AAH #728 - Countdown to the Tariff Disaster

Speaker 1: I'll online after hours is brought to you by bridge Stone Tires Solutions for your journey.

Speaker 2: Hey, everybody, thanks for joining us here. Boy, we got

some great topics to get into in today's show, especially these tariffs which are supposed to hit just a couple of days from now. If you're watching the show live,

if you're watching a tape, maybe it already happened. We've

got Paul Eichenberg here, great consultant analysts, really knows the industry.

Speaker 3: Well.

Speaker 2: We've got Perry Stern too, really knows cars, and we'll be getting into some of the cars that we've been driving as well. But first, Gary, I'm sure is going

to try to stump us with one of his history questions.

Speaker 4: All right, So, as you recall, a few weeks ago we talked about Pougo and how it started in business with pepper mills and bicycles, and Opal actually started as a sewing machine company, Toyota, a weaving company. Okay, So

there was a company founded on January thirtieth, nineteen twenty. Okay,

January thirty, nineteen twenty, and it started out and in nineteen twenty seven it said this business that we started out in a working out so well, so it became a machine tool manufacturer, okay, and then a few years later it decided, you know what, we really need to get into the auto industry. So in nineteen thirty one

it manufactured its first vehicle. So this machine tool manufacturer

becomes a vehicle manufacturer. And I'll even throw in another

hint that the name we know it by didn't come to the official until May nineteen eighty four. And this

company was founded in nineteen twenty on January thirtieth, today's anniversary.

Speaker 2: The only thing I can think of is Toyo Cogyo Mazda.

Really is that's it?

Speaker 3: You're absolutely right.

Speaker 4: So it started out, and see I didn't I didn't want to say what it started out. It started out

as a cork manufacturing company, so its first name was Toyo Cork Coyo Company, and then it dropped the cork in nineteen twenty seven when it became a machine fool manufacturer.

Then in nineteen thirty one it made.

Speaker 2: A three wheel truck.

Speaker 4: It didn't make its first car until nineteen sixty, wow.

Speaker 2: And that was probably the Mansa three sixty. It was

the R three sixty, R three sixty and that car is famous, and I swear to God, this is like something nobody knows. The stamping dies for that car. This

was a little inky dinky car with little inky dinky fenders.

The stamping dies were made out of ceramics and very low cost because this was a company Mazda that back then Toyo Kogyo, that didn't have any money, so they figured out a way to make stamping diys out of ceramics.

Speaker 4: And it's very delicate, I'd imagine. I'm sure you had

to treat it the very nicely because otherwise man shatter one of those things.

Speaker 5: To say, what's the crash rating on something like that?

Speaker 4: Yeah, probably not very good, but you know what, I believe league as a legal entity, Mazda's official name still is Toyo Kogi. They actually changed it.

Speaker 2: Oh, they did change it. And Honda. Somebody should look

this up. Somebody in the in the chat room, you

should look this up. Honda's official name is some crazy thing.

It's not Honda. Interesting But anyway, at the show, Okay,

So Paul, Yes, we brought you in here today because we want to talk about what it's going to happen if these tariffs go through and so everybody knows this right now, right President Trump has threatened to put twenty five percent import tariffs on vehicles and components coming in from Mexico and Canada. This is uh pressure he's putting

on because he thinks there's too much illegal immigration and too much fentanyl, you know, very harmful drug coming in here on what the terrorists are supposed to go in on this on this Saturday, two days from where we're taping the show, right now, what are you hearing? I

mean to me, this has disaster written all over it.

Speaker 3: Yeah, well, I'm sure you know. The first place to

start is, well, what happened in the last Trump administration when it came around this, And when you talk to the suppliers, one of the things they'll tell you is it was it was a disaster for many of us.

And part of the reason it became a disaster is because, for instance, you had an increase in the steel tariffs, and I had a client that had that twenty five percent increase in stale tariffs, and steel you know around the globe had sort of you know, capacity had been put in place to support the industry. So this particular

supplier had a very strong position in North America supplying all the OEMs, and then they were exporting, you know, around the globe to other locations. And with the steel

tariffs came in, the first thing that happened was they, you know, go back to the customer and they say, hey, you got to pay this, and the customer said, well, we'll pay it for a certain amount of time, but you got to develop an alternative supply base. And then

ultimately what they did is they start looking for a local supplier, but that local supplier had raised prices in line with where the tariffs would have put the pricing, so there was no relief there. And what ended up

happening was the tariffs stood for steel imports, but not the finished goods. So then what did the OEMs start doing.

They started bringing finish goods in the same place because they that's how they got around the tariffs. So eventually,

this supplier ended up losing market share where they had a very strong position because they had established this global supply chain. And ultimately, I think the goal of the

administration is, hey, how do we create more jobs? But

if you look at that as an example of what happened the last time, it didn't create jobs. It just

raised prices for everybody in the ecosystem. And nobody came

in and said, oh, well, we're going to put in new steel capacity, or we're going to put in new capacity for you know, these commodity products that are really have stabilized across the industry based on you know, the leanest value chain that they could establish before this up and down cycle that we've seen.

Speaker 4: Did that have any effect on the whole US steel situation that's going on right now? Do you think?

Speaker 3: Well? I do think it had an increase. It led

to an increase in pricing, okay, but there was not any new capacity that was really put in place. And

I think that's the thing that you got to look at is ultimately, if you're doing this to create jobs, okay, what incentives are you giving the steel companies or those across the whole ecosystem to be putting more capacity in place?

And I think, you know, and not suggesting one administration has done better than the other, but if you looked under the IRA, look at all of the new new economy or new energy jobs that were put in place, as far as batteries, you know, there's now lithium be in mind here in the US, this whole value chain is being created around the incentives that were there. If

you're going to move, you know, if you're going to move to tariffs and you're going to move, you know, and change the emissions requirements. And if the idea is,

you know, we're going to protect jobs, we're going to do things, what are you doing incentivize the companies that are in those value chains to do that? And and

I think that's where you start to see the challenge in this whole process is just that.

