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Wednesday, November 23, 2016

Why BEVs Won't Be Disruptive

Mike Smitka, Torino Italy

In 2030 I expect that Toyota, VW and GM will remain the top 3 global automotive producers (though not necessarily in that order). The flip side is that neither vehicle electrification nor autonomy nor Mobility 2.0 businesses will prove disruptive.

...Disruptive Technologies? Not in Automotive!...

Each of these purported threats have their own challenges as technologies and businesses. That is for other blog posts. All three however have a common feature: new technologies roll out slowly, and in the auto industry they roll out very slowly. Even with rapid commercialization, in 2030 only 1 in 10 vehicles on the road will be BEVs (battery electric vehicles).

New technology adoption and diffusion follows a logistics process: slow early on, then accelerating, and slow again towards peak. That is true in theory: few are willing to chance adopting a technology when no one they know has done so. Similarly, towards the peak those who have yet to adopt a technology have refrained not because (or not only because) they are obstinate but due to idiosyncratic circumstances. This is a robust empirical finding, dating back to Zvi Griliches' classic 1957 study of hybrid corn. Commercial hybrids were first developed in 1923. While half of Iowa farmers used such seeds by 1938, farmers in regions where corn was less widely planted continued to sow non-hybrid cultivars until the 1960s.

Automotive technologies are no different. Initial costs of a new technology will be high, while performance will still have room to improve. Historically many technologies appeared first as an option on luxury cars. If the uptake was good, one or more firms might make it a standard feature. As the volume rose, suppliers would reduce the price point, and OEMs would migrate it to high-volume products.

Feasible BEV Rollout Scenario

Year

Global new vehicle output

BEV share

BEV share vehicles on road

2020

100

1%

0%

2021

103

1%

0%

2022

106

2%

0%

2023

109

2%

1%

2024

113

3%

1%

2025

116

5%

1%

2030

134

41%

11%

2035

156

77%

35%

2040

181

81%

55%

This process is thus constrained by the commercialization process, by the standard "learning curve" and economies of scale effects, and by the time needed for the supply chain to add new capacity. It is also constrained by the new model development process, because it is highly unusual for a feature to be introduced in the middle of a model year. So the use of new technologies can only expand as models are redesigned, which for standard sedans is done a rolling 4-year cycle. That puts a limit on the pace of adoption. Furthermore, it may only be possible to introduce a radical technology with a new platform; those are developed on a rolling 6-10 year cycle. Drivetrains are also redesigned less often. And heavy trucks may not be fundamentally redesigned for as much as 20-30 years. (One major brand uses an H-frame first introduced in the 1960s, before the advent of the steel and aluminum alloys that are widespread in the passenger car market.)

[The bulk of the engineering for a standard passenger vehicle model takes place over roughly a 12-month period, with a smaller advance team working on model specifications at the front end of the process, and at the tail end a smaller team seeing the design through to SOP (the start of production). The full process thus spans 18-24s months. The rolling development cycle is thus due to staffing constraints in the development process, and the desire of the marketing and dealership end to have a steady stream of new models, but not a flood of them.]

In the past, even rapid rollouts of technology in the automotive space, such as when there is a "hard" regulatory deadline, has required over a decade. The fastest example of which I'm aware is the replacement of carburetors by technically superior fuel injectors, the latter necessary to meet emissions requirements. They had been used intermittently in racing from the 1950s, and began to appear on low-volume luxury cars in Europe in the 1970s. However, they were complex and costly mechanical contraptions. That changed with the introduction of microprocessor engine control units (ECUs), which also made fuel injectors much more effective. The first Motorola ECU was launched in 1980, and by 1990 GM had converted the last of its engines to the new technology. At the firm level, the rollout was over one decade, but for the industry as a whole it follows a logistics curve. Pulling off this fast introduction required huge investment. To facilitate the fast pace and not be hostage to Motorola, GM invested in its own semiconductor manufacturing operation; for a time it was the fourth largest chip maker in the world.

...15 years from now BEVs will still account for less than half of production. That's hardly disruptive!...

So what does it look like if you combine industry specifics with a logistics curve? First, by 2020 global production will be 100 million vehicles, and slowly increasing. Globally there will be perhaps 1 billion vehicles in operation, with 8% scrapped in a given year (at which rate the average vehicle on the road will be 11.5 years old). Finally, because large vehicles are unlikely to be BEVs, it's sensible to assume diffusion peaks at 80% of the market. You can read the numbers for yourself.

