As Marketing Effectiveness Analytics comes of age, it seems to have been promoted from specialized firms to it's own practice area within Marketing Strategy dvisions of Crème de la Crème of the consulting world and from an esoteric existence within Market Research Departments to the Corporate Boardroom- almost a Cinderella story. Marketing Effectiveness Analytics today is the tool of choice while setting benchmarks and hurdle rates for assessing marketing campaign performance, setting new product marketing budgets and pricing strategy shifts.
Studies like Marketing ROI Analysis (a.k.a Marketing-Mix Modeling a.k.a Marketing Effectiveness Analysis), Marketing Spend and Advertising Optimization etc. were not mainstream services within the Marketing practice area of blue-chip firms like McKinsey, Accenture, Booz and Deloitte. Now these firms have dedicated sections to Marketing Effectiveness/Efficiency within their Marketing practice area. It's not as if they have created new and improved version of these analytics that have been practiced by niche firms for the last 20 years or so, they have just added their branding to them and this is causing C-level execs to take notice. So now that Marketing Effectiveness Analytics has established as a mainstay within the "must-haves" of Market Research tools, hopefully there will be more focus on standardizing this tool across industries so that the results can be normalized and used as benchmarks.
One potential outcome of marketing effectiveness becoming a standardized corporate practice is that GAAP could be amended to treat Marketing as a Capital expense (maybe a bit of a stretch but not impossible). This will have far-reaching effects on marketing budget management- for instance if marketing expenses could be capitalized and amortized over time instead of in the same revenue period, Corporate stakeholders would be less likely to slash marketing budgets every time costs need to be trimmed. Return hurdles set by Marketing Effectiveness analyses would ensure that marketing spending is efficient and productive thereby providing a check to a tendency to overspend and amortize over longer periods. Just a thought.
Torture the Data long enough and it will confess to anything...
The core motivation for this Blog was to promote some rigor in business and economic analysis and research. In our posts we had talked about how research is becoming less and less exploratory and more and more confirmatory.
I was just reading an article on Yahoo! Real Estate from CNNMoney.com titled "Americans Tame Their Wanderlust". The article is pretty cool as it focuses on domestic migration patterns, which obviously has a strong bearing on regional shifts in Real Estate demand and pricing. What was not so cool was the lack of connectivity between the data presented and the corresponding insights developed. For instance the article's title is based on the following statement "Only about 2.4% of Americans moved from state to state in 2008, down from 2.5% the previous year". The author relies on U.S. Census Bureau population data, which is publicly available at the Census Bureau website. Now this is a 0.1% change- 307,000 absolute decline assuming a total U.S. population of 307 Million. This seems like a large number if the numbers aren't estimates but actuals, but it is impossible to measure this data with 100% accuracy, so the Census Bureau like most other folks in Business and Social research settles for 90% confidence (with a 10% probability that the estimates are wrong). A key metric in gauging how much importance to put into this change is the "standard deviation" of how this percentage varies year over year. So if this percentage varies +/-0.05% every year, there is only a weak possibility that there was actually a decline and for all purposes the change would be statistically "insignificant".
I am not saying that the article is inaccurate, all I am saying is that in my opinion enough data may not have been presented to justify the title. It is especially risky to base real estate investment decisions using just two data points as typically the gestation period for these investments to bear fruit is significantly longer than 2 years (if more folks had been mindful of this we probably wouldn't have had a real estate bubble).
A little rigor around analysis of Census Bureau would have yielded the author a few interesting nuggets around domestic migration trends in place. For example the chart below shows net migration trends by 4 U.S. regions.
The chart indicates that with the exception of 2002-2003, the South seems to significantly lead all other regions in migration. The West seems to have some cyclical pattern going on but seems to generally mean-reverting around an equilibrium balance. Over the past 10 years the exodus out of the Midwest has progressively abated. The exodus out of the Northeast seems to have peaked out in 2004-2005 and is progressively becoming less negative in net domestic migration.
Looking at this from a State level may have generated too much noise as there are several factors to be considered like the fact that Washington D.C. is at the confluence of three states and has a significant number of people that at one point in time or another lived in both D.C. and one of the neighboring states. So either analysis and insights should be limited to the granularity permitted by raw data or an appropriate statistical model should be leveraged that controls the influence of potentially confounding factors.