Speaker 2: So what do you guys think Are these tariffs going to go in this Saturday? Gary? What do you think? Yeah?

Speaker 4: I think they will.

Speaker 2: Yeah, Perry, you think so too.

Speaker 5: I think they're going to put them through. I mean,

they're you know, it's hard to say exactly how they'll be implemented, and given you know how some things have come out this week that have had mediate pushback, I don't know if that's the sort of thing that will affect what their final decision is on the tariffs.

Speaker 4: Well, but the pushback thing was was that arguably or this is what they're arguing that they were, they were illegal.

But the president does have the authority to put on tariffs, so so the whole challenging it in court would not work. Sure,

But I mean I think the question becomes I mean, before you know, they were putting these tariffs on materials, but now it's like everything coming in. And so you

look at General Motors and the number of vehicles that it produces in Mexico. Now, I think.

Speaker 2: One third of what GM sells in the US comes from Canada and Mexico.

Speaker 4: So how can it afford to deal with that? I mean,

it's got to be devastating.

Speaker 3: Well, and I think you saw their earnings announcement, you know, earlier in the week, and one thing when everybody asked them what kind of guidance you give? And there's so

much policy change that's you know, out there that's going to potentially impact us, and it hasn't settled down. We

don't know which way it's going to go.

Speaker 2: They didn't have an answer for They didn't have an answer, and their stock took a hit because and.

Speaker 3: The analysts were very upset with that.

Speaker 2: Oh no, you should be, But I don't blame GM.

I mean, if you don't know what's going to go on, how can you say, here's what we're going to do.

Speaker 5: Agreed, Agreed.

Speaker 3: But that's just going to carry on through the earnings calls that you're going to see from the suppliers. And

I think some of the suppliers have already started to come out hey when it comes to tariffs, that's being passed on to the OEM because I have no means in my system to be able to absorb all that cost.

So this is going to be really hard on the OEMs.

It's going to be tough on the suppliers as you go through this because of just the disruption, and you know, you've got to think about the supply base. Over the

past thirty years has just focused on the idea, what's the leanest value chain can we create? This industry has

really focused on no disruption, no disruption. You know, we

just continuously improve what we do day after day after day.

When you throw this in here, you throw a wrench in everything. The suppliers are in complete disarray. The suppliers

have to go through can solidation with way things are in the industry, and you know, it's going to hit the M and A market, It's going to hit the capital market as far as suppliers being able to raise capital because of just the uncertainty that all this puts in the system, at least for the next year or two as these things start to get sorted out through you know, the legal system and Congress, et cetera, as you go through this.

Speaker 4: But Paul, what is the likelihood I mean, you deal with suppliers all the time. I mean, what's the likelihood

that they would be able to say to an om, oh, by the way, we're not paying that twenty five percent.

Speaker 3: I mean, I think right now, I think they've probably got a pretty strong voice because they're they're struggling. The

suppliers in the market today are struggling. And if you

look at the beginning of the last administration, what you had then was you still had powertrain suppliers that we're making great margins. What's happened, you know, over the past

you know, uh, you know several years since the beginning of the last Trump administration, is you've had this steady increase around the globe of electric vehicles. In that electrical

vehicle content, You've had supply you know, you've had suppliers who make traditional powertrain components and make great money they've lost the efficiency in making powertrain components. The EV component

volumes not high enough for them to really be making money.

And as a result, you know, this large population of suppliers are struggling to make money. And what are the

OEMs trying to do? Oh, you got to help us

bridge this transit, you know, this transition from you know, from traditional ice to evs And as a result, who's absorbing a lot of that cost? Because there's just not

the efficiency in the volumes, there's not the scale for EV.

It's the supply base. So the supply base isn't you know,

going to be able to go, you know, go and say well we can absorb this, you know. And I

think that's going to be where the OEMs are going to be forced to really have to deal with this more so.

Speaker 5: And does that mean that you know, as you you know, they have to raise prices, they have to I mean, does it eventually come down to the consumer that yeah, prices are gonctually right immediately, that's I mean, ultimately, that's that's what's going to be the result of you know, everything going up in price. It all comes down to

the final payment.

Speaker 3: Who's going to absorb it?

Speaker 5: And it's likely to be the consumer.

Speaker 2: Yes, yes, And look it's we've already hit a position in pricing where the consumer is saying, no, Moss, I don't, I can't take it anymore. Right, And so if if

the average car today is retailing at about fifty grand, I'm going to say that the average factory price before destination charges dealer market, let's just say it's forty grand.

A twenty five percent increase or tariff is ten thousand bucks.

And that's just on average. And people say, well, that's

only for the imported cars, And I'm going you're living.

Speaker 3: In la la land.

Speaker 2: They're all going to raise their prices. They just are.

So for example, you know, Toyota makes the RAB four in Canada, got selling Toyota in the United States. Honda

makes the CRV in Canada. If those they go up

by ten thousand dollars, what do you think Ford's going to do with the price of the Escape? What do

you think GM is going to do with the Equinox?

Or they're all going to raise their prices.

Speaker 3: Yes, So again I go back to it from a standpoint of well, what are you trying to do with the policy, And ultimately how are you going to incentivize people to create jobs here in the US. And that's

why if you look at a sort of a comparison that Biden model, which was, hey, you know what, I know, people don't like the fact that evs are being shoved down their throats, but you're building this whole ecosystem to be able to support that industry in a very different manner, which you know, again is just a very you know, it's just a different approach. But I think this ultimately,

we're in this time of this polarization. And if you

think of the traditional supplier and the OEMs, what they've gone through from the beginning of the Obama administration. You know,

they're the first to really issue the emissions regulations. You

had CARB come forward and say, hey, we're going to start driving our own own requirements. And then you have

Trump come in, who you know, tries to freeze all of that and try to reverse the CARB mandate. Then

you have Biden come in and he increases it. And

now you come back and this is a real difficult time for people to operate in the industry where you're you know, this continuous improvement mindset, you know, is always what we have that we're trying to do. And the

hard part is is that this shift with you know, the Trump administration is going against what the rest of the globe's doing. So if you think of those European,

those Asian OEMs, and even if you look at commercial vehicles, commercial vehicles, all the commercial vehicle OEMs are driven out of Europe now because Navistar is now owned you know, by Scania and the Trade and Group and VW Group.

