Car Focus

It is the time of year when the new automobile models are being introduced and as usual I find myself looking to read everything I can about the new models.  I have been fascinated by cars since I was a young kid, and only later on did I realize how important the automobile industry was to the American economy.  Now I am not a believer that whatever is good for GM (or Ford of Chrysler) is good for the United States, but I do believe that the American car industry doing well is inextricably interwoven with the American economy doing well.

For many years, the greatest excitement about the new models being introduced was reserved for foreign cars, for the most part those cars imported either from Germany or Japan. And the reality was that I was part of the foreign car bandwagon.  American cars didn’t excite me and more importantly, I just didn’t have a sense that they were as durable or well designed as the German or Japanese cars. Now American cars are at the top of the list in almost every category.  The new Corvette, the new Impala, the new Cadillac CTS, the new Jeep Cherokee, the new Ford Fusion are all the best of breed; tested continuously and praised for all they represent and for all the value they provide.  And because American cars are so good at doing what they should do, it is no longer unusual to see American cars well represented in important foreign cities.  Beijing and Buick is the best example.

In many ways, the higher education industry is in a similar position.  American higher education is respected at home and around the globe. The impact of higher education on the economy – taking into consideration all levels of public and private education– is huge, and here too, the American economy doing well is dependent on higher education continuing to do well.  We need to be relevant, we need to be reasonable, and we need to be a good investment in the future.  Foreign competition continues to grow but in almost every area, our education is still the most sought after.

At times, for the automobile industry, economic incentives have been key to the public’s purchase of automobiles.  No money down, very low interest rates, low leasing rates, and discounts off the sticker price have all made a difference.  Discount rates are key to higher education purchases as well.  Either scholarships or well below cost public tuition provide the same, price cutting, economic incentives.  As the economy improved and as cars improved, the automobile industry was able to reduce the reliance on price incentives.  In higher education, we are still struggling with how to come to grips with price incentives.  And what makes it especially difficult is that public institutions may have exactly the same cost structure but because there is a subsidy from the state where the public institution is located, public institutions do their discounting up front and visible for all to see.  Imagine higher education, if Ford were a public company with a permanent subsidy for all Ford purchasers.  What would GM and Chrysler do?

I know many of us – especially in the private section– are looking for ways to reduce the increasing reliance in higher education on discounting to attract students.  Since it is no longer unusual for a private institution to approach 50% in the first year discount rate, the pace of discount rate increases by definition will slow down.  But unfortunately, I don’t see a workable solution for phasing out what so many of us have become dependent on.

Kids and Cars

I grew up during the time that Detroit’s Big 3 ruled the automobile industry and grew up with an automobile being an important part of my American dream. Since I grew up in New York City with the benefit of a great mass transit system, I’m not really sure why I was so car focused but there is no doubt that I studied every fin, checked every instrument panel, and knew all horsepower figures and 0-60 miles per hour acceleration data. And very much related to the times I grew up in, cars had no apparent flaws even though the mileage and the quality left much to be desired.

To this day, I still read every car magazine and remain focused on cars, now regardless of where they are produced. Crain’s Autoweek is now at the top of my list of must readings regarding automobiles (and just for the record, Consumer Reports is at the top of my list for any and every consumer product). In the September 17th issues of Autoweek, there is an article on “Love of Driving Lost?” subtitled “Gen Y doesn’t share the same lust for wheels as past generations.” The article by Jayne O’Donnell quotes Kit Yarrow, a marketing and psychology professor at Golden Gate University, who makes the point that “young people are not burning for freedom from their parents or the independence they can get from a car,” and that “teenagers are happy with the freedom they get from smartphones and computers” (which Professor Yarrow calls “private brain places”). Yarrow’s final point is that Gen Y is more visually oriented than previous generations and that “brands and products represent who they are,” which “makes driving a clunker just to have wheels less acceptable.’”