This is an excerpt from one section of a paper on new vehicle technologies that I presented this will at the "Toronto-Torino Conference" organized by the Munk School of Global Affairs at the University of Toronto, Collegio Carlo Alberto, and Politecnico di Torino. Along with wonderful food and wine, the conference also included a tour of the Torino assembly plant of Maserati.

Wednesday, November 16, 2016

Premature Panic over Bonds


It's anyone's guess at this point what the incoming Administration will do. [I'm guilty, having indulged in speculation on trade policy and the auto industry in my previous post.] So why should each and every change in the economy be viewed as a reaction to Trump? Well, I suppose it's easier than thinking.

...don't blame Trump – yet...

According to headlines, bond prices have crashed over the past couple days. First, is that really the case? Second, there are many reasons for interest rates to change that have nothing to do with the election. If we look at the first graph, we do see a spike in yields over the past week. But rates constantly bump around, and remain within the range we've see over the past 12 months. Second, if we look at what the slope of the yield curve implies for what 1-year Treasuries will look like down the road, we're almost exactly where we were a year ago. That in turn is very little different from where we were two years ago.

We should remember that employment data suggest the economy continues to improve. At 152 million [Oct 2016] the level is 13 million higher than the 139 million of November 2010. In addition, the number working involuntary short hours fell by 2 million, and now is back to more-or-less normal numbers. That's 15 million new or improved jobs. Slack remains, but since monetary policy can take 18 months to have an impact – and a 25 basis point hike to 0.50% won't have much! – we should expect rates to rise sooner rather than later.

So don't blame Trump. Yet.

Monday, November 14, 2016

Autos, Trade and Jobs: Chaos Looms

One of the things that appears to motivate Trump supporters is a desire for better jobs. They will be disappointed: trading part-time work at Walmart for sewing garments in a sweatshop is not what they have in mind. If he really does clamp down on trade – one of the few economic tools he has without going to Congress – the results will be counterproductive. The impact on the auto industry could be worse.

...campaign nostrums do not good automotive policy make...

Creating jobs is not easy. Getting legislation through Congress takes time, and hiring isn't immediate. If Trump wants quick action before midterm elections, then it's to trade policy that he will turn, as he can impose emergency trade restrictions without waiting for Congress. That will be yuuuge, it will be decisive. It will give the U.S. an upper hand in negotiations. Or at least that's been Trump's historic mindset.

...we would lose the jobs for our $45 billion in annual automotive exports to Mexico and China...

That would also be in accord with his campaign rhetoric, with its focus on manufacturing and trade. But in fact trade isn't the issue, it's productivity. The gradual increase in the efficiency of our factories over the past half century means that we are turning out more goods with fewer workers. Indeed, some estimates suggest global manufacturing jobs are in decline. Manufacturing jobs are in any case a small slice of our economy. A small number tweaked remains a small number. As a politician though Trump's experience is limited to the virtual Twitter universe, not the real world. So such facts aren't likely to matter to him.

Back to trade. There are sectors where automation is limited, with productivity is little higher than a century ago. Garment production is one; in the automotive sector, wire harnesses are another. Those are the jobs that have moved overseas, in line with the analytic approach developed two centuries ago by another wheeler-and-dealer turned politician, David Ricardo. Anyway, higher tariffs can indeed lead to more of those sorts of jobs, albeit only as a response to rises in prices for clothing sufficient to make production here profitable. Being priced out of shopping for clothing at Walmart is not part of the the mythical golden age of the 1950s and 1960s that his supporters have in mind. Nor, to repeat my opening claim, is sweatshop labor.

For the auto industry, however, low-wage labor is not central, it is intraindustry trade. Ricardo's view of specialization based on wages is not the main story. If it was, the rich world would not be engaging in trade with itself. In fact finished vehicle trade with the rich world – Australia, Europe, Japan and South Korea – is 72% of the US total, while 74% of parts exports – $45 billion in Jan-Sep 2016 – are to Canada and Mexico. Much specialization is within product niches, rather than in labor-intensive versus capital-intensive goods. We value variety, while production still benefits from economics of scale. As an example, BMW turns out the X-series in South Carolina, exporting 70% of output, while the other models for the US market are imported from Germany. Without such efficiency-enhancing specialization and associated intraindustry trade, consumers in the US and Europe would face a smaller and more expensive array of product choices. Indeed, that was the motivation behind the formation of the US-Canada Auto Pact of 1965, our first free trade arrangement with Canada, which paved the way for the 1988 Canada-US Free Trade Agreement, and in turn to NAFTA in 1994.

