Episode 29: Kevin Tynan, Director of Research at The Presidio Group

Tune in now for Episode 29: Jason Stein interviews Kevin Tynan, Presidio’s Director of Research, to talk about the challenges facing automakers and dealers. From inventory to truck dependance to EVs and transaction pricing – there is much to discuss on the roadway to a final quarter of 2024.

0:00 Intro 
3:53 The 4 Buckets of Pain 
9:18 Truck Mix Shift 
14:14 Overflowing EV Inventory 
16:50 Affordability 

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Transcript

Welcome to Episode 29 of Full Throttle, The Presidio Group's automotive industry podcast. I'm your host, Jason Stein, Director of Multimedia Events and Partnerships at Presidio. On a regular basis, Full Throttle serves as the industry's meeting point for great conversations with leaders across the automotive world.

While inventory shifted from 4 million before the pandemic to 900,000 during it's back to 3 million but but in all that period, monthly sales not seasonally adjusted, stayed constant between 1 and 1.5 million. So what gives in that scenario is price power and profitability and margins. So while there was no margin power or price power prior to the pandemic, there was an overabundance of it during and now we're kind of swinging back to that period where too much inventory is starting to damage price power and margin strength.

Automakers are facing four key challenges today, at leas. Among those buckets of issues, supply and demand are quickly moving out of balance again, truck mix shift has been the main earnings driver for automakers since 2013 but there isn't much runway left. Electric vehicles were supposed to take over as the earnings drivers, but we know how that's turning out. And finally, the truck mix shift has left most automakers at record high transaction prices. All combined, it makes for a fascinating, or scary, view of where the industry is today and where it's headed. These challenges will pressure dealers, but ultimately, manufacturers will become more dependent on the scope, scale and expertise of the dealer base as the best way to move forward. And as OEMs build inventory and the product portfolio becomes the most expensive it has ever been, dealers will be the ones to help determine where the industry is headed. Today, we look at all of these challenges, the four buckets of pain, as we go in house and talk to our new Director of Research, Kevin Tynan. Kevin came to The Presidio Group this summer from Bloomberg intelligence, where he was a leading voice on the industry. As director of research, he's responsible for market insights, content creation and client engagement, focused on the US franchise dealer network and automotive technology segments. With 25 years of investment research experience, Kevin began his career as an equity analyst at Argus Research covering the global automotive auto parts and auto retail industries. As a Senior Analyst The Financial Times Star Mind ranked him the top stock picker for the automobile parts segment in 2007 and two years later, he became the Global Director of automotive research for Bloomberg intelligence. During his tenure at Bloomberg, Kevin designed, built and maintained global automotive coverage for North America, Europe and Asia based automakers. The unit became Bloomberg intelligence as the coverage team expanded to put analyst teams on the ground in each region. Today, He gives us His unfiltered view on Full Throttle. 

Kevin Tynan, welcome to the program. It's great to have you on Full Throttle.

Thank you very much for having me. It's a pleasure.

It's a pleasure to have you on the team. And we should say, you are not new to the industry at all, especially industry audiences who see you from sea to shining sea, but you are new to Presidio. So welcome to The Presidio Group, and you are the Director of Research, and I think you have a lot of research for us to talk about, don't you? 

Yeah, I mean, that's the nice thing, is that there's no learning curve in terms of the industry and what's happening and the dynamics there. It's really just getting to know the people like I like to say, same player, same skills, just new uniform. So really ready to dive into it 

Wonderful. Let's dive into some of the key challenges, four key challenges, you've identified them affectionately as buckets of pain, which could not be more descriptive than it already is. Let's go through the pressure on dealers, but ultimately, the manufacturers becoming more dependent on scope, scale, expertise of their dealer base as the best way to move forward the buckets of pain. What is bucket number one Kevin?

So the buckets of pain are some of the issues that have obviously changed dramatically since the pandemic period that will pressure automaker earnings, also pressure dealerships, but ultimately the way through for the manufacturers is a stronger and better and more reliant relationship on their franchise dealer base. I think what happened was you had this period where inventory was so so low, and that's the first bucket that it was very easy to sell things. And I think the idea that, oh, a manufacturer could magically become a retailer overnight, whether it's agency or direct sales or whatever other spin you wanted to put on it was that, well, this is easy, that the inventory comes in this morning, it's gone late this afternoon, and we just move on to the next thing. So the first bucket of pain is that supply and demand are now getting out of balance. So they were way out of balance through 2019 got swung wildly the other direction to where the industry was very undersupplied through 2020, through 2023, and now we're getting back into this period of dangerously oversupplied. And what's interesting about that, Jason, is that while inventory shifted from 4 million before the pandemic to 900,000 during it's back to 3 million but but in all that period, monthly sales not seasonally adjusted stayed constant between 1 and 1.5 million. So what gives in that scenario is price power and profitability and margins. So while there was no margin power or price power prior to the pandemic, there was an overabundance of it during and now we're kind of swinging back to that period where too much inventory is starting to damage price, power and margin strength.

