3rd gen BMW X5

Check out the third generation of the BMW X5  This Sports Activity Vehicle (SAV) combines performance and luxury. The new model has enhanced aerodynamics, a few new engine variants, adaptive chassis options and a range of customisable design packages.

New 2014 Volvo models [Video]

New design changes:


About the technology behind (or inside) the cars:

Reducing driver distraction with ICTs

Inappropriate use of information and communication technologies (ICTs), especially mobile phones, is a chief culprit behind driver distraction and road accidents, and with automobile manufacturers scrambling to develop a “connected” driving experience, the ICT and automotive industries are becoming ever more closely entwined.

However, this integration of cars and ICTs need not come at the expense of driver safety, and there are strong grounds on which to argue that ICTs have great potential to enhance rather than diminish vehicle safety systems.

Under the banner of intelligent transport systems (ITS) the automotive and ICT communities are working towards a convergence of automobiles and ICTs that prioritizes drivers’ safety and broad consensus has it that international standards are the tools through which this will be achieved.

Over the past two years, as chairman of the ITU-T Focus Group on Driver Distraction, I have had the pleasure of leading a group tasked with laying the foundations for driver-distraction standardization work in ITU’s Telecommunication Standardization Sector (ITU-T).

Established in February 2011, the Focus Group reached the end of its study period in March 2013 and has been instrumental in raising awareness around ITU-T activity on driver distraction and the scale of this workload, as well as in providing clear direction to ITU-T’s driver-distraction work plan. The group has also been successful in opening lines of communication with key organizations and drawing new expertise into the ITU-T standardization process.

The Focus Group’s final deliverables take the form of five technical reports that describe:

• use cases and user interface requirements for automotive applications 
• system capabilities for improving the safety of driver interaction with applications and services (situational awareness management) 
• approaches that enable external applications to communicate with a vehicle

The reports are freely available here.

The conclusions put forward by the reports are being taken up by the two groups leading ITU-T’s standardization work on driver distraction, Study Group 12 (Performance, QoS and QoE) and Study Group 16 (Multimedia). New related work items calling for external coordination and collaboration may also be addressed by the Collaboration on ITS Communication Standards, a forum working to create an internationally harmonized set of ITS communication standards to enable the deployment of fully interoperable ITS products and services in the global marketplace.

Safe interaction with applications and services
The Focus Group’s work is just the beginning of an international standards effort to help drivers interact safely with applications and services — and not just apps on phones, but apps running in the cloud, in roadside infrastructure systems, and in the car itself, to name just a few locations.

The Focus Group’s Use Cases report details the use cases and user scenarios being targeted by this standards effort, but for now let’s look at Use Case 2, Scenario A (arbitration of external message), which illustrates how ITU-T is working towards a comprehensive framework for managing distraction and workload.

Keeping priorities straight
In this user scenario, a navigation maneuver is given priority over a social media ‘status update’ message. The blue call-out boxes indicate where the ITU-T Recommendations under development can enable safe interaction between the driver and applications. For instance, ITU-T Recommendation G.SAM will define mechanisms for prioritizing navigation, G.V2A will define the communications interface between the app and the driver-vehicle interface (DVI), and P.UIA will recommend characteristics of the auditory social media message.

Remember that the focus here is not on how to implement social media in the car, but rather on how best to manage workload and distraction.



Giving a navigation maneuver priority over a social media status update message

In for the long haul
Speaking from our perspective at QNX Software Systems, a subsidiary of BlackBerry, the work of the Focus Group marks the beginning of a long road ahead. Within ITU-T, QNX will continue to:

1. Work with the relevant parties to identify solutions to the problem of technology-related driver distraction and workload. These parties include automotive, telecommunications, and consumer electronics organizations; standards development groups; academia; and government agencies.
2. Determine which aspects of the solution should be standardized, and help drive this standardization.
3. Align QNX product roadmaps as solutions develop.

Certainly this is a long-term strategy that will take years to realize, factoring in the rigour of ITU-T’s standards process as well as the significant amount of time needed to deploy technologies in vehicles on a meaningful scale.

Join the discussion
A workshop hosted by ITU and UNECE at ITU headquarters in Geneva, 27 June 2013, will address “Intelligent transport systems in emerging markets – drivers for safe and sustainable growth” with a view to analyzing recent advances in ITS with emphasis on improving road safety in developing countries.

This workshop includes a session dedicated to driver distraction in which I will present the outcomes outlined by the Focus Group’s technical reports to spur discussion on the likely course of corresponding ITU-T standardization work.

The workshop is free of charge and open to all interested parties, including non-members of ITU, and online ‘remote participation’ will be available to all those unable to travel to Geneva. Please join us for what will certainly be a richly informative and interactive event!

This post originally appeared on the ITU Blog.

Turbos vs Hybrids?

Another guest post by Mr. Liu, as this ties well with the previous post. Original draft May 8, 2013 with editing by Smitka (the prof)

Forced induction provided by turbochargers and superchargers is a nice way to get more power out of an engine with a fixed displacement. The manufacturers of this technology are a fairly concentrated group, however, which is a worry to OEM's. If the supply of these forced induction products is too concentrated with a few select manufacturers, then there is a worry that if demand for blowers goes up substantially, then the suppliers will have undue leverage in price setting. Therefore, OEM's are encouraging other suppliers to enter the market.

...Toyota is hedging its bets ... with both a turbo and a hybrid ...

Turbocharging, which uses exhaust gasses to force a blower thereby raising compression ratios, is used on many vehicles to increase power without sacrificing fuel economy. BMW's Efficient Dynamics system relies upon it and other manufactures employ the same principles in their vehicles. The technology has the potential of providing huge power gains, however there is the issue of turbo lag, namely the lack of instantaneous full-power throttle response. Supercharging, which can be done with either an added engine belt (an detriment to fuel economy) or with an electric motor is a way to achieve power gains with instantaneous response behind the pedal.

Now Toyota is entering the fray — see a June 24, 2013 Automotive News article by Mark Rechtin. I [Smitka] don't know whether Toyota offers other turbos, but this article notes that a turbocharged 4-cylinder engine will power a late 2014 Lexus model, the NX200t. In this Toyota is following in the footsteps BMW, Cadillac and Mercedes, with a several year lag. [I owned a 1998 turbocharged Volvo; even small-car maker Suzuki is using turbos, Nikkei TechOn here notes a new model will get 52 mpg.]

More interesting, Toyota will also produce a hybrid model, the NX300h. As I read it, this is a hedge on Toyota's hybrid strategy: fuel efficiency from a smaller engine rather than putting in a second (electric = hybrid) powertrain. So which costs less? Surely not the hybrid!

Source: WardsAuto.com

Tyler Kaelin wrote: Although the turbochargers and superchargers themselves might be constrained to a few companies, they are creating opportunities for many other companies. Forced induction puts greater strain on an engine. To handle this added strain other parts need to be upgraded as well. That is where companies like Federal Mogul come in, designing parts to compliment forced induction.

The Prof wrote: Turbocharger innovations have led to numerous PACE awards over the past 5 years. And concentrated it is: the dominant players are two in number, BorgWarner and Honeywell. New entrants would be hard-pressed to match them even if OEMs forced the two leaders to license their patents, because so much of their lead comes from the ability to design products to specific engines, and from production skills protected by trade secrets – the OEMs can’t force BW and Honeywell to share things they don’t know about.

Note the same issue comes up with the Chinese partners in various joint venture arrangements – claims that they invite the stealing of technology is in contrast to complaints that JV partners fail to transfer technology. The underlying reality is that even if you could buy [steal!] blueprints, you still wouldn't be able to make it in a cost-effective and high quality manner, much less provide design and technology advice to your customers.

Anyway, here is a set of links to recent PACE award-winning turbocharger innovations:

PACE Award Winners: Turbos [additional turbo innovations were finalists]

• 2007 BorgWarner variable geometry turbo
• 2008 BorgWarner two-stage turbocharger
• 2011 Honeywell dualboost turbo
• 2012 BorgWarner Turbo with EGR
• 2012 Honeywell low-friction turbo ball bearings
• 2013 BorgWarner 3-stage turbocharger

Do Suppliers Now Drive Technology?

