Ronald Reagan is famously quoted as saying "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" One wonders if a similar sentiment is shared by automakers and suppliers now that the National Highway Traffic Safety Administration is talking about increasing its understanding of vehicle electronic systems and the risks of electromagnetic interference. Is NHTSA likely to be a help or a hindrance in the process of returning the market to the culture of ‘better driving through technology’ that has marked the industry over the past twenty years?

Past testing by NHTSA has not shown any link between unintended acceleration and electronic control systems, but there are lingering questions about whether this is a solid conclusion or a failure of testing. Stung by criticism that it, too, was lax in addressing complaints from Toyota owners, NHTSA is gearing up a broader investigation [sub].

In a recent Wall Street Journal article [sub], Toyota spokesman John Hanson said that Toyota is very supportive of NHTSA’s plan to further study electrical interference. He said that Toyota has done “exhaustive testing” but has yet to find any evidence that such a problem could lead to unwanted acceleration. This public comment suggests that the additional resources leveraged by a government agency would be a benefit in getting a more definitive answer to an industry-wide concern. We also appreciate that the government is embracing the concept of getting the facts before leaping into more regulation – hopefully NHTSA can keep Congress from indulging in a kneejerk reaction that adds cost and obstacles rather than facilitating what we all want – safe, affordable vehicles that fully leverage the progress of science and technology.

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You have to have a little sympathy for CTS Corp. these days as it struggles with the public relations nightmare that has engulfed Toyota. This week’s press release titled “CTS Not a Supplier of Pedals for Prius or Lexus Models” is evidence of an effort to limit the damage in the court of public opinion and its shareholders. CTS has said it built its parts to Toyota’s specifications but other sources say it was an RDDP program (Request for Design and Development Process). RDDPs are functional parts that are separable and are designed fundamentally by the suppliers (as opposed to either a ‘design-in’ which takes place interactively at the Toyota Technical Center, or a build-to-print part). With RDDP, Toyota provides only basic specs and relies on the supplier’s expertise in its field to complete the design and development for a specific vehicle program. Eventually, blame for unintended acceleration will undoubtedly be affixed and apportioned, but right now, the attention of the parties is appropriately focused on the fix. What’s ahead for CTS in this storm?

In its investor presentations from last year, CTS shows as a great example of a healthy, strategically sound company that is positioned to benefit from external trends. At 28% automotive, it has desirable market diversification as well as customer diversification – no single customer accounts for more than 10% of sales, and the Detroit 3 combined are 5% of sales. Through the course of 2009, the company reported at least $200 million worth of new contracts for its electronic throttle control accelerator pedal modules and other automotive applications. Regulatory initiatives driving tougher emissions standards and better fuel economy were expected to yield double-digit sales growth for the company’s sensors and actuators business over the next 3-5 years.

The imperative for CTS now is to limit the damage from spreading to other customers or other products. What happens to its projected $82 million in sales of accelerator pedal modules, sold to 10 major customers in North America, Europe and Asia? Toyota issued a statement supporting CTS and citing shared responsibility as the pedals were designed jointly, but the fact remains that the problems appear to be limited to vehicles with CTS pedals and not those with Denso-built pedals. We hope that rational inquiry and effective communications will serve the participants well, but in these days of the dramatic 24-hour news cycle, it’s hard to be optimistic.

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While I was very critical of Toyota's handling of this crisis only two days ago, I am now beginning to be very sympathetic to their increasing "Sucks to be you" position. First, they did a much better job on the PR front starting on Monday. They gave a detailed and what appeared to be a very sincere apology in multiple ways and did a nice job of stressing that they pride themselves on their quality reputation and will do everything possible to keep their customers' trust.  Numerous dealers have also helped the cause with Toyota customers by reiterating that they are doing everything possible to fix the vehicles as quickly as possible. The problem is, they apparently dragged their feet before understanding the gravity of this situation and succeeded in ticking off NHTSA and the Department of Transportation. Numerous media outlets reference department officials "needing to go to Japan to remind Toyota of their legal obligations".  Ouch!