And that was talked about during Covid, and it's been talked about, obviously, you and I both know for decades. But the thinking post-Covid was, well, there'll be manufacturer discipline now, now it's different, but there's no way that it's different. 

Right. Yeah, well, like, I think for a few minutes, I thought that the the impact on profitability was so stark and so obvious that it was very simple, right? Well, we produce fewer things, and we have this sort of built in demand level between one and one, one and a half million units a month, and then we can kind of just nail down profitability exactly where we want it to be. The problem is, is cost inflation, right? You're going to have material cost inflation, ou're going to have labor cost inflation, all these things, and that's not to mention the pressure on the consumer, right, where they start to push back and say, you know, we're a little financially tentative right now because interest rates are high and there's cost pressure on the on the household as well. So what you're getting now is this sort of scenario where the manufacturers have to produce to cover their costs. That's the priority, not really what is the demand. It's what's my cost structure look like now that was very rationalized through the bankruptcy period and then again during the pandemic, so you could have lower production and have strong pricing. But as we get out of it, look at September of last year, September, October, you have the UAW strike. You come out with a 25% increase over you know, the next four years there's labor cost inflation, right there. We know what happens in an inflationary climate with raw materials and input costs, right? They're always going up so that manufacturer's break even point, or every manufacturer's break even point goes up with it.

And what's funny is, pre-bankruptcy, there was an enormous dependence on running the factories, because running the factories paid the bills, so...

You have to utilize your capacity, right, right? So there's no way, yeah, there's no way around that. And then, as you get to, you know, it's almost like, as a manufacturer, that's the priority, not where is demand? We can create demand by throwing money at it, and that's the thing that you worry about, right? That's where your margins start to go away, in the discounting, in the incentives, and the aggressive lease deals, subsidizing residual values, all those things the demand level can be whatever they want it to be. It's a question of, what do those deals look like? Are they good sales? Are they bad sales? And we're kind of swinging out of that great sales, where everything was over MSRP and margins were unprecedented to having to cover the cost by producing more vehicles. And there goes your bar starting to deteriorate, very clearly. 

And when we talk about margin. Of course, we talk about where most automakers have been able to secure hefty margins through the course of the last decade, and we said goodbye to the sedan during that period of time, and we saw truck mix really shift. Now you say it's at historic levels without much runway, left, right, Kevin, second bucket of pain. 

Right, so the second bucket of pain is that truck mix shift, which has really been the profit and earnings driver for the past 10 years. And I use 2013 because that's the last time the US was 50% car, 50% truck. Now we're 81/19 80/20, whatever you want to call it, but that's been the driver of earnings. It's not electrification, it's not even more volume, it's actually less volume, but more trucks. Because essentially what happened was every time you traded a $25,000 probably unprofitable coup or sedan for a very profitable $45 / $50,000 SUV that just went to the bottom line, to the operating income of the manufacturers. So that became the goal. And this really started, and I have the chart in my presentation. It's really started around the turn of the century, where the cost structure was very fixed and very oppressive, and manufacturers knew that, and SUVs were a thing in the early 90s and on through. And hey, we can share this platform of full size pickup trucks, put a body on it, call it an SUV, and sell them like crazy at great margins, because these platforms are now being spread across the portfolio, most of them were old and all paid for. So what winds up happening is that you get in obviously, 2007 2008 you get gasoline prices spike. And everybody was I remember those days, neighbors coming to me saying it cost me 120 to fill up this suburban or Tahoe. What should I buy? And everybody wanted to move smaller. The problem was that the domestic manufacturers didn't have anything to offer. They had made, if they were making small vehicles, they were terrible relative to competition. So really, the industry was trying to push in the at the turn of the century towards more truck. Then you get four and a half dollar gasoline. You get cash for clunkers. And then there's a little messy period in there. But by 2013 we're a straight run from 50 to 80 without any of those external sort of factors, be it government or be it high gasoline prices. So now where you're at is that you have Ford, General Motors, and Stellantis brands, price of Jeep, Dodge and Ram are in the 90s, right? So, if you think about it, and Ford has one car left, Mustang, that's it, right? No focus, fusion, Fiesta, Taurus, you know, same thing for DM, I think two cars in Cadillac and Corvette, and that's it. CDJR has none, right? That LX platform is being phased out with Charger, Challenger and 300 there's zero. So while this has been the earnings driver for 10 years, there's some manufacturers are domestic. There's no more cars to phase out. Now you have the Japanese the Japan based manufacturers, even Hyundai Kia, who still like that car market the entry level and move up level, because they that gets them young customers who they believe that the ownership experience will be largely positive, and that you can move a customer from a $25,000 Civic, Sentra, Corolla, even if it's unprofitable to you as a manufacturer, your breakeven is a lot lower. And you think that in the next purchase, or the one after that, you're going to keep them in the portfolio and eventually get them to the profitable parts of of your lineup. The domestic manufacturers, that's not the mindset is, it's not, we're going to sell you a $25,000 vehicle on the hopes you come back and buy a $32,000 vehicle, both of which are unprofitable, you know, so in the hopes that you'll buy a $40,000 vehicle, which might be profitable, and if, and I've done this analysis in terms of cost of goods per unit, and for the domestic manufacturers right up there, around $40,000 and that's bill of goods, that's not any operating expenses either. So essentially, what those the domestic manufacturers have said, we're not going to count on you coming back for four of our unprofitable things on the hope that somewhere in the future you're going to be in the profitable part of our lineup. They just backed out completely. And almost every manufacturer has except for those that like that entry part of the market or can withstand the losses, but nobody's going to make money down there. Nobody's making money at $25,000 it's just whether you have the wherewithal to stay in that segment, because you think at some point this will be a benefit to your brand.

