PRICE REDUCTIONS ON THE VOLT: THE CARMAKERS DOUBLE DOWN ON PLUG-IN TECHNOLOGY

8/6/13

As long time readers know, I have not always written favorably of the Chevy Volt and its kindred cars.   However, my problem with the Volt had little to do with the car itself, which is both relatively fun to drive and a technological marvel.  My problems with the Volt had just about everything to do with the inability of the numbers to work at anything like the car’s $40,000 sticker price, thus limiting its appeal to ostentatious greenies, a very limited market.

However…

Apparently, no one in the Volt’s short life has ever paid sticker price for the car, as far as I can tell.  A good buddy of mine leased one when they were relatively new at a monthly payment that reflected a sale price nowhere near its sticker price; in fact, if you played with the numbers, the lease had to be based on a price at which one could buy a similarly equipped conventional, mainstream mid-sized car.  At those numbers, the Volt makes a lot of sense, provided one drives more than a modest number of miles per year. 

GM has finally acknowledged reality, but not completely, by reducing the sticker price of the Volt by $5,000 to $35,000.  This is in line with a general trend of automakers’ reducing the prices, through very attractive lease deals and outright reductions of sticker prices, of their plug-in hybrids and pure electrics due to a very slow market for these cars.   GM says that reductions in the cost of manufacturing the Volt contributed to the decision to reduce its price.   This may be true, but Economics 101 tells us that it is weak demand at current prices, not falling costs, that leads to reduced prices.  If GM didn’t have roughly twice the normal inventory of this car sitting on dealer lots, it wouldn’t be reducing prices in response to a reduction in its costs of production; it would be maintaining prices and pocketing the reduction in costs.

So GM, Ford, Honda, and Nissan have reduced the prices of their plug-in offerings, making it easier for people to get into these cars.  However, these reductions in prices have trashed the resale value of these cars.  The Wall Street Journal reports this (Tuesday, 8/6/13, pages B1 and B2) morning that the trade-in value of a one year old Nissan Leaf is down 25% from a year ago; the trade in value of a one year old Volt is down 21%.   This cratering in trade-in values will have two effects.

First, it will, or should, infuriate those who bought plug-in vehicles, increasing their  overall costs of ownership and thus incurring ill-will for the car companies while providing another reason for people to sour on hybrids or electrics.

Second, and perhaps more insidiously, the incentive to lease, rather than buy, these cars will increase.  Even before these price reductions, as my friend who leased the Volt pointed out, it made little sense to buy a car in a period of rapidly advancing technology; better to lease and let the lessor take the risk of obsolescence.  (Yes, my buddy is a very smart guy.)  Now with the carmakers reducing prices in response to slack demand, the near absurdity of owning these cars has been exacerbated.   Unless the terms are heavily skewed away from leasing (They run in the other direction currently.), any thinking person will lease his or her plug-in hybrid or pure electric.   Thus, the ultimate lessors (the car companies, either through captive finance companies or the heavy subsidies they pay to third party lenders) will bear the risk, either of rapidly advancing technology and attendant obsolescence or of simply a cool reception in the market place, of owning these cars.

Not only, then, are the car companies taking a gamble by making and marketing these cars; by making leasing the only logical way for people to get into these automobiles, the companies are doubling down on their bets by making themselves the second owners, the receptacles, if you will, of these vehicles that may very well be obsolete or simply unwanted in the marketplace.

The impact on the stocks of these companies should be miniscule; electrics and plug-in hybrids are a very small part of their business.  But the implications for the technology of such vehicles, which still looks transitional, and perhaps for the company that specializes in such cars, Tesla (TSLA; See my 5/30/13 and 5/23/13 pieces, IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA) and TESLA (TSLA):  THEGREENIES ARE CHARGED UP, BUT…), could be profound.

IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA)

5/30/13

Writing about and/or commenting on Tesla (TSLA) is a lot like writing or commenting on Apple (AAPL).   Neither of these appears to be a stock; both instead appear to be religions.   People have decided they love one (or maybe both) of the company’s products, and therefore the stock, and no one can talk them out of that position.   Not surprisingly, then, my 5/23/13 post TESLA (TSLA):  THE GREENIES ARE CHARGED UP, BUT… in which I questioned (Some who aren’t used to reading my material said “bashed,” but I thought I was quite balanced in my assessment.) the Tesla Model S and expressed my misgivings about the stock at a much lower price ($92.71) than that at which it closed today taught me that if you want to draw attention to your writing, write about TSLA. 

The big announcement today from Tesla Chairman Elon Musk, the announcement on which people had been anticipating for weeks, was that Tesla will triple the number of supercharging stations by the end of next month.  Within six months, Tesla will have covered most of the country’s major metro areas with superchargers and will enable people to cross the country diagonally from New York to LA without fear of losing power…and all, presumably, on Tesla.  By a year from now, the whole country should be covered…no more range anxiety.   Also, the charging network will have some kind of solar backup so Tesla owners will be able to charge their cars even if the electrical grid goes down.

A supercharger, by the way, enables drivers to, within twenty minutes, charge their cars to the point at which they can be driven three hours.   Twenty minutes is longer than it takes to fill a conventional gasoline tank (about four times longer), and if I fill my tank in five minutes, I can drive five or six hours before having to stop to refill.  But Tesla’s getting close to being practical with their supercharging systems…and that’s impressive.  And, lest I draw even more brickbats than I anticipate, I will also add (again) that most of the buff books, especially Motor Trend and Automobile, and Consumer Reports LOVE the Tesla Model S.  Yours truly has not driven it; despite my love of test driving (See my already seminal 5/20/13 post, I TEST DROVE A KIA TODAY…), I cannot in good conscience go into one of the few showrooms in the area and test drive a car I could not possibly afford.

The first reaction of the suitably skeptical and cynical investor (or car buyer) should be to question whether Tesla can pull off such a feat.  A nationwide system of superchargers that can be conveniently accessed would be a titanic accomplishment.   And even if it can be achieved, 20 minutes for three hours of driving, while impressive, still adds a lot of time to long trips and renders the Model S not the vehicle of choice for anything but driving around town.  At $70,000 (Okay, $62,500 after tax credits.), one would like to not have to buy a second car for long trips. 

A few more questions.

According to reports, the juice that Tesla owners get from the superchargers will be free, provided by Tesla.  That can’t be right, can it?   Why not charge the drivers for the relatively cheap electricity?  It would seem that people who are rich, and/or silly, enough to shell out $70,000 for a car should have no problem paying for the electricity necessary to power their status symbols.   But if Tesla is indeed picking up the charge for the charge, if you will, how much will that cost Tesla?  A wise guy answer would be something like “at the volumes TSLA is looking to sell, not much,” but it is something to think about.

And, on a broader scale, if I am wrong and this electric car fad really catches on with the Tesla, the Nissan Leaf, and various other pure electrics capturing the American imagination, how will our electrical grid handle it?   One could answer that if we reach that point, Tesla will have been a resounding success, but not only do stocks discount the future but also the country will have to do something about increasing electrical supply, in a relative hurry, in a nuclearphobic world.  No mean task.

Even if we assume that TSLA can fulfill its promise of covering the country with superchargers by a year from now, which is quite a brave assumption even for someone as widely and justifiably admired as Elon Musk, questions remain.  And it still looks like TSLA is a company selling cars that use a transitional technology, cars that only a few people want and even fewer can afford.   And, yes, I realize that TSLA is a luxury car maker (Its lower priced models, which still won’t be cheap, aren’t supposed to come out until 2017 (See today’s announcement.) and, right now, at least, TSLA doesn’t have the money to develop and produce them (See my aforementioned 5/23/13 post.)) and not everyone can afford luxury cars.  But TSLA is a luxury car producer, indeed, a boutique luxury car producer, aiming to sell 20,000 cars this year in a 15 million car market, with a market capitalization of $12 BILLION!   By contrast, other car companies’ market caps are as follows:

Ford                             $61 billion

GM                              $48 billion

Daimler                        $67 billion

Toyota                         $191 billion

Honda                          $70 billion

Nissan                          $47 billion

Volkswagen                 $76 billion

The comparisons are not perfect, but they are a lot more apt than the comparison the bulls are throwing around to AAPL’s $426 billion market capitalization.   Does it make sense that a company that might sell 20,000 cars this year is trading at ¼ of the value of GM, which sells ten times as many cars, in the U.S. alone, in a month?   Again, this is not the best metric around, but just think logically here.