Much worse, it appears Ray LaHood, the Secretary of Transportation, has sensed an opportunity to take center stage and set himself up as the protector of the American consumer. He told a press conference today, "If you own one of these vehicles, stop driving it and get it to a Toyota dealer to get it fixed." While he has since referenced this as a mis-statement, the damage was done.

This media feeding frenzy is not good for anyone in the industry as it keeps another negative story about automotive going and does major damage to one of the most revered companies in the world - a company that critics need to remember employs a significant number of American workers and is still one of the best companies in the world. We should all hope that Toyota starts to get ahead of this story and that the Obama administration tempers its tone a bit.  Otherwise, the fallout could be a lot broader than Toyota.

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Hard as it is to tear one’s attention away from Toyota’s travails these days, we wanted to highlight a recent article in the Wall Street Journal concerning a pattern to anticipate in 2010 (“’Bullwhip’ Hits Firms As Growth Snaps Back,” WSJ, 1/27/10 [sub]). Caterpillar Inc. is used as an illustration of how the need to replenish depleted inventories is likely to create a production jump even if overall demand (whatever the product) remains flat. Given Caterpillar’s projections for growth in 2010, it has launched an organized campaign to prepare for ‘the bullwhip effect.’ We think this falls into the category of ‘good problems to have,’ but the article describes the challenges that OEMs and suppliers face in coping with a significant swing in orders, and the measures that Caterpillar is taking to forestall potential snags in the supply chain.

Caterpillar estimates that it will need to raise production at least 10-15%, but suppliers would see increases in the range of 30-40% as they help Cat restock inventories in addition to meeting the base level of ongoing demand. The challenges and concerns for suppliers faced with these sudden shifts are many - will they be able to finance the purchase of raw materials; should they re-hire workers yet; if they can’t get credit should they just say no to new orders, etc. – and the effects travel up and down the supply chain. Caterpillar has seen it all before, so it has launched a campaign to absorb the whiplash. Steps cited in the article include:

• Visits to 500 major suppliers around the world accounting for 80% of purchased goods and materials to present their forecasts and discuss preparations;
• Instituting a program to allow suppliers to borrow money from a bank against their receivables at a favorable interest rate within five days of delivery of goods to Cat, vs. a typical 60-day wait;
• Requiring suppliers to prepare a detailed written plan for each part produced on how it plans to respond to the bullwhip on that part;
• Committing to a freeze period as it transitions to growth, where Cat will not change an order for a three-month time span, so suppliers and their banks can plan with greater assurance;
• An internal risk-assessment team that meets weekly to rate and monitor suppliers’ viability.

Caterpillar’s deliberate and proactive approach is laudable and it’s encouraging to look forward to the coming upswing in heavy equipment and other industries. We had to grimace a little over one point in the article, though, when a company that supplies metal tubing for engines and hydraulic systems was commenting on its experience. The article says, “The company [Morton Industries LLC in Morton, IL] is also adjusting to probing questions from Caterpillar. “They asked us things like, ‘How much affiliation do you have to the auto industry?’”… says Steve Leitch, an account manager.” Although it is discouraging that automotive exposure can be seen as the kiss of death in certain circles, we are confident that well-managed supplier companies will succeed in any of these transportation equipment sectors.

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... hopefully it's not! I am really excited about electric vehicles, and, despite the fact that a rational thought process says they won’t be a significant share of the market for a long time, I sincerely hope that a technological breakthrough comes along quickly and shatters that line of thinking. And, with all of the development work and investments being funneled into this area, there is a small part of me that believes it will happen and soon. There are companies out there that are so close to making the viable electric vehicle a reality! Take Saba Motors, for example….