The same article discounts the economy as a primary reason why cars are no longer irresistible. “Some say its debt, college or otherwise keeping Gen Y out of the driver’s seat. But consumer psychologist Kit Yarrow says that never stopped previous generations…from getting a nice junker until they could afford better.” I think Kit Yarrow is certainly correct in explaining some Gen Y behavior and noting that the impact of computers, smartphones and the internet cannot be minimized. Absent her analysis, my initial position would certainly have been that it’s the economy that matters most together with the reality that the automobile, though still very desirable, has substantial costs that are much more visible today. I would point to the decline in family wealth, and the uncertain economy making it harder for families to cover all the necessary costs of living as well as a car for their driving age kids. I would also point out that the costs and other requirements associated with automobile ownership are much clearer and more substantial today than for previous generations: Insurance requirements, credit requirements, gas mileage costs, environmental impact. I have no doubts that the economics based answer is at least partially correct, but this is a case where economics alone would not provide a sufficient explanation. Our kids are different and this analysis helps us as educators understand that difference.

Last Chance

As I have noted before I am a car person and so last night I took advantage of an opportunity from a local dealer to take a preview firsthand look at the new 2013 Cadillac ATS.  The ATS is aimed at the Mercedes C class and BMW 3 class competition, a competition that BMW has dominated for a number of years.   The luxury entry level cars are key bread and butter cars for the upscale brands and Cadillac has been absent from this market for many years.  I actually remember when Cadillac first entered this market—the vehicle was the Cadillac Cimarron, a mediocre leather trimmed version of the Chevrolet Cavalier. Since my brother had one of the first Cimarrons delivered, I know up front and personal how mediocre feels, drives, rides, and lasts.  Cadillac’s last attempt prior to the ATS was the Catera, a decent car that was based on an Opel that coupled anonymous style that never conveyed luxury, with a respectable road manners.  But nothing special doesn’t compete effectively with BMW, Mercedes, Lexus and Infiniti.

The ATS is very impressive inside and out. It has style but doesn’t in anyway copy either the BMW or the Mercedes. Instead the style is distinctly American, slightly more brash with somewhat more flashy trim than either of the European leaders of this market.  And the inside is also very classy and elegant. Once again a little more styled and brash than the corresponding European cars but in a very positive way.  The car also comes with almost anything you could possible want in a luxury car including all wheel drive.

Lincoln is in a similar situation with the new MKZ entry level luxury vehicle.  Here too, this is a critical effort on the part of Ford.  Previous MKZs were simply slightly more styled (but not necessarily more attractive) Ford Fusions.  And here too the new car seems to be up to the challenge with a contemporary look and flowing lines that denote class and luxury.

The Cadillac advertising campaign as noted in Automotive News is “dubbed Cadillac ATS vs. the World.”  The characterization is correct.  The US automobile industry has come back in a very impressive way.  The government bailout in my opinion has served us well and US firms have demonstrated we can be fully competitive across a wide range of cars.  But ATS and MKZ are aimed at the market that seems to date to have eluded even a respectable showing for American cars.  If the quality and durability are there, if the ride and handling are there, if the quietness is there, if the service is there, we can make a significant impact not only on American markets but also in Europe and elsewhere.   We are challenging the world leaders in this critical market segment.  From what I have seen, I’m optimistic about the result, and the ripple effect of these cars being successful can impact our overall economy.  It would be gratifying if the last chance showed how well we can compete just when it mattered most.

