Companies that produce cheaper, smaller and gas efficient vehicles have a historic opportunity in the US market during the current downturn, says Jesse Toprak, a car industry analyst of Turkish origin. Speaking to Hürriyet Daily News & Economic Review on how he became one of the most quoted analysts in the car industry, Toprak, a vice president at TrueCar, adds that Chinese and Indian companies are fully realizing the opportunity
HISTORY: During the greatest economic downturn since the 1930s, the U.S. auto industry, already reeling under competition from Japanese and Korean brands, descended further and General Motors, once the symbol of capitalism, had to go under a painful restructuring period that is still continuing. Bloomberg photo.
Turks know him as Cüneyt Toprak, but as one of the most quoted analysts in the U.S. auto industry, many recognize him as Jesse Toprak. After working for years at Edmunds.com as the executive director for industry analysis, Toprak recently took the position of vice president of industry at TrueCar, a company that calls itself the authority in new car pricing in the United States.
Answering questions from the Hürriyet Daily News & Economic Review, Toprak, a graduate of Marmara University's International Relations department in Istanbul, explained how he became one of the best-known faces in the U.S. automotive industry.
"In my last year at Marmara, I got a scholarship to study at Beloit College in Wisconsin as an exchange student," he said. "I ended up staying in the U.S. after that year and started working on my MBA at Northern Illinois University. A few months later, I realized that I better start making money soon if I didn't want to keep piling on student loans. I switched to part-time evening classes and initiated my job hunt."
But there weren't many exciting career opportunities in Beloit, so after some research, Toprak "found out that the only way to make decent money is to go into sales."
"After selling vacuum cleaners door-to-door for a short while I walked into a Ford dealership one day, talked to the sales manager and got a job selling cars," he said. "Within a matter of a few months I started running the finance department of the dealership. A few years later I became the general manager of several different dealerships in the area. My dealership experience lasted about eight years and gave me a good understanding of how the car business works, especially when it comes to analyzing pricing trends."
During the greatest economic downturn since the 1930s, the U.S. auto industry, already reeling under competition from Japanese and Korean brands, descended further and General Motors, once the symbol of capitalism, had to go under a painful restructuring period that is still continuing. Toprak sees this historic episode as one that displays "the short-sighted and somewhat arrogant management style that ran the domestic automakers throughout the last few decades."
"They blindly focused on volume and market share for so many years, rather than actually concentrating on what really matters, which is profitability," he told the Daily News. "Their idea was that they will produce whatever they want at whatever production levels and they will find a way to sell them all. Their labor union obligations also encouraged the domestic automakers to keep producing cars even when they clearly knew there was not enough consumer demand for this excess inventory levels. In other words, their supply far exceeded demand but they did little to fix this glaring problem."
Building up problems since the 1970s:
The problem of not being able to make quality cars started impacting companies in the 1970s, he said. "Constant improvement-based quality control methods resulted in increasingly more reliable products from the Japanese automakers in the same time, which resulted in a significant quality gap between the U.S.-based automakers and their Japanese counterparts by the time we reached the 1990s." he noted. "Domestic automakers also suffered from their heavy reliance on SUV and truck sales. In the 1990s, when the gas prices were barely over $1 a gallon and the economy was growing, the big three – GM, Chrysler and Ford – reported record profits mainly due to very favorable profit margins they had from their SUV and truck sales. However, in the last few years when the gas prices started climbing and the economy took a downturn, consumers’ preferences shifted to smaller, cheaper and more gas-efficient cars – a trend that worked to the advantage of Japanese and South Korean automakers."
When adjusted for population, the United States is currently dealing with the lowest selling rates for new vehicles since the 1950s. "The SAAR [Seasonally Adjusted Annualized Rate] has been fewer than 10 million units for the first half of 2009," Toprak explained. "This is well below the 16 million plus units we had been used to seeing up until last year and even below the scrappage rate of 12.5 million units. The volatility in the economy, continued job losses and deteriorating home values are causing many Americans to postpone buying a new vehicle until the dust settles."
Still, Toprak sees "green shoots" that give hope to the industry. "Although quite limited in its scope, the Cash for Clunkers legislation [provided] some boost to industry sales starting late July. The stock market has improved nicely from its lowest points and there are some minor positive trends in the real estate market – which are all positive drivers for vehicle sales. We estimate that 2009 total sales will be 10.4 million units and then recover somewhat to 12.4 million units in 2010."
Intense global competition
But U.S. carmakers, even if they ride past the crisis, have not solved the problem of stiff competition from especially the Japanese. "They will need to learn to make money with much more limited production runs and a smaller market share," Toprak said. "The current reorganization efforts of Chrysler and GM will certainly be helpful in bringing their cost structures to more reasonable levels. The lesson learned here is to design and produce cars that people want to buy while creating greatest possible efficiencies in their organizations. The end result of these structuring efforts will be leaner carmakers that have the pulse of the consumers. Flexibility in production, platform sharing and utilizing global resources will be critical for their future success."
The crisis has also seen new brands or companies rising, especially those that are bidding for assets of General Motors, such as Magna International, a Canadian auto parts manufacturer, or Sichuan Tengzhong Heavy Industrial Machinery Company, a firm unknown to industry outsiders until it purchased Hummer. "Times of crises are times of opportunity and companies with ample resources stand to gain from the downturn in global automotive sales," Toprak noted. "Several Chinese and Indian companies with deep pockets fully realized this opportunity and they have been quite aggressive in acquiring brands that are in financial trouble. Tata of India buying Jaguar, for example. We are likely to see more and more new players either buying or becoming partners with existing brands as well as introducing their own new brands, like China’s Cherry."
This is a time for opportunity in the U.S. market for cheaper, smaller and more gas efficient vehicles, he added. "New players will certainly be looking to grab a piece of this business in the next several years. The U.S. is a difficult and competitive market, but other newcomers have managed to succeed in the past."
Despite the demise of the gas-guzzling Hummer, Toprak thinks the "niche" market is alive and well. "Certain brands like Hummer suffered bigger than average losses, but I believe, at least in Hummer’s case, it was more to do with extremely poor gas mileage and a very negative environmental image. Other niche brands like Smart and Mini have performed quite well through the downturn. Generation X and Y car shoppers value personalization of their vehicles more so than any other generation we have seen before. Therefore, I think that the niche brands with appealing attributes are poised to do well for the foreseeable future."