So you have this polarity that's taken place in the industry that says, how do I manage a business in this environment? I mean think of GM. GM sells as

many vehicles in Asia as they do here in the US. Asia,

their whole markets going towards evs.

Speaker 2: What do we do?

Speaker 3: You know? So this polarity is really creating a challenging

time for the OEMs and the suppliers in this ecosystem.

Speaker 5: With the incentives that were put forth for you know, the electric vehicles, you know, to incentivize the manufacturers to get the you know, resources in America, build the batteries in America. Do well, is that going to somehow make

electric cars become more on an even playing field? Because

those may not be as susceptible to teriffs if everything is being built here.

Speaker 3: Yeah, so, and I think that's you know, that's something that's yet to be seen, is the market poll with all this, you know, all the new models coming out, Well, the market continue to shift that way on their own, minus the incentives. We've done a lot of work in

the commercial vehicle space, and one of the things I can tell you is the incentives on commercial vehicles are just nowhere near where they need to be to be able to get the scale. I mean, if you look

at Class eight truck one hundred and eighty two hundred thousand dollars, well, if you make it an EV right now, it's four or five hundred thousand dollars. So and there's

not enough incentive in that. But the market has to

do something to bridge this gap. You know, how you

get scales to be able to drive those type of vehicles into the market is really a question there. It's

not that big of a gap when it comes to you know, evs and the internal combustion engine, we're really getting to a point in time where there's you know, there's more of this parody between the two. So that's

not as big of a gap to measure and manage versus what you have, like for instance, in commercial vehicles.

So you know, it's all going to come down to what kind of policy can you drive to really get that point where we have a tipping point. Now we've

got enough volume and scale for people to start making real money when it comes to at least like vehicles.

Speaker 4: So Peril, let me ask you. I mean, you drive

a lot of cars, and so let's say that seventy five hundred dollars goes away, and basically if someone wants to go out and buy a vehicle, they have to make a choice of whether they want to, you know, I mean, as John pointed out, average transaction price fifty grand, and evs are about six seventh grand above that. Right now,

if the mandates go away, if their tax credit goes away, what are people going to buy?

Speaker 5: I think there are still people that are going to want evs. I mean, there's there are certain qualities about

evs that make them really desirable. They're great to drive,

they can be very efficient, they can save you a lot of money depending on how you use it. I mean,

for example, if you typical commute is thirty to forty miles a day. For most evs, you can go all

week and then charge them up for you know, at lower times, you know when electricity is a little less expensive, and so you can end up saving considerable money. So

you still have to do that equation to see is it makes sense to you know, versus a gas vehicle.

So if you're looking at say a you know, equinox EV versus an equinox, the equinox EV is going to be more expensive, but over time you have to do the math and see if it's going to balance out even without the tax credit.

Speaker 2: So back to the terroriffs for a minute. Who's the

CEO of Linamar, the Canadian company, Linda hassen Fratz. I'm

butchering butchering her name, but she was quoted in Not a Votive News is saying, look if this twenty five percent tariff hits Canada and Mexico this weekend, she predicted that North American production would go for about a week and then everything would come to a crunching stop. Do

you think that could happen? Well?

Speaker 4: And this is because of the components that go back and forth across the border as it gets processed. So

if you have to do all this administrative work that, yeah, it's going to be a real problem to do that and to do the calculations and to try to figure all that out. And if companies then just decide Jesus can't,

we can't ship, then where the park's going to come from?

In this conspect what you're saying, Paul about how they built a network in order to produce things, I mean, I think that maybe many people, many of whom are probably in Washington. Just just imagine if things get poof

get made right, and you know there it is, well do.

Speaker 3: You think you know, you think of the supplier that I was talking about her, I mean, they make simple components, but the complexity of you've got to get a specialty steel, and that specialty steel, you know, I can only get in a couple of locations. And then they go out

and they bid it to say, hey, where am I going to get the best price? And you know, my

local supplier of the steel already has capacity that is spoken for for others, So you know, we're going to buy it from France and then it gets shipped in and then the next thing you know, you've got a cost on top of that. That just makes you uncompetitive.

And then the OEMs are moving. Oh, we got to

change our supply base because somebody can. They'll buy that

French steel, but now they can make them good, you know, and bring it here.

Speaker 5: Now.

Speaker 3: I understand that components aren't going to go back and forth like they did maybe the last time. But everybody

has work to build this efficiency into this ecosystem. And yeah,

it just is going.

Speaker 2: To be a rook, you know, to a paraphrase an old saying, supply chain is only as strong as its weakest link, and you know, you break one part of it and a all unravels. Yes, we've been talking about

tariffs in Canada and Mexico, but I mean the talk of it is that Trump is going to put an import tariff twenty five percent above what we've already got the two and a half percent on everything, including from Europe and and so uh. Volkswagen is reportedly looking at

building Audis and Porschas at its assembly plant in Tennessee.

What do you think, Perry, how long would it take them?

Do you think or know it's gonna take.

Speaker 5: It's clearly not an easy thing to do. I mean,

it takes it takes years to get it up to production.

So I mean by the you know, by the time they're able to do it, is it already too late.

It's it makes sense to start thinking down that road.

But but you still have all of the parts are going to still be coming in. You know, you're still

going to have the effect of the tariffs no matter.

I mean even the carrent like Subaru builds most of its vehicles in Indiana, but all the parts are coming in from from around the globe, and so it's it's it's still not immune from all the tariffs.

