AAH #671 - The End of Affordable Cars

Out online. After Hours is brought to you by bridge Stone Tires, Solutions

for Your Journey and by Borg Warner. Hey Gary, are Oh, I

am so bad, so glad to be back do an auto line after hours.

You know I missed last weekend, missed the show. You missed it.

We missed you as a lively one, and I hope the audience enjoyed it. I know that the participants did. Let's just put it that way,

so we won't go go further than that. So before we start the

show, November ninth is a rather important date in history. I'm not going

to quiz you on what it was, but so little backstory here. In

nineteen forty six, after World War Two, Robert McNamara joined the Ford Motor Company in the planning department. Okay, so here's Robert McNamara and he's working

very hard. He's working very hard. And on November ninth, nineteen sixty,

Henry Ford the second resigned the presidency of Ford Motor Company, named himself the CEO, and remained being chairman. So now, after all of these

years, Robert McNamara becomes only the second person in the history of the company who wasn't a Ford family member to be the president of Ford. The first

one is this guy named John S. Gray, who was from nineteen o

three to nineteen o six. He basically was the guy who put in the

money that made the Ford Mortar Company exist. So here's McNamara after all these

years, becomes president. Okay. Now, On November eighth, nineteen sixty,

John Kennedy was elected President of the United States. Five weeks after McNamara

became the president sident of the Ford Motor Company, he resigned and became the Secretary of Defense. That's right, So just just imagine you have this whole

career and then suddenly become president and it's like, okay, thank you, goodbye. All right. Yeah, and he probably made a lot more money

as president of Ford than he did as Defense Secretary. Yes, and as

it's a serrated defense, he was a rather controversial figure, which one of our guests today, mister Todd Lassa, who is a contributing editor of Vanoweek, probably knows far more about mister mcnamur than we would even want to know.

I wish, I wish I knew a lot more than I did.

I'm not quite as taken aback by that name as you thought, I will say that if you haven't watched it, and I haven't watched it in many years, but rent Errol Morris's documentary where he interviews Robert McNamara, and it was it came out on the big screen then small screen short not long before McNamara died. But it's a good it's worth looking up that documentary. And

our very special guest Jeff Schuster, who is the group head and executive vice president of Automotive at Global Data. So garis well, welcome Jeff. Great

to be with you guys. Actually, I think, Jeff, each time

you've come on the show, you've been at a company with a different name, even though it's still the same company. Yeah, I think we've had

a few iterations as a few others in the industry have gone through as well.

So yeah, I guess it's just our turn this time. Yeah,

that's right. So, Jeff, recently you wrote, and I will quote

you to you, the outlet for twenty twenty four has been increased slightly to ninety two million units, a four percent increase in twenty twenty three. This

is global numbers. Of course, volatility and risk remain elevated. Given the

number of variables that are currently affecting auto sales globally. Talk to us about

the volatility and risk that we've seen in twenty three so far and what you see moving forward absolutely well. I think from a volatility standpoint, you have

to look to the UAW strike and I'm sure we'll talk a little bit more about that later, but that, obviously in the US is impacting things.

The biggest thing globally is pricing. Pricing, pricing certainly keeping consumers on the

sidelines in a lot of different markets around the world. Now, having said

that, if we go back to where we were at the beginning of the year to where we are now in the outlook for the year getting closer, so it's a little easier to fortune tell the end of the year now.

But things have improved the market, really, the global market, even though there's a lot of risks, the global market has outperformed expectations at the level that we're at right now. So I think that's the good news story the

consumers. Despite all of that pricing pressure, be it actual cost of a

vehicle plus the rise and interest rates that occurred throughout the year, you know, it really has impacted where autos should be in this recovery. But in

addition to that, if we look at the other side of it, there's still a level of disruption from a supply standpoint, much less than we saw last year or even the previous year, but we still are dealing with some other disruptions and shortages of parts that the industry is working through. So that's

really the setup. I think as we look at twenty twenty four, a

little bit better feel for things going forward and expecting a continued recovery, but nonetheless there's still volatility and risk ahead. So why is the doing better than

expected? And where? I mean, we know where the US sales are

on Europe's been doing pretty good. Yes, yeah, yeah, go ahead,

no no, Well what about the rest of the world. It's really

a similar story, John. I think when we look at where we expected

Europe, and I would split it between Western and Eastern Europe. Obviously or

in Ukraine has impacted that market, but the market has shown improvement from the beginning when it started. And I think if you look at Western Europe again

outperforming expectations. Parts of the Asian market are doing well. We're looking at

China China has been a market that was expected to see a more pronounced pullback.

Now there's a unique situation there. They're having a little bit of a

price war, and that's I think certainly helping volume there. So maybe the

price is a different type of a driver when we look at the Chinese market right now domestically anyway, and their exports have been off the charts this year, mainly going to Russia and replenishing the vehicle market there with all the global oeens that have exited there. So it really is a story of good performance

in a relatively healthy vehicle market around the world in most of the major markets.