Carnomics

I’m a car person as you may have gathered from previous blogs. But it actually makes good sense to be an economist who also happens to be a car person given the important role that the automobile industry has played and continues to play, for good or bad, in our economy. Right now it is certainly for good. It is once again a very positive time in terms of the domestic automobile industry and all three key manufacturers—Chrysler, Ford, and GM – are doing well, having demonstrated impressive growth for the 2011 model year. Automotive News reported that “U.S. light vehicle sales were up 10 percent to 12.8 million in 2011 after a similar rise the year before.” And the promise is there of even better times. Just look at three key domestic products introduced at the 2012 Detroit auto show. The three, in alphabetical order, are the Cadillac ATS, which has the promise of making the kind of impact on the entry luxury market, presently led by the BMW 3 class, that has never before happened with a domestic product. My brother had a Cadillac Cimarron. Saying the car was forgettable was the nicest thing that anyone could say about it. It was better than the Vega that I bought which was the pits but it was on the low side of mediocre which made it a strong catalyst for foreign cars sales. The second is the Dodge Dart which is a genuinely attractive, well designed compact car. It should be able to compete effectively with both foreign and domestic competitors in a way that the Dodge Caliber never could. And the third is the Ford Fusion. The Ford is a very attractive competitor to the Camry or the Accord. It looks better than both of the other cars and many other competing brands, and seems to have the functionality and the quality to be a major player in the major arena of car competition. There are other cars in the wings from all three manufacturers that have the promise of being just as successful and the evidence is clear and, in fact increasing, that Detroit can compete successfully with the best cars around the globe. At the same time that I am watching the latest Detroit success story unfold in the form of all these impressive products, I have also been reading and have just finished “Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers- GM, Ford and Chrysler” by Bill Vlasic who is the Detroit Bureau Chief of The New York Times. The book starts at a time (2007) when light vehicle sales were 3 million above where they are today and is must reading for a very comprehensive overview of what went wrong and what ultimately happened to these three automobile titans. What went wrong, and this was just a few years ago, was just about everything—building cars that weren’t responsive to what customers were looking for; building too many overly similar cars (with Mercury and Pontiac being just two examples); too many different platforms, engines, etc. around the globe undermining economies of scale; and labor costs including fringe benefits (and health care programs) that created a clear and very serious economic disadvantage. The failure was across the board— arrogant, isolated management together with myopic labor and this book chronicles it all in a well written fast paced and thoroughly absorbing volume. What went wrong was just about everything, and what is going right now is just about everything which I hope continues into the foreseeable future. The US government deserves great credit for engineering much of the turnaround (specifically the saving of GM and Chrysler), and the car companies (led by Ford) deserve great credit for designing a comeback which demonstrates the strength still inherent in American manufacturing and the US economy. We should all celebrate this success story but also remember for the automobile industry and all industries including higher education, that success taken for granted is just the first step toward devastating failure.

Charging Into the Future

For the last four days, I have been driving a Chevrolet Volt which is a real electric car (different from the typical hybrid) with a back-up gas powered engine to charge the Lithium-Ion batteries when necessary.  The “when necessary” is when you drive the Volt for more than 40 miles.  It’s been very interesting and the future is clearly visible here.   The car will be displayed on campus (courtesy of East Hills Chevrolet) as part of the University’s Earth Day activities, and the dealer also invited me to drive the car for a few days before it goes on display.

Where I live is just less than 11 miles from the campus.  The Volt is therefore good for my daily commute including a meeting or lunch off campus, which of course happens regularly.  The car has keyless ignition, automatic transmission, Bluetooth, a highly interactive and well thought out instrument panel. leather seats, pleasant styling, and power window, mirrors etc.  This is a very well equipped and very comfortable vehicle, it handles well and rides well, not that different from many other very nice sedans.  Except there are differences—first and most noticeable, the car is silent.  Not just quiet but beautifully silent (unless the climate control fan is on a higher setting, in which case the car is virtually silent).  Even more importantly, there are no emissions when driven within its electric range and so the environment clearly benefits. The other major difference is that the car needs to be plugged in when I come home at the end of the day.  So now when I come home, I not only make sure my phone is fully charged for the next day, I also make sure my car is fully charged as well.  In fact I never travel anywhere without an extension cord.  At the beginning of the day and the end of the day, I am liking this car.

What I am also liking, is what the car says about General Motors and by extension what it says about the American automobile industry.  We can compete, and we can be at the cutting edge.   Overall, the cars being produced this year by GM, Ford and Chrysler come closer to meeting the needs and desires of the American public than any product line-up in many years.  There is no longer a need to go to a Japanese or German car to drive a top quality vehicle.

But there is still much more work to be done.  The American automobile industry must show it can build quality cars responsive to consumer demand, not just this year but over the long term.  And the cars must also last over the long run.  Innovation must continue.  Here too there is much more work to be done.  The Volt is a great car but it is only a start.  The battery capacity needs to be increased and the price needs to come down. The technology is brilliant but this is still not my idea of a $40,000+ car ($32,500+ after factoring the Federal tax credit).  I would like to drive a green car but one with an electric range of closer to 200 miles.  And if I spend $40,000 on a car, I certainly expect power seats rather than the manual adjustment the car presently has.

I will miss driving the Volt and I really like the car.  Perhaps not in the next year or two but certainly in the next 5 or 10 years, I see myself driving an electric car on a daily basis.  The world is certainly changing.  In the car industry as well as in higher education, we need to make sure that what we do facilitates change, prepares us for change and respond to change. No short circuits welcome here.