you come down?

—jgoods

Car Industry News, Car Minded, Car Politics, Domestic Cars, Gas for your car..., General Chat, Green Updates

Hummer is now an import brand

During GM’s bankruptcy hearings, the company estimated it’s iconic Hummer brand to be worth somewhere in the ballpark of $500 million.

According to the latest estimates, China’s Sichuan Tengzhong Heavy Industrial Machinery Co. will acquire the brand for about $150 million, though official financial terms have not been released.

GM’s press release says the Chinese company gets “ownership of the Hummer brand, trademark and tradenames, as well as specific intellectual property license rights necessary for the manufacture of Hummer vehicles.” The buyer also gets access to the existing dealer network.

Considering all that, the price is a relative bargain; even when Hummer’s free-falling sales numbers are taken into account.

The press release goes on to say,

Under the agreement, HUMMER would contract vehicle manufacturing, key components and business services from GM during a defined transitional time period. For example, GM’s Shreveport assembly plant would continue to contract assemble the H3 and H3T and AM General’s Mishawaka assembly plant will continue to assemble the H2. Both facilities will produce the specified vehicles until June 2011, with an optional one year extension until June 2012. The deal is expected to secure more than 3,000 jobs in the U.S. related to the sale and manufacturing of HUMMER vehicles.

So far, the sale looks like good news for fans of the Hummer brand and for the Americans who build and sell them. (Though I’m sure Saturn and Pontiac people are shaking their collective heads in disbelief.)

Yang Yi, Chief Executive Officer of Tengzhong, said this about his company’s acquisition:

We are excited about some of the initiatives already underway at HUMMER that we believe our investment will be able to accelerate, particularly related to the creation of the next generation of more fuel-efficient vehicles to meet not only future regulations but also customer expectations.

While I would have rather seen the Pontiac brand saved, it looks like the Hummer brand has a real chance at surviving well into the future; if it isn’t driven directly off a cliff by its new owners.

Can Hummer succeed in America under foreign ownership? Is the sale smart or should the brand have been left to die?

-tgriffith

Car Industry News, Car Minded, Car Politics, Domestic Cars, Foreign Cars, General Chat, Trucks & SUVs