Back to Trump. If he wants quick action on "jobs," then trade policy it is. Trump is not one for nuance, and developing fine-grained policy also takes time. We are looking at broad-brush, across-the-board tariff increases. In a globally integrated auto industry, that would prove highly disruptive.

On the intraindustry trade front, we already have tariffs of 25% on trucks, which has proven sufficient to effectively eliminate imports of such products from outside NAFTA. Tariffs of 35% would be prohibitive, starving dealerships of product in a scattershot manner, and killing the jobs associated with our $35 billion in automotive exports to Mexico and China. [Again, Jan-Sep 2016 data.]

Not all parts production is intraindustry in nature; about half of our imports are from Mexico, China and other lower-wage countries. Of course a 35% tariff would lead to sharply higher prices for items such as wire harnesses, for which there is virtually no production capacity inside the US. (The cost of adds up: a “loaded” vehicle can have 2 miles of copper to power and control 10 airbags, seats, infotainment systems, and computer-controlled drivetrains.) But tariffs will hit the parts sector in a scattershot manner, driving up costs and throwing investment and sourcing plans into disarray. Car companies operate on a 4-year product cycle and an 8-10 planning cycle. Managing sharp changes will be a nightmare.

Border policy also matters to the industry, and that has remained part of Trump's post-election rhetoric. Just-in-time production means assembly plants are critically dependent on the uninterrupted the physical movement of goods across the Canadian and Mexican borders. It is easy to paint a scenario under which the auto industry incurs major collateral damage from quick-draw, shoot-from-the-hip policy.

...whatever the putative long-run regulatory and tax benefits of a Trump administration, the immediately impact will be harmful and chaotic...

There is one gray lining in these black clouds: we live in a world of flexible exchange rates. The dollar has already strengthened significantly agains the Mexican peso, which is down from ₱18.5 to (as I write) ₱21, a 12% drop in a few days (and 21% from November 2015). This will offset some of the financial impact of higher tariffs, but in an uneven manner.

Campaign nostrums do not good policy make. The net impact of higher tariffs will be higher prices, and lower real wages for the working class, and less consumption across the US as a whole. Lower consumption means it will be a job-destroying policy, not a job-creating one. Whatever the putative long-run benefits to the auto industry from relaxed regulation and lower taxes, the immediate impact will be both harmful and chaotic.

Thursday, November 3, 2016

The Problem with Electric Vehicles: They're Cannibals

Mike Smitka

I'm working on a paper for a conference in Torino on disrupters in the auto industry. Contrary to most, I'm not convinced that battery electric vehicles (BEVs), autonomous vehicles or "Mobility 2.0" business models will be disrupters. That's not because I believe these technologies are unworkable. Indeed, I expect BEVs will one day dominate. I define "disrupter" narrowly. I argue (but not here) that existing car companies will dominate, so that the transition will only be disruptive for the portion of the supply chain devoted to fuel delivery and engine components. That's not a small footprint. Even there the impact won't be disruptive, because BEVs will diffuse slowly.

we should look to 2030 for BEVs to go mainstream

The market for hybrids is an example to which we need to pay heed. None of the full hybrids has sold well – with the exception of the Toyota Prius, to which I return below. That is true whether they are in the form of a Chevy Volt with a range extender, or a "traditional" hybrid such as the Honda Accord. As the name suggests, hybrids have two complete drivetrains that must be made to work together. That's not clean engineering, and it adds cost – hybrid vehicles are inevitably priced $3,000 or more higher than comparable regular vehicles. If someone drives 15,000 miles a year, then at $4 per gallon the fuel savings come to only about 125-150 gallons or $500-$600 per year. So unless they are subsidized, either by the government or through rebates by the manufacturer, then for most people a hybrid is not a good value proposition.