But you mentioned pricing, pricing, pricing, right, And I mean that's one of the things that we wanted to get into on today's show is you know, everywhere I go people complain about the price of cars. I

mean everywhere I go. And what's the impact on pricing that you think.

I mean, we've seen such a skyrocketed increase in prices ever since COVID and the chip shortage, and I guess it's abate in someone, but I mean, prices are still sky high. They are, They're still at record highs

even though they may have pulled back a little bit, but it's certainly prohibitive to some consumers. That pushed the many consumers out of the new car market

and has fueled the used car market as well because they've either decided to buy their lease and just hold it, repair their existing vehicle, or venture into the used car market. So it's been it's been a challenging environment for the

consumer, and while it is easing a bit, I certainly don't expect things to go back to where they were. I think we're going to deal with

elevated pricing. There's a few other drivers to that as we transition further to

evs, the price associated with those. Obviously, costs are another factor that

plays a role here as we look at the market going forward, at least over the near to midterm. Jeff, I've been Gary and have heard me

say this way too often over the years that brand new cars are becoming are out of reach for most class that they're becoming. They've become an upper middle

class and more type of purchase. And that was even before the big jump

from an ATP of about thirty thousand dollars to forty and then now close to fifty thousand dollars today. So is there if if that is the market,

If you agree with that, and please tell me if you don't, does that mean that the market that may be part of this kind of exuberance for the market as it is today has to do with the fact that people who are pretty well off comparatively to the middle class and are maybe less affected by interest rates and all those other factors. You know, maybe that's what's driving

the continued demand in Europe and Western Europe and in the US. Yeah,

Todd, I think there's absolutely some truth to that. You know, certainly

you're looking at a market. When we say you've shrunk the market, you've

really created a essentially a premium market from a price standpoint. Uh. And

I think that market is behaving much like the premium market subset does, and that is there those buyers tend to be insulated from from some of the noise and some of the risks that have that have occurred, and they're less impacted by the inflationary pressure, not obviously just in the in the vehicle market, but in everything you buy that we've all dealt with. I think there's also

a level of conditioning here where we've become accustomed to waiting for things, We've become accustomed to higher prices, and as those ease, I think I think you'll see some buyers that are able to come back in or or will just come back in. But I think when you look at the longer term implications

of this, if pricing doesn't come down, you've probably front the new car market permanently, and that brings up a whole lot of potential issues when you look at capacity too much out there, So you know this, this spins out of control potentially if we don't see pricing moved down and or other creative ways to get buyers into vehicles. Well, look, and during the pandemic,

during this huge supply shortage, when automakers were, especially in the US, we're putting their precious few chips into the most expensive, highest margin cars Catallacs instead of Chevyes. You know, they they found that they were able

to maintain or or increase their profit profits on a quarterly, yearly basis.

So you know, why why switch back? Why go back? Well,

that's it. I think the you know, during that was a lesson obviously

out of COVID. I think a lot of the manufacturers realize, let's stop

chasing volume and margin is where it's at, and you can make a lot of money on a higher margin vehicle and with less volume. And I think

that's likely what one of the outcomes of the pandemic is, and that is a smaller market going forward, unless unless there's some major movement on pricing or getting getting things under control where you really open it up, it's going to be really challenging I think in some of the emerging markets around the world to to really get on that growth train that a lot of you know, a lot of us. We've been talking about markets like India, which has done

fairly well and continues to improve. But I think the challenge there is as

as you start to introduce technology and electrification and other things that have a higher cost, you're again going to be shrinking that possible pool of buyers. Well,

you know, I think one thing the only thing that I see that could bring down prices in the rest market. We just saw that comment pop

up from one of our viewers, Mark Patatchnick. I hope I didn't butcher

your name too bad of saying, Hey, the twelve thousand dollars BYDC Gulf it's going to clean up. I mean, you know, we can get

into the UIW stuff too. But Jeff, I don't see anything bringing down

car prices, nothing whatsoever, unless the Chinese come in with much lower price cars. Yeah, I would agree, John. I think it's going to

take a major cost or technology breakthrough that gets us a much cheaper vehicle to produce, and I just don't see that happening, at least at least for a few years. You know, I suppose these things are hard to predict

anyway, But without something like that or a Chinese low cost vehicle coming in, and then I would question, is is that a one time purchase and then you don't want to go back to it. I guess it just depends

on the quality and how well that vehicle is able to last in the market.

But but Jeff, are you talking here about evs or ice vehicles?

