Today, unlike those first systems, the pilot can sit back and relax. There are some huge questions travelling around the world every day at super-high speed. One is ‘what is the point of the stocks/bonds/shares/exchange markets?’ Another is ‘has capitalism ultimately failed?’ and yet another is ‘where is the automotive industry heading in the midst of unparalleled technology revolution?’
These questions have been asked for more than a century, and yet they really are more relevant today than at any point in the past 100 years. At the bottom of all of this is a super power which embodies both the power of capitalism as well as demonstrating what happens when sustained abuse of power takes place.
Why should the rest of the world care what happens in any single market, and especially the US? Let’s find out.
The vision of capitalism which the majority of the world now understands was perfected in the US, where the honourable practice of forming companies to provide goods or services could be sold in the form of shares to backers. The function of trading in such shares quickly became a business in it’s own right, and infamously promoted the idea of ever increasing ‘value’ to a gullible public during the 1920s. When the feed money ran out and the process required debts to be honoured, many companies were grossly overvalued which led directly to the financial crash in 1929.
Back then the only real global communication was post, telephone and telegraph.
In the modern idiom ‘lessons were learnt’ and more rules were placed around the purchase of stocks and shares, to make investors plainly aware that they need only spend cash which they could afford to lose. Yet the individuals and companies that did much to promote pyramid selling during the 1920s were not found out, nor punished. Unsurprisingly the insider dealing that characterises share and commodity speculation continued.
Wars and economic crisis came and went, and the international reach of financial institutions became increasingly global. One notable exception was China, which was quietly making its own definition of capitalism away from the gaze of the ‘western’ world. The technology revolution for financial institutions was to move away from people physically interacting with each other to on-line trading, and to do so 24 hours a day, seven days a week, following each market as it opens in its own local time zone.
This whole machine for all its global reach is primarily defined by the US and close allies such as Europe. Trading may well take place all over, but it is from the perspective of its own market values. Now many of these processes are fully automated, designed to buy or sell assets based on tiny changes in prices trends – and many of those automated processes inside individual financial institutions work exactly the same way. Instead of taking months or even years to create an unsustainable ‘bubble’, it can now take a matter of minutes.
Global financial crisis has never been easier to create, and the time between such devastating events – let alone picking on a single economy as South Africa has suffered from in the past decade – is decreasing. Now we can see the stark question: What’s the point of trading in phantom cash on product or services yet to be delivered when the system has failed society repeatedly?
The last big financial crisis was apparently initiated by banks in the US openly trading debt as a commodity, to the point that few knew how the system worked. The symptoms were to suck an ever increasing number of people into the system in order to create more debt and so more ‘value’. There were two problems – firstly, the system relied on those taking out credit agreements would actually pay cash on time, and do so until the agreement was completed. Secondly the type of client allowed to take out such agreements was extended to those who either did not have the required income in the first place or who had a long history of not paying back debts.
Fatally the loans continued even though the millions of new agreements taken out were flawed, in the belief that the regulation authorities and the insurance companies would pick up the tab if everything went wrong. Neither assumption was correct due to the way the financial sector made a new business activity and did so on a vast scale. Crucially the loans were for all sorts of things, and right after houses came cars in terms of scale.
The automotive market
As with the understanding of capitalism, many of the practises we now accept around the globe to value vehicles were born in the US. We all know a vehicle starts to lose money the moment it is driven out of the show room, and keeps losing money throughout its entire life. This was born to flatter the new vehicle market, to encourage those who could afford new vehicles to swap for another new vehicle to minimise their potential loss. Other forms of transport have value based on remaining life/service costs (aircraft), by the number of hours used (agriculture) or the distance covered per year (trucks, buses, coaches). But not cars.
Worse was to happen. From the heady days in the 1950s to the 1970s where popular models could regularly make 50% or more profit, increasing competition combined with sophistication driven by both consumers as well as law, have seen that profit drop to 6% – and sometimes less than that. As consumer electronics moved towards a new product every six months or less, financial services increased the speed of international trading to thousandths of a second, the automotive sector is stuck with a minimum of 18 months to create any new product.
Backers became reluctant to invest in established vehicle manufacturers, instead getting excited about the booming China market with annual growth exceeding 10% each year for more than a decade. For those looking beyond the next quarterly bonus, the market in China was an illusion in that quite a lot of activity was state sponsored and it was heavily reliant on state/province policy as well as foreign investment. When the feed of cash was reduced and the policies tightened, the market stopped expanding at double digit rates. Yes, this was a very long boom, but it could never last forever.
US love affair with pickups and SUVs
Due to unparalleled product choice, elimination of most of the really bad vehicles and poor differentiation with other products, the non-automotive enthusiast – which makes up the biggest part of the car market, for example – has become weary. Cars have become little more than a commodity in the same vein as a freezer or dish washer. Set against that, the lack of room to manoeuvre on retail price and the automotive industry survival mode to just keep building, so something has to give.
