These past two days we met with Mr. David Ruggles, a true industry veteran and financing guru. Mr. Ruggles began by talking about how he became interested in the auto industry (a logical place to start!) which would lead to a an immensely successful 40+ year career in the industry. Mr. Ruggles began his career as a dragster who blew up an engine during an impromptu race. He needed a new set of wheels and at the time one way to get a nice car fairly cheaply was to work at a dealership, so Mr. Ruggles worked on the sales floor at a (Chrysler?) dealership to help him get a new car. From there, Mr. Ruggles moved up the industry food chain and learned the tricks of the trade along the way, as his work took him from various places in the U.S. then to Japan and back. In Japan he worked for a Toyota dealership for many years as both a salesman and a consult to the dealer group. After returning to the U.S. he worked for many different automotive groups one of which, Central Motors where he was VP, is located in Evanston, IL which is only 20 or so minutes away from where I live! It was nice to be able to talk about his experiences in Chicago back in the day over dinner at professor Smitka’s house. Mr. Ruggles demonstrated his expertise in finance when he was able to successfully explain how financing works and how to be a savvy lessee to students who for the most part have never been a part of a car buying or leasing process. Mr. Ruggles talked about how a lessee doesn’t actually take a loan out from the dealer, they go through (usually) the financial branch of an OEM, like Ford’s Red Carpet Lease. Leases can range anywhere from 36 months to 72 months and even more and most leasing options have a limit as to how many miles the lessee can put on the car per year. This is because after the lease is up, the dealer or leasing program gets the car back and it can sell it as a used car, whose selling price is affected by the amount of miles that the lessee put on the car. Another key aspect of leasing is the residual price or the price of the car at the end of the lease, as stated by the lessor, if the lessee is interested in purchasing it. Mr. Ruggles said that a smart lessee will negotiate the residual price and will potentially be able to negotiate the price low enough where he/she can resell the car he/she once leased at a higher price than what they paid in residual. Mr. Ruggles also explained to us what “trunk money” and stair step incentives are. Trunk money is when a manufacturer offers a dealer money to take a car to try to sell it, because it is a car that the dealer may not want on their lot. The buyer of the car does not know about the incentive hence its moniker, trunk money. Stair step incentives are bonuses that increase after a dealer reaches a target number of sales, however this incentive has been criticized because it supposedly decreases transparency between salespeople and the customer. Finally, Mr. Ruggles talked briefly about rebates as a means of attracting customers who want the extra money offered by the rebate. For many, rebates offer a way for customers to put a downpayment on a car, which is one way customers are attracted to buying a car. I really enjoyed having Mr. Ruggles come in to talk to us and I learned a lot about the financing aspect of car buying.
Today the highlight of the day (besides seeing the mansions at Grosse Point!) was going to the Federal-Mogul technical center. The company is a parts manufacturer that produces a variety of products from steel and aluminum pistons to next-gen corona spark plugs. At the center, they have many employees developing new ideas for the new technologies that will help car manufacturers achieve the federally mandated 54.5 mpg fuel efficiency standard by 2020. For example, their new piston is smaller and made of steel which means less material is needed for the pistons and manufacturers can work with Federal-Mogul to develop new engines that are smaller and more efficient (downsizing). A company like Federal-Mogul will bring a new idea to OEM’s and work with them to develop new engines and designs that work with the new technology. They also do various tests of all kinds at Plymouth, like heat and friction testing on pistons using special wires. They also subject engines to various stress tests including very high rpm’s for an extended period of time (they can run them for 24 hours!) or varying temperature from very very cold temperatures to very high; manufacturers will specify which conditions they want Federal-Mogul to subject their engines to. They also have very high-tec equipment that scans the parts they make for any imperfections, as even the slightest scratch can affect the quality of the product. They also can test parts that were defective and can trace the part to a specific batch in order to ensure that their products won’t be defective when the customers uses them. The combination of equipment and extremely competent employees has led to Federal-Mogul being a consecutive PACE award winner.