Because there are certainly affordable ice vehicles there are, and there are so you know, it would seem to me that you know, this, this whole issue of affordability is in some ways, you know, addressed by you know, corollas and civics and things like that. Yeah, it certainly could be

obviously that's not the focus of the manufacturers right now. And and again,

as we move towards an electrified market, and we can we can debate the speed of that because I think I think the indication is probably slower than what most thought. But I think as that happens, that's that's just additional pricing

pressure. So there are ways to mitigate that, and that is ice vehicles

stay around longer, you develop a lower cost EV that that can play in that entry level space because there really isn't one in the US anyway at this point, and or some combination of the two. And right now, the

focus really is on those larger, high priced vehicles that drive margin, and that's not necessarily good for those buyers that can't afford them. Obviously. I

wonder too whether the Chinese really want to bring those low cost vehicles into the US market. I mean, just like you know, Hyundai and Kia pushing

up market after they had some ups and downs with entry level cars in the nineties quality issues, and the Japanese for that matter. I mean, you

know, I think the Chinese want to come in maybe with maybe relatively affordable EV but nothing blow say thirty thousand dollars MSRP. Yeah, I think I

think it's a that's potentially a slip, very slope for them, because, as you mentioned that, we saw what happened initially with the launch of the Japanese brands in the US. The Korean brands had a similar issue. The

Chinese have had an experience with launching call it affordable, maybe cheaps a little too harsh, but affordable vehicles in South America Brazila's as an example, and buyers that took a chance on it, bought the vehicle, it broke down, then they couldn't get parts. So there's all kinds of issues related to

that, and consumers don't forget it takes it's going to take a would take a generation or a new buyer to come in and not have that that bad taste from an experience like that, so I would agree. I'm not sure

that would be the first Forte into the into the US market from a Chinese brand. It may come later when it's been proven or they've established the brand

first, but I think it's likely you're likely to see the higher end products come in because they want margin as well. I think it would vary by

company though, so you know, I had expect a Neo to come in and be upper priced because that's the market that they play in. And I

could see other Chinese brands coming in dirt cheap and just cleaning up taking over the bottom end of the market. There isn't a low end market right now,

so yeah, I think there is. There's definitely an opportunity there if

someone were to come in and do it right. Well, but the low

end of the market is our off lease certified used cars three years old, right, I mean that's given that the average age of a car in the US is eleven or twelve years or it's up to now cars last lot longer.

Three years old is not what a three year old car was in the nineteen seventies. Absolutely, Yeah, I thought was interesting, you know,

speaking of margins that you know, when you hear the rhetoric from most OEMs about their electric future, it's electric for everybody, right, and we're not seeing this for everybody, you know, and someday we will. But yesterday

the CEO of Pollstar, which is sort of sort of a startup right g Lely owned spin out of Volvo, which g Lee owns, Thomas Ingleheth said and I quote, margin over volume is our way forward, supported by a gorgeous lineup of four exclusive performance cars. So here's a guy who's basically saying,

Okay, we're just going after margin globally. We got four cars.

We're not going to build very mandam, but we're going to get enough margin on them to make money. And I just like, Wow, that's so

refreshing. This guy's being honest about what's actually going on. No, it

is, and I think I think you'll find a lot of a lot of focus and strategies are are on margin now. So this this plays into that,

and it plays into that issue of pricing remaining a potential headwind for the for the volume and for the consumer. So where do you see things going,

especially with in the US with this uaw you contract. I mean,

the Detroit three now have to pay much higher labor costs, but it looks like that's pulling everybody else up with them. Yeah, yeah, absolutely,

Yeah, Yeah. I mean we saw some of the some of the actions

that have taken place already, and I suspect we'll see more of that.

It essentially is raising the costs to produce a vehicle. So that's got to

go somewhere, it's likely to go to the suppliers and likely to go to the consumer consumers. So I think you know certainly that there's going to be

some implications to how that plays a role in this issue of lower volume as well. But Jeff, are the Detroit three really going to be able to

pass on these labor costs? I think it's going to be possible in the

heavy duty pickup segment because they don't face any international competition, not even Toyota's in that segment, at least not yet, so they got that segment to themselves. But everywhere else, can you really price a Ford Explorer that much

above say a Toyota Highlander or something like that. I just don't think the

market's going to let you get away with it. No, I think competition

will keep things in check, clearly. And that's why I think supply base

better be ready for some pain, because I think that's likely where it's headed.

You know, I wonder, because I'm ready for pain, Okay, more pain, exactly, very exactly. I mean, how much can they

take? Right? How much work can they take? And you know,

if you're talking, you know, the big multinational tier ones, maybe they can lean on them. But you get into some of these smaller suppliers and

they're at their wits end already. I don't even see them agreeing to price

cuts whatsoever. They just the opposite. They want more, as they call

it economics. Yeah, and I think that's an I was just going to

say, I think that's an issue. I think when you look at this,

you could could potentially make it. You know, have suppliers make a

decision to opt out of supplying vehicle. And that also applies some pressure and

some risk, I think, certainly to the manufacturers. So a lot of

moving pieces here, for sure. They're not all or I should say,

they're all pointing to pricing problems. I think when we look forward, see

where I think it's going to come out of is OEM margins. That's where

I think we're going to see the biggest tit not on suppliers, not on prices for consumers, because I don't think they're going to be able to get away with it. I think it's going to go hit them right in their

margins. John, is another reason to sell forty nine dollars cars instead of

Yeah, exactly in John, I mean, aren't the OEMs focused primarily on their margins. I mean looking at what Tesla's margin is and going, oh

