Two years ago MarketWatch, part of the Wall Street Journal, published a story on the concentration of economic wealth in America that explained everything happening in our country today. It showed that over 52 percent of America’s entire Gross Domestic Product was held by just 20 major metropolitan areas in five distinct regions: New York, Chicago, Miami, the DFW-Houston Corridor, and Los Angeles-to-San Francisco. Think of that for just a moment. Half of our great nation’s economic wealth lives in five major regions; the entire rest of the country gets slightly less than half.
In an article published just over two years later, MarketWatch discussed how the list of the 10 most valuable companies in America has changed over the past 100 years. Leading the 1917 group was U.S. Steel, followed by AT&T, Standard Oil of New Jersey, and Bethlehem Steel. In 1967, 50 years later, IBM topped the heap, followed by AT&T, Eastman Kodak, and General Motors; Sears and Polaroid were also in the top 10 for market value. Today Apple, Alphabet (Google), Microsoft, and Amazon take the top four positions; as in 1917 no car company today makes the top 10 list, but for the first time ever two banks, J.P. Morgan Chase and Wells Fargo, do round out the top ten.
What’s truly amazing is that, taking inflation into account, the $46.6 billion value of U.S. Steel in 1917 made it slightly more valuable than Apple’s $898 billion today. And IBM’s 1967 value of $258 billion is the equivalent of double Apple’s current valuation. Still, in looking at the most valuable American corporations from long ago and comparing their value to our economy today, we see a dynamic shift among America’s economic powerhouses that isn’t so apparent looking decade by decade. After all, our steel industry is a shadow of its former self; and if one owned a camera store that once was the largest retailer of Polaroid products, you’ve long since been put out of business.
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Then too, for many areas of our economy, how capitalism works has also changed. In the past it was driven by creating new products and services and offering them to the public at undeniably good prices. When you took on competitors in any given segment, capitalism dictated you come up with a better product, with either a better price or better service, preferably both — and your competitor went out of business, and your business picked up the profits of those you bested in the marketplace.
But that’s not what is happening today in many key start-ups. For years we’ve discussed here how Tesla and its products have shaken the auto industry to its core, and as a result have forced every automaker in the world to recreate its own future. Yet Tesla has never once managed to post a profit.
That’s right. In fact, in spite of Tesla’s sales success, the Automotive News pointed out that the company still lost over $23,000 per car sold in the third quarter of last year.
Tesla was started in 2003 and has yet to turn a profit. In contrast, by the time Henry Ford had been in business for 15 years he had brought out the Model T, invented modern medicine, created the moving assembly line, doubled the wages of his workforce (simultaneously helping to create the modern middle class), built the world’s largest factory, and become the richest man in America. But he made money doing all that. His first two car companies that didn’t make money folded.
“Profit-free” also describes Uber, another automotive start-up whose sole goal was to displace the nation’s cab industry. But doing so entailed dropping riders’ rates to below the established competition’s, while ignoring rules and regulations put in place to protect the public. And, while they certainly haven’t managed to kill off the taxi industry — although they did destroy the value of overpriced taxi medallions in some large cities — Uber has done nothing but bleed red ink, to the tune of billions of dollars.
Further, this year’s exceptional holiday spending notwithstanding, more retailers have already said they’re downsizing their operations again. And even in Amazon’s case, I’ve read Wall Street analysts questioning how Amazon is so dominant in so many areas now, yet still hasn’t picked up the profit streams of the competitors it has driven out of the marketplace.
All of this is happening at a time when the cost of money has been virtually free.
A few days ago one of my listeners, a financial advisor in Waco, sent me a Twitter link to a dealer’s big sales push for 1959. Turns out it was taken on the showroom floor of Bill McDavid Pontiac on West Seventh. That was the year McDavid, still a teenager, got his first dealership. And for his big sales push McDavid was offering a year’s supply of Kleenex with every new car purchase. It must have worked; Bill kept that store for the next three decades. Still, aside from the old automotive Midnight Sales and super discounts in weekend ads, rebates and incentives didn’t enter the automobile retail process until the recession following the First Energy Crisis. At that time Chrysler’s Carnival of Savings Event offered rebates of a mere $300, yet that was enough to save that company in the mid-Seventies. A decade later in 1985, General Motors offered cheap interest rates to move its unsold inventory, though a cheap interest rate back then was 4.9 percent.