Is this the time to sell TSLA?   Though I’ve taken a small put position, just to focus my thinking, I don’t know.   And to prove that I don’t know, I bought my July puts on May 21 when the stock was trading at $88.24; it’s now trading at $104.95 and I am down well over half on my position.  The stock has doubled in the last month and has tripled in the last six months.  Somethin’s gotta give.  But, as I’ve said before, markets, and stocks, can stay rich a long, long time.   See my 5/9/13 post, OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.  And perhaps stepping in front of this freight train is not advisable; note how TSLA has defied, so far, the old “buy on rumor, sell on fact” adage in the wake of today’s supercharger announcement.

As for yours truly, I’m going to wait around a little while before I dump my puts.   Even trading, like investing, should be done with patience, understanding the relative nature of that term.   And, as a further warning, I am a far better investor than I am a trader; accordingly, I have so little in this trade it won’t make much difference one way or the other.

TSLA:              $104.95

S&P 500:         1,654.41

Dow                 15,324.53

GM:                 $34.64

F:                     $15.90

JAPANESE CAR EXPORTS TO CHINA: VALUE AND QUALITY TRUMP POLITICS

5/24/13

It looks as though Chinese car buyers have gotten over their politics spawned aversion to Japanese cars.  (See my 10/10/12 post in the now defunct Rant Finance entitled WE’VE FOUND THE ULTIMATE VALUE INVESTOR!, reproduced below for your convenience.  And, no, I didn’t buy a bunch of TM, HMC and NSANY stock, which have since surged, after writing that now immortal missive, even after seeing the buying opportunity, which demonstrates one of the reasons I don’t trade nearly as actively as I once did.)   Japan shipped 16,000 vehicles to China in April, 2013, up from 4,417 units in October of last year, the low reached at the height of the tensions surrounding the, depending on whom you are talking to, the Senkaku or Diaoyu Islands in the East China Sea.  Last month’s 16,000 units were still below April, 2012 levels, but the more than three fold increase in shipments from the bottom is a sure sign that things are turning around.

One knew that Chinese consumers would be buying Japanese cars again despite the nationalistic whoop-whoop that dissuaded them from doing so for a time.  First, we had intrepid consumers like Mr. Zhou San, the ultimate value investor, who, quoted in the aforementioned and below reproduced post, said

“I won’t buy a Japanese car unless it is very, very cheap because purchasing a Japanese car is dangerous now.  People would beat not only the Japanese car, but also the car owner, when something goes wrong with Sino-Japan relations again.”

So Mr. Zhou would risk being beaten within an inch of his life if he could get a good enough deal on the car; I must have Chinese cousins, but I digress.

Then we have Mr. Yan Ke, a 33 year old Shanghai information technology project manager (Talk about stereotypes!), who is quoted in the Wall Street Journal as saying, after buying a sharp Nissan Qashqai (pictured…not Mr. Yan’s Qashqai, but a representative Qashqai),

“I wanted to buy this car a year ago.  I’ve been saving money for it.  (Saving money for it!  What a concept!  But I digress.)  I don’t give a damn about the Sino-Japanese tensions.”

Mr. Yan is not at all unique; his habit of actually saving money in order to buy something may seem as foreign to Americans as his name and the brand name of his car, but he is not unique.  He simply, like most people, doesn’t give a damn, as he puts it, about silly squabbling of politicians over islands that may or may not have much value beyond their ability to satisfy jingoistic impulses.  Whether one finds that sentiment admirable or not, it reflects reality; people want to live their lives, make a living, get the most for their buck (or yuan), and take care of their families.  The games politicians play matter little to them; apparently, though, the pols didn’t get the memo, but I digress once again.

