Used Cars Trending Upwards

With many customers still having trouble getting loans for new cars, lower-priced used cars are increasingly popular. For dealers, that means used-car revenue is up. And, in many cases, so are profits.

CarMax Inc., the nation’s largest seller of used cars with 103 superstores, said it’s hiring for 1,200 store positions across the country. While part of that is for seasonal staffing, it’s also part of a broader expansion. The news comes days after AutoNation, the largest seller of new cars with 251 new vehicle franchises, said it’s moving more aggressively into the used car business. AutoNation has opened 16 Value Vehicle outlets, and six more are expected to open by next spring. These stores stock reconditioned used cars that it previously would have sold at auctions.

AutoNation’s recent third-quarter results show why: Used car revenue this year is up 26%. For new cars, sales are up a comparable 18%. Take a look at the latest quarterly profit comparisons, too: CarMax reported a gross profit per used car of $2,205 this year, while AutoNation reported a gross profit per new vehicle of only $1,994.

I believe new car manufacturers should definitely take note: The business case for used cars is looking more attractive to customers and dealers these days. Overall, this can be a positive and a negative for the automotive industry and might influence manufacturers to consider selling many of their vehicles to large business for fleet use as they will be worth more when sold as used later on down the road.


Morgan Duff

http://www.freep.com/article/20101103/BLOG40/101103033/1210/BUSINESS01/Automakers-beware-Used-cars-are-showing-their-value

Tata Motors' Nano isn't Very Safe

The car industry is one of the more globalized industries. GM and Toyota, among others, build cars on every continent (minus Antarctica, obviously). Automakers are always trying to gain the upper hand in the Chinese market, which is basically the biggest market for car sales since the U.S. has slowed its appetite for autos because of the recession.

India, you would think, might be pretty big too, since it is the second most populous nation on earth. However, you would be wrong. Unlike China, there aren't a whole lot of middle-class or upper-class citizens and poverty is widespread. So while a Buick might sell well in Beijing, this is not the case in India.

India's own Tata Motors began selling the Nano throughout its domestic market in March of 2009. Now, they are having safety issues:

Tata Motors Ltd. (TTM), maker of the Nano, said Wednesday it will offer buyers of the world's cheapest car additional safety equipment free of cost and clarified it won't recall any of the units.

The Press Trust of India earlier in the day reported that the company, India's largest auto maker by sales, will recall some units of the minicar to add safety features, citing Tata Motors' managing director for India operations, P. M. Telang.

"We have decided to make the car even more robust. We will do this by providing additional protection in the exhaust system and the electrical system," the auto maker said.

"These actions don't constitute a recall."

Some customers in India have reported incidences of the minicar catching fire. But after investigating in May, Tata Motors said that there aren't any manufacturing defects and that such episodes have been because of the installation of additional electrical equipment or due to some material on the exhaust system.

Why does this matter?

This incident illustrates are very important fact about the world auto industry. Standard in Western Europe, North American, and Australia are much more strict than those in China, India, Russia, and Africa. This poses a very serious challenge for auto makers as they attempt to expand their global reach. For companies used to strict safety standards, they must adapt their vehicles to sell in poorer markets. Safety features are expensive, so U.S. and European automakers must adapt to compete in poorer parts of the world were safety isn't a big concern.

Automakers in less-developed countries must spend a lot of money on safety feature research to compete in areas with stricter controls.

Other than the quote from the article, this has been my opinion based on what I have read and learned about the auto industry throughout the world.

Obsessed? So is America. But where's our customer service??

It is commonly known that people and automobiles eventually become attached to each other. The purchased car begins to grow on the owner and it is inevitable that the owner has sentimental feelings for a piece of metal and plastic. However, is it that strange? Like our homes, cars are expensive. Cars are chosen with great thought before a decision is made because owners realize that much like a home, the majority of their income will be devoted to payments for the car. It is not always the case that owners make the smartest decisions as to which car they choose. This inconsistency is further supported by the hundreds of jobs available for car reposessers in Washington, DC alone (http://www.careerjet.com/repo-jobs.html). Nevertheless, the saying "home sweet home" has a strong correlation in terms of the veneration and importance that a car means to its owner. Some call it love while others call it insanity, but the incredible amount of devotion owners invest into their cars supports the statement that America is a nation of car enthusiasts. After all in 2007, there were over 254.4 million registered vehicles in the U.S., according to a depart of transportaion study. Considering there are currently an estimated 310,673,613 million people in America, that means over 50% of the United States population owns vehicles and that is just 60 million shy of the population (http://www.census.gov/main/www/popclock.html).