The company’s Carbon Zero roadster is a plug-in electric that will be available in the second half of 2010. According to Saba, the vehicle has a low-manufacturing cost, can be easily ramped up to production volumes, is affordable, offers high-performance, and costs an average of $7.04 per week to charge and operate. The Carbon Zero can go from zero to 60 mph in five seconds, with a top speed of 105 mph, and has a driving range of between 120-140 miles between charges.

Saba’s product certainly sounds too good to be true. But, the Carbon Zero made it onto the list of final contestants for the Progressive Automotive X-Prize. This is significant, because the X-Prize foundation applies very strict and rigorous selection criteria and only vehicles that are truly viable are selected for the final phase of the competition. The vehicles must be available for the spring competition and testing events and they must be production capable. The winners of the competition will be selected in September 2010. Saba Motors is still looking for additional investors – any takers out there?

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With Super Bowl 44 fast approaching, it’s been a tough year for automakers to decide whether to enter the expensive commercial fray or not.  Certainly it would be considered unwise to waste taxpayer money for Chrysler and GM.  But perhaps it signals another change going on in the industry as other automakers are shaking things up and dipping their toe in the proverbial beer bowl.  Volkswagen is going to premiere a 30-second ad in the third quarter of the game.  This will be the first time in nine years that VW is airing during Super Bowl game time. 

The campaign (subtitled “Punch Dub”) is based on the concept of Slug Bug – when you would see a VW Beetle you would call out “Slug Bug” and then slug your friend (yeah, nice friend, I know).  VW is bringing this concept alive again but based on any Volkswagen model and will expand the ad campaign to social media (Facebook, Twitter, etc.) as well.  Here at IRN we don’t see this as an isolated fun little ad campaign that starts in the second half.  This is a sign that VW is roaring back with a new campaign designed to play on historic strengths, current vehicle line up and rev up more business to assure both their Chattanooga and Puebla plants are kept humming along.  After all, Volkswagen’s sales were only off 4.3% in 2009 from 2008 levels - - not too shabby considering the industry average was down over 20%.

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If Toyota's initial public relations campaign that started this weekend is any indication of how they will approach this crisis, the company is in more trouble than I thought. In case you missed it, there were two things that happened. Chief Executive Akio Toyoda, grandson of the founder of Toyota, was at the Davos economic conference in Switzerland and he was caught briefly by reporters where he was quoted as saying; "I am deeply sorry...about the recall." He then disappeared from view for the rest of the conference, skipping out on all the major functions to avoid having to talk to the media again. He appears to have the same apology skills as George W. Bush so avoiding the media was probably a good idea.

Then, there was the beginning of the media campaign this weekend. In full page ads in most major newspapers, Toyota started communicating with customers and the American public. To say it was not an auspicious start is an understatement. I actually was turning the page of the Sunday New York Times before I realized it was their ad. It was typical Japanese minimalism as it showed a giant pause button to start the explanation of why they had stopped production at many of their North American plants. It went on to say that in the next few days it would start telling customers what Toyota was going to do to fix their accelerator problem. It then listed a website you could go to for more information. This ad was wrong on too many levels to count. First, the general public and your customers don't give a rip about stopped production at your plants!  They care about the fact that their trusty Camry accelerates out of control periodically and kills people. Second, it attempted to say it was a relatively limited problem but they were being extra careful with the massive recall. And lastly, did I miss even a modest apology?  The ad actually made Mr. Toyoda's "deeply sorry" comment look good. And you paid for someone to help you develop this ad?

We can only hope that starting with an interview on the Today show this morning, Toyota understands that learning how to say "we're sorry" in every way imaginable is their only hope of not suffering significant long term damage to their brand.