Originally posted May 14, 2013 by Oliver Liu on the W&L Economics 244 Web Site and paralleling one by Marybeth Benjamin. Modest additions by the Prof.

At the Federal Mogul Plymouth Technical Center, I was shown a new spark plug technology that Federal Mogul engineers developed called the Advanced Corona Ignition System (ACIS). ACIS looks like a conventional spark plug except it has a crown on the end instead of the ignition electrode with the ground in front. ACIS fills more of the chamber with ignition-producing electricity (25 mm i/o 1 mm), which will allow for higher compression ratios (about twice conventional levels), resulting in a cleaner burn with improved fuel economy and emissions. It's also faster and the corona can be modified in line with engine speed. The engineer, Mr. Mixell, said that ACIS will be optimized with changes in engine design and that it may take a while before it is available in aftermarket applications for older vehicles.

Mill Garages for Volvo cars

I recently wrote about the exciting new Volvo V40 R-Design and how the new breed of models are slowly changing the perception of this brand. Anyway, I just found out that besides the great looks and specifications, I found out that this hatchback is quite economical to run. It gives you 83.1MPG and you do not have to pay the DVLA car tax. You can now have the car for only £299 per month with a £299 deposit.

If you live in the North East of England, check out the V40 R-Design and other offers on the Mill Garages website (http://www.millnortheast.co.uk/).   One of the biggest car dealers in the region, I discovered that they have a long and fascinating history. The first Mill Garage was established in Sunderland in 1947 by a guy called George Rollings. They have had a number of ownership changes and the current owners have been running the company since 2008. They now have 4 dealerships at Sunderland, Stockton, St James Retail Park and Newcastle.

They website is really clean and easy to navigate with clear links. I really liked the videos as well. I was going through the testimonials and noticed that many of them referred to the staff by their name which says a lot about the service quality of this company. 

State Franchise Regulation

This is the fourth carryover from student blogs, with guest blogger Asher Stevens-Lubin. In his defense he wrote this post at the very start of the term, before we'd covered franchising issues (and had David in as a speaker). Both Ruggles and Smitka append comments. Roberts-Lubin's citations are detailed at the bottom.

The cost of the auto distribution system in the United States has been estimated as averaging up to 30 percent of vehicle price, with 15 percent on the end of the manufacturer (in the form of advertising, loans, and rebates) and the other 15 percent solidly on the side of the retailer, or dealer. This 15 percent of the total price of a given vehicle is due to the cost to dealers of financing inventory, paying for insurance, advertising, and paying commissions. [Source: Marti et al.]

Early in the history of the US auto industry, most manufacturers sold their vehicles directly to the consumer. However with the advent of Ford’s assembly line and the mass-production of automobiles, distribution was more efficient through retailers since manufacturers mainly had just one or two factories located near resources like steel mills (making the assessment of demand and provision of customer services easier for retailers).

In these early days, this franchise system was conducted through voluntary contracts between manufacturers and dealers. However since then, virtually every state has codified the automobile franchise system, making it illegal for manufacturers to sell automobiles directly to the consumer; largely because states earn around 20 percent of their sales taxes from automobile retail, but also because car dealerships account for, on average, 7-8 percent of employment. [Source: Lafontaine & Morton]

Ruggles writes: This is the first misnomer. The reason for state franchise law is to protect Dealers from their Suppliers. A Dealer makes a SIGNIFICANT investment to represent an OEM's products. That Dealer is then in in a position of subjugation to that supplier without significant protection other than the traditional franchise agreement. The supplier could over supply or under supply on a whim. The supplier could provide premium stock to a competitor while withholding premium stock from the original Dealer. The supplier could make unreasonable demands on the original Dealer and use the control of inventory supply, compensation for warranty repairs, etc. to coerce Dealer. Without Dealer protection the supplier could open a factory owned store near the franchise Dealer, and under sell that dealer to drive them out of business. This is the primary reason for Franchise laws.

This model was beneficial to both manufacturers and retailers until the advent of the Information Age in the late nineteen-eighties. With the arrival of global instantaneous information sharing and online automobile sale, disintermediation occurred—that is, the role of the retailer became superfluous (or at least very much different). Cutting back on its number of dealerships has been a key means for GM to reattain profitability. [Source: Bodish]

Ruggles writes: The model is STILL beneficial to both OEMs and Retailers.

Disintermediation has NOT occurred, at least not yet. Cutting back on the number of its Dealerships was NOT a key means for GM to regain profitability. GM's customers are its Dealers. Consumer end users are the customer of their Dealers. Getting rid of customers doesn't help an auto OEM become profitable. GM realized their mistake and reinstated many of the terminated Dealers with some urging from Congress. The story behind how Team Auto came to the conclusion that reducing Dealerships helped OEM profitability is a long one. Looking through this blog one will find numerous columns on the subject. But if one wants to read the most scathing criticism of that mistaken thinking, read the SIGTARP report on the auto bailout (such as HERE).

Yesterday, Automotive News reported that Tesla Motors CEO Elon Musk (the same billionaire entrepreneur who plans to build a colony on Mars and die there himself, “just not on impact”) will “consider federal options” in his battle to overturn automobile franchise laws.

Ruggles writes: Actually, Elon Musk is NOT seeking to overturn automobile franchise law. He is looking for the means for Tesla to own its own Dealerships. This is not a problem in most states as long as there are no Tesla franchised Dealers. Musk plans to have NO privately owned franchised Dealers in any state, or so he thinks, UNTIL he realizes that expansion is limited by his own personal finances and having franchised Dealers might benefit him and his company. Personally, I have no problem with Tesla owning its own stores, and don't think anyone else should either, as long as Tesla isn't competing against any franchised Telsa dealers. But he did run afoul of the Texas auto franchise law, and that is where the legal action is taking place. Read Maryann Keller's statement about the matter in this blog.

He tweeted a link to a petition calling for the same on the White House’s website (as of this writing it had just over 5000 signatures). Musk runs Tesla Motors on a “mall-based” retail network, which dealers in Texas and elsewhere have alleged violates many states’ laws.

David Hyatt, a spokesman for the National Automobile Dealers Association, responded to this petition’s claim that franchise laws “stifle the auto industry, keep prices of new vehicles up and reduce consumer choice,” stating that “the franchise system is good for consumers, good for communities and good for the economy. Manufacturers that sell their vehicles directly to consumers – and don't let anyone else sell that vehicle – eliminate competitive pricing.”^[4]

Ruggles writes: Yes, the state franchise laws stifle the auto industry to the point they have only sold as many as 17 million new vehicles in a year. So we can sell what, 20 million without Dealers? Who will deal with the tradeins and do the warranty work? If you want to see new vehicle prices rise, get rid of the franchise Dealers and leave it to the OEMs. Is anyone familiar with the Ford Collection experiment which failed miserably?

Yet allowing manufacturers to sell cars directly to the consumer could very well reduce inventory costs, and whether it does should be left to be seen. In other words, if retailing actually increases competition and lowers prices, then dealerships will survive the deregulation of the automobile franchising system.

Ruggles writes: It won't be seen any time soon. There is NO EVIDENCE that manufacturers selling directly to consumers will save inventory costs. NONE.

Now this is an arbitrary sum up. Why should the purpose be to lower prices? The mission is to let the competitive market determine prices. We're not going to see any deregulation of the automobile franchise system. Dealers have made BILLIONS of dollars of investment in their businesses based on the franchise system. The numbers are so high there is no way for OEMs to finance their own dealer network, and they know it.

the prof (Smitka) writes [originally April 23rd, 2013]: Whether dealers are “necessary” is something we’ll talk about; it’s good that you picked up the Tesla, which is attempting to circumvent state franchise law with Texas as a test case. Auto distribution was a key, probably the key, institution in the development of franchising; fast food is strictly post-WWII but as we’ll read, autos date to the 1920s. The case is much more complex than just physical distribution and inventory costs; on a regional basis swapping among dealers addresses the latter, because you can (potentially) sell cars held by others, but selling out of inventory is more profitable. However, a dealership also provides for the purchase of used cars (and then their sale), arranges finance, and handles service. “The Factory” has found that an impossible business to run as part of a large organization, and not just in the US but also in Japan, Germany, the UK and emerging markets such as China, Brazil and India. That ought to suggest that the issues are rather more complex.