I was just reading an article on Yahoo! Real Estate from CNNMoney.com titled "Americans Tame Their Wanderlust". The article is pretty cool as it focuses on domestic migration patterns, which obviously has a strong bearing on regional shifts in Real Estate demand and pricing. What was not so cool was the lack of connectivity between the data presented and the corresponding insights developed. For instance the article's title is based on the following statement "Only about 2.4% of Americans moved from state to state in 2008, down from 2.5% the previous year". The author relies on U.S. Census Bureau population data, which is publicly available at the Census Bureau website. Now this is a 0.1% change- 307,000 absolute decline assuming a total U.S. population of 307 Million. This seems like a large number if the numbers aren't estimates but actuals, but it is impossible to measure this data with 100% accuracy, so the Census Bureau like most other folks in Business and Social research settles for 90% confidence (with a 10% probability that the estimates are wrong). A key metric in gauging how much importance to put into this change is the "standard deviation" of how this percentage varies year over year. So if this percentage varies +/-0.05% every year, there is only a weak possibility that there was actually a decline and for all purposes the change would be statistically "insignificant".
I am not saying that the article is inaccurate, all I am saying is that in my opinion enough data may not have been presented to justify the title. It is especially risky to base real estate investment decisions using just two data points as typically the gestation period for these investments to bear fruit is significantly longer than 2 years (if more folks had been mindful of this we probably wouldn't have had a real estate bubble).
A little rigor around analysis of Census Bureau would have yielded the author a few interesting nuggets around domestic migration trends in place. For example the chart below shows net migration trends by 4 U.S. regions.
The chart indicates that with the exception of 2002-2003, the South seems to significantly lead all other regions in migration. The West seems to have some cyclical pattern going on but seems to generally mean-reverting around an equilibrium balance. Over the past 10 years the exodus out of the Midwest has progressively abated. The exodus out of the Northeast seems to have peaked out in 2004-2005 and is progressively becoming less negative in net domestic migration.
Looking at this from a State level may have generated too much noise as there are several factors to be considered like the fact that Washington D.C. is at the confluence of three states and has a significant number of people that at one point in time or another lived in both D.C. and one of the neighboring states. So either analysis and insights should be limited to the granularity permitted by raw data or an appropriate statistical model should be leveraged that controls the influence of potentially confounding factors.
Eye on The U.S. Economy: September 2009 Employment Report
The Employment Situation Report comes out on Friday September 4th, 2009 at 8:30 A.M. Based on other reports that came out earlier this week, it may go either way vs. expectations. Consensus estimates an average decline of 200,000 in Nonfarm Payrolls.
Although the ISM Manufacturing Index came out on September 1st at a very strong at 52.9 vs. a Consensus of 50.5, the Inventories Index was weak, suggesting Manufacturers are drawing down existing Inventories, which doesn't help Employment. but production was up.
From a historical perspective, last month ISM Manufacturing Index had an upside surprise, ADP came in at -371K, Consensus estimates on Nonfarm Payroll were -300K and Actual came in at -247K. So if we see a repeat trend this month, we could actually come better than -200K.
So far I see a couple of positive factors supporting better than expected Employment and one negative factor (ADP).
Here's the reason I am honing into Employment this month- Personal Income usually lags Employment and leads Consumption, therefore it is logical that Employment trends in September and October could be a major influence on Holiday sales. If you look at the last ten years Retail Sales estimates from the Census Bureau (excluding Auto), the monthly SAAR (Seasonally Adjusted Annual Rate) correlation vs. the Month-over-Month Employment percent change peaks out at a 3-month lag. The correlation with monthly change in Seasonally Adjusted Retail Sales (ex-Auto) peaked at a 2-month lag. Unless we have significant improvement in Employment and Personal Income over the next two months, we are looking at another year of bleak Holiday sales.
Although the ISM Manufacturing Index came out on September 1st at a very strong at 52.9 vs. a Consensus of 50.5, the Inventories Index was weak, suggesting Manufacturers are drawing down existing Inventories, which doesn't help Employment. but production was up.
From a historical perspective, last month ISM Manufacturing Index had an upside surprise, ADP came in at -371K, Consensus estimates on Nonfarm Payroll were -300K and Actual came in at -247K. So if we see a repeat trend this month, we could actually come better than -200K.
So far I see a couple of positive factors supporting better than expected Employment and one negative factor (ADP).