Speaker 4: So so Paul, let me ask you. So, I mean,

the last time we hit you on the show, which is years ago, you know, when we talked about power train and you know, you you pointed out that the move was towards electrification and that you know, conventional ice was on the way down. Let's say that because of

the unleashing the energy or whatever the policy was that that Trump signed that talked about you know, drilling and using oil and on and on and on, and let's say that the internal combustion engine comes back in a big way. I've got to believe that many of the

supplier companies have reduced their capacity in in you know, and reducing capacity meaning like maybe they sold the plant off and the equipment's gone they you know, I mean, how long does it take to ramp back up?

Speaker 3: Well? I think so. So obviously we follow a lot

of the m andy market and a lot of the work we do is with PE firms or are always looking to buy these type of powertrain assets. And what

does the consolidation of that look like? And what I

would tell you is many, many suppliers have gone through reduction of engineering resources around powertrain because now what you have is nobody's building new engines and transmission platforms. They're

not building new transfer cases, you know, these type of things.

They're really planning for that all electric future. I mean,

as soon as you guys realize the last Trump administration ended, Mary Vara came out and said, hey, we're planning for an all electric future and it starts in twenty thirty five.

And they've been marching to that. They do not have

really any hybrids. It's either EV or it's IC. So

now what is that supply based on that? We're not

getting RFQs for new engines, We're not getting rfques for new transmissions have been for five six years. The only

RFQs we get is when somebody else folds up and the OEM's got to come in and do something proactively.

So there isn't the supply base that's going to be there, Nor is the OEM going to come out and say, hey, wait a minute, for the North American market, we're going to start making new engines or new transmissions. They just

don't have the investment, you know, you know, there's not the resource. So the industry has really started to shift

more and more towards this, and I think that's the hard part is where do you get the resources to go back from where the industry sees as its future, which isn't just electric but connected cars and the whole architectures that those new cars produce and advantages that that produces for the consumers. That's where the industry has been pushing.

That's where China is pushing it. That's where Japan is

pushing it, That's where Korea is pushing it. That's where

Europe's pushing it. So I haven't been able to figure

out yet here. You know, mostly we make trucks in SUVs.

They're designed and developed here. I haven't been able to

figure out, is this, you know, just niche what we're going to be in this market? I haven't been able

to figure out, well, what does this mean overall? But

I don't see OEMs coming out and saying, Hey, we're going to design a new engine or a new transmission at this point in time. I just don't see that happening.

Speaker 2: So we're getting down to the end of this segment.

What are the chances of Trump saying, Okay, Canada, Mexico, I see you're making improvements on cutting down on illegal immigration.

I see that you're really taking some serious steps to block fent and all from coming into the United States. Okay,

I'm not going to put the Trump tariff on. What

are the chances of that?

Speaker 3: Oh, I think it's low.

Speaker 5: I just gonna say very low. Yeah, Okay.

Speaker 2: Then then what are the chances of him saying, Okay, we're going to do twenty five percent, but it's not going to fall this Saturday. We're going to give you

guys a number of months. We're going to phase it

in over time. Does that help at all?

Speaker 5: I don't think it helps at all, And I don't know that it would happen I mean I could see it going the other direction, where you know, I said, I'm doing a tariff Saturday. I'm doing it Saturday. But

you know, in six months, quietly dropping, lowering it down perhaps.

Speaker 3: Yeah, you know, I mean, let's let's face it. I mean,

we are all talking here about. Hey, the last time

the tariffs came in, it raised prices, it raised inflation, and he really stuck Joe Biden with that. Okay, but

that all started, you know, under the last Trump presidency.

So I think think he is going to go forward with it no matter what, because he thinks, at the end of the day, the people are voting for me, don't see this cause and effect and what I'm telling him by us doing this, this is going to create jobs.

And I think that's the most important message for the presidency at this point in time, and you know, showing a strong face to hey, this is how we treat you know, the rest of the globe in this environment because we got to take care of ourselves. So I

think that message is more important than Hey, what is the impact of this going to be over the next three four years, especially when you got a single presidency.

Speaker 4: Okay, quick question, Yeah, is it going to create jobs.

Speaker 3: I don't know that it is because the last time, I don't think it created jobs. There is no new

capacity added. You know, if we go back to the

steel nobody was building new steel mills, so I don't know that that created jobs.

Speaker 2: Well, we're gonna have a lot to talk about next week's show because we'll have a somewhat clearer picture of what's going on. Let's take a quick commercial break right now.

We'll be back in the moment to talk more about the automotive industry. Performance that shines even in the rain.

Speaker 3: That's what really matters. Rich don't pretends to tires, improved

grip and wet conditions.

Speaker 2: All Right, we're back. We've got a lot to talk

about this.

Speaker 4: This is probably the longest we've gone on the show.

And I talked about Tesla.

Speaker 2: Before we get into Tesla because that's a good topic.

Carry you drive a lot of cars. What you been

driving this week or what media events have you been out?

What's good out there that you like?

Speaker 5: Well, this week I'm driving a GMC train, which is all new for twenty twenty five. It's really good. They've

it's a you know, compact crossover five passenger, but it's it's got a ton of space inside. It looks really good.

It's got that same look as the rest of the GMC lineup. Got thirty one miles per gallon. Driving over

here today with a non electrified powertrain, it's.

Speaker 2: It's what a one point six turbo.

Speaker 5: At one point five I think one point five, but it's you know, it's it's got plenty of power, it's efficient.

Took it out found some snow yesterday a little bit in a parking lot where no one had plowed it yet, and so it's it's a great idea for a vehicle like that. It starts around thirty grand for front wheel drive,

two grand more for four wheel drive right now. Because

it's the new model year, it's only available in what they call the base model. But which is the elevation

I think. But it's you know, big screen inside, everything's digital.

It feels very high tech, feels like a you know, much higher level car. So it's impressive.

Speaker 4: How about you, Jary, Well, last week I was out in San Diego driving the new Toyota fore Runner.

Speaker 2: And this was like the first redo of the fore Runner in a couple of centuries, forever.

Speaker 4: Yeah, approximately two and a half centuries since they did that.