my god, we got to do something like that. Yeah, well,

you know, Tesla's playing it's lower cost card. You know, Tesla can

make an ev far cheaper than certainly any of the Western automakers can, and it's still very competitive in China. I mean, it kicked off the price

were in China, and you know this was very deliberate. They kicked this

off before they started to see really a dropping volume, and they're they're forcing a lot of others to play the game. Although it's very interesting. You

know, BMW has said screw that, we're not cutting our margins. Lucid

has sort of said that, but they've cut prices too. But you know,

if you've got the market demand, you can hold steady, if you've got the brand cache, you can hold steady. But others are going to

have to cut prices. Well, yeah, you're building evsy keep them under

six thousand for a car and what eighty thousand dollars for a truck or suv?

Right to get that seventy five hundred dollars tax credit, right, whether whether you're whether he able to afford it or not. You don't want to

buy an EV without getting the text without the text credit. Yeah yeah.

Let me ask though, UH, speaking about the U a W contracts and big raises, the higher wages involved, uh pretty much since the Japanese and Europeans have been building, uh assembling cars in the US, mostly in the South. Uh, they mostly try to keep their uh their employees wages near

the U a W levels, keep the U a W out. So what

do you see happening going forward now that these new contracts are going to be in place with with with the with the imports, with their wages for for their employees at the US factories. Well, I suspect we'll see more of

what we've we've seen already, and that is the nudging up of those wages for that for that exact purpose. Uh. Now, I think the wildcar

here is will the UAW coming off of this, I'll call it a win for them coming off of this win big way? Right? Will Will they

have some success and maybe moving into these other manufacturers that they haven't had success in before. So that'll be an interesting play. They're definitely going to give

it a go. And so I think to preempt that. I would expect

to see some wages increase again to try to get the keep the workers happy before that ware to happen. And then when he's the disadvantage we were talking

about regarding the new EUAW contracts, right, Yeah, Toyota has already announced that it's going to raise crudges and others are probably either looking at doing it or have done it and haven't said anything about it. But that's what they've

been doing for the last forty years anyway. But I think the I think

Sean Vain's going after them. I think that would be interesting. Who's going

to be his first target. Is it going to be Tesla? I don't

know. Is it going to be Toyota. I think Toyota is a very

likely one. And the others that I've wondered about are the Germans Mercedes,

BMW and Volkswagen who have plants in the US. And the reason I say

that is, as you guys all know, back at the headquarters in Germany, half the supervisory board has got to be labored and by law in Germany you have to have a works council at each and every one of your plants, and oh, by the way works councils are illegal in the United States, So you know, I would think that the union might have more leverage with the supervisory the UAW could have leverage with the supervisory boards of saying,

hey, what is this. Even your plants in China are unionized, your

plants in Mexico are unionized. They're not unionized in the US. So get

what the program on the issue here then becomes. You know, Volkswagen kind

of welcomed it when they built their plant. And what what the U a

W will be up against is not Volkswagen or even Toyota, but those southern states and the politicians who want to keep unions out keep them out. Yep,

Well, John, we heard we heard an interesting one yesterday that you didn't mention. Rivian. Yeah, and now just think about that. It's

it's in an area that that isn't far south. They've got some you know,

concerns in terms of ramping up their production. It's a startup company.

If Sean Fain were to be able to get you know, his his foot in the door of an ev startup company and unionize that, I mean, I think that that would go a long long way. No, I'm glad

you brought that up, Gary, And you're exactly right. Because the Rivian

plant in Bloomington, Normal, Illinois, former UAW plant, there might be a lot of people in that region. I don't even know if they're working

at the plant, but there could be a lot of pro U a W sympathy there that would that would that would be be that'd be really interesting.

I think. Yeah. So to me, I think this is going to

be the big story of twenty twenty four. I mean, things always change,

right, but you know, sitting here towards the end of twenty three, I think the union making a move to start organizing the transplants and the ED startups is going to be a huge story. And you know, so

I looked up some of the numbers. There's there's about thirteen or fourteen transplants

plus EV startups. I'm counting Tesla, Lucid, Rivian. They have twenty

five manufacturing facilities. I mean we're talking big manufacturing complexes they're building bard They're

soon going to go to thirty. The employee around one hundred and twenty eight

thousand hourly workers, all of whom are none union, So one hundred and twenty eight thousand. There's about one hundred and forty two thousand UAW true auto

workers. I'm not caught counting you know, college ta you know, teaching

assistant or casino workers or whoever else the uaw's organized. So I mean,

for Sean Fain, that is a lot of membership. I mean, he

could almost double his automotive membership if he could get those workers. And it

appears he is certainly going to make that ploy. I think you're right,

John, I think we're gonna be talking a lot more about this in twenty twenty four. Yeah, I just I just am wondering. So if the

non traditional OEMs raised their prices or raise their their their wages to their employees, which would possibly mean they raise their prices, would there still be a proportionate advantage that they would have over the traditional three Yes. I mean,

like I said, ever since the union first made a run, I think it was at Honda or something like that. I'm going you know, this

goes back to the early eighties and and failed. Uh you know, Honda

raised their wages and I remember the former head of purchasing at BMW telling me that, uh, he felt that instead of building their plant in South Carolina.