Later in the day we met up with my cousin, Scott Preysler, and he gave us great insight into the struggles faced by MINI as they try to expand their brand in the U.S. Scottie also talked about the dilemma faced by BMW, who he used to work for before moving to MINI. BMWs were once seen as a vehicle for the wealthier car buyer but they have become increasingly popular and have seemingly been moving down the market. BMW is attempting to rebrand itself as a status symbol vehicle by making more expensive, luxurious cars that won’t be purchased in the quantities they have enjoyed as of late. Scottie also talked about the struggles faced by dealers when they have to keep cars in inventory, called floor plans. When cars stay on the lot, they depreciate in value (as we learned in class) and this also takes up space that could’ve been allotted to other, newer and more attractive cars. The cost to the dealer thus accumulates and manufacturers have to incentivize dealers to keep cars on the lot with trunk money, for example. Scottie also talked about how OEMs almost force dealers to adopt designs for their physical dealerships. For example, one of the MINI dealerships that he is in charge of has resisted putting in marble tiling in the back of the store per MINIs request. The dealer does not receive extra incentives from MINI because its dealership does not look like the rest of the MINI dealerships. This conflict between dealer and manufacturer makes me wonder how much of an influence OEMs should have on their dealers because dealers are involved in their communities and understand their customers’ tastes and preferences. Overall, it was a great day as we got to learn about both the supplier manufacturer’s story as well as that of the sales/dealer.
Today we started out at Ford’s Rouge factory where they make the F-150 trucks. The factory was very impressive as we first watched a video of the history of Ford and its origins in Henry Ford’s garage. Then we moved on to watch a semi-interactive video on the process of making the F-150 and we saw the various procedures that go in to making the truck both on-screen as well as on a blank model of the truck with actual machines. From there we went up to the viewing deck where we learned a bit about the factory itself and its history. It was originally farmland on the banks of the river rouge (or the Red River, as the area was originally settled by the French) however the muddy conditions made it difficult to farm, so Henry Ford was able to purchase the lot for a very cheap price. The factory soon came to life and was/still is an absolutely massive structure spanning a mile wide and a mile and a half long. Presently, the trucks move along conveyer belts through many parts of the factory where they start out as sheet metal (now aluminum) and are stamped into various shapes for the body and are then assembled and then go through what is called the paint shop. The paint shops are very interesting because they are able to do any color of paint and they do not have to do similar colors together, they are able to clean themselves out if they need to change color. After the body is painted they move into the final stage of assembly, the facet of production that we saw, where workers do everything from attaching interior lining to putting on the door latches. Once they are finished the trucks go through a series of tests, like driving through water or a manual test to check to see if the doors close properly, before they are deemed ready to go out for shipping. It was such a cool experience to be able to see a truck assembled in person and also to see the intricate process by which a single factory can produce 1,300 F-150s in a single day. From the Rouge, we went to the Henry Ford where Henry Ford kept his collection of various antiques as well as other innovations ranging from the auto industry, to steam powered engines, aviation technology, and agricultural equipment. My personal favorite in the museum were the huge engines that were used in the late 18th and early 19th centuries that were on display.
Later that day, we went to Ford’s headquarters in Dearborn to meet with Hau Thai-Tang, the VP of purchasing. Hau talked about Ford’s values as a company as well as the trends that they have started to see at Ford. What I took away from this part was that Ford is trying to establish itself as a car company for everyone, whether it is someone who wants a very basic, functional car to someone who is buying a car for the emotional attachment that comes with owning a nicer car (the other word he used in his deck was self-actualization). Hau also talked a lot about how Ford is very much interested in those with a background in humanities as it is in engineers, because they want people who understand their customers and can relate to them and understand their tastes and preferences, whereas someone with a background in engineering will be more focused on the design of car manufacturing. In terms of what Hau does, he is in charge of 4,000 employees who are in charge of purchasing any and everything that is necessary for Ford to operate whether it is a factor of production to toilet paper. In terms of the supply chain, Hau gave the example of if his engineers wanted him to order a specific pen and they would show him the sketch they made of the pen and their cost estimate to make the pen. Hau would then reach out to one of the suppliers he works with and give him the description of the pen to which they would give him a price it would cost to purchase each pen. Hau, then went into the intuition on behalf of the supplier that goes into the price of each pen: for example, they would have to change their current method of production to make ball-point pens instead of felt-tip pens. They also account for risk in case Ford does not order as much as they said. Hau’s job revolves around making shrewd business decisions as well as maintaining a good relationship with those he purchases his supplies from. Overall, I was very impressed with Hau’s presentation as he gave great insight into his responsibilities within Ford as well as Ford’s overall goals for its brand.
Today we started at the Federal Reserve Bank of Chicago-Detroit Branch where we met with Senior Business Economist Paul Traub and Business Economist Martin LaVelle. Mr. Traub started the presentation talking about the state of the economy today and comparing many data points to other periods in history. So today, we have lower unemployment than we did in both 2008 (obviously) and 2014. However, we have a lower participation rate than we did those previous years, meaning there are people who are leaving the workforce or have been discouraged from finding a job. The thing I found most relatable to what I learned this past term in Macro Theory was the fact that in this past quater, consumer spending made up for the bulk of the growth in GDP, at 1.6% (I think). Even though we had negative growth in Investment and in the trade balance (as the U.S. dollar has gotten stronger) the combination of positive consumption and government spending growth overcame these declines. Mr. Traub also covered many topics like how consumers have taken on debt over the years to things like total GDP in the U.S. as based on the market value of homes from consumers. Mr. Traub’s presentation, while very insightful, left us with an eerie feeling as to the state of the economy going forward, given that we have never seen more volatility in the market.