Subsidies aren't hypothetical, but in NAFTA, the EU or China, each with 20+ million sales, it's easy to exaggerate their potential. Initial pilot projects have largely run out – those in China, only just expanded to cover hybrids and not just BEVs, are set to expire in 2020. Governments (Congress in the US) rationally aren't eager to spend money to make hybrids a competitive option: at $2000 per vehicle (not $3,000 – lower fuel costs have some benefit!) and 10% of the NAFTA fleet, the requisite subsidies would come to $4 billion per year. That's not going to happen, not in the U.S., not in China.

The key point is that not only did hybrids not succeed, they will not succeed because the cost differential is fundamental to the technology: a downsized internal combustion engine (ICE) costs almost as much as a larger one, while batteries, power controls and electric motor can only add cost. The bottom line is that we have good evidence that when it comes to fuel efficiency, consumers won't buy vehicles unless there's a value proposition.

The exception is the Prius. After a slow couple years, it became the car for the Academy Awards. Was it an economy car that someone would buy because of the savings? No, as per above, there were none. And it was not an economy car; when I last checked it came in 5 trim levels, but don't try to find a base Level I vehicle! Instead it was a trendy statement of environmental concerns, bought at the fully loaded Level V. For that a Honda Accord Hybrid provides no benefits, as it's visually indistinguishable from the regular gas-guzzling version. [I have notes in my office and will fill in names/dates later.]

BEVs face the same challenge as hybrids. They also face a moving target. Over the past 20 years carmakers have added turbochargers, electric steering and other motor-driven functions that eliminate the cost, weight and parasitic losses of always-on hydraulic systems. Start/stop alternators are now diffusing, vastly improving the efficiency penalty of in-city and rush-hour driving. As 42V systems roll out, alternator-motors will be beefed up to provide power boosts at cruising speed and capture power through regenerative braking. Add in better combustion control, and ICEs have another 15 years of efficiency gains ahead of them, and likely more. Even though batteries are falling in price, BEVs will remain niche products.

BEVs are helped today by direct subsidies in China and elsewhere (a $7500 tax benefit in the U.S.). Those face the political-budgetary limits noted above. More important are indirect subsidies as "compliance vehicles," most obvious under California's zero-emission mandate. (The California Air Resources Board is a de facto global standard setter, as the state's 2.1 million unit market is too large to ignore.) That indirect subsidy may expand: as the US moves closer to implementing its 54.5 mpg fuel standard – with parallel measures in other major markets, including China – it may be in the interest of OEMs to expand the number of BEVs they sell, to offset the sales of larger non-compliant vehicles, even if consumers are not immediately interested.

Every BEV sold will mean an ICE that is not sold. How will this cannibalization play out? With the easing of the fleet-wide US fuel economy standards of the original CAFE mandate, companies no longer need to offset fat-margin light trucks with sales of small cars. That is, the latter can now be sold – or not sold! – on a stand-alone commercial basis, as long as each vehicle doesn't overflow it's footprint-based bucket. Money-losing BEVs will thus replace the sales of positive-margin vehicles. The larger the BEV, the bigger the gap: margins in general increase with vehicle size, but the bigger the battery pack, the greater the cost penalty of BEVs.

In other words, until battery prices fall enough to make them cost-competitive with comparable ICE vehicles, each BEV sold will lower OEM profits. That is, as stand-alone products BEVs have to be able to generate the same gross margin as the vehicles that they replace in consumers' garages. My educated guess is that batteries won't reach that break-even point for a full decade. Worse, if those battery systems involve new chemistries, instead of representing incremental improvements on today's lithium-ion cells, the validation and vehicle redesign process could easily add another 5 years. By then the global market may approach 140 million units, so a lot of battery capacity has to be added.

Diffusion will be speeded if driving habits co-evolve: small commuter vehicles with modest range incur a smaller cost penalty at any battery price. They don't sell today. I believe that too will change, but I expect that to be a function of cumulative exposure – it will be an "experience good" in economic terms. Hence my choice above of the term "co-evolve." So my expectation is that we should look to 2030 for BEVs to go mainstream. Only then will a car company* dare to offer at least one core model with only electric drivetrain as options.

* Boutique players such as Tesla are irrelevant to the industry as whole. New entrants must hurdle barriers that today's big players have already overcome, and face little or no advantages in technology. However attractive their product, they simply can't grow fast enough to make a dent in the global market.