But 1986 was a year without incentives. It was marked as the perfect economy; the consumer confidence surveys rated it a perfect 100, the basis for the scores we still use today. Interest rates were down from the 1980 peak of 21 percent, but leases were still calculated at over 10 percent interest and auto loans were not much better. New trucks still came without window stickers, but the half-tons’ base models could still be advertised at under ten grand. And Americans went out and purchased 16.32 million vehicles that year, the first time our dealers had exceeded that 16 million volume mark. The sale of new cars was still the primary driver of profitability for dealers nationwide. Oh, and there were only 176.1 million total vehicles on the nation’s roads.
Fast forward to today. In December General Motors returned to Employee Pricing to discount some of its vehicles; and, while other manufacturers didn’t go that deep into the rebate barrel, offerings to consumers were nothing short of phenomenal. Then again, that’s been the case since GM first offered Zero Percent Financing for 60 months in October of 2001. While car sales did fall by 2 percent last year, the industry celebrated the fact that once again we sold more than 17 million new cars. In fact, however, the nation bought only 900,000 more new vehicles in 2017 than were purchased in 1986 — when, as stated, interest rates were three times today’s average and there weren’t any rebates or manufacturers’ dealer bonuses. What’s more, America’s fleet now numbers 253 million, not 176.1 million, and the adult working population has likewise grown substantially.
One other thing.
In talking with many dealers over the year’s first week, it’s amazing how many are proud of the volume their staffs sold last month, but almost in shock at how little they made selling new cars for their manufacturers. And that’s assuming they made any money on new car sales; some didn’t. (This is not to say that some dealers didn’t do very well selling new cars, but the percentages on the other side are growing.) In fact, to compensate for just this issue, which has been a long time building, over the past two decades the best dealers have enlarged their used car operations and have really improved their fixed operations, service and parts. Some do well with their body shops, while other dealers have sold them off because, if you repair the cars properly, that business has extremely low margins.
Still, when one dealer shared with me the statistics on his top salesperson for December, who sold a remarkable 81 new cars and lost over $1,000 per car doing so, it took my breath away. And the worst part? He’s not the first to share such a story with me.
Now, many of you reading this column may say, so what? Fair enough; most claim to hate negotiating for a new car, although typically it’s the customer who demands a fair price and then wants to negotiate. But from a business perspective this is a troubling trend. Automobile manufacturers have been having a record run for profitability, while rebates and incentives to move the market at retail have been outrageously great for consumers for 17 years. Cars and trucks are better built and deliver superior fuel efficiency; and, because of the massive growth in used car sales, resale values have never been better. Not to mention that the cost of borrowing money for a lease or purchase is today virtually nothing compared to decades past. But the retail profit for the most expensive of consumer durable goods — the basis of our entire economic society — is close to nil. That, my friends, denotes an economy in transition.
Industrial Transition Also Underway
Personally, I believe there’s a huge market for self-driving cars as the Baby Boomers age and lose much of their mobility; given the choice between a nursing home or a self-driving car to maintain their independence longer, they’ll buy self-driving cars. But I don’t believe for a moment that the buying public at large will flock to that concept.
Also, I’m not buying the idea of car sharing across the board, although I can see where it might have some value if you live downtown in a large city, where the cost of parking can be more than most apartment dwellers pay in rent. I’ve got numerous nieces and nephews, and all of them and all of their friends own their own vehicles — and not one has ever asked about the future of car sharing. No, although none of them has hit 30 yet, many are on their second or third car.
But as I looked at a century’s data on how the most valuable companies have shifted in America, or the past 50 years when Bill McDavid offered free Kleenex to sell a new Pontiac — and then last month, when you could buy a new GM product for thousands less than the dealer paid for it. Then you financed it with little interest, if any, maybe got a rebate back too and given more money for your trade because of the hot used car market — one has to wonder what direction the industry, the direct proxy for the American economy’s health, is taking.
Then again, for years I’ve joked with my dealer friends that they need unionization worse than any other professional group in America, someone to stand up to the manufacturers to improve the process of selling new vehicles nationally. Since dealers are generally card-carrying members of the Republican party, that line always earned a big laugh. A week ago, however, one of my friends told me he was talking with one of his fellow dealers and said, “You know, Ed might be right. Maybe we do need a union.”
It will be interesting to see how this year turns out. But one thing is for sure: The car-buying public has never had it this good. They’ve just forgotten why that’s a true statement.
© Ed Wallace 2018 Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: firstname.lastname@example.org