Here's Another Reason They Want You to Be Mad at Dealers
Tesla plans to ship cars from China to North America, according to a new report; plug-in hybrids are due for a moment of truth; and dealers. All that and more in this edition of The Morning Shift for April 24, 2023.
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1st Gear: Dealers
Now, car dealerships come in for all sorts of stick, because they generally deserve it, protected as they are by state franchise laws, with little incentive to offer a positive experience for non-luxury consumers. There are also, you know, markups, which are annoying, but not because they are unique to car buying but because everyone involved seems to respond with a big shrug.
Automakers like to keep their dealers at an arm’s length, and whenever a particularly egregious example of a markup arises — or at least gets enough traction on social media — automakers like to pretend that, well, there are a few bad apples out there. On the other hand, dealers argue that they are here to make money and not friends, and they are simply selling cars according to market demand. (This also explains their service departments, the whole make-money-not-friends thing.)
All of that said, a story published Sunday in The Wall Street Journal made me sympathetic to dealers for once, in that the story seems to blame a good deal of inflation on dealer markups for new cars, based on a study published by a guy who used to work at the U.S. Bureau of Labor Statistics.
Markups on new cars were a key force behind the current bout of inflation, according to new research published this month.
Those extra dealer profits contributed between 0.3 and 0.7 percentage point of the nearly 16% rise in the consumer-price index between the end of 2019 and the end of 2022, a study published in a U.S. Bureau of Labor Statistics journal found.
[…]
“It was really from famine to feast for dealers,” said Michael Havlin, the economist who wrote the paper. He formerly worked at the BLS but wrote the paper, which was reviewed by the bureau’s subject-matter experts, in a personal capacity.
You can read the full study here if you’d like, but it’s not often that the a spokesperson for the National Automobile Dealers Association, a dealers group, is moved to say this:
It is “absurd” to argue that dealers contributed substantially, or even at all, to inflation, a spokesman for the National Automobile Dealers Association said. “By that logic, every consumer who sold or traded in a used vehicle for more than its Kelley Blue Book value profiteered off that sale and thus bears responsibility for contributing to consumer inflation,” he said.
The guy who did the study, though, offers the following:
Mr. Havlin studied markups by analyzing the differences between how new-car prices are measured in official government data. The consumer-price index, which tracks what customers pay for cars, and the producer-price index, which tracks what manufacturers charge dealers for cars, increasingly diverged over the past few years.
Mr. Havlin’s work showed that dealer markups were largely responsible for the gap between the two indexes. A new index he created to estimate dealer markups on new cars, which was informed by a separate measure of PPI for dealers markups, showed a rapid rise in 2021 that peaked at 17.7% in September 2022.
I can hear the voice of an old stats professor repeating over and over “correlation is not causation,” but perhaps it is true that dealers added to inflation, though it also seems like a group effort from pretty much every sector of the economy.
This is all too convoluted, in any case. Let’s go back to being mad at dealers for old, normal reasons, which never went away.
2nd Gear: Plug-Ins
Toyota’s new Prius Prime is coming, a bit of a half-measure from an automaker that has only recently begun to fully commit itself to the all-electric future. That’s fine for Toyota, which is big enough to make a lot of mistakes and still survive, but the Prius Prime might also be an unwitting referendum on plug-in hybrids, period. The question is: What and who are plug-in hybrids for?
The answer, according to people in the industry, is markets where charging infrastructure is crap, which may be most every country depending on how you measure it. Still, at the end of the day, a plug-in hybrid is a heavy car with two separate sources of power, which, what are we really doing here.
From the WSJ:
…some question the staying power of the plug-in hybrid market as full EV sales take off in China and parts of the U.S. and Europe. General Motors Co. has said that it sees no future for hybrids in its U.S. lineup and that it views its investment dollars as better spent on developing fully electric vehicles.
In a recent report, Moody’s Investors Service projected that plug-in hybrids would likely make up 7% of global sales in 2030, down from the 9% it had earlier projected. It said pure EVs would likely make up about a third of global sales by that date, up from its previous forecast of about a quarter.
One reason, said Moody’s, is “high costs for producing redundant propulsion systems,” referring to the fact that hybrids have both a gasoline engine and an electric motor.
In California, the share of plug-in hybrids in new-vehicle registrations has stalled at about 3%, while EVs surged to account for about one in six new registrations last year, according to the California New Car Dealers Association.
One other argument for plug-in hybrids is that they allow consumers to dip their toes into the electrified water, but, functionally speaking, they don’t operate much different from battery electric cars. Both of them you gotta plug in if you want to use electric power. If you’re going EV, might as well dive in.
3rd Gear: CarMax
The used car dealer CarMax has been going through a bit of a boom-and-bust cycle in the pandemic, as used car prices and inventories swing wildly. Perhaps this is in part why, according to Automotive News, CarMax is offering a revolutionary new feature in their app. The feature is telling you how much money you can borrow before you go shopping for a new (used) car.