Monday, October 24, 2016

Is Brexit a Risk to US Growth?

mike smitka

I made a short presentation as a component of board education for a local bank. The president was curious about Brexit, so I used that as a point of departure. What follows are thumbnails of slides; I add several at the end that (as expected) I did not get to during my talk.

First, I began by emphasizing that there is no business cycle, as emphasized in a previous posting on this blog. By chance in the immediate aftermath of WWII the US had 3 recessions with similar timing, but that's not happened since. Just because we've gone 7 years without a recession doesn't mean that one is more likely in the next year. Furthermore, the apparent causes vary, so predicting on the basis of past recessions is pointless. Now once a recession has begun, then certain changes occur – but those can also arise without a recession being underway. So it is possible to calculate recession probabilities, but those are weak and at best provide information on the next several quarters.

Still, we can think about potential threats. Is Brexit one? A quick look at recent data suggest "no". The pound has depreciated by about 25% and because the UK is relatively "open" – trade is about 1/3rd of GDP – that will result in some uptick in consumer prices. But so far that's been modest (from 0% inflation to 1% inflation). Meanwhile, unemployment is falling, not rising, and there's no evidence so far of a slump in GDP growth. Meanwhile, interest rates remain at zero. No surprise there, that's been true of the developed world thanks to the Great Recession, and the stalwart refusal of most countries to use fiscal policy.

Even if British growth does slow, that has only a modest impact on us, the US, because the UK is a modest part of the global economy, at a bit under 3%. Now if problems there hurt the remainder of the EU, then that starts to change – the EU is bigger than the US, but it's still only about 1/6th of the world economy. If we are worried about flash points, then we really need to look at the rest of the world because growth in the developed has been slower than elsewhere. NAFTA comes to only about 20% of the world economy; add in the EU and Japan and the developed countries are now less than half of the global economy. That's good news, the more the better for everyone. But we need to pay attention to China. No more on that here

Meanwhile NAFTA as a whole is doing relatively well, with the IMF projecting 2017 growth in all three member countries at over 2%, higher than the UK or any of the larger continental economies.

We do however need to set concerns about the future in context. Due to demographics, growth in the US will not hit 4%, no matter what politicians do. The baby boomers are retiring, and so we have very low labor force growth. While we still have slack, we are now – at long last – approaching historic levels of labor utilization. Indeed, I'm slightly hopeful that with the numbers of those working involuntary short hours is now close to historic levels more of demand will serve to pull those prime-aged Americans who dropped out in 2008-9 back into the labor force. So we can continue to grow at 2% for a couple years, but then things will slow, independent of whether the Fed raises interest rates.

The graphs below present several snippets. The first is the "broad" measure of unemployment (the black line, U-6) relative to the "headline" level in green. It's still high, but at least close to the level of the better time periods since 1994. (Consistent data aren't available before then.) Second, we can see the loss and now addition of jobs, all relative to my calculation of the number of additional jobs needed to keep up with population growth, net of "boomer" retirement. The third graph is a variant on the second one, looking at jobs relative to my attempt to calculation a "normal" baseline. Finally, there's age-specific participation, which continues to be well below normal – if we extend back before 2007, these curves are all flat. (That does hide other dynamics, such as a drop male participation prior to 2007 that is offset by a rise in female participation.) This graph suggests that we have further to go until full recovery – I'm hopeful of end-2017, but project participation and it's 2019.

Now the Rockbridge Virginia region is not average; we depend more on retirement and tourism, and construction. The bad news is that for the nation as a whole housing starts have been falling relative to the population for the past 50 years. We may not see an uptick at the national level. But the good news is that the CoreLogic data on mortgages shows the share with negative or near-negative equity has fallen from almost half of all homes to a quarter. Most of that has been due to the drop of those with negative equity, either because over time the combination of higher housing prices and the repayment of loan principle has pulled them into the 80%-100% loan-to-value bracket, or because due to foreclosures there are now new owners. Since as a small bank you do hold some mortgages on your books, that is reassuring, and it's even better that net homeowner equity has risen by over $4 trillion since the start of 2013.