The third bucket of pain is overflowing with EV inventory, isn't it? They were all supposed to take over the world and change the game and change the bottom line, then the fact is, they're not. So where are third bucket, EV?

Yeah, so the so the third bucket is that at that sort of jump off point where, I think when you, when you look at the mindset of the manufacturers, and you say, All right, well, truck mix is kind of getting tapped out. But now our next, our next level up, is EVs, right? We can, we can sell them more expensively. There's actually better margin in them, and then none of this ended up being true. Yes, they're more expensive, but the but the profit parity wasn't there. And people talk to me about this all the time, when EVs are on price parity with internal combustion, that's when adoption will take off. And I say no, when profit parity is there, then you'll get the manufacturers actually wanting to sell them and wanting to build them. So matching price for price means absolutely nothing. And the simple math is this, Jason, right? If price parity, let's say is $45,000 or $35,000 it doesn't matter what it is, and it costs me, let's call it $45,000 is price parity between an EV and an internal combustion vehicle. Cost me $35,000 to build the internal combustion vehicle. I have $10,000 of profit. Cost me 55 to build the EV, right? I'm losing 10 grand. So who cares if they're the same price? I care where the profit parity is. And that's that's been the problem is that the next step up after trucks was supposed to be EVs, but they just not carrying the same profit profile. And I think that the slow adoption, or the declining, you know, uptake, you know, because they're still growing, because they're off such a low base, but not growing at the rate they were, or that people are expecting, is as much, because the manufacturers can read an income statement and say, why would we do this? Ford is a good example, right? They lost $4.7 billion last year in the Model E business unit, and they're on track to lose another 5 billion this year. You don't want to sell things with a profit profile like that. So I don't think it's I mean, there's a big part of it that is the consumer saying, like, I don't know if this makes sense for me, charging infrastructure, the price premium, when do I get paid back? I think there's even more of it that is the manufacturer saying, Why would I do unprofitable things on purpose? I'm just not going to. Yeah, right. And then that's the that's the window we're in right now.

The final bucket is what?

Affordability, right? So if you think about that truck mix up market and the need to sell EVs expensive, just so they can be profitable. And then you layer on top of that, a lot of inventory, or 3 million units of inventory, you have a market in the US that is a lot of units near record transaction price, with a way that you need to sell these things. So you have the consumer saying, hey, like, where's my $25,000 $30,000 vehicle? And you know, if you look at it, I talked about Fusion and Focus, if you look at the three domestic manufacturers there, there's 10 name plates that used to sell between $20 and $28,000 call it $30, that accounted for a million units of sales in 2016 which is the peak volume year 17 and a half million. None of those 10 name plates existed. It's a million units that the manufacturers have walked away from, because a unit sale is not they're not all good, right? You know, the sale of an unprofitable $25,000 coupe is not the same thing as a profitable sale of a $65,000 pickup truck. They both count as one, you know, on the ledger, but they're very not the same thing. So what you have now is that every manufacturer has moved upmarket near their peak record transaction price orchestrated, saying we don't want that that affordable part of the market. Hey, you know, Toyota, Hyundai, Kia, if you want those buyers, they're yours. You think you can keep them in the portfolio and turn them into profitable buyers down the road, that's good for you have at it, but everybody else has sort of walked away from that. So now you have a market where the manufacturers are saying, like, we're not even in the game below $50,000 right? And that's tough on a lot of consumers, right? And it's saying, like, well, I guess you don't want me as a customer. And it's like, well, we, we don't because you're not a good customer. You're not a profitable customer for us. So now you have these manufacturers having to sell the most expensive vehicles in history. And that's not happening, you know, at the mall or direct sales or agency, you need the retail base which has the experience and this, like I said, scope and scale to be able to sell expensive things to people and do it efficiently and do it at, you know, cost effectively, and all these things. And it's only going to happen, like I said, retailers are not going to magically turn into good, manufacturers aren't going to turn into good retailers overnight, you know, and especially since you already have that installed retail base with 100 years of experience to do it for you. So I think we're going to, you're going to start to start to see manufacturers really leverage that relationship with the retailers. Talk of direct sales and of, you know, agency models is I you really haven't heard that much about it lately. 

