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Tuesday, June 06, 2006

Fleeting Glory - TTAC

4 June 2006

y Andrew Dederer


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The New York Times recently labelled GM a crack dealer for using $1000 gas cards to “addict” Californian drivers to its gas-guzzling SUV’s. There are several important differences between selling a
Schedule II substance to low-income drug addicts and marketing a legal
product to responsible consumers in a free market. Suffice it to say,
the Gray Lady's got it backwards: GM is the addict. The General is
hopelessly addicted to fleet sales. Although GM has publicly announced
its intention to reduce their reliance on this part of their business,
it’s nothing more than a junkie’s promise to reform. In fact, none of the Big Three are ready, willing or able to leave their dependency behind.

There are two kinds of fleet sales: organizational and rental. In both cases, profit margins are minuscule. Manufacturers aren't overly concerned. They rely on the huge orders to
increase production levels; which keep factories open, sudsidize union
salaries and reduce a given model’s cost-per-unit (CPU). A low
enough CPU creates higher profit margins on the model’s “regular” (i.e. retail) sales. The enormous volumes also facilitate all-important "top sales" bragging rights and protect the manufacturer’s Holy Grail: market share.

Selling cars to government agencies, schools, taxi firms and private companies is a
slam dunk. Few local politicians or business owners want to risk
ticking-off powerful [union] constituencies by buying foreign-- unless
the local car plant is foreign-owned. (And maybe not even then.) But
the rental market is the big score: hundreds of thousands of vehicles
per year. What's more, rental “sales” are actually
short-term leases (usually six months). The numbers can be massaged to
look even better if, say, you own the rental car company. When Ford
owned Hertz, they offered themselves some mighty impressive deals; like
four-month leases. That sort of turnover has an extremely salutary
effect on a manufacturer's production figures.

On a balance
sheet, there’s nothing wrong with selling cars to yourself. From
a long-term perspective, the damage is both massive and relentless. For
one thing, rental cars don’t disappear when their owners are
finished. When “lightly used” rental cars flood the market,
the vast supply of relatively low-mileage, good quality vehicles crater
the model’s resale value. The resulting depreciation hits retail
customers hard-- especially brand or model loyal buyers that trade-in
their vehicle every three to five years. The chronic over-supply also
reduces the possibility and profitability of competitive leasing.


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read the rest......
Fleeting Glory

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