Tesla’s Model 3 Is A Challenge That Has Only Just Begun

Here we are now, entertain us

Way back in 2006, Tesla Motors CEO Elon Musk laid out his vision for his electric-car company in a blog post promising that its six-figure luxury cars would be succeeded by increasingly affordable vehicles. Ten years later, it’s here in the form of the Model 3.

Musk described the vehicle at its unveiling in California on Thursday night as “the final step in the master plan, which is a mass-market, affordable car.” Already, 115,000 people have plunked down $1,000 deposits to order the car two years before it’s available.

Public enthusiasm and anticipation are once again being driven up to levels the rest of the auto industry could only hope to generate.

Beyond the hype there are a number of warning signs that indicate this intense excitement may ultimately lead to disappointment and even Tesla’s ruin.

Read more at The Daily Beast

Is China Merging Its “First” and “Second” Auto Works Into A Car Kaiju?

Preparing for the storm?

Preparing for the storm?

Consolidation has been the law of the auto industry ever since Ford’s assembly lines unlocked the brutal logic of scale, but fears that the US and Chinese markets may be cooling have automakers even more anxious to grab quick growth by merging. Last week, Fiat Chrysler Automobiles CEO Sergio Marchionne gave voice to the industry’s building anxiety by all but apologizing for his industry’s low rate of return on capital and threatening to explore mergers with Silicon Valley firms if no automaker wanted to acquire it. Marchionne’s position may be more desperate than some of his better-established competitors, but his basic logic is resounding across the auto industry.
When trading in shares of the Chinese automakers First Auto Works and Dongfeng (known until 1992 as “Second Auto Works”) were halted this week, the market’s initial read was that a merger between two of China’s biggest automakers was in the works. Dongfeng issued a swift denial of any merger plans but the Chinese state council shook up leadership at the two state-owned automakers, replacing the chairman at each with a man who had previously served at the other. With its automakers outmatched even in their home market, China appears to be pushing two of its “big four” manufacturers closer in hopes of creating a national champion with the scale to take on the global majors.

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Who’s Afraid Of Direct Sales?

This is how you don't change a business... (courtesy: Opensecrets.org)

This is how you don’t change a business… (courtesy: Opensecrets.org)

In my most recent post at Bloomberg View, I draw a connection between Michigan’s new law blocking Tesla’s direct-sales model and the interests of the automakers based there. General Motors has taken the lead among Michigan’s automakers in opposing Tesla’s state-by-state battle for direct sales, publicly pushing Governors to protect the franchise system in Ohio and now in Michigan. In both cases, GM positioned itself as defender of “an even playing field” in the car business rather than arguing against direct sales or defending the franchise model. As I point out in the column, this is nothing short of absurd: GM’s extraordinary bailout make it the auto industry’s least-qualified advocate for fair play. But it’s also strangely telling: GM may not want Tesla to sell directly to consumers in states where it has a franchise dealer network, but it is hardly settled on the issue of direct sales themselves.

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US Market Peak Heralds A New, Nervous Normal

Where do we go from here?

Where do we go from here?

After a five years of strong recovery in the US auto market, the jitters are coming back. Even with September sales posting nine percent growth year-over-year, the market’s nervousness with automaker equities is unmistakable. Ford’s stock has taken the most dramatic beating in recent days, but shares of all the big NYSE-listed US-market players are showing increased volatility and steady-to-sharp downward pressure. Even Nissan’s 19% sales boost in September, one of the month’s strongest performances, has been rewarded with a sell-off.

So what gives?

Though every automaker has its own story, the general nervousness around autos is largely explained by the fact that the US auto market has reached its pre-recession volume, and there’s little reason to think it has much further to go. Seasonally-adjusted sales have exceeded 16 million units for the last six months, even reaching as high as 17.5 million units in August, and a quick look at the market’s historical performance shows that growth above these levels doesn’t tend to last long.
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Subprime Auto Fights Back



Concerns that the recovery in US auto demand is overly dependent on unsustainable credit expansion have been around for some time, but are enjoying new popularity in the wake of Department of Justice subpoenas of  GM Financial and Santander. In response to the rash of headlines and commentary on “the subprime auto bubble,” Fed analysts and auto credit firms are moving to tamp down fears that auto lending is the latest Wall Street timebomb.