Outgoing President Obama had to deal with the fall out of the pyramid selling scam as the failure of Lehmans Brothers along with the near collapse of Goldman Sachs et al plunged the global economy with 24/7 trading into a flat spin. For the automotive business this brought long standing structural issues into sharp focus, as Ford through better planning narrowly avoided bankruptcy – but GM and Chrysler went under. Around the world other automotive companies very nearly collapsed, too.
The solution in the US was to create ‘New Co’ entities, leave the debt in the bankrupt company and offer public funded repayable loans to ensure operationally the companies continued to operate. With clear leadership from the President and the deletion of key executives from some automotive companies, much of the industry was saved. In that process, just as Ford had to do in the early 2000s, inventory for both cars and parts was cut back to a minimum.
The biggest profit margin products in the US during the 1990s were pickup trucks (huge bakkies), where consumers quickly saw well equipped, tough vehicles at prices at or below many cars. The boom quickly developed into full body trucks, or ‘SUVs’, where the build cost was relatively low thanks to much key component sharing with pickups. Even though the SUVs sold at a premium compared to pickup trucks, the consumer could see they were still getting a large, tough vehicle for not much more than a well equipped car.
The automotive industry did what it has done for a century – as each new generation of vehicle appeared, it became more sophisticated. Base costs have risen, and the fabled profit margin of the large pickups along with SUVs have been cut to less than 10% within three product generations. Crucially gasoline remained cheap compared to other parts of the world. Inefficiency combined with large scale was just right for the US – indeed – had it ever really gone out of fashion?
Stability and the rise of sub-prime loans again
As the self styled ‘money markets’ continued the race to full automation and the evident lack of control over competing sell/buy programmes, the automotive industry needed to make a living. The solution? Give the customer what they want.
Oil extracted from hydraulic fracturing of oil shale oil bed rock had taken the US from being a net importer of oil back into self-sufficiency. Crucially the retail price for petrol and diesel remained low, as the OPEC countries tried to force the US producers out of the global market with a glut of un-sold oil.
We can see this is all short term thinking
So everything should have worked out? Not quite. Wages and tax receipts remained low for large groups of consumers, and some never recovered from the 2007 financial collapse. Vehicle production did increase as consumer confidence finally allowed vehicles, which should have been replaced in 2007, to finally be sold in 2011. Once the backlog of sales were fulfilled, the economy remained flat.
The device which fuelled the recovery – printing money – had been used to such an extent there was blue sky between the day-to-day economy and the world inhabited by the financial institutions. In order to reach the planned sales targets and thus revenue, automotive companies decided to offer cash back, price cuts… even sub-prime loans. Unlike Europe or Japan, the stock of vehicles mainly destined for the North American market started to rise during 2016.
Undeniably President Obama and his administration took steps back in 2009 which directly saved thousands of jobs in the automotive industry. That in turn allowed investments to continue in countries such as South Africa, since the automotive industry is a global business. If one part of a global company fails, especially if it is the HQ, more often than not the overall business also suffers.
So far, so good. President Obama set in motion a move to invigorate the automotive industry by investing in future powertrain and connectivity on a scale much larger than his predecessors had done.
Again, good. The issue? It has not delivered. The advanced projects did not have sufficient ties to ensure real vehicles which customers could buy would come to market any time soon. Yes, the Corporate Average Fuel Economy (CAFE) legislation has done much to drive more efficient vehicles, but has also stopped short of genuine innovation. Swapping out a steel cab and load bed for items made of aluminium whilst retaining the large steel alloy chassis, barn door aerodynamics and vast powertrain is a good intermediate step, not a strategy. The idea that the ‘free market’ will come to the right conclusion is ill founded, because that’s where policy from government should step in to ensure the right future strategy for the best interests of all citizens.
Why should we care what the US gets up to?
The bottom line is that nowhere on earth – not even China – is immune from the automated marvel of US style capitalism. So getting industrial policy wrong in one part of the world directly affects the ability of the business to invest anywhere else. Low profit margins, increasing cost base, odd legislative policy from some governments and underlying boredom with the whole idea of vehicle ownership mean a big, big change is about to occur.
Most vehicle manufacturers already know this. Car ownership will move towards rental for the time we need to use a vehicle, which is never 24/7 unless one runs a taxi company. Whilst powertrain costs are far from settled, we will see more electricity used to help drive vehicles, and connectivity to ensure they are only a few kilometres from the next spending opportunity.
The good news? In this world of imperfect connectivity and fledgling autonomy, new ‘enabled’ short term hire vehicles will mix with lots of vehicles equipped with zip, meaning a brand new source of collision repair activity. Have a great 2017!
Auto Industry Consulting is an independent provider of technical information to the global collision repair industry. Products include EziMethods, our online collision repair methods system and Auto Industry Insider, our collision repair industry technical information website. For more information please visit the websites: www.ezimethods.com and www.autoindustryinsider.com or contact firstname.lastname@example.org