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The Toyota recall story has been moving so fast and furiously, it has been hard to keep up.  Given the amount of ink that has been used (and media air time) on this story, we were hesitant to jump into the fray but we also didn’t want people to think we were ignoring the story.  For those of you that have been on another planet the last week, Toyota has recalled over 2.3 million vehicles in North America and another 2 million vehicles in Europe over a faulty accelerator pedal.  While Toyota has been bearing (and will continue to bear) the brunt of the consumer backlash over this issue, it surfaced this week that the primary suppliers for this part are Denso and CTS, based in Elkhart, Indiana.  Numerous sources yesterday confirmed that the faulty parts appear to be confined to CTS.  While it is hard to address this issue in any kind of meaningful way in a short blog posting, here goes:

Impact on Toyota
•  Profound but still “fixable” if they handle it correctly.  Profound because their bullet proof reputation for quality is gone.   They had declining consumer quality ratings for the last few years and with this recall they will have successfully thrown themselves under a bus.  Too many front page stories of teary eyed drivers stressing how terrified they were when they lost control of their car;
•  Fixable if they can convince consumers that taking this massive approach to the problem is what a quality/safety oriented company would do.  The only problem is they apparently have known this was an issue for a long time so they may have a tough time explaining why they didn’t do anything before this.  They also need to convince NHTSA that this approach is acceptable.  If they have to replace the entire pedal assembly, the cost and damage to their brand could be astronomical;
•  Further evidence for critics that Toyota has continued to cheapen their components in an attempt to reduce their cost structure (probably trying to improve their position against Hyundai).  They were heavily criticized (and we agree), for example, for cheapening their interiors on most of their vehicles displayed at the recent Auto show;
•  A huge present to Ford, GM and even Chrysler.  Couldn’t have come at a better time for the Big 3 as they seek to recapture lost market share.

Impact on CTS
•  Contrary to their current bravado, they will be lucky to survive without a “significant financial emotional event”.  In their earnings call this week they claimed this would not have a materially negative impact on their earnings this year and besides, Toyota only represents 3% of their sales.  Really?  No major impact? I am frequently referred to as optimistic but this appears to border on delusional.

Impact on OEM Parts/Supplier Strategy
•  Could lead to some serious re-visitation of parts commonization.  Our guess is that there will be a greater attempt to balance the cost advantage vs. the risk;
•  Could seriously reinforce the OEMs taking back design responsibility for some modules and components, particularly those that are safety critical.  This could have the most long lasting effect of all.

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On the surface, it seems like EVs are the answer to the auto industry’s prayers – no fuel required and they do not contribute greenhouse gases to the environment. But what about the pollution that goes along with electricity generation? When EVs eventually reach a point of critical mass in the future, will we simply be trading one source of pollution for another? And, do we have the electricity-generating capacity to accommodate the new demands this will place on the system? These are issues not often discussed as part of the intense media attention that the electric vehicle sector receives. Part of the answer to those questions, it seems, is dependent upon the direction and developments that take place in the alternative energy sector. If wind, solar, or nuclear power are able to increase their share of domestic electricity production then there could be a net positive effect on the environment. At present, however, coal is responsible for roughly half of the electricity produced in the U.S. So where does that leave us?

Researchers are busy looking into this issue, and the Argonne National Laboratory has developed a model to measure energy use and emissions for different types of vehicles. The GREET (Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation) model, as it’s called, takes the entire cycle into account – from well to wheels. Recent studies from Argonne estimate that EVs would reduce greenhouse gas emissions by approximately 26% compared to gasoline vehicles, even considering the fact that the majority of our electricity is still created from coal. Other federally-funded studies have also indicated that if EVs are charged primarily at night, there would not be a need for new power plants. Furthermore, EV charging could take advantage of excess energy generated from renewable sources when it is available.

So, assuming all of the other variables (price, technology, consumer acceptance etc.) fall into place for EVs, we could indeed see a cleaner environment even without major strides in alternative or renewable energy sources right away.