Here's the reason I am honing into Employment this month- Personal Income usually lags Employment and leads Consumption, therefore it is logical that Employment trends in September and October could be a major influence on Holiday sales. If you look at the last ten years Retail Sales estimates from the Census Bureau (excluding Auto), the monthly SAAR (Seasonally Adjusted Annual Rate) correlation vs. the Month-over-Month Employment percent change peaks out at a 3-month lag. The correlation with monthly change in Seasonally Adjusted Retail Sales (ex-Auto) peaked at a 2-month lag. Unless we have significant improvement in Employment and Personal Income over the next two months, we are looking at another year of bleak Holiday sales.
Media, A Wharton Professor and Marketing Research - II
And a little book called Moneyball
Following up from my last post, I gave my second blog a little time to think itself through. For some reason, I kept thinking about this book while I was listening to Professor Fader's ideas. That set me off on another line of thought. What is marketing research all about? The professor kept talking about the value of conventional wisdom and using information more effectively. Perhaps a few innovators in baseball have hit upon the answer. So, without much further ado, let me introduce the reader to the book using the omnipresent Wikipedia (http://en.wikipedia.org/wiki/index.html?curid=438445). Here you can find a pretty succinct summary of the book. The core of the book to me, however, is the essence of innovative marketing research.
Every industry has its own conventional wisdom. Take, for instance, the motion picture industry. Traditional wisdom says that movies should be released on Fridays so that they can benefit from the weekend crowd. While this might have held true in times when the average movie-goer went to work 5 days a week and looked for some Friday night entertainment, but will this theory change if we had flexible working hours? Is the pre-release on Wednesdays and Thursdays an attempt to get an early edge? Is it the reflection of an extended weekend? Do these rules apply equally in the summer? I don't have a definitive answer, but I just know that the new trend certainly isn't conventional wisdom.
Baseball, too, suffers from its multitude of opinions. What Billy Beane and his crew did was to challenge opinions using statistically-backed stats. For example, they found that a college player's chance of making it in the big leagues is way greater than a high school player's odds. This flies in the face of traditional baseball thinking - but is validated by research! This allowed a middle of the pack team like the A's (when it came to budget) to run with organizations like the cash-rich Yankees or the Red Sox who in the past have simply shelled out exorbitant cash for the best established players.
I am sure marketing researchers at this point are smiling to themselves. Haven't we all faced some brand manager who seems to believe that her brand is premium despite all evidence to the contrary? Or that TV advertising still generates 15% incremental sales for a mature CPG product?
To me, the professor's theories, the book and the current state of marketing research all point in the same direction. Research is useless if it is only used to validate conventional wisdom. True value in research is driven by finding previously undiscovered nuggets - and not by doing the tried and tested.
Following up from my last post, I gave my second blog a little time to think itself through. For some reason, I kept thinking about this book while I was listening to Professor Fader's ideas. That set me off on another line of thought. What is marketing research all about? The professor kept talking about the value of conventional wisdom and using information more effectively. Perhaps a few innovators in baseball have hit upon the answer. So, without much further ado, let me introduce the reader to the book using the omnipresent Wikipedia (http://en.wikipedia.org/wiki/index.html?curid=438445). Here you can find a pretty succinct summary of the book. The core of the book to me, however, is the essence of innovative marketing research.
Every industry has its own conventional wisdom. Take, for instance, the motion picture industry. Traditional wisdom says that movies should be released on Fridays so that they can benefit from the weekend crowd. While this might have held true in times when the average movie-goer went to work 5 days a week and looked for some Friday night entertainment, but will this theory change if we had flexible working hours? Is the pre-release on Wednesdays and Thursdays an attempt to get an early edge? Is it the reflection of an extended weekend? Do these rules apply equally in the summer? I don't have a definitive answer, but I just know that the new trend certainly isn't conventional wisdom.
Baseball, too, suffers from its multitude of opinions. What Billy Beane and his crew did was to challenge opinions using statistically-backed stats. For example, they found that a college player's chance of making it in the big leagues is way greater than a high school player's odds. This flies in the face of traditional baseball thinking - but is validated by research! This allowed a middle of the pack team like the A's (when it came to budget) to run with organizations like the cash-rich Yankees or the Red Sox who in the past have simply shelled out exorbitant cash for the best established players.
I am sure marketing researchers at this point are smiling to themselves. Haven't we all faced some brand manager who seems to believe that her brand is premium despite all evidence to the contrary? Or that TV advertising still generates 15% incremental sales for a mature CPG product?