And speaking of value, one knew that Chinese consumers would still be willing, indeed in line, to buy Japanese cars.  For all the catching up U.S. “domestic” companies have done, and for all the (largely, but not always) baffling appeal that overpriced European (often, but not exclusively) troubleboxes have for consumers in, among other places, China and the United States, the Japanese still make the best, most reliable, most value laden cars for the broad range of consumers.   And competition from places like Korea (See my already seminal 5/20/13 piece, I TEST DROVE A KIA TODAY…) only make them better…and more desirable.   Consumers like Messrs. Yan and Zhou, and Smith,  Jones, Kowalski, and O’Brien, continually affirm that sentiment…or fact.

PROMISED REPRODUCED POST FROM RANT FINANCE

WE’VE FOUND THE ULTIMATE VALUE INVESTOR!

10/10/12

Value investors, as most readers of Rant Finance know, are people who like to buy stocks, or any investments, that they consider cheap.   Cheapness can be determined in terms of price/earnings (“P/E”) ratio, dividend yield, or other factors.   The overriding point seems to be that, while no investor wants to buy a lousy company, value investors are not necessarily looking for great companies.   They are looking for good, or at least passable, companies that are undervalued by some metric the investor deems important.  This is an old, tried, and largely true approach to investing that appeals to, among others, yours truly, at least to a certain extent.

With that background, consider what is going on with the Japanese auto companies in China.   Since China and Japan, among others, are squabbling over ownership of some islands in the East China Sea (See my 8/23/12 post in Rant Political entitled EXPANSION OF MISSILE DEFENSES IN ASIA…PROTECTING OUR INTERESTS OR PAYING BACK THE “DEFENSE” CONTRACTORS?), and the Chinese and Japanese politicians are, like politicians anywhere, concerned primarily with keeping their jobs, nationalist fervor has been whipped up throughout east Asia, but perhaps especially so in China.  One of the manifestations of this fervor is a near blanket refusal on the part of Chinese consumers to buy Japanese branded cars.   Not only will they not buy Japanese cars, but the irate Chinese have taken to street demonstrations that involve the destruction of Japanese cars and, in some cases, their drivers; last month, a driver of a Japanese car in Xi’an was beaten into partial paralysis by an angry mob.  From the coverage we see of these near riots, one wonders why no one has been killed yet.  

How much sense all this makes is a valuable point of digression.   These “Japanese” cars are built in China by Chinese workers using mostly Chinese parts.   Chinese industrial policy dictates that few cars, and mostly only very upper end luxury models, are imported.  So the cars that are being trashed, in some cases, are really Chinese cars; just as the Toyota Camry, for example, is the most American car an American consumer can buy, the “Japanese” cars that are now being used as flaming party favors by rioters on a lark are really Chinese cars.   So who’s hurting whom?  I digress, but I do so valuably.

Into this fray steps Mr. Zhou Shan, a Chinese citizen who works for Baidu, who states

“I won’t buy a Japanese car unless it is very, very cheap because purchasing a Japanese car is dangerous now.  People would beat not only the Japanese car, but also the car owner, when something goes wrong with Sino-Japan relations again.”

So there you have it; Mr. Zhou is aware that it is physically perilous to buy and drive a Japanese car, that doing so might result in his being beaten to within inches of his life, but he would do so if it is “very, very cheap.”  Ladies and gentlemen, we have found the ultimate value investor.

Many of you doubtless started to read this thinking that yours truly, as a guy who has made a dollar or two trading and investing in car stocks at various points in his career, would offer advice on Japanese car stocks at these levels.  All I can say at this stage is that I’m getting interested because it appears that the stocks are starting to reflect overly dire consequences from their Chinese exposure for the likes of Nissan (NSANY), Toyota (TM), and Honda (HMC).   But never (okay, rarely) wanting to try to field a falling knife, or getting between China and Japan when they decide to mix it up (a position nearly as perilous as getting between Jesse Jackson, Sr. and a television camera, but I digress), I think I’ll watch a while before getting interested in these stocks from the long side.