So we might instead ask: what might make Tesla different? Or is this a transitional pattern (which, by the way, ties up a lot of capital)?

Bodish, Gerald R. (2009). "Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers." Department of Justice Economic Analysis Group Competition Advocacy Paper #09-1 CA.

Lafontaine, Francine and Morton, Fiona Scott (2010). “State Franchise Laws, Dealer Terminations, and the Auto Crisis.” Journal of Economic Perspectives 24:3 (Summer), 233–250.

Martí, Eric, Garth Saloner, and A. Michael Spence (2000). "Disintermediation in the U.S. Auto Industry." Graduate School of Business, Stanford University, Case Number: EC-10.

OTA software: not just building castles in the air

Tina Jeffrey

After attending Telematics Detroit earlier this month, I realized more than ever that M2M will become the key competitive differentiator for automakers. With M2M, automakers can stay connected with their vehicles and perhaps more importantly, vehicle owners, long after the cars have been driven off dealer lots. Over-the-air (OTA) technology provides true connectivity between automakers and their vehicles, making it possible to upgrade multiple systems, including electronic control unit (ECU) software, infotainment systems that provide navigation and smartphone connectivity, and an ever-increasing number of apps and services.

Taken together, the various systems in a vehicle contain up to 100 million lines of code — which makes the 6.5 million lines of code in the Boeing 787 Dreamliner seem like a drop in the proverbial bucket. Software in cars will only continue to grow in both amount and complexity, and the model automakers currently use to maintain and upgrade vehicle software isn’t scalable.

Vehicle owners want to keep current with apps, services, and vehicle system upgrades, without always having to visit the dealer. Already, vehicle owners update many infotainment applications by accepting software pushed over the air, just like they update applications on their smartphones. But this isn’t currently the case for ECUs, which require either a complete module replacement or module re-flashing at a dealership.

Pushing for updates
Automakers know that updates must be delivered to vehicle owners in a secure, seamless, and transparent fashion, similar to how OTA updates are delivered to mobile phones. Vehicle software updates must be even more reliable given they are much more critical.


BlackBerry’s OTA solution: Software Update Management for Automotive service

With OTA technology, automakers will use wireless networks to push software updates to vehicles automatically. The OTA service will need to notify end-users of updates as they become available and allow the users to schedule the upgrade process at a convenient time. Large software updates that may take a while to download and install could be scheduled to run overnight while the car is parked in the garage, making use of the home Wi-Fi connection. Smaller size updates could be delivered over a cellular connection through a tethered smartphone, while on a road trip. In this latter scenario, an update could be interrupted, for instance, if the car travels into a tunnel or beyond the network area.

A win-win-win
Deployment of OTA software updates is a winning proposition for automakers, dealers, and vehicle owners. Automakers could manage the OTA software updates themselves, or extend the capability to their dealer networks. Either way, drivers will benefit from the convenience of up-to-date software loads, content, and apps with less frequent trips to the dealer. Dealership appointments would be limited to mechanical work, and could be scheduled automatically according to the vehicle’s diagnostic state, which could be transmitted over the air, routinely, to the dealer. With this sharing of diagnostic data, vehicle owners would better know how much they need to shell out for repairs in advance of the appointment, with less chance of a shocking repair-cost phone call.

OTA technology also provides vehicle owners and automakers with the ability to personalize the vehicle. Automaker-pushed content can be carefully controlled to target the driver’s needs, reflect the automaker's brand, and avoid distraction — rather than the unrestricted open content found on the internet, which could be unsafe for consumption while driving. Overall, OTA software updates will help automakers maintain the customers they care about, engender brand loyalty, and provide the best possible customer experience.

Poised to lead
Thinking back to Telematics Detroit, if the number of demos my BlackBerry colleagues gave of their Software Update Management for Automotive service is any indication, OTA will transform the auto industry. According to a study from Gartner ( “U.S. Consumer Vehicle ICT Study: Web-Based Features Continue to Rise” by Thilo Koslowski), 40 percent of all U.S. vehicle owners either “definitely want to get” or at least are “likely to get” the ability for wireless software updates in their next new vehicle — making it the third most demanded automotive-centric Web application and function.

BlackBerry is poised to lead in this space, given their expertise in infrastructure, security, software management, and close ties to automotive. They were leaders in building an OTA solution for the smartphone market, and now again are among the first entrants in enabling a solution that is network, hardware, firmware, OS, software, and application agnostic.

Maryann Keller - Recent Speech at a JD Power Conference

For the over four decades I’ve been involved with the auto industry, first as an investment analyst and now as a consultant and director serving on the boards of both automotive companies and auto dealers. Over those four decades, I’ve heard many arguments made against the franchise dealer system…which dealers never fail to disprove time and time again.

One myth promulgated in the 1990s - and now resurfaced by Tesla - is that factory stores save money by reducing distribution expenses wrongly estimated at 30% of total expense. Let’s put aside for the moment that the percentage itself is nonsense, Ford’s ill-fated Auto Collection experiment proved conclusively (as told to me by a former Ford executive last week) that corporate guys are not risk takers and lack the entrepreneurial spirit to manage dealerships. Big corporations control from the top but selling cars requires street smarts and adapting to local market and competition. Ford ended its experiment after a couple of years of market share losses amid mounting evidence that factory stores do not deliver a better customer experience nor reduce costs, in fact they proved to be bad at both. GM, perhaps after watching Ford’s travails, and despite repeating the same nonsense about reduced costs through factory ownership, canceled its plans to buy 10% of its dealers, plus the Saturn stores, and operate them in through what it called GM Retail Holdings.

Ford’s failed experiment demonstrated that, franchise laws notwithstanding, dealers are essential partners in the long process of a car’s journey from the factory to a customer’s garage. Franchise laws protect dealers from arbitrary actions by automakers and given the financial commitments they continue to make in response to factory demands in image programs, equipment, training and even vendor selection, the laws are entirely reasonable. Given the intense competition in auto retailing, it’s hard to understand how anyone could suggest that franchise laws hurt consumers.

Franchise dealers’ cumulative investment in land, equipment and facilities easily exceeds $100 billion. Dealers fund 60 days of inventory and another month of inventory in transit that would otherwise fall to the carmaker. The inventory buffer allows automakers to adjust future production levels. For a company like Ford US inventory funding equals about $15 billion at any point in time.

Tesla may be the first start up to launch a car and change the retail process as well but it is definitely not the only company that saw dealerships as a costly impediment to customer bliss. A few years ago I was involved with one such company funded by venture capitalists, and led by a non-automotive executive, that invested in a small car promising to build to order sold though mall-based stores. The car never made it to production and the company folded after consuming the investors’ capital. .

Despite evidence to the contrary and lacking any real world understanding to the business, a journalist writing on Yahoo Autos last year stated “Instead of building cars and selling them to dealers who hawk them to shoppers, Tesla wants to build only cars to customers orders, eliminating part of the auto industry’s massive overhead costs in inventory. By selling cars directly Tesla’s executives believe they can make their customer happy, and eventually sell more cars for less money.” Well we will see if it is fact is more economical for the factory to pay the rent, salaries, delivery and service or have someone else do it using his or her own capital. And build to order works only as long as there is an order bank…what happens when the orders dry up…do you send the assembly workers home, tell your suppliers to send to stop producing until you call?…..unfortunately auto assembly really doesn’t lend itself to build to order. It is capital and labor intensive even when work is farmed out to suppliers.

