Looking back

As the calendar gets ready to flip to 2009, it is natural to reflect a bit on 2008.

The past year has been eventful one for Suzanne and I.  I "retired" from Lexmark after nearly 14 years (I walked off the campus for the last time in November 2007, but my official departure was in February), while talking with Lowell and Betty about buying Lowell's.  After many twists and turns, we completed the purchase of Lowell's at the beginning of July.

Pleasantly Surprised
And it turned out better than we imagined: Employees, customers, and Lowell and Betty have all embraced us as the new owners of the business they built over the past 29 years. 

All of our employees have stayed with us after the ownership change.  Their knowledge, expertise, and patience were enormously helpful to me as I drank from the firehose to learn about Lowell's.  I've been able to focus on the financial and technical details of the business, while they continue to run day-to-day operations. 

I initially worried that customers might leave after Lowell and Betty retired.  I shouldn't have.  Our customers have been wonderful to us — it is clear that they want the business to continue to live up to its great reputation. 

Lowell and Betty have also been exceptionally generous with their time and insights after the purchase.  Their openness and honesty were a big part of our decision to buy Lowell's.  They still come in each week to help me with questions, issues, and much-appreciated advice.

Even as the economy crumbled and business slowed, the commitment of our employees and customers has kept us relatively healthy as we see other businesses struggle.

We had a couple of disappointments this year.

The first was that one of our technicians broke his ankle in a mountain biking accident in late October.  As a result, he has been unable to work on cars for a couple of months, and still has a couple of months more left on his recovery.  We've been working with him to find "non-vehicular" ways he can help us from home, and he has started calling customers to follow up on the quality of our service.  We've also asked him to study to improve his technical skills and increase his certification level.  But we still miss his repair contribution, and we eagerly look forward to his return near the end of February.

The second was that both ACE Weekly and the Lexington Herald-Leader dropped the automotive service category from their annual readers' polls.

  • After having won ACE's Best in Lex poll for "Best Mechanic" 7 times – including 2007 – ACE's editors decided to "retire" the category in 2008.
  • And after winning our second Herald-Leader's Readers' Choice Award for "Best Repair Shop" in 2007, the category disappeared from the 2008 poll (We do, however, appreciate the nice write-ups this year from Herald-Leader business columnist Jim Jordan).

Over the years, these polls — coupled with the enthusiasm and loyalty of our customers — have helped us create enough credibility to attract new customers and continue to grow.  So, we were sorry to see them go, and hope that "automotive service" might make a return appearance in 2009.

A Great Year
All in all, 2008 was a pretty great year for us: we finally owned our own business — and it was a good one — and we were able to work with and serve fantastic people.  Who could ask for more?

[where: 111 Mechanic St, Lexington, KY 40507]

Why gas prices will go back up

From the Lowell's Corporate Office of Fearless Predictions:

Gasoline will be well above $3 a gallon by June, if not sooner.

The recent and dramatic decline in gas and oil prices has been great news for our wallets and our troubled economy, and the extra cash has provided some much needed relief from the barrage of recent bad news.  Oil is trading under $39 a barrel as I write this (It had topped $140 a barrel this summer).

But it won't last. 

How can I so sure?  I think part of the answer lies in how oil prices collapsed.  So we'll start there.

The Collapse

Three events converged — and then fed one another — to drive oil and gasoline to multi-year lows.  

Supply / Demand.  First, the economic slowdown combined with gas pump sticker shock to cause people to really pull back from using as much oil — fewer and shorter trips.  Meanwhile, petro-regimes were ramping up production, greedily grabbing for historically high petroleum prices.  More oil + Less consumption = Lower prices.

Stronger Dollar.  This summer, really low interest rates had made the dollar incredibly weak in the world market.  Essentially, each dollar bought less of everything from other countries (including oil).  As the US slowdown began to hit other countries in early autumn, and their banks lowered interest rates too, the dollar was suddenly much stronger.  As a result, each dollar now bought much more oil.

Financial Meltdown.  Finally, much of the run-up in oil prices was driven by speculators in oil-based securities in the financial markets.  The speculators drank their own outrageous Kool-Aid as firms like Goldman Sachs predicted $250-a-barrel oil by the end of the year.  As so many financial firms imploded (think Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch, etc.), they unloaded their more-profitable oil holdings in a panic to generate additional cash. 

Any one of these trends would have driven down prices somewhat, but combined, they caused prices to fall to almost one-fourth of their summer highs.

The Coming Spike

There are signs that a couple of these trends are reversing, and that there will be a near-term spike in the price of oil.

