Thursday, 3 January 2008

Macro-Level Trends – Remodelling the Structural Economics of Autos and Housing

The car is typically the 2nd most expensive purchase an individual or household will incur, and although in fiscal terms miniscule compared to the buying of a home, and at first glance unrelated, the truth is that the 2 are symbiotic. An important intertwined relationship that deserves greater attention from both the automaker’s and consumer’s viewpoints.

Auto-sector’s fortunes rely heavily on the broad availability of consumer credit to underpin and absorb production capacity, itself driven by CapEx demands for volume efficiencies. Consumer credit availability is itself driven by regional/global investor optimism – liquidity encouraging further liquidity – the most prevalent indicator of economy growth being price inflation of housing – the captured equity in turn encouraging the lending/borrowing cycle. That is until economic fracture, the likes of which we’ve seen in H2 07, at present, and (optimistically) into the next 12/18 months.

In developed regions - the triad especially – auto-demand, and relative product margins, are connected to consumer ‘feel-good’ factors such as employment security, disposable income and house-price increase providing the opportunity for equity release in the form of a new car, additional holidays etc. This trend has been key given the ageing population bulge of advanced regions, comprising of what market researchers call ‘self-rewarders’.

But of course, today we witness a massive contraction of the credit-bubble, driven by consumer and latterly corporate debt default, which undermines the value of US, UK and European housing stock (Japan escaping the pressure as its economy finds traction at long last). This in turn obviously decreases the willingness of lenders, etc, and so a downward ‘protectionist’ spiral continues. If not controlled by central banks and policy makers (much harder to do in practice than theory) the general fear factor overpowers even considerable ‘liquidity pumping’ and interest rate holds/cuts from The Fed, BoE and ECB.

VMs well recognise to cut their cloth accordantly, bank and corporate economists on hand to assist CFO direction of fiscal strategy relative to the prevailing climate. Historically that has meant re-financing options, operational down-sizing, supplier squeezing, and typically on the sales front the reaction by VMs is to simply try and soak-up excess capacity/lack demand with conventional ‘demand-push’ sales incentives: reduced sticker price, lower interest financing (inc 0%, so negative NPV), ever heavier fleet discounting etc, all of which effects residual values and raises current owner discontent when the time comes to trade-in or sell on the vehicle.

Unfortunately this pattern has been the norm for nigh on 80 years, and although generic re-alignment focus is targeted on internal value-chain divestment or integration (depending on region) to raise margins more must be done to re-align the sales and marketing side of VMs to attune their offering to recognised, if not predictable, regional economic cycles

Whilst the corporate world understandably looks to emerging market growth as the off-set to domestic stagnation or contraction, the question must be asked “can VMs do more to manage their income-stream in recessionary times?” An especially pertinent question for US and European producers, given the worst case scenario of flat economic growth for many years to come; mimicking Japan’s 10 year hiatus.

In these depressed times and within an ever more urbanized, public transport-linked, web-connected and eco-conscious world, new car demand is possibly under greater threat of substitution than ever before. A reduction in middle-income household car numbers from 3 to 2, or 2 to 1, the likelihood of keeping a current vehicle longer, re-newing with a used car, switching to a pay-as-u-drive scheme, or indeed abandoning private vehicles altogether are very real threats that need to be tackled.

The search for alternative, higher value-creation, business models is always at the back of mind - the idealised CapEx de-shackled ‘Brand Enterprise’ an ultimate goal with initiatives such as the INDEGO project (and similar) serving to pave the way.
But surely, automakers should also look at the realities of today, including the important aspects of the economic cycle: a) downturn b) bottoming-out c) up-swing. And then attune business acumen and efforts with at least prototype business models to not just ride the peaks (upswings) of such economic waves, but also ride the troughs (downturns). And that means better meeting the consumer’s fiscally motivated auto-needs in such conditions. This doesn’t necessarily mean that GM turns to manufacturing bicycles, but the trick may well be to offer auto-solutions just at the ‘bottoming-out’ of the cycle, ready to create more pertinent complete product-service propositions relative to soon to be new homebuyers’ needs.

Relative to housing stock pricing demand, economic theory dictates that eventually supply and demand balance-out – via both over high prices falling and additional stock (government & private) added. Thus VMs should look to ‘assist’ new homebuyers – often geographically distant from amenities on housing estates. There may be a case for automakers, home-finance lenders and home-builders to co-operate to provide mutually beneficial, competitively advantageous, ‘bundled’ consumer propositions. Just as home-builders offer alternative interior design options or branded kitchen appliances, why not why not simply expand the proposition to higher margin vehicles, rather than simply loose sales to lower-price competitor automakers?

Obviously no VM can negate the realities of economic turbulence, but that is no reason to stick with less than optimal practices. Ways to de-couple and re-format the present destructive symbiotic relationship between Autos and Housing must be investigated and prompted. Ironically the seeds of opportunity may well be that old adage ‘safe as houses’; they just need to be nurtured.