They should have built it in Michigan. And I said, why why

do you say that? And he said, well, number one, we

have to pay almost ua W wages just to keep the union out. So

I mean, even going you know back several decades ago, the whole thinking with the transplants coming here was pay them just enough to keep the union out.

Jeff, Jeff made you made a very interesting point earlier about, you know, one of the consequences of higher prices for vehicles, and that suddenly the footprint that any auto company has that is now making you know, looking looking at margin, So volume goes down, but you have this big manufacturing footprint that you no longer need. How do you see this playing out in

the next five years or so well, and I think that is going to be something to keep an eye on. Utilizations are not where they were,

They're not at a healthy level right now. Yeah, part of that is

due to pandemic related recovery that we're still in. But again, if we

if we get back up and top out at sixteen sixteen and a half somewhere in that range instead of the seventeen seventeen and a half we already are sitting at too much capacity, especially if you look at this transition that's occurring as well, and you're converting some plants, you're building new plants, but you're not getting rid of anything. And it's not just a US issue, it's

a it's a global issue from a utilization standpoint. Globally, we're around sixty

percent six zero six zero six sixty sixty five percent and that's not sustainable.

And we're you know, we as an industry, I say, we collectively are continuing to build new factories that are state of the art electrified factories.

And you've got a lot of old capacity that's still out there that is going to be you're going to need to deal with it. And I think that

that's going to add another cost if it's not dealt with or can't be dealt with because maybe of labor contracts or other concerns. That's another cost factor.

When you're running efficiency or inefficient plants, building only a few thousand vehicles maybe in a capacity of over one hundred thousand or two hundred, three hundred thousand, Yeah, that's a problem, and I think that's something again the industry hasn't dealt with yet and is going to where its ugly head at some point.

Hey, let's get into more detail on that. But we to take

a quick commercial break right now. How do you Bridgestone tire stop shorter on

what roads? It's their hydro track technology, but you don't have to know

how the science works, just where the brain is. What really matters is

they're bridged stone. All right, Thank you Bridgestone and borg Warner for that.

So, you know, sort of to recap what we were talking about and launching off into the future, all the automakers, Gary, you made this point, well, that are pushing for better profit margins. But now

we've got higher labor costs, certainly in the United States, interest rates putting pressure on consumers. Volume is up but not quite as good. And Jeff,

you lift us off in the first segment saying the industry's operating at sixty percent capacity. As you know, you said it's not sustainable. I'll say

it's a disaster. I mean, because you need what rule of thumb,

you need eighty percent capacity utilization or you're not getting money. And so that

I think is going to put even more pressure to not build affordable cars and go more up market where you can really make some money. And that'll be

fine for the people who are in the market because they've got the money to buy those cars seven hundred dollars a month payment, eight hundred dollars a month payment, whatever. They've got the money to do it. But they're going

to buy expensive vehicles that then have to go into the used car market.

Are middle class Americans going to be able to forward even those cars? What

do you think, Jeff? You know, I honestly, I really question

it. I think there's there's a good portion of the middle class that probably

won't be able to afford them. And it's I suppose that's great for the

repair industry because that's that's likely. What's going to happen is people are going

to sit on their vehicles longer than they are today already, and I think it's putting additional pressure on that new car market that you know, right now, as we're talking, I'm getting more depressed about and I thought our forecast might have We cut our forecast by about globally by about seven and a half million units for this reason, and I'm wondering if maybe we need to cut it more. Well, you know, it's interesting, you know, you

mentioned, John mentioned Lucid before, and Lucid came out with their Q three numbers this week, so they only lost six hundred and thirty one million dollars, which was forty million dollars less than they lost in Q three last year.

But then to the point, Jeff, that you were making about having the these large plants that are not making very many cars, so Lucid, which does have a factory in Jasse Grande, Arizona, announced that they weren't going to build ten thousand cars this year. They're going to adjust it down

to maybe eight eight point five, Okay, So it's like, you have this big plant, you're not making anything. So then they decided, well,

we'll cut the prices of our vehicles by about ten grand. I mean,

what does this say about the possibility of some of these startups just completely running out of juice. Well, obviously we've seen that happen already to a

few of them, and I suspect it will do one of two things, if not both, and that is it will probably put some other ones out of business because this is a long game and you can't continue to bleed cash like that and survive. So you've got that issue. It'll probably also prevent

some others from from trying to come into the market for that same reason.

You've got to really bankroll this for ten to fifteen years, and I think that's a real challenge for any new startup today. I'd say almost impossible.