What happens locally is however more a function of whether retirees in nearby urban areas can sell their houses and buy a new one here. House prices in the mid-Atlantic region aren't uniformly above the bubble peak of late 2006, but Charlotte and Atlanta are close or positive, and the Washington DC area looks pretty good relative to much of the country. You can find all that data on FRED. Finally, my work is on the auto industry, and car (or more accurately) light truck sales are strong, but that does imply you should not expect much upside. With only one dealership left in the county car loans may not be a big part of your portfolio, but don't look at them to grow except as you increase market share. Production is strong, too, despite the bad-mouthing of NAFTA. The plants of Lear and Dana are long gone, so that's less relevant, but it is consistent with the picture of sales near their peak, reinforced by sales per person working back around 0.14 (scaled by 1,000).

Finally, what of interest rates? We should not expect the Fed to raise them quickly, or far. For the past 25 years interest rates have been falling. Some is that for the US as a whole inflation has fallen, and expectations seem to have gradually factored that in as a permanent change. Ditto in the major trading partners with whom we're linked financially, several of whom are actually experiencing mild deflation. In addition, it seems that despite all the hype around Silicon Valley, investors aren't expecting growth to pick up, either. Long-term interest rates are at 3.5%. We should take that with a dose of salt, as they've seldom been a good predictor of things 20 years hence. But if we return to 2% inflation, that means those in the bond market are factoring in growth of at most 1.5% (we surely need to deduct a risk premium, in which case growth and/or inflation must be lower).

Now I didn't include yield differentials. Those are quite volatile – the yield curve moves around a lot – and are neither high nor low today. So if the profits of a bank come from using short-term borrowing (including deposits) to fund longer-term loans, there's nothing to indicate conditions today are unusual. Have me back in a year and I can likely talk about the empirical evidence of interest rate normalization...

October 20, 2016

Friday, October 7, 2016

Jobs Update in 3 Graphs


The long, slow recovery continues. First, participation by prime-age workers continues its increase, as does that of those aged 20-24. These demographics bore almost all of the job losses in the Great Recession – I don't include it, but older worker employment actually rose, the "boomers" didn't retire the way their parents did. The same story shows up if we look at the gap between my calculation of expected levels of employment, given boomer retirement, and current levels. Indeed, the number of workers on short hours is now back to historic levels, good news as any strengthening on the demand side will be more likely to turn into new jobs rather than an increase in hours for those currently working.

Now the main focus of this blog is on the automotive industry. While it should not be surprising, given the likely peak in new vehicle sales, the rise in manufacturing employment has slowed if not stopped. But manufacturing jobs are affected by the continuing increase in productivity over the past 20 years. Fifteen years ago automotive manufacturing accounted for a full 1.0% of all jobs in the US. Now that level is peaking at 0.6%. Now the industry has added many software jobs, and will continue to do so to support new safety technologies and infotainment functions.

These data do not capture such employment. Our statistical systems were set up when manufacturing and construction were keys areas of employment, while healthcare and other services accounted for relatively modest shares. Bringing our data systems into the 21st century will require boosting the budgets of our statistical agencies. From the standpoint of the overall budget that expenditure would not even constitute spare change. However crucial such data are to business planning, there is no "business" lobby on Capitol Hill that can speak to such issues, and instead these agencies face budget cuts. It is not just physical infrastructure that is deteriorating, it is also some of the other hidden areas that our economy depends upon that need to be improved.

Monday, October 3, 2016

Domestic Automotive Jobs: NOT the Sept Monthly Sales Report!

Domestic Vehicle Production
Domestic Industry Revenue

The domestic US auto industry has by two metrics finally recovered from the Great Recession. The first two graphs present total industry output in unit terms and in revenue (deflated by the producer price index for motor vehicles and parts). Both are at the highest in 40 years. The industry has never surpassed the boom that immediately preceded the First Oil Crisis.

I remember that era well. As a college student in the summer of 1973 I worked at Chrysler Mack Stamping. Monday-Friday I worked 10 hour days, and to that added two 12-hour shifts on the weekends. For my 74 hours, between "regular" overtime and double time on Sundays I earned 96 hours pay. Anyway, it may be just as well that we've yet to repeat that level, as the boom (which coincided with booms in Japan and Europe) helped give rise to high inflation and the First Oil Crisis.


However, the level of manufacturing employment remains well below peak, as shown in the graph below. But that reflects productivity improvements: relative to 40 years ago, we need 40% few workers to produce the same number of vehicles. That's the graph at the bottom.