Every dealer knows that the vast majority of customers want their car that day not a date convenient to a manufacturer. The dealer has always been the buffer with the automaker facilitating inventory management through various incentives and production adjustments. It is the dealer who finds the market-clearing price for a vehicle even at the sacrifice of his or her profits.

Others have tried experiments in selling away from the traditional retail dealer location on the notion that a big box retailer or mall would mitigate advertising expenses by placing cars where the customers are.

Early in the 2000s, Asbury struck a deal with Walmart to sell used cars in the parking lots of Walmart stores. Asbury would take the cars to where the retail customers were at America’s busiest retailer. A few dealers have experimented (as Tesla is now doing) renting inline space in large shopping malls as storefronts to sell cars. So far, the history of non-dealership settings to sell cars – with perhaps the exception of the infrequent offsite tent sale – hasn’t worked. The Asbury/Walmart experiment ended in less than two years when both parties discovered there were too few car buyers among the static population of regular customers who shopped for food and other necessities at their local Walmart each week.

I suspect that once the novelty associated with Tesla wears off, it too will also discover that mall locations aren’t ideal places to market or sell cars. The enclosed shopping mall typically has several large anchor stores – Nordstrom, Macy’s, Neiman Marcus, etc. – and perhaps eighty to one hundred or so “in line” shops like GAP, the Limited, Zale’s, Sunglass Hut, Apple, etc. A large successful mall might have more than a million or more visitors a year – and that’s about 3,000 folks per day. Those big numbers can dazzle but they aren't what they seem. Much of this traffic represents repeat visitors, as it did at Walmart, coming each week or so to see the changing merchandise at her favorite stores – new fashion and seasonal clothing, makeup, shoes or the latest Apple gadget. Everything can be purchased on a credit card. I used the pronoun “her” deliberately because the vast majority of mall stores are dedicated to women and children not the men who would be the targets for an expensive, high tech performance car.

Furthermore, new car models are only really new only every four to six years. The merchandise doesn’t change very often – so on the second or third visit to the mall, the car store looks exactly as it did last month or even the month before. What was fresh once is now stale with the passage of time…so visitors to the mall just skip past that new car display.

What the uninformed forget – or figure out after an attempt or three – is that automotive retailing is very different from traditional retailing. The product car dealers sell is expensive, generally requires financing, and often involves a trade. It often includes helping shoppers match their budget to a car that might not be their first choice but rather one they can afford. The process is slowed by required disclosures and regulations resulting in a pile of documents that have to be signed even for the most straightforward transaction.

A car weighs 4,000 pounds and takes up 50 square feet of space. It can’t be delivered overnight to one’s front door by Fedex. And most folks don’t have a big enough credit limit on their Visa card to pay for it. And what do they do with their trade? Or get it serviced?

While we are talking about myths, how about the still repeated one that people hate dealers so, if given the chance, they will buy a car online. I almost don't know where to start in taking this one apart…..In the early days of the Internet, Silicon Valley funded and lost hundreds of millions, maybe even a billion dollars, on ill-fated ventures that promised to do just that. CarOrder.com, Greenlight.com, and CarsDirect.com (in its original configuration), among others, all promised to avoid the dealership experience. A few actually did that by buying cars from dealers and then reselling them at lower prices to customers until they blew through their capital. Build to Order.com proposed that you would place your order for a fully customized car while lounging in a company-owned showroom entertainment center. Again here the premise was to build these cars using an automaker’s parts and technology but avoiding high labor costs and dealerships and give the customer the exact car they wanted. Build-to-order.com never built anything for anyone.

In 1999 and 2000, I ran priceline.com’s experiment with selling cars online, which like most others of the era no longer exists. The essential elements of the priceline model were replicated by TrueCar.com and of course they too ran afoul of franchise laws for the same reasons as priceline. What I learned then – and this is still true today – we could connect buyers with dealers and that the price of a vehicle was the easiest part of a deal. The other elements are harder to control and often the cause of frustration for the customer and the dealer. People don’t like to hear that their trade isn’t worth the value they saw online or that their poor credit doesn’t qualify them for the no down payment, zero percent loan. There are few people who would think about buying a house online from a few photos taken make rooms seem larger than they are or the neighbors Beware of dog sign. Buying a car is comparable to buying a house, why should we think it should be as easy as buying a pair of shoes from Zappos with a return receipt in the box in case they don’t fit.

Although many automotive websites claim to have “sold” millions cars, even today twelve years after priceline decided to concentrate exclusively on travel, automotive websites link a buyer to a dealer who actually sells the car. The Internet has mostly replaced the newspaper as a source of information about cars and dealers but it has not reduced advertising expense per vehicle or made buying a car as easy as buying a book.

Add up all the monthly traffic to all automotive sites, including automakers, dealers and independent sites – and you’d get more than 100 million possibly close to 200 million unique visitors using the web to get information about buying or selling a new or used car. Except there’s one problem if this traffic is somehow suppose to represent potential sales…the total number of new and used cars sold by dealers at retail and excluding fleet each month is only about two million units, and that is probably generous given that not all retail customers go online..some might just release the same brand of the leased car they are returning to the dealer. So the real shoppers – however you want to define that number – are only a small fraction of the total visitors. So just like newspaper, radio, or TV advertising, dealer spend on the internet is likely no better targeted – once again dispelling the notion that the internet would solve the age-old problem of knowing which 50% of a dealer’s advertising works.

And what was once promised as to the beauty of the Internet for used cars…listings of available cars with pictures, even videos, and stated pricing would make it easy for shoppers to find the best car at the best price. But what has happened is that for any given vehicle, within a similar bandwidth of age, mileage, trim, the price range for specific models is usually within a few hundred dollars, not enough to make price the deciding purchase factor. The Internet hasn’t created a pricing advantage for any seller and customers simply have confirmation that similar cars within a market are priced the same. With the exception of hard to find cars, the differentiating factors are having the car the customer wants, proximity of the dealership and the dealer’s reputation in providing a good customer experience.

In summary, technology is a wonderful thing…and dealers have adopted it nearly full tilt. Sophisticated software to manage every aspect of the business is now de riguer…BDC’s to support internet sales…and eDocuments will eventually become the norm. But the point is that the system of franchised dealers – using their own risk capital to fund their businesses and guarantee millions of dollars of inventory, promote their own brand and that of their OEM, provide the expensive tools needed in their service departments, and manage the endless headache of a workforce – will not be superseded by technology or factory owned mall stores. Factories have learned that they cannot do a better job than independent businessmen at the retail level. And new start ups – many of whom will come and go – with new systems of selling and servicing retail automobiles will all reach the same conclusion: the dealer network is the best way. Thank you for listening today.

Why are there still car shows?

This is the third in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

...marketing has changed, auto shows haven't...

Shanghai Auto Show

The marketing "world" today is significantly different than that of 40 years ago, but motors shows today are remarkably similar to those of the 1960's. As the Shanghai Motor Show of a few days ago came to a close, it occurred to me that car shows in general seem to have lost much of their original purpose, or at the very least have not adapted to the internet.

First, given the ease with which the cars are frequently discovered before they even make it to the show, the main purpose of showing off vehicles which the public has never seen before doesn't seem to make sense. Take the new BMW X4 – virtually no one was surprised at the design, because it was available on the internet long before the show. Secondly, the argument that the purpose of the shows is to get as much exposure as possible for new vehicles also seems to fail, because the companies could just as easily provide images of the cars (which is what the vast majority of people see anyway, given that most people are not able to attend these shows) via the internet.

Perhaps one could make the argument that the sense of festivity associated with these shows creates publicity that would otherwise not exist, but given the high costs associated with auto shows, that argument doesn’t quite seem to hold water. It seems to me that the PR departments associated with these shows will find ways to show off their vehicles significantly more cheaply via the internet. Unless there is a big piece of the puzzle that I am missing, it seems likely that motor shows will at the very least be scaled down significantly.

Source: autoblog.com of April 19, 2013

...Blake Grady...