You know, I went back and started digging through Tesla's numbers and tried to figure out when did they really start making a profit, because, as you guys know, Tesla lost money for over a decade. They lost billions of

dollars. But they turned the corner in mid twenty nineteen when they started building

and selling eighty thousand cars a quarter. And what really got them there was

the Model three, And in mid Q three twenty nineteen, they built and sold fifty thousand Model threes and boom. That's what put them over the top

and they've never looked back since, so to me, you know, different automakers are going to have different overhead costs and things like that, different break even points. Depends where you price the vehicle. But I think an easy

rule of thumb is until everybody else is able to sell fifty thousand units a quarter, that's about seventeen thousand a month, Okay, so you need to sell seventeen thousand of the same vehicle from the same plant to be able to start making money, and no one's even close to that. And you're talking

globally, John, right, because Tesla never breaks out its US numbers.

Yeah. No, you're absolutely right, Todd. And you know, scale

is all about how many you build. It doesn't matter where you sell them.

You just have to be able to build that many so that you can advertize your sunk cost over that many more units where it overcomes your variable costs and vallah, you've got a profit at the end of the day. But

John, isn't it interesting that they had the models expensive, they had the Model X expensive, then they come with that car, which is affordable.

And so it's sort of saying, Okay, if you want to sell a lot, make it something that a lot of people can buy. So why

are they building the cyber truck first and not the small entry level hatchback that Elon Musk talks about every quarterly earning, Well, they're working on it.

I mean, they're building a plant in Mexico that supposedly is going to be what people are calling the bottle too. But you know, It also came

out recently that they're going to build a twenty five thousand euro car at their plant in Berlin, So we'll see. But I mean, Tesla's juggling a

lot of balls in the air all at once. I think the cyber truck

program has been something of a disaster for them. You know, I talked

to a production supplier earlier this summer and he said, the place is nuts.

He says, you know, they keep changing the direct of the program, and I, meaning the supplier guy, I was talking to you.

He says, like every six months I'm dealing with somebody new, they've transferred that person out someplace else. So to me, it sounds like that program

has been, you know, something of a disaster. Well, I and

must talk about that on the Q three are Learnings. Yeah, yeah,

he said, we dug our own grape. He's discovered that building cars and

trucks is hard, which I think he's mentioned a few times before. He

may have mentioned that a couple of times. Yeah, but you know it's

true. But look, you know they've hit home runs with the Model three,

in the Model Y home runs, and they're revolutionizing the manufacturing of the industry and this new assembly process could take it even farther. Well, see,

they still got to prove it. But sure it's intriguing what they're doing.

No, it is, it is and and I think, just just on top of that, John, when you so you talk about getting to that scale, getting to that fifty thousand unit scale or whatever the number might be. And it's going to be different for different brands that are positioning themselves

in a certain way. But I think when we look at what they did,

and that is high priced vehicles established and obviously as a cult following, but established an image of desirable something you aspire to own. I want to

own a Tesla. And I think then you take it to the mainstream from

a pricing standpoint and again using those affordable air quotes. I think that that

was brilliant and it has worked for them. Be interesting to see if others

try to follow that as they move into a more mainstream electrified products. You

know, they did what everybody said GM should have done with the Chevy Volt not Bolt, the extended range car. They should have done the Cadillac version

first made made the money money on that, and then do the Chevy Jeff, I have to ask So if indeed this this concentration on profit margin over volume takes hold and keeps hold, what happens in five ten years? Do

we lose brands? Do we lose entire automakers? Will there be you know,

six or eight majors instead of the what ten or twelve we have now?

Is the what is the what does the automotive lineup look like? In

five or ten years? It's a great question, Todd, I think.

I mean, I think if we play this out, if that all holds in margins, hold pricing is there, and the market shrinks or stays at the level that it's at, I think you're likely looking at consolidation in the industry to survive essentially, So it'll probably push some out just because they aren't able to essentially get to the scale that is able to get margin. Uh.

And then I think there'll be some proactive moves, likely in some other type of consolidation m and as joining joining forces, you know, however, our partnerships, it could be it could be actual acquisitions. So I think

it could spur the next wave of that consolidation in the industry. Hey,

look, look how successful Stilantis has been. You know, a merger of

Fiat, Chrysler and Bougeat. I mean, you know, Carlos Tavares is

something of a magician. You know, he turned around Opal and what almost

no time. So to me, Stilantis is going to be the model of

what we're probably going to see more of. But will Stilantis be able to

keep Fiat in the long run? What about alf Romeo or even Dodge?

I mean, you know, that's that's what I'm wondering both. Yeah,

yeah, within the within the corporations and then the corporations themselves. I mean

there's some fallout there. Yeah, I think that's very possible that you'll see

not only you see a consolidation as in acquisitions or like a Stilantis, but it's also very possible that you will see some tough decisions being made at within those large corporations that could lead to brands or vehicle lines that are no longer.