Weaker Dollar.  The recent moves by the Federal Reserve to take their funds rate to 0% have not been followed by similar moves by bankers in Europe and Asia.  This has served to significantly weaken the dollar in the global markets.  Each dollar will buy less oil and gas.

Less Oil.  OPEC members, watching their rivers of cash dwindle, have recently indicated that they will curtail production in order to restore higher prices.

Greater Demand.  At the same time, the US and other countries are stoking the economic engines with incredible amounts of 'rocket fuel': The government's huge economic stimulus packages and dramatic financial moves — from 0% interest rates to "infrastructure" projects to direct cash injections into failing firms — will (eventually) ignite, and will help the economy rebound, probably very aggressively.  As the economy takes off, much more oil will be needed to move products and rebuild infrastructure.

Speculation.  I would expect some moderation in the financial speculation — many
speculators just aren't around anymore — so I'd be surprised if the
prices reach the levels of this past summer.  There's also the Kool-Aid factor: Merrill-Lynch recently speculated
that oil prices would drop all the way to $25 a barrel.  They'll likely
be as outrageously wrong as Goldman's $250 prediction…

I'd look for these counter-trends to get traction in early January, and for the economic rebound to begin gaining steam in the April – May timeframe.  By June, these counter-trends will work together to drive oil and gas prices up again.  Netting it all out: I would expect gas prices over $3 per gallon and oil prices over $80 per barrel.

But that's just my crystal ball…  What do you think?  Where will prices be in 6 months?

[where: 111 Mechanic St, Lexington, KY 40507]

A decade of comments on Car Talk

We have long enjoyed listening to Car Talk on NPR on the weekends.  Tom and Ray Magliozzi, the brothers who host the show, are very funny and informative. 

Until recently, we didn't realize that Car Talk had a rating and comment section on their website which prominently features Lowell's.  You can see what customers have said about us (mostly good!) over the past 10 years.

As always, we are deeply appreciative of support from our customers and community.  Thank you, and please let us know how we can do better!

[where: 111 Mechanic St, Lexington, KY 40507]

Recent Posts: 12/10/2008

Here are the most recent posts to Under the Hood:

How do you shop for gas?

I remember the oil crisis from the 1970's when I was growing up.  A habit I picked up from my parents during the crisis was to keep a mental catalog of which gas stations had the best pricing.  I tend to notice the day-to-day changes as I drive around town.

There's a BP and a Speedway which I pass on my way to and from work each day.  As gas prices dropped from $4 to near $1.50 per gallon over the past few months, the two stations moved prices down in tandem — the BP's pricing was within 2 cents of Speedway's, usually higher. 

A few weeks ago, the BP started pricing 15 to 20 cents higher, and they have remained about 6 to 10 cents higher since. 

As I watched these fluctuations, I wondered how people shopped for gas, and if BP might be taking advantage of a particular customer behavior…  Do they take advantage of people who shop at BP no matter what?

So we'd like to know: How do you shop for gasoline?  Here are a few of the ways in which people might shop for gas.  Let us know if any of these match how you look for gas, or if you use a different strategy:

  • Lowest Price: Shop for the lowest price, even if you need to drive a little further.
  • Certain Brand: Try to go to the same brand, regardless of location (Shell, BP, Speedway, Sam's, etc.)
  • Neighborhood: Look for a station that's close to home (or work)

Has your shopping for gas changed at all since the prices have come down, or do you still go to the same places?

I look forward to seeing your comments.

[where: 900 Winchester Rd, Lexington, KY 40507]

Too much confidence

Driving back from Louisville to Lexington in the rotten weather earlier today, I saw 15 vehicles which had spun off of the road.  A couple of them had flipped over.  11 of the 15 were trucks or SUV's (and both of the flips were).

Too much confidence is a bad thing.  Be careful out there, no matter what you drive.

[where: i-64, Frankfort, KY 40601]

The Big 3: Saving the industry

As the Big 3 executives have returned to Washington asking for emergency funds with gestures that are both symbolic (driving in hybrids and taking $1 salaries) and substantive (slashing the numbers of dealers and brands), the question remains: Should we bail out (or invest in) the auto industry?

In my last Big 3 post, I said that I couldn't support a bailout.  But that was before the execs got flamed for their corporate jets and came back to congress in hybrids with business plans…  What do I think now?

I'm really disappointed. 

While many of the figures in the business plans are truly staggering (GM plans to fire up to 35,000 employees), my reaction to the plans is this:  Not enough. Not nearly enough.  My criticism flows along three lines of thought: 

  1. There appeared to be no cooperation among the Detroit automakers in drafting their plans, especially with regard to an inspiring "moonshot" style project to create a new generation of vehicles.
  2. There was little to address the huge overhang of retiree obligations which created much of Detroit's disadvantage to begin with.  The labor concessions the UAW appears prepared to accept are minuscule by comparison to the ongoing burden the retirees pose.
  3. The measures outlined in the plans — while aggressive on the surface — offered little in terms of real, structural changes to the way the Big 3 operate.