CarMax Finance and third-party lenders will “create a pre-qualification capability where customers get quick credit decisions from multiple lenders on vehicles across our nationwide inventory with no impact to your credit score,” said Jim Lyski, executive vice president for corporate strategy, product and marketing for CarMax.
“Pre-qualification decisions are personalized for each customer based on their credit profile, with vehicle and financing options that are curated just for them with more than 95 percent of customers receiving approvals,” Lyski said.
Once pre-qualified, customers can shop on CarMax.com with their personalized finance terms.
CarMax started building new enhancements to its online finance capabilities about a year ago, Lyski told Automotive News.
Getting pre-qualified for a loan before you go shopping for your big new purchase? That’s almost like how mortgages and home-buying works in America. It seems a little better for everyone involved rather than picking a car from the lot and having your financing stretched to its absolute thinnest to “afford” it.
4th Gear: Tesla Model Ys to Canada
Reuters says that, according to their sources, Tesla is going to ship some Model Ys to Canada to be sold this year. This would, Reuters says, be the first time that Tesla has shipped cars to North America from China to sell them. As such, this could be a tipping point, or something, because, apparently, Teslas are that much cheaper to make in China.
Over the weekend, Tesla posted on its website that it would offer a new, cheaper version of its Model Y in Canada, a rear-wheel drive variant of the SUV-styled crossover priced C$10,000 ($7,377.90) lower than the long-range version of the vehicle available in that market.
Tesla’s website showed that customers in Canada could take delivery of the new version of the Model Y between May and July.
The Canadian government’s website was updated on Friday to show that the new version of the Model Y and the more expensive long-range variant both qualify for incentives of C$5,000 on purchase or a four-year lease.
Tesla Shanghai began production of the Canada-bound version of Model Y earlier this month, the person with knowledge of the development said. The production memo reviewed by Reuters showed that vehicles had been designed and tested for export to North America, with a target of producing nearly 9,000 this quarter.
Tesla did not immediately respond to a request for comment.
The implication here is that shipments of Teslas to the U.S. from China aren’t far behind, and that sure seems the case, though I’m excited for a whole new level of Tesla hierarchy, those that own American-made Teslas and those that don’t.
5th Gear: Tesla Capital Expenditures Are Going Up
The company said Monday in a filing with the Securities and Exchange Commission that it would be spending more on capital expenditures this year, according to Bloomberg.
The electric-car maker expects to spend as much as $9 billion in 2023, according to a regulatory filing. As of January, Tesla provided a forecast range that was $1 billion less at both the low and high end.
While Tesla executives have been emphasizing cost-cutting efforts recently, as the company has repeatedly reduced vehicle prices, the carmaker has increased its capex forecast several times in the last nine months. In July, the company was expecting $6 billion to $8 billion for 2022 and the following two years.
What does this mean? Teslarati, a blog about Tesla, teases out that the increase is because of the new factory in Mexico, and other matters:
Additionally, Tesla continues to develop new battery cell technologies, work toward autonomous driving, and ramp manufacturing, which can manipulate its plans for spending, it said:
“We are simultaneously ramping new products, ramping manufacturing facilities on three continents, piloting the development and manufacture of new battery cell technologies and investing in autonomy and other artificial intelligence enabled products, and the pace of our capital spend may vary depending on overall priority among projects, the pace at which we meet milestones, production adjustments to and among our various products, increased capital efficiencies and the addition of new projects.”
The increased spending during these periods depends on “the specific pace of our capital-intensive projects and rising material prices and increasing supply chain and labor expenses resulting from changes in global trade conditions and labor availability associated with the COVID-19 pandemic.”
When is the new Roadster getting here, anyway.
Reverse: RIP Vladimir Komrov
Komarov, a fighter pilot and aeronautical engineer, had made his first space trip in 1964, three years before the doomed 1967 voyage. After 24 hours and 16 orbits of the earth, Komarov was scheduled to reenter the atmosphere, but ran into difficulty handling the vessel and was unable to fire the rocket brakes. It took two more trips around the earth before the cosmonaut could manage reentry.
When Soyuz I reached an altitude of 23,000 feet, a parachute was supposed to deploy, bringing Komarov safely to earth. However, the lines of the chute had gotten tangled during the craft’s reentry difficulties and there was no backup chute. Komarov plunged to the ground and was killed.
There was vast public mourning of Komarov in Moscow and his ashes were buried in the wall of the Kremlin. Sadly, Komarov’s wife had not been told of the Soyuz I launch until after Komarov was already in orbit and did not get to say goodbye to her husband.
Neutral: Hope You’ve Been Well
I was cleaning out my glove box the other day while waiting for help after my battery died because a driver of the car — who will remain nameless — left the goddamn lights on. Help arrived in short order but left me enough time to go through every service record on my 2008 Honda Fit for its entire life. One day I’ll do a full accounting, but it is all for normal maintenance: oil changes, air filter changes, a new alternator, new tires, a new air conditioning compressor, a new battery, brake pads and rotors, brake shoes, some belts, new spark plugs, throttle body service, transmission fluid flush, brake fluid flush and replace, etc. About two inches thick of service records. My attachment to my car isn’t sentimental, just sunk costs.