So we have a lot of choice out there right now, and obviously, you know, we're in that phase of we have a lot of ice choice and we're getting a lot of electrified choices now and we'll even see a lot more of those. But I think as we work through that the endgame

here could be fewer choices, and again you can get efficiencies in a different way by streamlining that. Well, certainly fewer affordable choices, right, well,

that's for sure. Yeah. It's interesting, you know, picking up

on what you're saying there, Todd, because Tavares has told all the brands, and they got a lot of them. I mean there's like fourteen brands

and working or something like that, and he's told them, hey, I'm not killing off any brands. Then you a decade and we're going to fund

you guys to come out with new product that it's up to you. And

uh but you bet he'll take an act to whoever doesn't perform. Volkswagen does

the new I mean, if this plant, this is the new Volkswagen, the new old GM, isn't it. Yeah? Yeah, yeah, I

think there's certainly some parallels there. So, you know, Jeff, when

you talk about being a reduction in the number or possible consolidation of companies, I mean, are you talking brand name companies or you know small you know, like we saw Lotus become part of Jilie. I mean, you know

who cares right right? Right? Again, I think if if we if

we follow this and all of these things happen in the way that that leads to a smaller vehicle market, then yeah, I think everything's on the on the table. So I think we could see some well known brands either consolidate

or or significant change their footprint in really what their brand is or do you you know some suggestions have been made, Uh maybe your brand is only three models and uh so you don't get rid of the brand per se, but you just shrink down the model line, shrink the model line and the complexity.

Ye, Chrysler has already pretty much done that in the last that's right.

Yeah, except for Jeep keeps everything well, yeah, even Jeep is struggling now though. And uh you know, as I've said before, I'm

amazed the industry let Jeep get away with it for so long without going after them. But you know, look at what the Bronco has done to the

Jeep sales and you really put the whammy on. So Jeff, you're you're

you were saying earlier that you know we're on this this path toward electrication and that is certain the ability to that happening, and you know we're seeing you know, tremendous investments being made by traditional automakers in terms of you know, getting the capacity to you know, build the vehicles, build the batteries, and it's it seems that we're beginning to see evidence that the market isn't necessarily

there for evs in a way that even a year ago people were talking about, Oh, we passed a tipping point. Now it's going to be a

hockey stick and we're going to be selling all kinds of these vehicles. You

know, what is the what is the challenge that the OEMs have in terms of, you know, on the one hand, maintaining their affordable ice vehicles even though they may be like you know, seventy eighty thousand dollars tahos and you know, having the wherewithal to make these big investments that is necessary for them to get to this electrified future. Yeah, it's a it's a massive

challenge for them, for the industry as a whole, if if this doesn't move down the path that they all are planning on. So right now that

that that Tahoe is paying the bills obviously and paying for the investment into evs, but at some point this has got a flip and and you'll hit a point of no return. We're not there yet because obviously there's still a significant

amount of of ice capacity and and vehicle choices out there, but that will start going away on this path and it I think there's a lot you know, we've been talking about this internally within our group but also just across the industry, and I think everyone's kind of on board with there's a lot to be solved yet before you hit mainstream consumers. Uh. And then your question

are the early adopters? Have we satisfied most of the early adopters? And

how do you transition? And it does? It comes down to what we've

been talking about today, and that's price. It comes down to convenience,

so the infrastructure, the charging, and then ultimately what do you do with the battery and the range of the vehicle. So those are still and we've

been talking about that for a long time, right, this is ten years longer than ten years, and those three issues still remain. And yes they've

improved. We've seen improvements in those areas, and some countries are better than

others, certainly at infrastructure for example. But I think that that's the problem

with this and especially if you're a traditional manufacturer that is making that transition from ic ETA to electrified, and you're making that investment, you're changing your factories over if the volume and scale isn't there from a consumer standpoint, that's a huge risk. And we're seeing some of the implications of that with the dialing

back of of production. Uh, you know, whether it's for some programs

being delayed or cut, joint ventures that have decided to hold off. I'm

producing vehicles. There's a there's a lot of a lot at stake here in

this transition, and again, I think it's probably going to go a little slower than we all thought. Yeah, but I agree with you totally,

dere Jeff. The problem for the industry. Of course, there's laws on

the book that says thou shalt sell this percentage of evs by the end of the decade. Yep. Absolutely, And and that's it. You've got the

REGs are all there, you've got the investment in the and the manufacturers said, okay, well tell us we have to do this. So we're going

to do it somewhere along the way that the consumer's got to come along for the ride. And and that's either going to be done forcefully or or through

advancements in the technology and investment in the infrastructure. And I think that's that's

really what's going to decide how quick we end up getting there. I still

don't think it's a question of will we get there unless something else comes along.

And I don't think you know, fuel cells are always ten years out.

We've joked about that, and I think it's still the case, or maybe even longer. But unless something else pops in there, I think this

is still at least the solution for the industry in the foreseeable future. Yeah.

Look, I think you nailed it. It's scale, scale and bracing

and you know, set the infrastructure stuff aside for the moment. But you

know, Tesla has proved it can be done. BYD has proved that it

can be done. Yeah, you know. I think the lessons are how

did they do it, you know, and who can replicate that? And

is the market big enough to absorb more than just Tesla and BYD right now?