The current proposals still smack of "life support" rather than a true plan for vibrant growth.

But rather than sit back and take easy potshots at the executives, I thought it might be more productive to outline what I had in mind.  So (using my beloved GM as an example), here is my not-so-modest proposal:

Scale Back the Brands.
GM has proposed scaling back or selling their Hummer, Saab, Saturn and (maybe) Pontiac brands — leaving them with Chevrolet, Buick, GMC, and Cadillac.  That is still 2 brands too many.

They should pour all mainstream car and truck efforts into the Chevy brand and clearly distinguish luxury vehicles with the Cadillac brand.  Just drop the rest.  To paraphrase John Moore, if Pontiac went out of business tomorrow, would any of us really care?  Buick?  GMC?

I can hear the objections: But Pontiac produces iconic performance vehicles like the Firebird and Grand Prix and GTO, right?  Oh, they don't anymore?  I think the nation will be OK without the G6 or the Torrent, as well-made as they might be…  The Buick brand is surprisingly strong in China, but the appropriate Chevy or Cadillac models should be rebadged as appropriate for that market.

Concentrating on two brands would rid GM of the ridiculous 8x duplication they have today in product development and marketing.

(Ford should drop the Mercury brand, and Chrysler should just become "Dodge" and focus exclusively on trucks and minivans.)

Revamp the Dealer Model.
GM's dealer network is broken — too many dealers chasing too few car sales, and doing so in the wrong way.  They've proposed cutting nearly a quarter of their dealers, but they should cut closer to half of them. 

One way to speed the process?  Get rid of dealers who won't accept the following: All dealers must accept a flat pricing model with no typical dealer shell games.  By adopting the major innovation that Saturn offered to the market (and which GM is currently offering through their "Red Tag Event"), GM might be able to offer a competitive difference in the notoriously awful purchase experience.  Doing so may draw buyers back to the showroom.

They'd also begin to align the dealer's interest with that of the customer.  The dealers that still want to use smoke and mirrors to drive their profit?  Get rid of 'em.

Establish a semi-public National Automotive Technology Institute (or some such entity) with the explicit objective of crafting an inspirational next generation of smarter, more desirable, more fuel-efficient vehicles within the next 3 years. 

Force the Big 3 to contribute their energy and talent to the venture.  Connect the Institute to the best private- and public-sector initiatives on energy, artificial intelligence, and vehicle design. 

Motivate the best and the brightest individuals to develop a true national energy program in which we 1) drastically curtail petroleum use, and thereby 2) stop funding despotic regimes who dislike (or terrorize) America the most: Russia, Venezuela, Iran, and Saudi Arabia.

How to fund this?  Any dollars used to fund continuing operations at the Big 3 must be matched dollar-for-dollar with funds for the Institute.

Scale Down Retirees.
The one problem that there is no real solution for is the retiree obligations.  Both the UAW and Big 3 management colluded for years to create monstrous future pension and health obligations for retirees that both sides knew was untenable. 

They are both to blame.  So they both must pay. 

First, the retirees must accept significant reduction in their benefits.  As painful as that might be, it is better than the alternative of no benefits if the Big 3 go belly up.

Second, the company must meet what remains of its obligations to the retirees.  But everyone knows that they can't afford even a reduced set of obligations.  So, in exchange for a federalization of the retirement programs (as well as in exchange for a cash infusion), the companies must give up a significant chunk of their equity to taxpayers, to ensure that they are an ongoing concern.

As long as they abide by the other elements of this not-so-modest proposal, a public investment in the Big 3 should turn profitable within the decade as Americans (and the rest of the world) come back to attractive, affordable, and fuel-efficient American cars.

Have I been over the top?  Perhaps… But really saving the auto industry will not be accomplished through bland half-measures.

[where: Washington, DC]

Two ways

There are only two ways to live your life:
One is as if nothing is a miracle;
The other is as if everything is a miracle.
– Albert Einstein

As I see the world through my 2-year-old son's eyes, I'm constantly reminded of the everyday wonders we sometimes take for granted as adults.  I've always liked Einstein's "two ways" quote, and have tried to maintain a child-like amazement at what I encounter in life.

Jaded people (the "nothing is a miracle" people), frankly, bore me to tears.  It is far too easy – and lazy – to pretend that you've been there and done that, and that there is nothing new or wonderful in the world.  Ultimately, that cynical attitude stunts one's ability to grow, learn, and change.  It isolates jaded people from others.