In every industry with which I'm familiar [the possible exception is garment production], over time manufacturing labor productivity consistently outstrips demand. Auto manufacturing jobs aren't going to return, ever. But the same is true for manufacturing jobs more generally. Now this shouldn't be surprising. Our population has more than doubled since 1945, but we today need only 30% as many farmers to feed us whiling generating a substantial surplus for export.

Oh, and China is undergoing the same transition: farmers are increasingly redundant, while factories are shedding workers as the economy moves away from labor-intensive goods.


Domestic Industry Employment
Domestic Auto Manufacturing Labor Productivity

Saturday, October 1, 2016

Who Owns the Cars? The Billion Dollar Problem with Autonomous Taxis

Written by Maryann Keller, Principal at Maryann Keller & Associates
reposted with permission from a September 12, 2016 post on LinkedIn

The Uber business model is brilliant: private citizens use their own cars as taxis and Uber takes a piece of the fare for arranging the ride via the Smartphone Uber app. Uber avoids vehicle depreciation that piles up with miles driven, maintenance expenses (that can include damage done by passengers), and insurance. Although Uber now leases some cars to its drivers, essentially the company has been built on an asset-light balance sheet that has enabled it to avoid the messiness of buying, maintaining, and disposing of vast numbers of vehicles.

But how will that work with driverless autonomous cars that eliminate the people who are currently shouldering the responsibility for the majority of vehicles in Uber’s, Lyft’s and similar providers’ fleets? Even if these companies can avoid the inconvenience and investment of vehicle assembly, they, or another entity, would still have to own and maintain their fleets.

Having spent twelve years as a Board Member of Dollar Thrifty, the car rental company, I am well aware of the capital and operational investments required to manage a fleet of a hundred thousand or more vehicles. And those needs don't change even when the cars are driverless. In fact, the car rental model approximates what ride-sharing on a large scale requires. (For the moment we won’t consider the issue of why a rental company would take on the costs on behalf of the “app” company when they could probably build their own similar app.)

Cars, whether autonomous or not, cost a lot of money which has to be paid to the manufacturer before they go into a fleet. A small fleet of 100,000 vehicles at $40,000 per unit amounts to $4 billion that would have to be paid by some entity.

Dealers and private individuals purchase essentially all “out of service” rental vehicles which still offer many years of useful life. But who is the buyer for a used autonomous car that was probably designed specifically for the ride share company? There isn’t much demand for “out of service” taxis so we would have to assume that autonomous cars stay in service until they come to a mechanical endpoint.

The next issue would be maintenance. There is a myth among some tech geeks that electric cars don’t need service. Tesla has demonstrated that in fact they need maintenance. Despite all the sensors and millions of lines of code and a large battery, they still have wheels and tires, brakes and other mechanical parts and fluids that require replacement or adjustment. And the moment you put people into a car, even one devoid of controls that passengers can mess with, things will happen.

That’s why rental car companies are so diligent in assessing and charging for new damage done to the vehicle whether it’s the Starbucks coffee spilled on the seat or the new door ding from a runaway luggage cart. Before any car is re-rented, it is washed and checked and all cars in a rental fleet are always monitored for scheduled maintenance at the rental company’s service area. In today’s Uber world, that’s all taken care of by the driver as an owner/operator. But in a driverless world that means a depot of some kind where the cars are marshaled, serviced and cleaned which in turn requires land, personnel, equipment, and associated expenses. Even if this was outsourced, it is still a cost that has to be factored into the profit model of the ride share company.

So far, the autonomous car advocates have focused on whiz-bang technology and the ability to summon transportation with a tap on the app. But the economics of autonomous cars might limit their appeal only to major metro areas, like Manhattan, where the monthly rent for a garage space would pay the mortgage on a nice home in other parts of New York State. They are, after all, cars that have to be acquired, serviced, repaired, insured and depreciated thereby transforming the asset light balance sheet of an app company into something more akin to that of a rental car business.