It was interesting. I mean I spent time talking to

the chief engineer, who is a Japanese man who lives in Japan, lived in the US for a while and he also was chief engineer on land Cruiser, and I guess I hadn't realized that there are three variants of the land Cruiser. There's the three hundred to two fifty

in the seventy and the seventy is like the real you know, like if you're you know, on a safari in Africa or something, you know, like a real, real grunty car that and and then it goes higher and hire in tech. But he was he was talking about

the love that exists for that particular vehicle and how very important it is. And it's a body on frame

still and I asked him about that because if you look in that segment, you know, you can't find vehicles that are body and frame anymore. And he basically said,

you know what, this is part of Toyota in this this this is where we beat, this is where we began and we're going to you know, this is this is something about us. And I just thought that was

that was so refreshing to hear.

Speaker 2: Well, yeah, but I mean that's a response to the customer.

The customer wants body on frame for a land Cruiser, no question about it.

Speaker 4: And for the Forerunner.

Speaker 5: And but it's a small number of customers that want a body on frame for the land I mean, they don't sell a lot of those. I agree though, that

having that, you know, paying attention to its loyal customers is important. And a lot of manufacturers have kind of

forgotten that that, you know, they can do volume. So

why build this kind of niche car that you know, lots of people you know, remember from a long time ago and love it. May not even buy it, they

just love the idea that they're building it. Yeah.

Speaker 4: So, as you guys know that on press drives, we often have the opportunity to do all kinds of silly things that we probably wouldn't otherwise do. And then in

the case of this, we were on this ranch and they had us basically jump the car, so we had all four wheels in the air, and of course we had it. We had a driver or an expert sitting

in the right seat, you know, explaining what we needed to do, you know, and He's like, go thirty one miles an hour, do you know, go? Do not go faster,

do not go slower. You must be at thirty one.

Watch these speedometer and it's just like oooh and quite an experience. What have you been driving?

Speaker 3: Well?

Speaker 2: Wait, just so on the fore erunner, if you're jumping the truck, does it have those spool valve shock absorbers.

Speaker 4: That made it feel really nice.

Speaker 2: Well when you hit the ground. I mean, I think

you need those things. I just wonder if they're putting

that in the Forerunner.

Speaker 4: Now I believe they do have those, but they do they And so it shares a lot with the new Tacoma, but it doesn't have that clever seat that we saw when we were out at the Twitter Technical Center.

Speaker 3: Right.

Speaker 2: So this week I've been in Mazda X ninety's the big one. It's the big one. It's all wheel drive,

it's got the inline six cylinder engine, drives beautifully. The

interior is really interesting because Mazda is I guess i'll use the term warmed it up. It actually has fabric

in the instrument panel, I mean like cloth, and it's got this interesting stitching to it as well. And it's

Mazda has been an interesting company for me to watch because I like their products. I think they're very handsomely designed,

they look good, I think they drive terrific. They air

on the side of enthusiasts, which I include myself to be one of. And I've always been puzzled why don't

they sell better, good looking cars, well prized, dry, beautifully blah blah blah blah. And last year it looks to

me like they turned the corner, at least in the US market. Sales are starting to look pretty good for

Mazda right now.

Speaker 4: Maybe too many people associate them with quirks or machine tools.

Speaker 2: Maybe they do.

Speaker 5: That's the problem. Maybe they do.

Speaker 4: Okay, Hasla all right, So they came out with their numbers yester day, Yeah, yesterday, yeah, yest night. Okay. So, Paul,

I want you to listen to these numbers because I want you to explain to me whether whether this is a sign of something or if I'm getting ahead of my proverbial skis Okay, okay. Auto revenue is down six percent,

operating expenses up eighteen percent, income from operations down twenty percent adjusted a bit of zero. Total production down seven percent.

How's that los? So let's say you didn't even know

what the company was and I gave you those numbers, what would say?

Speaker 3: I would say that's a typical OEM, that's a legacy.

That is a legacy OEM. And I think, you know,

what they're dealing with is now the hundreds of vehicles that are now evs in the market that have you know, that are software defined vehicles. They have the features that

have the comforts that people really appreciate in a Tesla.

And so I think competition is only going to continue to erode that that share that they have now if they can continue to introduce new technology like the full self driving, you know, maybe that's going to create barriers for others to compete. But I think even if you

look at BMW coming out with more models, you know, as people come off leases for Tesla's, you know, are they going to be buying another Tesla or are they going to say, well, we've got so many other options.

We now can put ourselves in a Mercedes, a BMW, a Cadillac, you know, whatever it may be. And I

think that's really their challenge going forward is how do they how do they continue to grow?

Speaker 4: But from a business. Are these numbers.

Speaker 3: No, they're not great.

Speaker 2: No, they're not great. But the stock went up on

the news, and so I look, I've been saying this for years. Don't bet against Tesla, don't bet against it. Yes,

these numbers look like legacy. And I think their profit

margin was like seven percent or something like that. I mean,

I think they're operating margin. GM beat them, General Motors

beat them on the operating margin. But there's a there's

several positives in there. Their energy storage business is growing

by leaps and bounds. It was up like sixty seven percent.

They did over ten billion dollars in revenue. There's services

which include insurance and finance and spare parts and the like, was up like twenty seven percent, ten and a half billion dollars. Their ZEV credits that they sold were like

two and a half billion dollars, up like fifty four percent.

I'm going off the top of my head, which I shouldn't do, but so all strong, and then Elon drops a couple of bombshells during the analyst call. They're going

to launch unsupervised FSD Level four in Austin, Texas. They're

going to start tests this year. With a view to

doing more later in the year. And he announced they're

going to start mass production of their humanoid robot Optimists, and the market for that could be overwhelming. And I

think the analysts are the investors ignored all the bad legacy car company like numbers and focused on this level four unsupervised and on the Optimists robots and went whoa good time to buy? That's my read of it.

Speaker 5: But hasn't that been pretty typical for Tesla in the past.

I mean, as you know, sales or they have issues over here, but look we have this new road strove here, or look we have this new truck.