The Prof: I think that’s an empirical question. How many people visit? – the big January show in Detroit — formally, the North American International Auto Show — attracts over 100,000 and gets exhibitors with cars many people may never otherwise see up close. Furthermore, people like to kick tires, and an auto show beats schlepping from dealership to dealership, indeed car companies hope it will be a prelude to that. Think of this co-location as a positive externality.

For the big shows, there's another positive externality: having lots of journalists in the same place at the same time, you can get more people to your product announcement than if you did it independently. Part of the attraction is the cars; part is that lots of executives show up and make themselves available for interviews. If you're from the New York Times, as our dinner with Bill Vlasic [and reading his book] made clear, you've got good access to senior management, year-in and year-out. Bzut if you're from a "small" publication — a Japanese car magazine or Polish newspaper – you can't just call up GM's CEO and expect a callback. Finally, there's an auto journalist motto: eat free or die. You don't go thirsty, either. (Thanks to Ward's Auto Dealer I attended the Chrysler [journalist] Christmas party last year, there was clear disappointment that so few execs were in attendance.) The bottom line is that these journalists are all filing stories, lots of newspapers and other outlets highlight the shows and carry reviews. Critically, internet content doesn't just appear out of thin air: the car shows all have their journalist previews a day (or two full days) before the shows open.

Hoopla helps, and is expensive to generate on your own. So as an economist, let’s call this another positive externality.

Are shows crucial to car nuts? No. Yet … the car companies need to get someone to generate the content that car guys seek out. Auto shows have their role.

That said, some shows have fallen by the wayside, when too few auto companies attend and sponsors can't recoup their venue costs. Journalists such as those at Automotive News can attend only so many events, and when SAE (the Society of Automotive Engineers) conflicts with an auto show, well, it's not SAE that gives way.

Libertarianism's Achilles' Heel, by E.J. Dionne Jr.

Here are comments stimulated by the following Washington Post item of Wednesday, June 12, 2013 12:00 pm

Every now and then someone hits the nail on the headby E.J. Dionne Jr.

In politics, we often skip past the simple questions. This is why inquiries about the fundamentals can sometimes catch everyone short.

Michael Lind, the independent-minded scholar, posed one such question last week about libertarianism that I hope will shake up the political world. I’ll get to his query in a moment. It’s important because many in the new generation of conservative politicians declare libertarianism as their core political philosophy.

Libertarians have the virtue, in principle at least, of a very clear creed: They believe in the smallest government possible, longing for what the late philosopher Robert Nozick, in his classic book “Anarchy, State and Utopia,” called “the night-watchman state.” Anything government does beyond protecting people from violence or theft and enforcing contracts is seen as illegitimate.

If you start there, taking a stand on issues is easy. All efforts to cut back on government functions — public schools, Medicare, environmental regulation, food stamps — should be supported. Anything that increases government activity (Obamacare, for example) should be opposed.

In his bracing 1970s libertarian manifesto “For a New Liberty,” the economist Murray Rothbard … concludes: “Liberty has never been fully tried in the modern world; libertarians now propose to fulfill the American dream and the world dream of liberty and prosperity for all mankind.”

… “Why are there no libertarian countries?”

---

Ruggles: Well, we DO have small government countries like Somalia and Angola to "prove" the libertarian point of view, but they seldom bring those types of countries up as success stories despite the fact they have REALLY small governments.

The ideas of the center-left — based on welfare states conjoined with market economies — have been deployed all over the democratic world, most extensively in the social democratic Scandinavian countries. We also had deadly experiments with communism, aka Marxism-Leninism, or perhaps more accurately Stalinist "state" dictatorship.

From this, Lind asks another question: “If socialism is discredited by the failure of communist regimes in the real world, why isn’t libertarianism discredited by the absence of any libertarian regimes in the real world?” Or in the case of Somalia, their failure?

The answer lies in a kind of circular logic: Libertarians can keep holding up their dream of perfection because, as a practical matter, it is a utopia that will never be — can never be — tried in full. Even many who say they are libertarians reject the idea when it gets too close to home.

The strongest political support for a broad anti-statist libertarianism now comes from the Tea Party. Yet Tea Party members, as the polls show, are older than the country as a whole. They say they want to shrink government in a big way but are uneasy about embracing this concept when reducing Social Security and Medicare comes up. There’s no way Republicans are going to attack their own base.

But this inconsistency (or hypocrisy) contains a truth: We had something close to a small government libertarian utopia in the late 19th century and we decided it didn’t work. Smaller government meant that too many people were poor and that monopolies were formed too easily.

JD Rockefeller, Andrew Carnegie, JP Morgan and their cronies controlled wealth equivalent to over 20% of the country's GDP. In today's dollars, that would be over $3 TRILLION, rather more than is controlled by Buffet, Gates, Waltons, and Kochs these days. Government policy was routinely bought and sold.

In fact, as Lind points out, most countries that we typically see as “free” and prosperous have governments that consume around 40 percent of their GDP. They are better off for it. “Libertarians,” he writes, “seem to have persuaded themselves that there is no significant trade-off between less government and more national insecurity, more crime, more illiteracy and more infant and maternal mortality ... .”

This matters to our current politics because too many politicians are making decisions on the basis of a grand, utopian theory that they never can — or will — put into practice. They then use this theory to avoid a candid conversation about the messy choices governance requires. And this is why we have gridlock.

---

Smitka comments: Libertarians also refuse to engage in empiricism – unlike, say, a Milton Friedman, who moved away from his earlier monetarism by the 1990s because it simply wasn't supported by the data. On a different dimension, the New Right resemble the state's rights people of old, who when push came to shove did not believe in the concept of a United States, politically or as a national economy. (Do Tea Party members realize that they are thus anything but patriots?)

Too much government? Get states to gut higher education – hardly a hypothetical – and just rely on recruiting from the next state over. For that matter, shut down local public schools, and recruit from the next county over. Roads? Healthcare? Regulation of markets? Small claims courts? As David Ruggles notes, we then start to resemble Somalia. Now Stalin never went all the way to communism (or to be more precise, socialism), but we quite rightly reject the concept on the basis of the historical evidence from his attempt to push the boundaries of the USSR polity in that direction. Somalia stops short of a full libertarianism. But such failed states ought to be enough proof that libertarianism, too, should be treated as a failed concept.

Maryann Keller Testimonay RE: Tesla versus the state of Texas

Considerations for the State of Texas

Consumer Benefits of the Independent versus Factory-owned New Car Retailer

April 9, 2013

My name is Maryann Keller. I am the Managing Partner of Maryann Keller & Associates LLC, a management consulting firm specializing in the automotive industry. I have served in this position for more than twelve years. My firm is and has been engaged on a wide variety of consulting projects for clients including automotive OEMs, lenders, private equity firms, government agencies, and retailers. Several law firms and one US government agency have engaged me to provide expert witness testimony in support of litigation. I have never served as an expert witness in any litigation involving or related to auto retailing or auto dealers.

I currently serve as a Director on the Boards of two companies. The first is a privately-owned franchise new car dealership group in the State of Maine, and the second is for Drivetime Automotive, a privately-held multi-state automotive retailer specializing in providing subprime credit customers with affordable transportation. At various times in the last twelve years, I have served on the Boards of several public companies including Sonic Automotive and Lithia Motors, both multi-state franchised dealership operators, and for Dollar Thrifty Automotive Group, a rental car agency. Prior to starting my own firm, I was President of priceline.com’s automotive services division during 1999-2000. That start up operation was essentially a sophisticated lead generation process that matched online shoppers of new cars to franchised dealers.