And I think the BYD story is an interesting one because that is a manufacturer that pivoted and said okay, and yeah, maybe they had a little more flexible in doing so, but they went all right, we're going all all electric, and they weren't. So Tesla's a different story. They started

that way, and I think obviously they they have advantages in that because they were they were built to be an electric car company, but by D was not, and now they are, and you're absolutely right, they're they're definitely eating up the Chinese market right now and have aspirations elsewhere as well. Right

Well, Todd will probably disagree with this, but you know, it seems to me that the phenomenon of Tesla is is that Tesla has cachet that has been developed that would be exceedingly difficult for any traditional manufacturer to achieve. So

even if they got scale, they still wouldn't be, you know, as special as Tesla is. And you know, in the case of by D,

you know, here's a company that you know, China based, that you know, developed its footprint, developed developed its manufacturer werewithal to do that, advanced the technogy, and you know, there was the government support for the new energy vehicles in the China market, which certainly helped them. So

you know, I suppose that if somebody were faced with you can buy a Tesla or you can buy a BYD or you can buy a Chevy. I

think they'd opt for the Tesla if they had the opportunity. I don't know

that I disagree Garia with that. I mean, I think I think Wall

Street is what is our collectively gave Tesla its cachet over the last ten or twelve years. The talk, by the way, John mentioning regulations that will

kind of force more ev production by the end of the decade reminded me of Bob Lutz and some of the other executives in Detroit arguing twenty years ago that we should get rid of Cafe and just hike up the federal gas tax to sell more fuel fision cars and hybrids at the time, and that sort of thing. Of course, that's that's impossible if you're if you're in president or

you are on Capitol Hill, you don't want to raise gas taxes and the inflationary spiral. But it's about as popular as talking about cutting you know,

social security and stuff. It's the third rail of politics, right, anybody

who talks about anybody who talks about raising gas taxes will not have to worry about their next elections, right, that's right, and that that would have been Bob Watts, of course in two thousand and two or three or whatever.

But isn't there the possibility. I mean, we saw it in the

UK where they said, Okay, we're going to push back our ban of ice vehicles until twenty thirty five MOVID five years from twenty thirty. I mean,

you know, politics is fluid, so you know these regulations I don't know are necessarily going to stick. You know who wins election four and in

twenty twenty six. Yeah, no, I absolutely agree, And I think

that's and that's a challenge for this industry that is trying to figure out, what, you know, what's the endgame here? What do I need to

How do I get from from here to the future here? If it's electrified

and putting all this investment in for something that could get walked back. I

suspect, even if there's not a pivot on the policy, it's going to have to get walked back. We're not going to get there. We're just

not going to get there. So I see no other choice. But again,

if you're a vehicle manufacturer, you can't gamble everything on that the likelihood that it's going to get walked back. You've got to march forward with what

you know, and that's the reg as it is right now. Right Remember,

what's driving all the eggs is you know, concerned about climate change and you know, we get a few more hurricanes and droughts and floods and fires, and you know, there's going to be a huge part of the population said, don't you dare back off on those regulations. So big fight coming

over that. The big fight though, has already been going on, especially

in the oil producing states. By big oil, I mean that pushback is

already coming on big time. And you know, how do we how do

we tax evs so that they pay for the roads the way the gasoline tax roads that sort of thing. Well, you know, look that's going to

have to come anyway, because as cars get more ice, vehicles get more fuel efficient, they're just going to use less fuel. And especially as we're

talking about maybe if the car market plateaus, the states are going to have to find new ways to pay for roads, not just with gasoline taxes.

And you know this goes back decades. You know, we've been talking about

a per mile tax, so you get taxed by the number of miles you drive and whether it's through electricity or gasoline or diesel, doesn't matter. Yeah,

I think some level of creativity is going to be needed to solve that issue. And obviously there's a whole lot of attention in that area right now

already. Probably another fight ahead though, I imagine. Yeah, I mean,

nothing's easy in life, right These things that we've been talking about are prime examples of that. Hey, look, we're almost at the top of

the hour. We probably probably ought to wrap up here, but Jeff Schuster,

thanks so much for coming on. Really great to get your insights,

and you know, your knowledge of the industry is terrific. Appreciate that.

I always enjoy chatting with you guys. It was a lot of fun.

Thank you. Great. Good Todd, great seeing you again. Great having

you back on the show. Likewise, thanks for having me back, mister

you guys. Okay, that's great. And Gary, we'll be back at

it next week. Okay, thanks guys. Thanks. Auto Line After Hours

is brought to you by Bridge Stone Tires, Solutions for Your Journey and by Borg Warner. If you like this program, I would like to learn more

about the automotive industry, check out our website at Autoline dot TV or look for US on YouTube on the Autoline channel

AAH #671 - The End of Affordable Cars

Toyota Corolla

Ford Explorer

Toyota Highlander

Tesla Model X

Lucid Air

Tesla Model Y

Chevrolet Volt

Ford Bronco

About this episode

Original notes