The second presentation was given by Martin LaVelle, who outlined the causes that contributed to Detroit’s downward spiral over the span of 21st century. He highlighted issues like a lack of strong leadership, citing the mayorship of of Kwame Kilpatrick who resigned amid felony charges of perjury. The leadership in Detroit slowly improved since his mayorship to the point that now members from the fed can meet and discuss issues with representatives from the city (whereas before their calls were ignored). Another issue that Mr. LaVelle elaborated on was the issue of the lack of public transportation within the city. There are currently public buses, however they can be unreliable and aren’t necessarily the most convenient mode of public transportation. Mr. LaVelle noted that there used to be a public trolley, however the auto executives wanted it shut down so that the people would be more inclined to buy cars. The problem was that this created a disconnect between the less wealthy inner city and the wealthy suburbs, as it became more difficult to connect the two. The suburbs then created their own bus system that only serves suburbanites. Then there is the issue of the Detroit public schools and the fact that they need another $700 million or so in order to stay open. The house and the senate of Michigan’s state legislature cannot agree on the issue as one branch’s plan allows this to work (the senate) but the other’s (the Republican house) does not have the financial needs being met, because it would come out of taxpayers pockets. One final issue that I will bring up (for the sake of the length of this post as there were 12 total issues) is the fact that the tax rate is very high. This discourages businesses from moving to the city and it discourages people from living in the city because it will cost them more to do so. These issues all led to the eventual bankruptcy filling by the city of Detroit. Mr. LaVelle believes there is still hope for Detroit. He believes the fact property values are so low, people like Dan Gilbert are buying property and investing in the area, the plans that are in place to put in a light-rail system, and the emergence of Wayne State as a more attractive institution for higher education will all help Detroit become a metropolis that people will soon flock back to, as they did when Ford offered his $5 a day wage (perhaps not in the same numbers).
Later that day we went to the University of Michigan Transportation Research Institute (UMTRI) to meet with a few staff members Bruce and Brandon. Bruce provided an outline of the divisions that operate within UMTRI such as the engineering group, the human studies group, and the automotive futures (Bruce’s) group to name a few. Bruce has been with UMTRI since the early ’90s and currently works on international research relating to the globalization of the industry. Next, Brandon talked about his various research project such as optimal headlight directions (straight versus something else, like divergent headlights) and the evolution of headlights since the late ’90s. He has also worked on the placement of the B-column on both two and four door cars so as to improve driver visibility close to the blindspot. The most interesting thing that he brought up was his research on the future of autonomous cars and the issues that they may face with certain unexpected conditions. For example, will an autonomous car be able to detect a police officer manually directing traffic? Will they know not to go through standing water or other hazards like fallen wires or fires, so as to not damage the vehicles? These will pose issues for software producers as these issues, while uncommon, will be encountered. He also posed the issue that if an autonomous car gets into an accident, then the software may be at fault rather than the driver. Finally, he did research about what drivers know about certain aspects relating to cars as well as what people would do with their free time in an autonomous vehicle that they would have otherwise spent driving: sleeping or doing work seemed to be popular options. We finished our trip to UMTRI by taking a peek at their Mcity facility where they test various on-road encounters for their testing vehicles.Unfortunately, the facility was locked so we were only able to take a brief look through the fence at Mcity.
Today we started off at Fox Auto Parts, a local salvage yard. We met with one of the co-owners of the family business that has been operating since 1973 and we got to witness first-hand all of their operations. We learned that they buy cars that have been deemed unfit to drive by insurance companies auctions and dismantle the cars for their parts. The process by which they choose which cars they want to purchase is much more complicated than I had originally thought; they use their complex data systems to figure out which parts are most in demand and they bid for cars that will meet these requirements. The parts of cars that are most in demand are engines and transmissions however, things like break or headlights are also taken and sold. The largest customers for a company like Fox are other salvage companies, however they also sell to dealerships or auto bodies as well to everyday consumers through their service centers. Given the nature of the business, there has been a decline in mid-sized salvage companies as many are being bought by the larger, publicly traded companies, while the smaller, family operated firms are left to fend for themselves and face the dilemma of either expanding or risking going under. Fox currently purchases around 100 cars per month whereas a firm like Barrett’s family will buy closer to 200 per month. The business is very fixed cost driven, building structures around items and engaging in capex intensive purchases like construction equipment and warehouse space, in order to move things around and store parts. In order to continue operating an expand, Fox needs to make shrewd decisions in terms of the price they pay at auctions as this will increase their margins and allow them to hire more employees, purchase more vehicles and expand their operations. It was amazing to see how much of a car can be reused even after it has been in a wreck and deemed totaled by insurance companies: everything from transmissions and engines to things like wire harnesses (as they have the highest concentration of copper in a car) and steering columns. I asked about the future of the car industry and how it would affect salvage companies and as they average model year in Fox’s lot gets younger they will have to adapt to be able to salvage things like rear-camera technology. The biggest threat to salvage companies right now is the looming paradigm shift to autonomous cars as this would greatly impact how many accidents there are on the road, which is how salvage companies obtain the cars that they purchase at auction.
