I love cars. I love car magazines. I especially love Car
& Driver, however, mainly because of the irrepressible rantings of
Brock Yates. In this month's column, for example, he starts off with a
quick hit on some of my least favorite people:
The small claque of unrepentant
socialists, liberal bed-wetters, and graying refugees of the 1960s
counterculture, all of whom perhaps by accident read this journal,
quickly discover that we remain devoted to a sybaritic celebration of
essentially useless, antisocial, high-speed, gas-guzzling, overpowered
automobiles.
Having annoyed the enviro-weenies, he then moves on to make a
serious point about the future of the American auto
industry:
The thrust of the data indicates a
strong penchant among American social leaders for European machinery,
with a surprising disdain for Japanese and American-branded iron.
...
This indicator of automotive
tastes comes hard on the heels of new data from the Kelley Blue
Book?a publication that makes hard-edged, impartial evaluations of
used cars. The Kelley recently released a list of models that
it expects to hold their value well above the industry average of 30
percent after five years. ... Those include the BMW 5-series, the Mini
Cooper, the Acura TL, the Infiniti G35 coupe, the Mazda RX-8, the
Mercedes-Benz CLK320, the Nissan 350Z, the Volvo XC90, and the Porsche
Cayenne. ...
There are several points to be
made in all this garble. For one, upscale European makes?Porsche, BMW,
Mercedes-Benz, and Audi?control the market in perceived status and
performance. Second, Japanese makes?Toyota, Nissan, Honda, Infiniti,
Lexus, and Mazda?score well on the long-term-value curve. Third, and
most alarming, our beloved domestic brands tend to be bottom feeders by
these measurements. With the exception of the Corvette and the
Escalade, American market strength remains fixed in the categories of
light trucks and mid-priced SUVs. ...
Well, what's the problem? Why can't the US
industry just keep churning out F-150s and Suburbans? Yates
explains:
The heart and soul of the
automobile business will always be the four-place sedan, as exemplified
by the best from BMW, Toyota, Honda, etc. While the boys in Detroit
offer us such tepid dishes as the Ford Five Hundred and the Chevrolet
Malibu Maxx, the Europeans and the Japanese continue to expand their
lead in this core market.
I think he's exactly right. Depending on your price point,
if you set out to buy a 4 place sedan, my guess is that most people
would think about a Camry or Accord, an A4 or a 3-series, or maybe an E
330, or a 745 or a SL 500 or a LS 430. Where are the great American
sedans? Where are the American halo sedans that could compete with
Maybach or Bentley? Where are the incredibly reliable daily drivers
like the Accord or the Camry? It's not the American worker who is at
fault. After all, lots of Camrys and 3-series and other foreign models
are made right here in the US. Something is wrong with the management
of American car companies - and has been for a very long time.
When I was a kid, my Dad and his
friends all aspired to drive Cadillacs. I don't know many kids for whom
that is true these days. The American auto industry needs to get back
to that place.
Update: Adrian Tschoegl emailed
some interesting thoughts:
A BMW is a Euro-
denominated good. When the US$ falls against the Euro, the price
of new BMWs in US$ should rise. (Even though BMW now builds cars in the
US, these compete with BMWs built in Europe.) If the price of new BMWs
rises, the price of used BMWs should rise. Before looking to used
car prices as indicators of quality one should check for exchange rate
effects.
In
response to which, I asked: To what extent can BMW offset exchange rate
effects with hedging? Also by producing cars here?
Adrian responded:
BMW can hedge.
Let's take the case where it hedges its operations in the US but not
Germany. Then, as the US$ weakens, we can expect entrepreurs to
start buying up used BMWs in the US for sale in Europe as prices for
used BMWs in Europe, expressed in US$ terms, rise. BMW, not
having hedged its European costs, will not be able to reduce the price
of its new cars in Europe, and the prices of used BMWs in Europe will
retain their normal discount vis-a-vis new cars.
As the US$
weakens, the gap between the price of a used BMW in the US and one in
Europe will widen. The demand for used BMWs in the US will drive
up prices for used BMWs there. As the prices for used BMWs in the
US rises, this will put upward pressure on the prices of new US
BMWs. First, if used BMWs sell for almost as much as a new BMW,
buyers will be willing to pay more for the new car as they can
anticipate that they will not lose much on resale. Dealers will
respond by being unwilling to discount or bargain, or even by adding
"dealer's surcharges". Second, if the gap between US and
European prices widens sufficiently, buyers will start arbitraging new
cars as well, with Europeans coming to the US to buy their BMWs,
perhaps in connection with a holiday in Florida.
If BMW has
hedged sufficiently it may be able to keep its prices in Europe
unchanged in US$ terms. This means that they will fall dramatically in
euro terms. Then there is no US-Europe arbitrage
opportunity. However, this has an immediate consequence of
changing where the BMW sits in the hierarchy of cars. If Robert
Franks (Luxury Fever) is correct (and my research suggests that he is)
and we buy cars to signal status, then if BMWs become cheap in Europe
relative to other luxury marks, they will lose their up-market image
and market. Instead, they will be competing with imports from the
US or Asia. Sales volumes will increase, but there is the
risk that when the euro weakens against the US$ BMW will not be able to
recapture its position as a status symbol as there will be lots of them
around and everybody and his sister will have one.
One can,
therefore, expect that BMW will not reduce the European price of its
cars to keep the price steady in US$ terms, even if it has
hedged. We can suspect that it will try and walk a middle path,
raising prices in the US a little and holding its European prices down
a little, to limit arbitrage, while still watching the pricing of BMWs
against competing marques. As the price of new BMWs rises in the
US, the prices of used BMWs in the US will also rise as the two are
substitutes.
The result, from the US buyer's point of view,
will be that the BMW value in resale is rising, but the reason will be
the exchange rate as the quality of the car has remained unchanged.
Basically, when you are buying a BMW or a Mercedes, you are
buying an asset whose value is correlated positively, though less than
perfectly so, with that of euro-denominated assets such as French
premier cru chateaus. (I mean the vinyards, though one can think
through the issues with respect to the wines themselves too.)
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