To me, the professor's theories, the book and the current state of marketing research all point in the same direction. Research is useless if it is only used to validate conventional wisdom. True value in research is driven by finding previously undiscovered nuggets - and not by doing the tried and tested.
Wading Through A Deluge of Recession Pricing Advice
Over the past year or so a lot of advice has come out from business thought leaders about recessionary pricing strategies. Below are three articles from what are considered to be well-regarded sources:
INSEAD: When to push the panic button?
Harvard Business School: Marketing Your Way Through a Recession
McKinsey: Pricing in an inflationary downturn
Although there's a lot of valuable advice in these perspectives, it is surprising that some of these studies propose a one-size-fits-all approach to recessionary pricing.
Sorry to burst the bubble, but the consumer decision process is not that simple. For instance the INSEAD article proposes that consumers are not more price sensitive during a recession, the extra sensitiveness shown during recessionary times is attributed to income smoothing and advices firms to focus on share of customer wallet rather than share of market. Good advice, but while it is great to focus on share of wallet, share of market ultimately determines the financial performance corporate stakeholders will be evaluated on. Share of wallet as a metric is focused on retention(up-selling and cross-selling). While retention is critical, acquisition is important too in driving growth. Market-share is a more wholesome metric that takes into account performance of both retention and acquisition activities, especially if the firm is in a growing category, where acquisition could be a greater determinant of performance than retention. On the other hand for mature industries, retention would certainly be more important. This highlights the perils of subscribing to generic strategies.
Another frequent advice I have come across is to not take a perceived increase in price sensitiveness during economic downturns as a signal to aggressive pricing strategies that may lead to unprofitable price wars. That is all good, but game theory suggests that in multi-competitor industries, you will always have a player that will try to increase their payoff by defecting and using aggressive pricing strategies to garner market shares. In this case should you take the higher road and trust in your customer loyalty or protect your market-share?
The Harvard article scores on a few points, for instance Advice #6 is to "Adjust Pricing Tactics"- some good nuggets of wisdom here, but #3 "Maintain Marketing Spending" is no all that realistic. Margin pressures inevitably result in budget cuts.
The McKinsey article actually has some pretty good advice on how research steps that can help fine tune pricing strategy, without actually trying to generalize findings. I especially liked these:
Monitor customer-level profitability
Update price sensitivity research
Monitor your industry’s microeconomics
Consumers reaction to pricing in recessions is not generic across all of their purchases. For instance, if a Brand is in a category with relatively low product differentiation, price discounting could forever forfeit brand premium, while Brands in categories with higher product differentiation can actually leverage pricing without damaging longer term equity. Also for service-based industries, brands can drive longer-term market-share by lowering price and locking in customers over a longer-period. Ultimately the key thing to remember is that when it comes to pricing strategy- one size certainly doesn't fit all.
INSEAD: When to push the panic button?
Harvard Business School: Marketing Your Way Through a Recession
McKinsey: Pricing in an inflationary downturn
Although there's a lot of valuable advice in these perspectives, it is surprising that some of these studies propose a one-size-fits-all approach to recessionary pricing.
Sorry to burst the bubble, but the consumer decision process is not that simple. For instance the INSEAD article proposes that consumers are not more price sensitive during a recession, the extra sensitiveness shown during recessionary times is attributed to income smoothing and advices firms to focus on share of customer wallet rather than share of market. Good advice, but while it is great to focus on share of wallet, share of market ultimately determines the financial performance corporate stakeholders will be evaluated on. Share of wallet as a metric is focused on retention(up-selling and cross-selling). While retention is critical, acquisition is important too in driving growth. Market-share is a more wholesome metric that takes into account performance of both retention and acquisition activities, especially if the firm is in a growing category, where acquisition could be a greater determinant of performance than retention. On the other hand for mature industries, retention would certainly be more important. This highlights the perils of subscribing to generic strategies.
Another frequent advice I have come across is to not take a perceived increase in price sensitiveness during economic downturns as a signal to aggressive pricing strategies that may lead to unprofitable price wars. That is all good, but game theory suggests that in multi-competitor industries, you will always have a player that will try to increase their payoff by defecting and using aggressive pricing strategies to garner market shares. In this case should you take the higher road and trust in your customer loyalty or protect your market-share?
The Harvard article scores on a few points, for instance Advice #6 is to "Adjust Pricing Tactics"- some good nuggets of wisdom here, but #3 "Maintain Marketing Spending" is no all that realistic. Margin pressures inevitably result in budget cuts.