Speaker 2: It's a shiny scirrel.

Speaker 5: That's right, and and everybody goes with it's exactly what you just described. And so I think, you know, but

to your point, the I mean, it does make sense that you know, they were the only game in town for a long time and they have I mean, when you look at a model S right now, it's not all that much different than that first model S. I mean,

there's been some style changes things like that. But you know,

in order to for any car company to remain competitive, you've got to not reinvent it, but you've got to redo it.

Speaker 2: To Paul's point, Let's say most people probably lease a car for three years typical lease. Now somebody coming out

of their three year Tesla lease this year goes, oh, go to your point, look great that Cadillac lyric. Hmm.

Speaker 5: I like that.

Speaker 2: And if you're in a market like California, we're Eslas are everywhere, a lot of people upscale especially, are going to say, you know what, I don't want to be driving what everybody else is driving.

Speaker 4: So I was reading the Tesla deck that went around, went along with the numbers, and one of the slides was a comparison of the existing model Why in the new bottle Why okay, and it's of course, you know, the new bottle Why has got all kinds of checks because it's got all this new cool stuff, right, and so this is this is their comparison, okay. And then

I noticed, well, when there's this really fine print on the bottom here, and.

Speaker 3: So I blew it up and see what it said.

Speaker 4: So it says model Why rear drive starts at forty six six hundred and thirty and new moodel of Y Launch series long range all wheel drive starts at sixty one thousand, six hundred and thirty, So we're basically talking, you know, about twenty grand. Price includes destination and order fees,

but excludes taxes and all other feats subjects to change.

New model Y launch series has upgrades that will increase the price. Estimated savings includes six thousand dollars in gas

savings estimated over five years, and the seventy five hundred federal tax credit available at eligible buyers for now. So

I mean that that, you know, so Terry, Erry, Sorry, it's got your two points the gas savings and cost savings related.

Speaker 5: To but you're going to but you're not going to have all of.

Speaker 4: That possibly, Yeah, yeah, I just I just wonder if this isn't indicative of, you know, as we've said, like traditional car company business rather than the special company that it's long been.

Speaker 5: Well, it can help become a traditional car company.

Speaker 2: The investors don't look at it that way. In fact,

they don't even look at Tesla as a car company.

They look at it as an AI slash robotics company.

And that's why the market valuation is where it's at, and why legacy car company numbers didn't put a dent in the stock price it did. Initially for the first

couple of hours after trading, it was down and then boom, bounce right back.

Speaker 3: There are a couple types of analysts that cover them.

So there are so you know, Morgan Stanley's you know, very bullish because they're sitting there saying, well, with optimists alone, that's a game changer, you know. So you have that

side of the equation as a traditional automotive analyst. Then

you have other automotive analysts like at Wells Fargo's like, this is a traditional car company, you know, forget all that shiny stuff. Here is how this is performing. Is

a car company. And I think people have to decide,

you know, for themselves, Hey, is this a good investment, you know, based on the shiny stuff or do I buy into No, as you increase competition, they're just not going to be able to, you know, sustain this stock price.

I think that's the decision that people need to make, you know, as they're thinking about this act.

Speaker 4: So Perry, one of the things that Elon said in his call was that he would have this self driving service in Austin, Texas sometime this year, and that at some point in the not too distant future, it would be possible for Tesla owners to put their cars into the fleet, so they could basically do an Airbnb with their vehicle. What's the likelihood of any v ABU. There's

so many obstacles to level four. I mean we're not

even to level three drive, you know, where you can you know, take hands you know, be hands free and not pay attention to the road.

Speaker 5: We're level two, which is not that uncommon now where you know, with super crews and for you know, Blue crews, where you still have to pay attention. You take your

hands off the wheel and you take your feet off the pedals, and it does everything very well. But to

get to level four, which I believe means you don't even have to be in the front seat you can be.

I mean, it's a it's a major step that you know, they are you know, accidents, weather conditions, things like that that I'm not sure that they're able to deal with that yet. So I'm I'm not holding my breath.

Speaker 4: Well, then WEIMO announced that it's going to begin testing in ten more cities. Now it isn't going to be

putting service in these ten cities, and it's only going to be sending ten or fewer vehicles into these ten markets.

But it seems that, you know, that's a company that is is really aggressively going after this or level level four.

Speaker 2: Level Well, that's the thing that I think about.

Speaker 5: I guess is that level five no.

Speaker 3: Love level four.

Speaker 2: But weamo's uh, you know, when you look at the cities where it's say it's going into, or the regions it's going into. One of them was the Upper Peninsula

of Michigan. I saw one of them was Upstate New York.

So I find that now they're going to have us drivers driving them. Then the next step is going to

be a safety driver monitoring, but then the next step after that is going to be take the driver out. Well,

what I find fascinating about this is, I mean, you guys know, but maybe a lot of the audience doesn't know.

The Upper Peninsula of Michigan very rural, remote, brutal winters.

Same with Upstate New York, very mountainous, very snowy. So

I find it fascinating that WEIMO is saying, Okay, boom, we got to make this work there.

Speaker 3: So yeah, and I'm curious, and why would you think they chose those areas Because they're not going to get a lot of you know, taxi type service, you know, in those areas. So why do you think they chose those.

Speaker 2: Because I think they're looking way down in the future where I mean in rural areas where you've got a long distance to try. Maybe robotaxis make more sense there

than in say like a crowded city. And in fact two,

in rural areas like the upper Peninsula of Michigan or upstate New York. Rural areas tend to be lower income areas,

and maybe you can offer this robotaxi service at a price that looked very attractive to these people. And I

and I, you know, look, way moos started in Phoenix really because it's sunny, it's warm, there's no snow to worry about, the roads are all straight, so they picked an easy area. And now I think that they've got

enough mileage under their belt so to speak, that they're saying, let's go after some of the tougher ones, because if we can crack that nut we have got, we've just opened our business plan up into a lot more opportunity.