In the afternoon we returned to the Heidelberg Project to meet with the visionary behind the artwork, Mr. Tyree Guyton. Mr. Guyton had a lot to say about his work and the inspiration behind it. Mr. Guyton was an art student at the Center of Creative Studies and during his time there he said he was always questioning his professors. His inspiration for the project came from within him and he began by painting polka dots on his house on Heidelberg street and soon began collecting junk and other belongings left on the streets of Detroit and arranged them in certain spots on the street. The most prominent image was the image of the clock and the reasoning behind this is because Mr. Guyton likes walking through time, which he says doesn’t exist, it only exists in our mind. Therefore, walking through Heidelberg is like taking a walk through time. Mr. Guyton’s bigger than life philosophy has rewarded him with international recognition and fame, he said that he was visiting China a few weeks ago to speak about his art and talk with people there. He also mentioned the pride he felt when people from Iceland came to Heidelberg to visit the piece and converse with him. With all the success the project has rewarded Mr. Guyton with, he has invested in the community by employing community members to do landscaping and help maintain the grounds. It is definitely not a very appealing piece of artwork but the creativity behind it is quite imaginative.
In the evening we had dinner with a few journalists from Automotive News. My end of the table had the pleasure of speaking with Jim Treece, who is an editor for Crain Communications. Jim talked about his experience as the editor in Tokyo for Automotive News in Asia. He also had experience covering suppliers and technology, the Detroit 3, and auto-retail. We talked with him about things like emissions regulations and the Nissan takeover of Mitsubishi, given that Mitsubishi has been cheating on emissions testing since the early ’90s and does not have the capital to bail itself out. After learning that he drives a Chevy Bolt I asked him whether electric vehicles are actually better for the environment, given that it takes the burning of fossil fuels/coal to generate the electricity that goes into power an electric vehicle. Mr. Treece said that because electric vehicles do not emit any harmful chemicals, they are inherently better, because the electricity will still have been used but in other ways had it not gone into charging the Bolt. Mr. Treece was great to talk to and seemed genuinely interested as to what we had done in the Motor City up to that point as well as our academic interests and potential career paths. He was very encouraging, offering personal anecdotes from his encounters in the “real-world” and spoke a great deal about journalism and publishing houses, as someone suggested that they would like to go into publishing after graduating.
Today we are leaving Detroit and the Pink Palace after a great few days spent meeting with various people with connections in the auto industry. We stopped at the Transportation Research Center Inc. in East Liberty, OH, about 45 miles outside of Columbus. The TRC is affiliated with The Ohio State University (akin to UMTRI but they differ in what they do), but are a private company after realizing that having professors run the center was not conducive to generating returns on investment in the testing facility. They are also close with both Honda (who has a manufacturing plant nearby, which has employed many laborers from the rural Ohio farm towns nearby) as well as the National Highway Traffic Safety Administration (NHTSA). They also contract out space in their various testing grounds to other OEMs; our host there, Jeff Sprague, said that any company that we can think of has been to their facilities for testing. While we were there, there was a test in progress for the new Acura NSX. On our tour we learned about their various facilities and how they help test cars for durability, dynamics, emissions, and crash testing (which we were unable to see, since there were no crash tests happening that day). They have all sorts of different road conditions that mimic surfaces that cars may encounter throughout their lifetimes, such as gravel roads, river rocks, and basalt tile that when wet simulates icy conditions. They also have a 7.5 mile test track that we drove on and cars can drive 100+ mph on it. The track also has 30º inclines on turns, so that cars going over 100 mph can turn with ease and not have to slow down (the fastest car they had ever had was in the ’80s as a Corvette went up in the range of 250 mph). The testing facility was very impressive and I think it was a great way to end our trip!