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In September of last year, I did a posting that reinforced that IRN was one of the only automotive analysts that believed in a reasonable recovery in 2010. As many clients will remember, I referred to the forecast scenarios using the following terms:

• Best Case Scenario=Production Sucks
• Probable Case Scenario=Production Really Sucks
• Worst Case Scenario=Production Really, Really Sucks

At the time, our production forecast for 2010 was 11.3 million units which we referred to as the probable scenario. A brief reminder of what I said at the time:

It’s Lonely Believing the Economy Will Actually Recover in 2010 …it is very difficult to find anyone that doesn’t think 2010 will still be a very tough year with a modest recovery if we are lucky in 2011. That is, anybody but IRN.  Our outlier position was really brought home in a meeting last week where the current automotive production forecasts from the major forecast services for 2010 were compared and we were a million units higher than the next closest forecast and almost two million units higher than the most pessimistic forecast.  My initial reaction was: • “I sure hope we turn out to be right because we will look brilliant compared to everyone else” -and- • “I sure hope if we are wrong, we are not too far off or we will look stupid compared to everyone else” Yes, I admit it.  It was a shallow initial response.  But the more I thought about how many times I have been referred to as being optimistic relative to the economy and the outlook for the automotive industry in the last six months, I realized that we need to make sure our clients understand that our realism is thoroughly supported by data and history and is not just a positive reaction to the continuous chorus of negative attitudes.

 
So yes, I am taking this opportunity to suggest that while we may not be brilliant, we are clearly really smart.   We have brought our forecast down a bit since September (we are currently projecting 11 million units), but most other analysts have been gradually or rapidly bringing their forecast numbers up. At this point, there is less than a 500,000-unit difference in projections from the various analysts for 2010 with most falling between 10.8 and 11 million. While I have some caution that we are less than one month into 2010, barring some unseen catastrophic event, production should be near 11 million units with clear potential for a higher upside in the second half of 2010. After having been perpetually referred to as way too optimistic throughout 2009, I am definitely taking this opportunity to say “I told you so.”

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If you have always been an early adopter, on the cutting edge of fashion, you’re going to have another opportunity to shine again. Nissan is launching its all new electric vehicle, the Leaf, late this year.  The Leaf is considered a plug-in hybrid vehicle.  Plug-in hybrids run on batteries that are recharged using electricity from the wall plug and can be driven on electricity alone for a range of at least 20 miles.  The gasoline engine acts only as a back-up to the electric motor and battery system.  Nissan claims to get 100 miles from a single charge.



Nissan’s Leaf won’t be rolling out to dealerships until 2012 but Nissan is testing the vehicle in five major metropolitan markets throughout the US starting late this year.  This is a follow-up to their already extensive testing conducted by in-house teams.  Expect Nissan to spend a great deal of attention on fine-tuning consumer preferences and needs between now and production launch.  It will make the difference between a lackluster entrant and clear brand differentiator in what will be a quickly crowding market space. 

Most industry analysts, IRN included, do not expect fully electric vehicles to reach any sort of critical mass for at least ten years. As we have referenced in other posts on this topic, savvy suppliers, however, will develop a strategy now.

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We posted on Jan. 19 about the question in the recent IRN study Industry in Transition: The Dynamics of Supplier-Customer Power which asked suppliers how their power relative to that of customers had changed over the last few years. Fifty-seven percent of the survey respondents felt that their power had increased. On Tuesday we looked at these respondents arrayed by company size. Today our inquiring minds wondered how those who are feeling powerful look when arrayed by product area. The chart below shows the distribution of the Powerful vs. the overall survey respondents.



Product areas where those who feel increased relative power are more numerous than their overall presence in the survey are: Body Exterior; Electrical/Electronics; and, most strongly, Powertrain. Suspension suppliers were equally represented in the overall survey results and in the set of Increased Power, while Interior suppliers and those in the Other category were slightly less likely to be feeling the surge. But the good news is that suppliers appear to be regaining their footing regardless of where they operate.