While reading the Wall Street Journal, I came upon a question and answer section regarding car problems that an ordinary person might have. Problems consisted of a dying battery, the decision to purchase a new car for a new baby and advice as to whether the owner should dump his beloved Jaguar. These are normal problems, at least in America, but the logic to the solutions some of these owners created were anything but conventional. The owner with battery problems reasoned, " I just unscrew the dial to disconnect the battery at night and it no longer discharges" (Welsh, "Cars: Me & My Car"). The owner had figured out that if he disconnected his 12 volt battery during the night, the battery would not end up being "dead" in the morning. The solution was certainly creative, and I was more than impressed by the ingenuity. Nonetheless, I am left wondering what I would have personally done in that situation. Would I have risked every night opening my car hood and then delicately proceed to disconnect the wires from the battery with the knowledge that one slip up could send my whole entire to body into electrical shock? Probably not. Americans have for decades been inventing novel methods to sustain the life of their beloved automobile. I remember watching the movie Matilda where the father proceeded to circulate saw dust through the engine manifold to reduce the amount of miles on the odometer. Media and exposure to cars then produces this perception and almost reality that everywhere an American turns their head, there is a conversation or commercial about cars. It is almost seems compulsory to our behavior and adds to the notion that Americans are not only defined by an inherent desire to gourge their faces with food and develop diabetes, but also incorporate cars and the automobile into their daily lives. The final question in the article for the Q&A was whether an owner should dump his Jaguar for a new vehicle. This particular owner purchased his Jaguar in '98 and the odometer reads over 160,000 (Welsh, "Cars: Me & My Car"). Most cars usually require an increasing amount of attention and service after 100,000 miles, but the owner in question here has kept his vehicle for over a decade and has outrageously surpassed the 100,000 mile life span of a car. Now, you might be wondering why this is such an important topic and that is because every car that my family has owned no matter how well it is taken car of has not lasted more than 120,000 miles. The figures clearly indicate this owner is taking great care of vehicle and may even be obsessed. However, be it obsession or love, the important fact about both cases of owners is the attention auto makers in the U.S. should heed to this trend. As a prospective car buyer, besides speed, technological innovations and safety features, I would like to know whether the car company cares about me, the owner. Our capitalistic society dictates the companies care more about profit than people, but I would rather purchase a vehicle that has been desgined for the car buyers in mind. This leads to the greatest and personally what I think of as the most important facet of car companies, customer service. No matter how much auto makers innovate and update their factories to reduce the number of employees that work their, the increasing number of machines and computers that take over the work force directly correlates to the increasing number of customers the company inevitably garners from sales. It is a contradictory relation since auto makers are trying to reduce the human factor in their factories to stream line operation while increasing their customer base. So I am finally left with one thought and that is since factories are bringing about the extinction of car factory workers, shouldn't they begin focusing on customer satisfaction and service more than developing a new seat to reduce back strain? Tell me what you think.

http://proquest.umi.com/pqdweb?index=1&did=2175009941&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1289403375&clientId=31806
http://www.careerjet.com/repo-jobs.html
http://www.census.gov/main/www/popclock.html

Interesting Video

Germany Does Well In China

BMW announced surprising third-quarter profits which has been attributed to strong sales in China. In fact, all German luxury brands are doing well in the country. Audi seems to be first and attracts the older, government official crowd while BMW is capturing the hearts of young people in the country.

BMW, Audi and Mercedes-Benz have been heavily investing in the Chinese market. To avoid import taxes, the have built their own factories within the country. The three have also designed specific models for the Chinese market. Apparently, Chinese businesspeople like to be chauffeured around and have been demanding cars with more legroom in the back. Special versions of cars like the 5 series and E class have been lengthened for more room in the back. These only-to-China models look slightly odd with their rear doors considerably longer than the forward doors. This type of lengthening is known as “long wheelbase” within the industry.