Four analysts at the NY Fed’s Liberty Street Economics blog linked to a provocative NY Times investigation into subprime auto lending, asking “what has all the fuss been about?” The analysts argue that although subprime auto lending growth has been substantial that “growth has been most pronounced among the riskier groups, which also experienced the most severe contraction during the credit crunch of 2007-09.”” They conclude: “the increase in prime auto lending over the same period makes the relative increase in the subprime share less pronounced.” 

More recently, the credit bureau Equifax piled on, issuing an “Economic Trends Commentary” white paper entitled “Not Yesterday’s Subprime Auto Loan” [PDF]. The paper opens:

There has been a great deal of attention recently on the topic of auto lending, with a particular focus on “subprime lending.” The tone of many of the articles on subprime lending is negative. Many are chastising lenders and investors for “subprime shenanigans,” suggesting that, similar to the mortgage issues that precipitated the financial crisis, there is a bubble being created that is ready to burst. Others criticize the often high interest rates that borrowers with subprime credit must pay to obtain financing and feel that the practice is unfair and that rates should be capped.

Surprisingly little data has been shared in the press. Many of the arguments have been rhetorical, based on the following premise: Subprime lending caused the financial crisis, ergo subprime lending is dangerous. This generalization, however, does not always account for actual subprime loan data.

This is an easy argument to make; clearly subprime lending is not intrinsically bad, nor does it inevitably lead to a repeat of the 2008 mortgage meltdown. But the way Equifax characterizes the argument against subprime lending smacks of strawman. Attacking the most simplistic critiques of subprime lending is a good way to avoid the real problems, and Equifax joins the Liberty Street bloggers in focusing far too narrowly on the problem. The key to auto credit expansion has not been simply that subprime has grown, but that leases and term length has grown as well. As I noted at Bloomberg View recently, the auto market has to be looked at as a whole:

With half of new car sales supported either by leases or subprime credit, and ballooning loan terms leaving an increasing number of new car buyers underwater on their trade-ins, it’s clear that auto demand is hardly at a sustainable, organic level. 

The question to ask is not “are an economy-wrecking number of car loans about to go bad?” but rather “how sustainable can auto demand be under these conditions?”  What the more far-sighted auto executives, like Honda’s John Mendel, understand is that the negative effects of over-reliance on credit will hurt automakers themselves the most. Mendel tells Automotive News that a suite of unsustainable tactics are being used and that Honda wants no part:

“It’s a very, very short-term tactic, especially in the subprime area, because you not only are pulling sales forward, you’re probably pulling people out of used cars into a new car that maybe they can’t afford…. In addition to a heavy reliance on fleet sales to boost volumes, we are seeing some of our competitors adopt short-term tactics to stoke sales, like big jumps in subprime lending and 72-month terms. We have no desire to go there.”

Mendel’s warning echoes the Liberty Street bloggers, who point out that auto “captive lenders” have been responsible for most subprime auto lending both before and after the financial crisis.

“in the recovery, subprime lending by auto finance companies has shown considerable strength: since the trough, auto finance company lending to each of the three lowest credit score groups has more than doubled. In contrast… banks’ lending to subprime borrowers has historically been lower than that to prime borrowers, and despite the increase in recent subprime originations, the share of subprime borrowers remains small.”

Automakers are in the subprime lending business because they have deep incentives to maximize sales volume at almost all costs. And yet, as Mendel points out, using subprime or leasing or 72-month loans to expand demand typically just pulls it forward from the future… or worse. The reality is that vehicle registrations per licensed driver and Vehicle Miles Traveled  peaked in 2006 and have been in decline ever since. In short, the United States is increasingly a mature market for cars, meaning there is an ultimate limit on credit-fueled expansion. When that limit is reached, either because consumers must slow new car purchases due to long loan terms or because Wall Street loses its taste for securitized auto loans due to Fed policy changes, demand for new cars could face serious –and extended– downward pressure.



The Mystery Of The Unsold Cars

Ah, look at all the lonely automobiles...

Ah, look at all the lonely automobiles…

One of the great frustrations about writing on the internet is the constant reminder that words can never compete with images for immediate impact. The human symbol-based psyche craves simplicity in a frighteningly complex world, and images provide their impact immediately, without need for further consideration. The old chestnut that “a lie is halfway ’round the world before the truth gets its pants on” is especially true in the modern world, where ever more is shared in images that can only ever show so much.