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For those of us who have recently been enjoying the Detroit Auto Show, it’s hard to ignore all the attention that Ford has been receiving especially with winning both Car and Truck of the Year Awards. But here at IRN we are pretty intrigued by what we see as ‘shifting sands’ of loyalty. Consumers have evolved in their idea of what comprises a “value vehicle” vs. a “solid investment.” Value traditionally meant lower price AND giving up features they desired.  Investment tended to focus on warranty and reliability. Hyundai entered the US market with a phenomenal warranty offering that blew competitors out of the water but still competed in a price-sensitive market. Honda and Toyota have always focused on the long-term vision of offering solid designs (albeit stodgy by some) and limited price variances to maintain brand integrity. Here is where Hyundai is carefully intensifying their branding footprint into the critical mid-size sedan market…. 

The redesigned 2011 Sonata that is starting to arrive in dealerships now is causing headaches at Toyota and Honda (and it should). With 35 mpg, it beats all of the competitors in its class. Stylistically, it’s spot on – with European flare that the Japanese have been lacking for years and Americans will gravitate to. Hyundai will be offering a hybrid and turbo version later this year. The IRN crystal ball suggests that this vehicle will be winning Car of the Year at next year’s Detroit Auto Show….

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Do you remember as a kid dreaming of when you would be big enough to sit at the “adult table”? And then when you finally make it, you learn it has its good points and bad. That’s probably how Honda is feeling right now. One of the downsides of maturity is that your days of making progress by leaps and bounds are behind you. We see evidence of this in the recent news about 2009 industry results; Honda gained just 0.2% in U.S. market share for the year. By contrast, the newer kid on the block, Hyundai/Kia gained an impressive 2% year-over-year, picking up a couple hundred thousand units of sales. Honda’s days of easy expansion at the expense of the US Big Three may be over, but on the plus side, it now has time to refine and reap the benefits of the highly flexible and focused organization that it has built.

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The much hailed Chevy Volt – GM’s entree into the alternative vehicle segment – has hit a snag, it appears. Just recently, Ed Whitacre was quoted saying that the Volt would be priced in the low 30s, and furthermore it would be profitable for the company. Up to the point of Whitacre’s comment, the Volt’s price target had always been around $40K. So, the $30K announcement no doubt raised some eyebrows. The rumor was put to rest almost immediately, with a separate announcement from a different GM spokesman who said that Whitacre’s comment was misleading. The $40K price tag still holds, but GM is hoping for a $7,500 tax credit from the federal government to help bring the price down into the more palatable low 30s. The conflicting information certainly was not flawlessly executed PR for the Volt.

As if that isn’t bad enough, IEEE Spectrum magazine, in their annual piece on technology winners and losers, rated the Volt as one of the losers for 2010. Why? Price was a major factor – because most consumers just won’t be willing to shell out $40K for the car. A further obstacle relative to the pricing issue was highlighted in a recent study published in Energy Policy journal. According to the study, the savings on fuel costs for Volt customers will not offset the higher sticker price.

So, for now, it looks like the Volt (as great a concept as it may be) will remain in the low volume ranks along with many of the other fledgling EV companies and models.



Source: www.chevrolet.com
 

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Posted by IRN Sales on 12/16/2009 4:20:47 PM

This year's pricing survey report, Industry in Transition: The Dynamics of Supplier-Customer Power, is chock full of new information and insight. The study covers all the core questions on price reduction requests that we have been asking since 1997, but it goes far beyond that in presenting a picture of how commercial relationships and power are changing in the industry. Get your copy for only $250. Click here for an order form. 

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Posted by THE AIP TEAM on 2/5/2010

IRN's Q1 January 2010 Forecast Report 
The North American monthly forecast report and Summary Of Changes are now available. 

IRN's OEM Downtime Tracking Report (released on February 4, 2010)
Due to the current situation at Toyota, IRN has only shown one week of downtime for selected models throughout its North American production facilities.  It is our understanding that Toyota is making day-to-day decisions on exactly when each of those facilities will be coming back up to full production to meet demand.  During this time, it will be imperative that you work with your OE/supply network to monitor inventory levels accordingly.

Sincerely,
IRN's Automotive Intelligence Products Team

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