Financial Crisis – Cars. 16 Feb 2009

Financial Crisis – Cars. 16 Feb 2009
Andre Willers
16 Feb 2009

Selling Cars below cost .
The automobile industry has been selling cars below cost for some considerable time .
See http://andreswhy.blogspot.com "Financial Crisis 31 Jan 2009" et al why this is a Bad Idea .

How could they manage it ?
1. Parts
Building a car from parts costs at least about ten times the shopfloor price . Yet these parts are made on the same assembly lines . Users are fobbed off with various excuses .

What happens:
The extra profits from future sales of parts form an income stream that is used to subsidise the price on the shopfloor .

Once a car has been sold (ie it is in circulation) , actuarial principles can be used to calculate the exact future income over a large number of vehicles .

Part of this is applied to subsidise the shopfloor price , to make it seem more competitive . The rest is profit .
Everybody is forced to do this to sell the clunky contraptions with too many doodads .

New-business strain :
This process places a new-business strain on the company ie the difference between the actual cost at time of sale and the (shopfloor price + future income stream ) . This is handled by bridging credit at the company level .

All very lucrative , until the credit dried up .


2. Theft
Automobile companies used pension- and health benefit reserves to play the futures markets in their own and other stocks , to the detriment of their employees
This was a major source of profit to many of them .
These profits were partly used to subsidise the new-business strain of new cars .

The whole process formed a positive feedback loop that pushed up share prices while lowering shopfloor-prices of vehicles .
Hence SUV's , luxuries like air-conditioning , power-steering , power-adjustable seats , etc , etc .


What to expect .
1.A glut of overly-subsidised luxury vehicles . But the price on the shopfloor won't go down as one would expect from supply-and-demand . Get two for the price of one (as is already happening) or other equally imaginative schemes to get vehicles into circulation . This is to kick-start the income-stream from parts , which can be discounted for desperately needed immediate cash and accounting figures .

2.The price of parts will go up for obvious reasons .
Renault is a good example . They have the same basic model , with parts for different years differing in minor details . They retain the same production line , with minor alterations . Prices are variable (usually upwards) , with excuses of scarcity , transport , storage , etc .

3.Some companies will go belly-up , and deservedly so for abusing a perfectly good mechanism . Their parts will become more and more expensive . The second-hand value of their cars will fall until they are scrapped .
The impact of their demise can be reduced by keeping some parts-lines in production .

4.Does this mean the end of the cheap car ?
I'm afraid so .
No matter how one slices it , the day of the cross-subsidy mechanism is done .
Full up-front disclosure of the real cost has arrived .

Real cost = shopfloor cost + parts + interest + fuel + maintenance + emissions costs + parking + scrapping costs + infrastructure costs .

It will take some time . As the process proceeds , the number of unnecessary add-ons now standard will be reduced to the absolute minimum . Prices will normally rise .

Sometimes the actual total price might even reduce (eg a Model-T BMW) . The marketing corkscrews will be fascinating to watch .

5.The number of models will reduce and simplify .
Green will be in .

6.Public transport .
This will increase . Big auto manufacturers that wish to survive can switch to buses , etc . Suburban and inter-city car traffic will still flourish , but be very expensive and much smaller in volume .

7. Ancillary industries
Small businesses supplying the motor industry will have immediate long-term credit problems . They will slowly go the way of buggy-whip manufacturers .

8. Real estate .
The sprawling suburb is dead .
Expect problems with infrastructure , especially water and sewerage as population densities shift quite rapidly to reflect new costs of transportation .

9 Alternative transportation .
Expect a splitting of urban and rural transportation systems .
Probably the biggest effect of this little storm .

At present , we treat the two as the same , at a huge cost .
We expect to drive on a rural road with maybe 200 users a year in the same vehicle at the same speed as on an inter-urban road serving 200 000 users a year .
Cheap cars and cheap petrol fuelled this , as so many tax-payers expected to go where they pleased in their ordinary car and were willing to pay for it .

But it is really expensive .

This has already happened in many countries , developed and developing . Road and railway maintenance budgets have been concentrated on core areas and core routes .

This is seen as a disaster , instead of the massive opportunity that it is .

Electric and hydrogen cars can be economically implemented in intra- and inter urban areas , but be prohibitively expensive in rural areas .

Why bother ?
Because the rural areas still feed the urban areas .
Without the food from tractors , harvesters , food- and fertilizer transport and silos , the cities starve into a welter of anarchy and war . See "10 . Rural Effects" below .

Expect that this abrupt shift in the automotive industry will lead to a schism between urban and rural transport systems .


10 . Rural Effects
10.1. Rural Roads and railway lines .
A big casualty .
Major routes will be maintained , but smaller country-side routes will no longer bear enough traffic to justify central subsidy or privatization .
But crops still need to be stored or get to market .
This is already a problem in South Africa .

Many countries don't even have rural roads or railways, to start with .
In developed countries , many rural routes , both road and railway , have been allowed to degenerate to a state where is more expensive to repair them than build new ones .
See Land Train below .

10.2.Tyres.
A big winner .
As rural roads grow worse , tyres will grow bigger . Using new synthetics much tougher than existing materials (eg cheap carbon-fibre composites) . They won't be going fast , so they need not be very sophisticated or expensive .

10.3. Land trains .
The "time is money" argument does not hold much water for occasional , slow speed cargo that can be planned for .

We're talking a prime-mover with ten-meter or larger wheels , towing dollies with equally large wheels over rough roads . Fast enough for crops and cargo .
Refrigerated if needed .

External combustion engines would be quite sufficient , cheap and can use any fuel .
Rugged and can be maintained or nearly rebuilt in the field .
Run by co-ops or transport services .
Beats walking , horses , oxen or mules .

10.4 Real 4x4 's
Not the dinky toys that masquerade as sports or military vehicles .

A 4x4 that sneers at bigfoot .
Whose old tyre makes a nice swimming pool . And an engine lasts for centuries .

10.5. Bridges and passes
Toll privatization plus government subsidy .

10.6 Emergencies
Aircraft , hovercraft , airships , high-performance real 4x4's . etc .

10.7 Tractors , harvesters .etc
Really important .
The prime feeders of the cities .
No need to change them in the short term .

10.8 Tourism .
Luxury land-trains carrying 4x4's , horses , planes , flying-wings , swimming pool , tennis court , squash court , etc .

The dynamic golf-course : tee-off from the train onto a pre-prepared golf-course , hop on horse to complete the putt and gallop back to a pukka 19'th hole .
The only golf course a thousand kilometers long .

Put the whole damn train on land-train dollies and travel on the Railways' right-of-ways all over the country . Beats canal barges . And never mind if enterprising locals have stolen the rails .

10.9 Aircraft .
Private airplanes are already extensively used . The cost of a small plane is about the same as an expensive car at present . This will even be more true as cars become more expensive and costs of planes fall due to the new US FAA licencing laws that have stimulated the production of small private planes .
Expect a huge demand for pilot training and ancillary services .

10.10 Water .
Water transport will become a big problem , not only in SA but all over the world .
Periodic droughts will necessitate the irregular shipments of thousands of tons of water for human and animal use over routes that have been allowed to decay to rough tracks . An infrastructure of land-trains can do this .


Summary .
As you can see , there is plenty of scope for making lots of money , using existing technology and not much capital .

In South Africa , there is actually no choice . Transnet has already allowed rural railway networks to decay to the point where they are unusable to get bulk crops to silos . And no new capital will be forthcoming .
Credit has dried up to buy food . Entrepreneurs (like Rovos) are quite capable of cobbling together a land-train .

What will they do ?
Tune in to the next thrilling episode and find out .

Andre