Wednesday, September 28, 2016

How TrueCar and other Third Party Auto Retail Vendors Work

by David Ruggles

How do the third party vendors like TrueCar, and the others, actually work? It’s really quite simple. The auto buying Consumer belongs to retail Auto Dealers. They have the money invested in inventory. They have substantial investment in facilities. The third party vendors spend large amounts of money to “hijack” those auto buying Consumers and take them “hostage.” They then “ransom” them back to the Dealers for a sizable chunk of change. In the case of TrueCar the “ransom” is about $400. on a new vehicle and $300. on pre-owned. That money is reinvested by the vendor and used to “hijack” and “ransom” even more car buying Consumers. They are able to “hijack” these Consumers by pretending to protect them from the Auto Dealers, as if the Consumers are helpless sheep. These vendors don’t lead their message to Consumers with the fact that they raise the cost of the Dealer’s sale, and the Consumer’s purchase price, by the “ransom” amount. How many consumers would knowingly pay an upfront fee to these vendors?

The ultimate customers of these third party vendors are the Dealers. That’s where their revenue is derived. Most Dealers understand what’s going on and aren’t happy about it. A large number of them, however, have capitulated. Others use the third party vendor strategy in their favor without paying for it. For example, a TrueCar customer can come to a Dealership that isn’t a TC Dealer. That Dealer can go to the TC site and use the information provided there as a closing tool to negotiate the deal with the Consumer. Because the non-TC Dealer’s cost doesn’t include the “ransom fee,” the Consumer potentially gets an even better price while the dealer makes additional profit if they split the unpaid “ransom fee.” The Consumer becomes a higher value owner to that Dealer.

All Dealers have advertising and marketing budgets. These third party vendors would like everyone to believe that their fee would be spent in other areas of advertising rather than adding to the cost of individual the vehicles sold to Consumers the vendor took “hostage.” The vendors insist that their services allow dealers to target their marketing efforts better, thereby providing savings. The fact of the matter is that Dealer advertising budgets have done nothing but rise since the proliferation of third party vendors came into being. The Internet has spawned so many “leads” that Dealers are now struggling to figure out how to “weight” them, to distinguish leads in terms of “likelihood to purchase.” Despite the fact that TrueCar has yet to make a profit, despite reaching a Dealer saturation point that they used to claim would make them money, many third party vendors DO make money. They make enough money that there is about to be a flood of new major players enter the field.

In particular, enter Amazon Vehicles, with pockets deeper than any of the existing players. They will potentially have the budget to do almost anything they want. Indeed, they can afford to fritter away a lot of money figuring things out. Relative to stand-alone players they can lose money for an extended period of time, in a market where profits are already diluted, all the while using their competitors as “pricing cover.” Dealers could call a halt to all of this by just saying no, but while a few may hold back, enough will participate because they just don't get it, and their rivals down the street will join to make sure they don't gain an advantage. So collectively they won’t say no. There will be further consolidation in this business as players with really deep pockets enter the fray. In the meantime, neither Consumers nor Dealers will be well served.

Tuesday, September 27, 2016

Do the "Jobs" Arithmetic: Trump Calls for 19 million Immigrants

mike smitka

In the first presidential candidate debate Donald Trump proposed creating 25 million jobs. Now currently 152 million people are employed in the US, out of a potential labor force of 156 million. Yes, we're short – by 4 million jobs. Now because of baby boomer retirements and lower birth rates over the past 20 years, the size of the potential labor force will rise to only 158 million by February 2021. So while he could oversee an economy that creates 6 million additional jobs, the only way to add 25 million new jobs would be to bring in 19 million working-age adults from outside the US. Yes, Trump must be pro-immigration.

...Trump can only add 25 mil jobs by bringing in 19 mil immigrants...

There are other, less palatable alternatives, such as instituting a draft of all 22 million youth of high-school age. Since relatively few of them work or have family responsibilities, that could get him to the 25 million level.

So let's assume instead that he's not engaged in sophistry but is instead being sophisticated. That is, he's arguing about GROSS job creation, not net new jobs. In 2016, on a monthly basis about 5 million people leave their jobs, voluntarily or otherwise, and 5.1-5.2 million people are hired, in what to those individuals are new jobs. Then all Mr. Trump proposes is 5 months hires at the normal rate. Using this metric, over 4 years he needs to create not 25 million but 250 million jobs.

Now does everything Secretary Clinton has said on the economy during her decades of public life make sense? Unlikely! We all spout nonsense on occasion. But she does have staff, listens to them, and mainly gets things right. Once Trump proposes actual policies, I'll look at her proposals. But so far all he has are sound bites that don't add up.