They're also going to Tokyo, by the way, so leaving the US and going there. Yeah.

Speaker 4: I mean you just think about driving in the Upper Peninsula.

I mean it's two lane roads in the winter. You're

basically have solid walls of snow on the side of you, and so you know things that autonomous vehicles use like side markers and things like that, you're not going to be able to see those. So if they're able to

solve that and be able to drive under those conditions, maybe they won't even go up there, but they'll say, Hey, Minneapolis, it snow's a lot there, and let's be putting cars there with high level of confidence that it's going to work out.

Speaker 3: But I think some of that is those vehicles train themselves as far as where are they at in the road, So the repetitive miles become very critical when you get in those conditions where you don't see you know, the lane marker and you don't see the road as clearly, So that repetitive nature is really critical. The up is

a huge, you know, area to cover to be able to do that. So I'd be really interested to understand,

you know, what's sort of the algorithm around the idea of well, how long do they have to be there before they have that level of confidence.

Speaker 4: Yeah, So, speaking of super crews, as we just did so, Mary Barrow said this week during the earnings call that they expect super crews to bring them two billion dollars a year in revenue by twenty thirty. As we recall

a few years ago that number was a lot higher for autonomous vehicles, and now it's been rationalized some I think, what are the likelihood Paul, do you think that they'll hit two billion in.

Speaker 3: You know, I think so as you were talking about, as you get into these you know, sort of two plus level two level two plus type of features. If

you're doing highway driving, that is a great feature to have the fatigue that you have, like to drive to Chicago.

So you know, I took the family to Chicago a couple of weeks ago, and to do four hours in the car with those type of features, it's just it makes the trip go by so much better. And I

think people who drive that type of way even occasionally will start to say, this is really a much better way of doing this. So I think when it comes

to those level two plus type of features, I think there's going to be a strong pull in the market that once you get that in front of people, you know, and you know, I may not be sitting here for you know, five minutes at a time with my hands off the steering wheel, but the fact that I don't have to have my eyes on the road, you know, all the time, is just so much easier. And I

think people we'll start to see that, we'll really start to take to those features.

Speaker 5: It'd be interesting because there's also people like my wife, who scared the death of it. Doesn't trust it. It

doesn't even like it when I use it. Yes in

the car, Yes, And it's you know, and it may be an age thing. I'm not sure, but it's you know,

there are certain people that just will never trust that the vehicle can do all of that on their own.

And it's funny. I remember when they first started talking

about a ton of miss driving, and in my head, I'm thinking, I love driving. I don't want to ever

give up the driving. I think it's the coolest thing ever. Yeah,

to be able to get on the freeway. I mean

I picked up a vehicle at the airport and drove thirty miles on the freeway home without ever touching the pedals or the steering wheel. It changed lanes on its own,

it passed other cars, it was easy and relaxing.

Speaker 2: Look, I love driving too. I'm about a hardcore enthusiast

stop and go traffic or just you know, going straight on a freeway for hours on end. No, I'm ready

to let the car do it.

Speaker 4: So to what extent are people going to be willing to pay a subscription fee for something in their vehicle like a super cruise? I mean, in some way serious

XM has proven that people will pay for something that had long been free radio right, But is so so here's a recurring charge that you're getting on your credit card, or recurring charge that is in your car loan. Is

this going to be acceptable or is there going to be a sufficient amount of churn such that you know, they're really going to have to work hard at getting people to, you know, initially get it and keep it.

Speaker 5: I mean, I think they're smart about the fact that, you know, most of the new vehicles you buy have a couple of year trial, so you basically you get them hooked because, like you said, it is a wonderful thing to have, and for a lot of people, it's worth spending a little bit more to have that feature.

So I think, you know, I think people will pay it, especially if they get addicted.

Speaker 2: Well, you know, Mary had a specific number two because they've been given it out for free for X number of time, and then what she said is twenty percent, say yeah, I'll continue paying for this. So if GM

sells I don't know, four million vehicles, twenty percent is eight hundred thousand. You're knocking on the door of a

million people a year paying this. I could see it happening.

And right now it's been introduced on premium products, you know, Denali's Cadillacs and thing. What's Hyundai going to charge when

it offers this this kind of level three plus or level three driving, They'll probably offer it at a much lower price point.

Speaker 4: If they didn't have the deal with GM, I'd say they'd offer it for zero.

Speaker 2: Speaking of GM, one of the other things that I found in their financials, uh that they just announced this week was they paid damn near a billion dollars buying out buick dealers who didn't want to sell evs. And

I was I was astonished at that number. It was

like nine hundred and forty or nine hundred and sixty million dollars. But I had no idea that they were

still going through that. I don't know. What what do

you think, Perry?

Speaker 5: I mean I could see Buick dealers, you know, not wanting to make the investment into going ev What I'd be curious to know, though, is how what percentage of the Buick dealers went away? I mean how many there weren't.

I can't imagine there are a lot of Buicks being There aren't a lot of Buicks being sold in America, I mean comparatively speaking, So I'm curious to know, you know, how many of them were Is this was this an out that they were looking for?

Speaker 2: Yeah, And I don't know why it singled out Bwick dealers.

I mean Cadillac selling electrics. I'm sure there's Cadillac dealers

who say I don't want this, and cheval A is doing it, and I'm sure there's Chevrolet dealers.

Speaker 3: But I think with Buick you have a number of rural, you know, sort of dealerships that are just like, hey, you know what, I'm set up to take care of an internal combustion engine. You want me to pay more,

you want me to do more with this. I think

that's where you start to get the rub you know, for brands like Buick, Cadillac tends to be much more you know, suburban, you know, city type of individuals. And

I think that's what you start to look at when you start considering, well, why would this happen with Bwick?

But all the OEMs have this issue. I think Ford

a year or so ago came out and said, hey, you know what, we're going to the agency model when it's evs and there was somewhat of a re vole with the dealers, you know, which they started as soften on that. So this disruption isn't just hitting you know,

General Motors and Buick, It's going to hit that whole car side of the dealership model. I think.