When Zerohedge posted photos portraying huge parking lots where, allegedly, “the world’s cars go to die” it was inevitable that the photos would have a huge impact. After all, 1) ZH is very well read and 2)monstrous overflow lots stuffed with unsold vehicles were to the 2008 US auto meltdown what suburbs full of foreclosure signs were to the mortgage crisis. In my naivete, however, I believed the shocking (if not entirely accurate) imagery of the post would inspire a closer look at the current auto inventory situation around the world. Having warned of inventory buildup in the US in a recent Bloomberg View post, I thought I could busy my weekend with other issues.

Yeah, right.

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The Car, The Phone And The Platform

Who needs a car to do this?

Who needs a car to do this? (courtesy: General Motors)

I remember the first flashes of the technological blossoming we are currently living through, in the five formative years I spent growing up just South of California’s Silicon Valley. Though we were hardly a technology-focused family (the television was kept in a wardrobe), my dad already had his first 8086 “laptop” PC by the time we moved to Los Gatos in 1987. Some time around second grade I remember a friend showing me something called “Prodigy,” which he claimed had allowed him to “accidentally” place an order for a bulk volume of dog food through his home computer. But the most convincing evidence that we were living on the cusp of a glorious future was my father’s Mercedes 300E. I was, of course, to young to truly appreciate the car itself, but inside the leather-scented bank vault of its interior were hidden great technological wonders of the age: a Sony Watchman portable TV and a car phone. To my young mind, such extravagant connectivity was undeniable proof that we already living in the future.

More than twenty years later, it’s remarkable how far those then-high-tech talismans were from the actual future. Both television and telephony are rapidly being subsumed by the internet, the cathode ray tube is as dead as the eight track and having either a telephone or a television physically attached to your vehicle is absurd in the modern technological environment (with the possible exception of the flip-down video system babysitters offered in minivans and CUVs). Though Dad’s early 90s TV executive toolkit was a harbinger of our hyper-connected, screen-centric, distracted driving-plagued age, it was a vision of the future seen through a glass, darkly.

The revolution in connectivity and computing power of the last twenty years has long since wiped away the Watchman and car phone (not to mention Prodigy), and increasingly consumers find themselves distracted from their cars by high-tech devices, both in the literal sense and in economic and cultural terms. For automakers already navigating intense global competition, finding relevance in the information age (or at the very least, an accommodation with it)  is a critical challenge to long-term viability.

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Does Beijing-Shanghai Tension Spell Trouble For GM and VW?

Jiang Zemin and the Communist Youth League, in happier times.

Jiang Zemin and the Communist Youth League, in happier times.


Ever since the dramatic 2012 downfall of the colorful Chongqing party leader Bo Xilai, the Western press has been fascinated with China’s “princeling” plutocrats and the Central Government’s efforts to restrain them. No wonder: the battle is China’s basic political division, pitting the bureaucratic and ideological power of the Beijing Central government against the economic power of Southern Chinese entrepreneurs centered around Shanghai. Under former Shanghai mayor Jiang Zemin, China opened rapidly to the foreign investment that spurred decades of florid economic expansion… and sowed the seeds of China’s major political problems, corruption, inequality and environmental ruin. The downfall of Bo Xilai, a protege of Jiang Zemin’s Shanghai clique and member of its successor “Princeling” clique, was taken as a sign that Xi Jinping is serious about continuing Hu Jintao’s campaign against the ill-gotten gains of the Shanghai boom… a signal that is growing louder as the investigations widen.

Why the ten-cent lecture on Chinese politics? Shanghai’s automotive star rose alongside Jiang Zemin’s, and the city with which the he is synonymous has become one of China’s biggest automotive players and partner to the two biggest foreign presences in China, Volkswagen and GM. If Xi Jinping’s reform movement continues to target Shanghai and  its Princelings, and especially if the investigations draw closer to Zemin himself, automakers could find themselves on awkward ground. Caught between the guanxi (connections) culture of the world’s new largest market for cars and the Foreign Corrupt Practices Act of what is still the most profitable market for cars, automakers with Shanghai exposure have reason for concern.

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