However, the German luxury giants have a long way to go to win the Chinese market. So far this year BMW sold 102,916 units in China but sold 176,736 units in the US. Don’t forget that the US is still in bad economic times and has a lot more luxury options than in the Chinese market. While sales in China are not bad for these luxury cars, I don’t think they should be an indicator in the Chinese market. I would place my bet on mainstream cars selling the best in China. China’s wealthy may be buying a few 5 series but the real money is to be made with the growing middle class. The people who are moving up from a motorbike or even a bicycle to a car are the consumers guiding the industry.


http://blogs.wsj.com/scene/2010/11/03/bmw-in-china-its-paid-in-full-in-cash/

http://www.bloomberg.com/news/2010-11-03/toyota-s-lexus-widens-u-s-luxury-sales-lead-over-mercedes-bmw.html

GM (Government Motors)

Since the company's bailout in 2008, GM has quietly been referred to as "Government Motors". However comical, this nickname actually has serious implications regarding not only how GM has operated for the past two years, but also how GM will be taken public with an Initial Public Offering taking place on November 17. One of the most controversial aspects is the ability of sovereign wealth funds, like in the Middle East and China, to purchase extensive holdings in GM. The Obama administration and its financial advisers understand the political sensitivity of the situation, but in the end decided to allow access to large foreign investors.

However, I believe it may not be so much the question of whether foreign wealth funds should have the ability to buy GM stock, but whether these entities should be given what could be large and immediate profits when U.S. citizens, those who theoretically provided the billions in taxes to keep GM afloat, will not enjoy such access.

This sensitive situation involving one of our nation's oldest and most iconic companies further illustrates the importance of the midterm elections that have just finished up. With a conservative and economically concerned congress, the likelihood of gridlock between Obama's plans and theirs is certainly increased. Who knows what lies in the fate of one of our nation's icons.

Morgan Duff
http://www.reuters.com/article/idUSTRE6A04RG20101101?pageNumber=1

Two Big GM Stories

This week I stumbled on two big stories about GM. First, GM has decided for sure how many dealers to keep. At one point they were gutting much of their dealer network, but they have now settled on 4,500 dealers. From Fox Business:

General Motors will move forward with 4,500 dealers after the automaker, under pressure from Congress angry with j

ob losses, reversed planned closures of more than 800 franchises, the company said Monday.

GM finalized dealership closures and franchise reinstatements over the weekend, one of the final pieces of business to be checked off before beginning its presentation to investors this week on its proposed share sale.

The public offering is designed to return GM to public markets and shake off the government's controlling ownership.

The U.S. Treasury obtained a nearly 61% stake in GM in return for $50 billion in taxpayer Bailout and bankruptcy financing in 2009.

The automaker said it intended to stick with the decision to terminate 1,233 dealerships as of Sunday following months of arbitration and despite continued pressure from lawmakers, including an Ohio delegation that includes House Republican Leader John Boehner, to keep more small businesses open in a struggling economy.

I think that, while it is good for GM to be saving jobs, this move is financially bad for them long-term. No company should be pressured by Congress on how to act, except in instances with already existing regulations. This is one of the big pitfalls of the governments 61% stake in GM. Un-American things start to happen.

However, GM will look good for saving jobs, yet I expect them to further shave down the dealer network once they are free of the federal government's coercive control.

As the Fox Business piece mentions, GM is going to be issuing an IPO very soon. Here's a story from the WSJ:

The U.S. will cut its ownership stake in General Motors Co. below the symbolically important 50% to about 35% when the car maker relists its stock later this month, according to new figures the company plans to disclose Tuesday, but it will be tough for the government to break even on its investment.

Neal Boudette discusses GM's IPO plans, which will raise up to $10 billion and cut the government's stake to below 50%.

The new projections by GM say the company could have a stock-market value at the start of trading of $50 billion—about the same as the solidly profitable Ford Motor Co.—and that it could be as high as $60 billion, said people familiar with the plan.

But for the U.S. to break even through sales of the rest of its stake, the share price may need to rise more than 60% from its initial level, to about $50.

The initial public offering plan envisions the shares would be priced at $26 to $29 each, these people said. The actual price of the stock to be sold in the IPO would be set about Nov. 17, and the sale would take place the following day.

Through the IPO, GM plans to sell 24% of its total shares, or about $10 billion worth, based on the midrange of the share-price estimate.

Ultimately, this IPO will be very good for all parties, in my opinion, because it will pay back the government and will loosen the government's grasp on GM. GM will also be a great investment because they are still in the top three globally for car sales, but now they have much less debt and dead weight since going through bankruptcy. Moving forward, GM is a company to keep a close eye on. Lots of great new products will be coming out soon, so I expect sales, profits, and the stock price to increase in the near future.