Before my employment at priceline.com, I worked as an automotive industry analyst on Wall Street for 28 years. I served as Chairman of the Society of Automotive Analysts from 1994-1999. During my Wall Street tenure, I was ranked as an All-Star Analyst 12 times by Institutional Investor magazine. I have authored two books on the industry. My first bookRude Awakening: The Rise, Fall and Struggle to Recover at General Motors, was published in 1989 and received the prestigious George S. Eccles prize for Excellence in Economic Writing from Columbia University. My second book, published in 1993, is entitled Collision: GM, Toyota, and Volkswagen and the Race to Own the Twenty-first Century.
The Texas Auto Dealers Association asked me to submit my comments for your consideration as to the benefits of the franchised dealer system for consumers. I can unequivocally state that the consumer is best served by the franchise dealership system for the reasons elaborated herein. My opinions are based upon my four decades of involvement with the automotive industry, particularly within the United States, during which time I have witnessed challenges to the franchised dealer model, including a somewhat recent experiment by Ford that proved both the value and superiority of the franchise dealership over a factory–owned store.
All too often the debate about what is the better retail solution of the car buyer is couched in vague goals: lower distribution costs, more control over the ownership experience, consistent experience in every store, etc. But this ignores the actual car purchase and ownership experience for the vast majority of new car buyers who acquire a new car every four to six years and in doing so links him or herself to the dealer expecting that dealer to resolve all repair issues, manage recalls and warranty claims, and be their advocate in resolving issues with the manufacturer.
Buying a car is not akin to shopping at Target, Wal-Mart, or Tiffany where the transaction is paid by credit card and requires no further relationship with the seller. Buying a new car is a thoughtful process often involving months of online research and visits to multiple dealerships to test drive vehicles under consideration. Even with the enormous amount of easily accessible information on the characteristics and features of every make and model, retail and invoice pricing, projected residual values, quality ratings etc., the process is different. With a new vehicle, most customers are making significant emotional and investment decisions which require assistance in obtaining new financing and disposal of an existing vehicle often including extinguishment of associated debt. The new car purchase experience is far removed from any other retail purchase as to the unique needs of every shopper and the regulatory and disclosure requirements for each sale.
Further, the customer relationship with any new vehicle (and some used vehicles which offer extended manufacturer warranties) and the selling entity – a new car dealer – extends well beyond the initial acquisition. There are elements of warranty repair, manufacturer recalls (from time to time), and even silent recalls which are addressed at service visits. Warranty periods are generally at least three years in length (subject to mileage limits) or longer with some components, such as powertrain, emissions and occupant safety systems, having manufacturer warranty coverage over an even longer period. Warranty and recalls are exclusively handled only by dealers authorized to represent the manufacturer. And for lease customers, one end-of-lease option includes returning the vehicle to manufacturer’s captive fiancé company or other lender through its dealer network. It is also interesting to note that while General Motors, Ford and others have abandoned some brands in recent years, the remaining franchised dealers were designated to perform the above required functions for the owners of Oldsmobiles, Saturns, Hummers, Pontiacs and Mercurys.
There is a strong consumer interest in having independently-owned dealerships acting on behalf of the manufacturers. The primary reasons result from the following:

1. Desire by the independent dealer to find a solution that best meets the transportation requirements for all customers regardless of income, creditworthiness, available cash, or trade value;
2. Competition among dealers drives product and service pricing to a true market level and offers the consumer a choice among vendors; and
3. Value preservation for both the manufacturer’s brand and dealer’s brand drives behavior to seek customer satisfaction with the dealer acting as in intermediary between the manufacturer and the consumer.

It should be understood that the franchised dealership, an entity owned and operated by a business separate and distinct from the vehicle manufacturer, is nonetheless a franchisee. As such, the franchisee is granted specific rights to utilize certain marks of the manufacturer, sell and service the manufacturer’s products, and engage in a limited number of other ancillary activities such as used car sales, car rental, and other related automotive services. However, the franchisee is not given an unlimited license and must conform to the standards and practices set forth by the manufacturer in order to retain the franchise rights. This can include investing in store image programs, adding service bays, personnel and service hours to accommodate local needs, purchasing specialized tools, investing in continuous training levels of sales and service personnel, meeting specific levels of customer satisfaction based upon manufacturer surveys of every buyer and service customer, and acting in a manner appropriate to maintain the general goodwill of the manufacturer and the brands represented.
As such, the dealer – as the franchisee – must conform to the standards expected by the franchisee. Yet, unlike other franchise systems such as McDonalds or 7-11, the automotive dealer also has his own local, regional, or even nationwide brand to support and maintain. In this manner, the dealer acts as both a “system operator” selling and servicing an automotive brand for a manufacturer but also on his own behalf to support his or her own brand. Think of the local car dealers in your districts. You likely do not think of them as just the “Ford” or “Nissan” store but that of “John Doe Ford” or “Jane Doe Nissan” owned and operated by businesses distinct from their manufacturers. They and their employees are members of the community where they continue to represent the automaker’s brand as well as their own.
This is a singularly different element of the franchised automotive dealer system as opposed to most other franchise businesses. No one goes to a McDonalds or a Fairfield Inn and cares who the actual owner might be – the reputation is solely that of the franchisor. The nature of their products and services are such that there is little variance, if any, among franchisees, the product or service is rapidly consumed (and at relatively low cost), and there is no long term on-going relationship of daily use.
Any new car though is expensive, has a long duration ownership cycle, and warranty claims can only be satisfied at a franchised dealer. The relationship with a new car dealer extends well beyond the initial purchase, and maintaining customer satisfaction with the vehicle becomes not only the responsibility of the manufacturer but that of the local dealership as well, even if different from that where the vehicle was purchased. Hence, new car dealers are different from other franchise operators in that there is usually a name attached to the franchise brand that is promoted, advertised, and carries its own reputation separate and distinct from the vehicle brand. Hence, the new car dealer actually serves two masters – that of his manufacturer and that of his or her own creation.
This distinction is extremely important for one reason: the dealer’s desire to maintain his or her own reputation serves as the buffer between the customer and the manufacturer. It is in the dealer’s interest to ensure the complete satisfaction of the customer during the duration of vehicle ownership – and this may involve satisfaction of warranty claims, policy work as goodwill from time to time (for vehicles out of warranty), and expeditious handling of recalls and technical service bulletins as they arise. The franchised dealer often can be the advocate for the consumer with regard to issues that may be a result of action (or inaction) by the manufacturer to provide redress.
Second, the franchised dealer network – among any given brand – provides choices for the customer as to both sales and service. While different brands compete for customers, within a given brand, a consumer can pick and choose among different dealers offering the exact same products and services. So price competition exists between not only different vehicle companies (e.g., Chevrolet versus Toyota) but between dealers within the same brand as well. The vast majority of new car purchases are done in major metropolitan regions. Here, shoppers generally have access to several dealers of the same brand within a 25 mile radius who compete with each other and while providing convenient access to service without forcing the owner to drive long distances for repairs.
Competition permits true price discovery by consumers for the best deal among different brands. But such competition also exists among the dealers of any specific brand to promote their best deals. Thus, dealers provide a service to all shoppers that may see such promotions – and hence force competing dealers to respond. Here again, the consumer is served by independently-owned franchisees competing for business from consumers in a local market. Likewise with service, dealers compete for such business and drive prices to a market level as consumers have a choice.
I note that while all new vehicles are required by federal law to display a Manufacturer Suggested Retail Price, the reality is that most new vehicles are sold at prices somewhat below the suggested price. Further, the actual market pricing for a given vehicle can vary among markets for a number of different reasons – changes in local demand associated with local economies, regional manufacturer incentives, equipment match (or mismatch) with regional needs and desires, excess or insufficient inventory stock, or simply response to new models from competing brands at the local level. With so many variables in the dynamic automobile marketplace no company or dealer can fix a price over long periods of time. The presence of competing dealerships allows this market-based pricing to occur among brands, models and among dealers.
Third, the franchised dealer system has generally served customers very well. Everyone who wants to buy a vehicle – a necessity for many – is generally accommodated in some fashion. For new and used car buyers, the franchised dealer provides the inventory and financing to provide transportation for many even if means offering an alternative to a new car purchase for some. But as independent businesses, the franchised dealer owns his inventory of new and used cars. There are often hundreds of vehicles available sale – which gives customers same day access to transportation. Because such inventory is owned by the dealer – there is a strong incentive for the dealer to make sure that each and every customer can be satisfied. Once again, the consumer benefits from broad selection, immediate availability, and the on-site services the dealer provides to take trades and arrange financing for the customer.
Furthermore there is no evidence that the vast majority of car buyers are willing to wait weeks or months for a build to order vehicle. The purchase of a new car is often prompted by a life changing event: a new job, relocation to the another city, a move to a new home, the birth of a child, marriage, divorce, a death in the family, or an accident rendering the car a total loss or resulting in high repair costs. We know that the shopping process can begin months before the actual purchase, but once the decision has been made the customer wants the car as soon as possible. The franchised dealer, with his inventory, is generally able to accommodate every customer’s needs and pocketbook. Even if a dealer doesn’t have the exact car in stock, the dealer is generally able to find and deliver that exact car the customer desires within a couple of days. This past October, my sister, having just moved to CT from AZ, decided prior to her move to purchase a specific make and model. I accompanied her and my brother in law to the dealer where they settled on the trim level and color they wanted which this dealer didn’t have in stock. My sister needed a car quickly and couldn’t wait for the next factory shipment. However, within ten minutes, the dealer located the exact vehicle 60 miles away in New Jersey and arranged with the NJ dealer to flat bed the car to CT the next day. Within 48 hours of entering the CT dealership for the first time, she and her husband drove out of the store with their desired vehicle.
One of the arguments made by vehicle manufacturers seeking to control both distribution and service can generally be described as follows:

We can offer a compelling customer experience while achieving operating efficiencies and capturing sales and service revenues incumbent automobile manufacturers do not enjoy in the traditional franchised distribution and service model. Our customers deal directly with our own factory-employed sales and service staff, creating what we believe is a superior buying experience from the buying experience consumers have with franchised automobile dealers and service centers. We believe we will also be able to better control costs of inventory, manage warranty service and pricing, maintain and strengthen our brand, and obtain rapid customer feedback. Further, we believe that by owning our sales network we will avoid the conflict of interest in the traditional dealership structure inherent to most incumbent automobile manufacturers where the sale of warranty parts and repairs by a dealer are a key source of revenue and profit for the dealer but often are an expense for the vehicle manufacturer.

The fundamental problem with this argument is that the consumer has no choice but to deal with the factory itself for both sales and service. There is no opportunity for price discovery by consumers for a new car or for service as there is no competition among stores and service centers all are owned by the factory. All new cars are priced as set by the factory – and not determined by the marketplace among competing sellers. Second, the factory also determines service rates, parts costs, and makes its own determination as to whether a claim is valid for warranty coverage. There is no independent arbitrator that can act on behalf of the consumer as in the case of the independent franchised dealer system. And last, the factory owned store has little impetus to accommodate customers that cannot afford their new vehicles – in contrast to the franchised dealer which has a strong motivation to satisfy each and every customer with a transportation solution.
There is yet another problem with the factory-owned model of distribution and service. Since the factory controls both the parts supply as well as the technical training for the mechanics, there is little impetus for the factory to provide such to independent third party agencies. In effect, the factory service locations and its own mechanics (whether based at a service center or delivered through mobile repair trucks) forces all customers to utilize its labor and needed parts at prices it solely determines. The customer is effectively trapped within the network solely controlled by the vehicle manufacturer.
This is in contrast to the franchised dealer system where a customer can access parts and labor among competing independently owned service centers – at prices that are determined by the market. Further, franchised dealers also sell factory original parts to vehicle owners, independent mechanics, and even to other dealers. Some franchised dealers have large wholesale parts inventories and supply factory parts to various professional buyers, thus supplementing the manufacturer’s own parts distribution system. In contrast, the factory-owned store system, as a sole source, has no incentive to do so in order to maximize its own revenues and eliminate potential competitors from servicing its vehicles. Again, not only are customers deprived of the right to shop for the best service price (and experience) but other third parties – such as independent mechanics or other dealers – are deprived of the right to service and support vehicles sold and serviced only by the factory.
Last, there is no inherent conflict between the factory and the franchised dealer with regard to warranty and service. It is true that warranty work can generate a profit for the dealer – and the desire to provide warranty service is a motivator, not detraction for such independent dealers as it is a solution which optimizes customer satisfaction. In the factory-centric model, as a single source provider of service, such motivation to supply and support warranty service becomes diminished as it is only a cost to the factory, not a revenue stream.
There is a notion that factory stores eliminate costs in the factory-owned distribution system that can be passed on to consumers. It is easy to find essays written by uninformed professors on the topic that have helped to perpetuate this notion. One has to ask exactly where those savings might arise. It is also merely hypothetical to assume that the automaker would be altruistic and pass any “realized” savings on the consumer.
There are certainly no savings in fixed assets such as the dealerships land, buildings, or equipment. Nor would there be a reduction in employees. Variable costs such as advertising would remain unchanged. So the question is whether there would be savings in inventory. The “build to order” model remains a theoretical ideal. Currently auto companies are paid immediately for their output by their dealers. Each dealer is then obligated to find the market clearing price for vehicles in high demand as well as models that might be at the end of the production cycle facing intense competition and requiring heavy discounting.
Auto assembly is capital intensive which requires large facilities and skilled workforces. It is called auto assembly because vehicles are assembled from parts and components produced by suppliers that fabricate them in equally capital and labor intensive production plants. Parts producers bid contracts based upon annual production volume targets. They make investments to support projected volumes. Neither the supplier community nor the automakers themselves can rely upon a fixed price retail model based on “build to order” as a way to manage or reduce costs. For both assembler and parts suppliers steady output above breakeven optimizes profits. Stop start production raises unit costs because of the high fixed costs associated these factories. Every product has a life cycle whether an Apple iPhone or Chevrolet Silverado. Demand for individual products varies not only because of macro economic factors but also competition. So to assume that there are savings from a perpetual order bank is simply not credible or supported over the long term even by models like Dell Computer. Dell Computer’s build to order model worked as long as there was no iPAd.
Both GM and Ford experimented with factory ownership of retail stores during the late 1990s. Ford’s ill-fated Auto Collection experiment proved conclusively that factory ownership did not work well. Ford ended its experiment after a couple of years of market share losses amid mounting evidence that its factory stores did not deliver a better customer experience nor reduce costs. GM, perhaps after watching Ford’s travails, and despite repeating the same nonsense about reduced costs through factory ownership, canceled its own planned takeover of 10% of its franchised dealers.
In summary, the independent franchised dealer system does provide the best solution for consumers for the reasons elaborated above. Of course, I recognize that the franchised system is not perfect – and there are and will always be a few dealers which do not provide high levels of customer satisfaction. Yet the franchise system has survived for over 100 years and best serves customer needs.

The competition for transport: room for cars?

This is the second in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

... it's to sell a car in my country!! ...
Guest Blogger: Clara Suong Tran

I had an opportunity to work on the Ford Vietnam account when I interned for a U.S. public relations firm based in Hanoi in 2011. Although my focus was the media and branding side, I also learned a lot about Ford Vietnam's business model. What stood out is how hard it was for Ford to sell a car in my country.

During my 3 months in Hanoi, Ford introduced the Fiesta to Vietnam, opened 2 new showrooms, worked on assembly line expansion and was the subject of a tax scandal on imported parts. The new Fiesta was priced at $27,000 - totally unaffordable for 90% of Vietnamese people. The majority of the population farm on small parcels, which limits their incomes. However, even an urban family in Hanoi or Saigon has an annual income of only $6,000-$10,000. As a result we rely on motorbikes for transportation.

How many cars are there in this picture?

Families that can afford to buy a car usually consider Japanese and Korean brands as their top choices — Ford is a high-end brand in Vietnam. Tourism companies favor Ford Escape 7-seaters, which can carry a family on vacation.

In addition to a small market and competition against the Japanese, Ford (and other brands) suffer from complicated regulations.  Import the whole car into Vietnam and the government will tax you 200%. Companies that assemble their cars inside Vietnam can import parts (but parts need to qualify under a "small" and "separated" standard - this was the reason got Ford into trouble during my internship). All brands suffer from roads inside metropolitan cities that are not wide enough to accommodate cars.