No we haven't.

These are all, yeah, these are all the reasons why. When you know when inventory was here, today, gone late today, it was easy, right? You think you can do it, and I think it's the reality is setting in is that we manufacturers need a more than ever, need that relationship to be tight with their dealer base. 

Does that create an opportunity, I've long held this belief, but you tell me, does that create an opportunity for the Chinese or someone else to come in on the affordability side and try to own the market? 

Yeah, it's a really I struggle with this, and I talk to people about this a lot, because looking at this from a sort of contrarian view, I'm thinking, right? So we know that basically, you know, even in the election, right? That's what we're going to hear. We're keeping the Chinese brands out. We don't want them. We're going to kill them with tariffs, whatever Europe's going through it now. My issue is, if you can, if you if Chinese manufacturers get into the bottom of the market, I don't know call it $15,000 to $25,000 market, it doesn't exist now. You're not taking fare from anybody, right? So if that creates maybe the used car market, but if that creates affordability for the consumer, it's not a threat to General Motors, whose average transaction price is $52,000 now that now, correctly, people will say to me, yeah, but it's the problem that they get in at 15,000 and then they become 25 then become 35 and then they're in the mix, which is exactly what happened with, you know, after World War Two with Toyota and Nissan or Datsun at the time, and, you know, all the Japanese brands. So my thing is, like, Well, why wouldn't you let them in? Let them satisfy the bottom end of that market with whatever drivetrain technology they want, and then when they try and creep up out of that, then that's when the terrorists come in. You know where you say, like, Hey, you can have the 15 to $25,000 part of the market, but once you're above that, it's 100% tariff or whatever I'm I'm no policy guy or a politician, but I'm looking at it like, well, that would actually be good for the consumer to have those affordable products, the problem would be moving up market and actually challenging the manufacturers at other price points. I don't know if it's possible to stop that, but to me, every manufacturer has run away from the bottom of the market. Not forget, a race to the bottom. It's been a race away from the bottom. 

A race to the top. 

 Yeah, absolutely. I mean, you look at, you know, Mercedes is incredible. There was a time I remember looking doing the average transaction price of BMW versus Mercedes versus Cadillac, and Cadillac was actually above BMW and Mercedes. Because, if you remember, I don't know, maybe 10 years ago, Mercedes moves down market, right? CLA, for $29,999, all those right entry because, because idea was like, we want to get people into the brand, and then we can move them up through the product portfolio, and hopefully someday they're buying G Wagons or whatever. But what happened is that was not a profitable part of the market right? Now you've got, you got people focused on the wrong end for them. And now, when you look at it, Mercedes is like, run away from everybody else into the high 70s for average transaction price. You know, Audi's in the low 60s, BMWs in the in the mid to upper 60s. So, you know, they've all sort of found their clear air there to get into. But Mercedes Benz has said, like, we're dropping that part of the portfolio, and we're going absolutely to the top, where average transaction price is close to $80,000 and it was, you know, they were competing with Cadillac at 55,000 10 years ago, you know? So it hasn't been, it's been, it's been an absolute Race to the Top. You that's the exactly correct term. 

Kevin Tynan is the director of research for The Presidio Group, and has given us a ton to think about. We're going to have you back on regularly, because I think your insights and wisdom and shining a light in places, some dark corners that the industry doesn't like to look into as a good thing, especially for us. Kevin, thank you so much, and welcome.

My pleasure. Jason, great time 

Thank you.

Thanks again to my guest Presidio's Director of Research, Kevin Tynan, and thanks for listening to Full Throttle. Come back to us later in the month for our next interview on this platform. Email ,e with suggestions, JStein@ThePresidioGroup.com or go to the website ThePresidioGroup.com. Follow us as well on LinkedIn. Thanks for listening to the program. We'll see you next time.