Speaker 4: Well, a couple of weeks ago this firm, Carrigan Advisors, which deals with dealerships and their consultants to dealerships, did they did a study and reading from Carrigan Advisors. One

of the most striking findings of the survey is the concern surrounding new electric vehicle sales is significant. Seventy seven

percent of dealers expect EV sales to negatively affect profitability in twenty twenty five, setting challenges such as higher costs and an evolving consumer base. In contrast, hybrid vehicle sales

and parts and service operations are seen as key growth drivers, with seventy seven percent and seventy five percent of respondence, respectively, expecting these areas to boost earnings. So if you got

seventy five percent of the dealer saying EVS are going to not be good for.

Speaker 3: Us, well, I think so I have I have another data point. We did a project in the commercial vehicle space,

working with the OEM and their dealers to understand, Hey, what is the impact as you start to shift to all these new technologies and for the traditional commercial vehicle.

You know Class eight trucks, you know Class six trucks.

You know that whole market for commercial vehicles, sixty five percent of the profit that they generate comes from, you know, supporting the internal combustion engine. You know some truck drivers

going across country, he's got a break down, He's got to come in and they take care of that, and that's where their profits are made. And they're all sitting there, Sam,

Wait a minute, When you go away from the internal combustion engine and you go to EVS, you don't have anywhere near the parts, the service, the requirements. How am

I going to make money in this where I've built a business around this traditional model. So I think, you know,

that's not only on the commercial vehicle side, that's on the traditional autumn maker dealer model also, which I think becomes really a challenge. And then you start looking at Tesla.

Now we really don't even have dealerships, you know. That's

the other thing that all these dealers are looking at. Hey,

this change, what does it really mean for me? And

I think that's where the rubs starts to become uncertainty.

Speaker 5: It makes sense also then that hybrids would be less of a less of a concern. You still have all

of the internal combustion, and you still have all the same certain.

Speaker 3: And you have the duel you know, sure power trains.

So you've got an e which now has new maintenance requirements.

You've got traditional IC you know, so for them, Oh yeah, there's a lot more that could go wrong with traditional eyebrid.

Speaker 4: But what I wonder about is is, you know, Harry, going back to your example of the Equinox. Ev in

the Equinox, So you know, somebody goes into their local Chevy dealer and there's these two vehicles, and the dealer is thinking to himself, I'm gonna lose dough if I sell this, this Equinox EV. So I'm gonna tell the

consumer they really want the equinox.

Speaker 5: It is possible. I mean, I don't know if the

salesman salespeople are looking that way. I mean the yes,

as far as terms of service, there are going to make more money. I would imagine on the.

Speaker 2: Well, see I sink it's somewhat different. If there's an

Equinox EV on the lot, the dealer bought it from the factory. The dealer is financing that. The dealer is

losing money, and to say that it's there, you gotta salid.

If somebody comes in as interested, you bet, I'm gonna try to sell them into the CV, okay. But if

they have from order it, then no, I'm going to sell them what's on the lot, okay.

Speaker 4: So if they come in and they're just they're just looking.

They they don't care one way or the other.

Speaker 2: And the typical salesperson will steer them towards a nice vehicle.

Speaker 3: You know. Again, going back to the commercial vehicle side,

a huge disruption in that market is the typical salesman sits down. You know, all those trucks have been SPECD

over the years for all those fleets, so you got a small fleet, medium sized fleet. Largely they know what

they need and how to expect those vehicles. So you

come into that dealership if you're buying five, six, ten trucks, whatever it is, what colors, you know, what cab do you need, et cetera. Now you start to introduce an EV,

you've got infrastructure needs, You've got a whole different you know, requirements around you know, towing and everything. It becomes such

a sophisticated sale. Most brands, the OEM has to be

involved in that sale because of specing that vehicle, and it's so different. So you go to a whole different

sales type of model to introduce a commercial vehicle EV versus what you do, you know, your standard diesel Class eight truck. So there's a lot of change that comes

when you start to introduce EV's in the commercial vehicle space.

Speaker 4: All right, last question just for YouTube is we're talking about all ye long. So okay, here at the beginning

of the year, what do you think sales will be like in twenty twenty five? More than last year, same

as last year, or less than less.

Speaker 3: I think it's going to be less than last year.

If we look here in North America, I think it's going to be less, and I think it could be less globally because we are about to deal with a big disruption. You know, I think we're all in similar alignment.

The tariffs are going to happen if it's just to send a message to the globe. As a result, that

disruption is going to create a challenge when it comes to the number of vehicles that you're going to sell.

So I think it's you know, I think it's going to be less.

Speaker 5: And I have to agree. I mean, coming back full

circle to the tariffs, we don't really know exactly what's going to happen, but if vehicle prices are certainly going to be climbing, you know, people that are you know, we're thinking they might want to buy a car, they may put it off. You know, by my old car

is doing well enough, I'm just going to fix it rather than spend the extra money on a new car.

So I think, yeah, I would agree that the sales are not going to cause.

Speaker 3: Is that what happened in January sales because January sales were.

Speaker 2: January sales are going to be up by all accounts.

Speaker 3: So did people say, oh, I was going to buy a car this summer, but you know what, I'm going to buy it now versus when these things happen.

Speaker 4: They think there was some pull ahead. That seems to

be But yeah, see next week, John will be really smart.

We'll be able to say those guys didn't know they're they're they're on fire, really good, and next week's show will be all about them, not all about EV's. But

we have Mike Colias, who wrote a book about EV's, will be on the show.

Speaker 2: And we'll know a little bit more about what happened with the tarists by then. But one thing's for sure, man,

This business, sir, is not easy. But Kerry Stern, thanks

so much for coming in. You know, Paul I can

so great to have you back on the show.

Speaker 3: Thank you.

Speaker 2: Gary. I'll see you next week and I hope all

of you join us then.

Speaker 1: I'll don't line After Hours is brought to you by Bridge Stone Tires. Solutions for your Journey

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