The agency I interned for decided to brand the Fiesta as a lifestyle, fashionable car, targeting young and affluent working professionals age 25-35, who want to look trendy, modern and are also familiar with the concept of taking out a loan for the car. (We have a saving culture there and we pay for houses and cars upfront, for the whole amount, in cash.) So the agency photoshot the new Fiesta with sexy models in bikinis and placed the pictures in fashion magazines. I don't want to get into too much detail of what we did, but 4 months after the Fiesta was introduced, sales reached 1,000 cars. We believed it was a great success!

It is tough to sell cars in third world countries. Toyota last year announced a plan to roll out a number of new compact cars priced around $12,500 in developing nations. Meanwhile, the U.S. is also trying to dump used cars on poor countries. If you want to know more about how hard it is to get into a developing market, try reading the book American Wheels, Chinese Roads by Michael Dunne. (Prof. Smitka assigned this book about how GM set foot in China to my China's Modern Economy class in 2013.) Though time has changed and China is different from other developing countries, it's a good book to read and see why third world countries are both an attraction and challenge to foreign car makers.

...Clara Suong Tran...
editing by mike smitka

The Prof: Vietnam is typical of the ISI (import substitution industrialization) strategy of a high tariff wall around finished goods and lower tariffs on parts. With a 200% tariff (which thus triples the wholesale price), it’s quite profitable to import “kits” at a lower tariff rate and then assemble them, even at very low (and hence inefficient) volumes. In countries that follow the ISI strategy you also get lots of entry, I’m willing to be that everyone in the global industry is present. The only country to step away from that policy in ASEAN is Thailand – and Thailand is the only country with an efficient industry that exports a substantial part of its output.
A sensible policy for a developing country is to import used cars. That ends up using less foreign exchange than importing knocked-down (KD) parts kits. However, it doesn't create the highly visible jobs of a car plant. It also is subject to false invoicing, since it's hard to find an objective standard to make sure importers aren't evading taxes or using artificially high prices to surreptitiously transfer funds overseas. (Many developing countries have foreign exchange controls and a black market for foreign currency.)
Japan has long exported used cars, as domestic regulations encouraged owners to scrap vehicles by their 10th year, even if they were low mileage. That's one reason their brands are well-known in Southeast Asia, and why jeepney makers in the Philippines favor Japanese engines – the lack of a good used car market in Japan makes good used engines cheap. Now the "sha-ken" regulations eased circa 1994, but the used car market remains "thin" so plenty still get exported.

Has Auto Racing Outrun Its Usefulness?

This is the first in a series of guest posts by Mike Smitka's students, drawn from the Economics 244 course blog.

...road cars have been a reflection of racing...

Since the beginning of the automobile industry in the late 1800s, auto racing has been pivotal in the technological progression and proliferation of the modern motor vehicle. Developments often taken for granted in modern cars are attributable to innovations originally intended to shave seconds from a lap time. Advances in transmissions, engine efficiency and power, aerodynamics, suspensions, and safety technology are examples. Racing not only contributed to technical progress, but also to the car's social perception. As the old saying goes, "what wins on Sunday sells on Monday." Customers enjoy owning cars with racing pedigree. Even if your base Chevy Malibu will never enter itself in a road race, it feels a little more special because its (somewhat distant) cousin is currently dominating the NASCAR circuit.

But has auto racing seen the end of its useful life? Has technology reached such a point that advances in racing technology are no longer likely to trickle down to our mundane road cars? Have racing cars distanced themselves so greatly (for safety, speed, and regulatory reasons) that they no longer contribute to a culture of people buying cars because they perceive them as winners?

Take for example Formula One, what many would consider to be the pinnacle of automotive performance. Formula One race teams spend enormous sums of money in order to develop and produce their cars; Red Bull Racing has an annual budget somewhere north of US$296 million. Its cars are capable of speeds over 225 mph and 5 g's of sustained cornering force (about 5 times what your road car can hope to achieve). While technologically impressive, one has to wonder if the cars have diverged so far from their road-going counterparts that their innovation and sales boosting potential have been diminished. For example, tire technology has advanced to the point that Pirelli, the official supplier of all Formula One tires, intentionally engineers its tires to fail rapidly and unpredictably, so that pit stops and "tire strategy" become a bigger factor in races. Instead of innovating in a way that could benefit road cars, the focus is now on ensuring the sport remains entertaining.

NASCAR is another example of racing's departure from pedestrian vehicles [pardon the image!]. Up until the mid- to late-1960's NASCAR (National Association for Stock Car Auto Racing) literally involved major manufacturers racing stock cars, upgraded slightly for power and safety reasons. A Ford Mustang that you could buy off of the showroom floor was not all that different from what you saw the superstars of NASCAR racing on the weekend. Gradually, the cars began to employ non-stock chassis, engines, and eventually even bodies. Today, all NASCAR cars share a common "body template." A Toyota Camry race car shares the exact same body dimensions as a Ford Fusion (only the stickers differ). Your showroom floor Fusion now has about as much in common with its NASCAR brethren as it does a NASA space shuttle. As a result, one has to wonder, does a "Fusion" sticker on the front of a NASCAR vehicle really lead to increased Fusion sales?

As an auto enthusiast and an avid racing fan (a Lotus F1 fan here!) I want auto racing to continue to be a source of innovation and inspiration for the auto industry as a whole. However, at this point in time I can't help but wonder if auto racing has run its course. Shaving even one second from a lap time is becoming exponentially more expensive as more exotic and expensive materials and technologies are required.

Luckily, one bright spot of racing innovation remains: weight reduction. The process of making a vehicle of the same size and physical strength weigh less is a major focus of racing teams. Materials like carbon fiber and advanced aluminum alloys not only make cars faster, but also more fuel efficient. As auto manufactures struggle to meet fuel efficiency standards, weight reduction is a major emphasis. A lighter vehicle, all else equal, will consume less fuel. Materials like carbon fiber are incredibly strong and light, but until recently were both difficult and expensive to produce. [Joining them to the rest of the vehicle also requires advanced adhesives, which have migrated to regular production vehicles.] Luckily, economics of scale and technological developments have made materials like aluminum, magnesium and carbon fiber more feasible to use in your average road car.

These advancements match the current needs of the auto industry. With the ever rising cost of fuel consumers no longer need the 400+ horsepower "muscle cars" of the 60's and early 70's that barely achieve 10 miles to the gallon. Maybe auto racing does still serve a role, but that role has changed. As the requirements placed on the modern automobile change, so do the requirements placed on the race cars.

Road cars have been a reflection of racing. No longer!

...Tyler Kaelin...
with editing by Mike smitka

Comments by students and by the prof, edited for brevity

Andrew Shipp: Auto racing in the sense of technological inovation may have jumped the shark. However, the sport and skill of the drivers are still present and thriving. It may not come down to who has the best car any more, but this fact opens the arena to who has the best skill. This may give scientific data to help worse drivers improve their skills on real roads.

The Prof: As a judge for the Automotive News PACE supplier competition, which recognizes innovation, we used to see things coming out of racing into high end vehicles and then migrating towards mass market cars. Now we see examples of the opposite, innovations first launched on volume vehicles and then diffusing to niche markets but not making it to racing vehicles. Furthermore, I can't recall an example from recent years of the PACE competition where the innovation originated in racing. To give an example, turbos began in the racing arena, but with the downsizing of engines are now commonplace in cars. In PACE we continue to see innovation in turbos, but these are implemented first on production vehicles and not on racecars. So this is a very interesting thesis.

The Prof: No one ever "needed" 400hp! And while the price of gas is higher than in the recent past – corrected for inflation, gas prices during 1986-2003 were the cheapest in history – it's not clear prices will rise further. However, weight saving will remain a priority, due to CAFE (corp avg fuel economy) standards in the US and CO₂ regulations that exert comparable pressures in the EU and Japan.