I was talking (debating, really) with a group of business leaders the other day, and it struck me that there is a nearly identical "two way" attitude division in the business world. 

The Lazy Way
Some companies approach their business with a cold, calculating, flinty-eyed precision.  These companies look at business as a pure numbers game.  They often see their customers, suppliers, and employees as opponents or obstacles or dupes to be taken advantage of in their pursuit of the almighty dollar.

They see every relationship as an opportunity to "take" — in fact, "relationship" is seen as a soft, weak, and silly notion which has no place in business.  This is the case among executives at my last company

In their lazy reliance on numbers, such miserly companies manage for the short term, the "quick fix" — "Let's make a mint before the customer (or employee or supplier) gets wise to us!"  Eventually, these companies get so disconnected from customers and employees that the dominant day-to-day focus of the organization is on internal politics and positioning. 

From my experience, I can tell you that such shrinking companies are miserable places to work, and they ultimately suffer long, slow, painful deaths as customers and employees flee in droves.

The Generous Way
Other companies adopt a fundamentally different philosophy and approach to their business.  They approach business with a spirit of generosity.  They see that building long-term relationships with customers, employees, and community creates both financial and human rewards.  While the numbers might inform their choices, these companies make decisions based on doing the right thing.

"Doing the right thing" shifts the focus from the financial numbers to the human equation. Doing the right thing isn't easy.  It can be hard work.  It isn't always profitable.  "Right thing" companies usually grow more slowly than "quick fix" companies (at first).  But they do continue to grow when quick fix companies fade (or implode). They build lasting relationships which sustain them through good times and bad.

The "right thing" companies still pursue profit, but their primary focus is outward: on generous relationships with their customers, their employees, and their communities.  They trust that the profit will follow.

These growing, vibrant, connected companies are engaging and rewarding places to work (and to do business with), and they have long-term employees and customers.

Everything is a Miracle
As the economy weakens, many companies have scrambled back to the quick fix of analyzing cold, hard numbers (and charts and plans) and have abandoned their "soft and fuzzy" relationships with people.  The numbers make them feel safe and precise and comfortable.  But they aren't any of those things…

They might not know it yet, but they are the walking dead. 

The companies who will ultimately thrive in this economy (and who will drive real economic growth) are the ones who continue to connect with their customers, employees, and communities — and who continue to do the right things.

But Albert Einstein could have told you that.  My 2-year-old could have told you that.  It is just that simple.

Driving off a cliff

U.S. auto sales drove off of a cliff in November.

The numbers from Autodata show that the industry as a whole is down almost 37% from last November, and GM and Chrysler are especially hurting, with sales down 41% and 47%, respectively.  Toyota fared better than the industry average, but still lost a third of its sales from last year.

Industry sales have been down all year, but the November numbers were especially shocking. 

In this post, we'll look deeper into the numbers to see what they say about the industry and what they say about the market.

Cars and Trucks
One of the things that jumps out about the sales figures is just how dependent the Big 3 are on truck NovTruckSales
sales.  Combined, the Detroit automakers derive two-thirds of their sales from light trucks.  Chrysler sells three times as many trucks as it does cars. 

Toyota, Honda, and Nissan get most of their sales from cars.  In fact, I was surprised to see that the "Japan 3" sell more cars in the U.S. than the Detroit 3.  Toyota has the largest share (21%) of cars in the U.S. market.

So when gas prices topped $4 per gallon earlier this year, the sales of gas-guzzling trucks fell off dramatically.  Because of their dependence on trucks, Detroit suffered far more than the Japanese and European automakers.

Essentially, customers shifted their purchase patterns to cars when gasoline prices became a burden, and that helped Japan at the expense of Detroit.

November was different
But what happened in November was fundamentally different from what happened earlier in 2008.  In November, car sales and truck sales both declined at about the same rate.  The truck / car differences we described above disappeared (along with $4 gas).  In November, all of the automakers were hit pretty hard.

So what is going on?

November is different because customers stopped buying vehicles, regardless of whether they were a truck or a car

In most of 2008 vehicle purchasing decisions were affected by fuel economy — and the market shifted to buying cars from buying trucks.  In October and November, purchasing decisions were affected by the overall economy — and vehicle buyers disappeared. 

All of this has amounted to a fatal one-two punch for Detroit.  Wobbled by disappearing truck sales when gas prices were high, the knockout punch for the Big 3 came when the overall market dried up.  While the economic downturn has hit all of the automakers, Detroit has crumpled under the weight of its legacy burdens.

As the Big 3 executives go back to Washington (this time driving hybrids instead of riding in company jets) to ask for emergency funds, I'm still wondering: What will change?