The McKinsey article actually has some pretty good advice on how research steps that can help fine tune pricing strategy, without actually trying to generalize findings. I especially liked these:
Monitor customer-level profitability
Update price sensitivity research
Monitor your industry’s microeconomics
Consumers reaction to pricing in recessions is not generic across all of their purchases. For instance, if a Brand is in a category with relatively low product differentiation, price discounting could forever forfeit brand premium, while Brands in categories with higher product differentiation can actually leverage pricing without damaging longer term equity. Also for service-based industries, brands can drive longer-term market-share by lowering price and locking in customers over a longer-period. Ultimately the key thing to remember is that when it comes to pricing strategy- one size certainly doesn't fit all.
U.S. Economic Outlook: Bottom In Sight or Double-Dip Recession?
A quick survey of key economic indicators for the U.S. Economy may indicate that some of the downward drivers may be paring back more than expected, which could either indicate a reversal may be in the offing or we are on the brink of a double dip recession.
Durable Goods Orders: Durable Goods orders are to be released on June 24th and the consensus average is a -0.5% change. Durable Goods orders for April released on 5/28 was an upside surprise (new Orders expected 0.0% change vs. Actual 1.9%), and in April released for March were an upside surprise too (declined less than expected). If the underlying trend in Durable Goods is less negative than what economists are expecting, it may suggest that industrial production and capital spending situation may be a little bit better than expected coming up into the close of the second quarter of 2009.
Consumer Confidence & Consumer Sentiment: Both Consumer Confidence (Conference Board) and Consumer Sentiment (University of Michigan) where upside surprises (upside surprise in April too). Consumer spending is the heart of the U.S. Economy, representing 2/3rd of the economy.
Retail Sales: Although overall Retail sales were slightly below consensus, Retail Sales ex-Auto was slightly better than expected.
Inflation: May Headline Inflation rate was lower than expected, while Core Inflation came in right on the mark.
Employment: May Non Farm Employment was less negative than expected, while the Unemployment rate was slightly higher than expected. Numbers released in May for April also showed a better than expected Non-Farm Payroll situation.
Given the fact that First Quarter GDP was a little worse than Consensus expectation, the overall economic scenario painted by these indicators may suggest that a bottom could be in sight. It is too early to call a turnaround since GDP still has a negative trend, although the trend seems to be decelerating. At the very least we can expect overall 2Q to perform better than 1Q. This seems to align with Prof. Nouriel Roubini’s January prediction (first quarter 2009: -5%; second quarter 2009: -4%; third quarter 2009: -2.5%; fourth quarter 2009: -1%--adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009). Although now "Dr. Doom" Roubini is raising the prospect of a Double-Dip recession, as he thinks that not everything is in alignment for a significant reversal of the recovery trend. Hopefully he is underestimating the impact of all that stimulus money or overestimating the fallout of the public debt burden, because if we are indeed looking at a Double-Dip recession, it will get a lot worse before it gets better.
Durable Goods Orders: Durable Goods orders are to be released on June 24th and the consensus average is a -0.5% change. Durable Goods orders for April released on 5/28 was an upside surprise (new Orders expected 0.0% change vs. Actual 1.9%), and in April released for March were an upside surprise too (declined less than expected). If the underlying trend in Durable Goods is less negative than what economists are expecting, it may suggest that industrial production and capital spending situation may be a little bit better than expected coming up into the close of the second quarter of 2009.
Consumer Confidence & Consumer Sentiment: Both Consumer Confidence (Conference Board) and Consumer Sentiment (University of Michigan) where upside surprises (upside surprise in April too). Consumer spending is the heart of the U.S. Economy, representing 2/3rd of the economy.
Retail Sales: Although overall Retail sales were slightly below consensus, Retail Sales ex-Auto was slightly better than expected.
Inflation: May Headline Inflation rate was lower than expected, while Core Inflation came in right on the mark.
Employment: May Non Farm Employment was less negative than expected, while the Unemployment rate was slightly higher than expected. Numbers released in May for April also showed a better than expected Non-Farm Payroll situation.
Given the fact that First Quarter GDP was a little worse than Consensus expectation, the overall economic scenario painted by these indicators may suggest that a bottom could be in sight. It is too early to call a turnaround since GDP still has a negative trend, although the trend seems to be decelerating. At the very least we can expect overall 2Q to perform better than 1Q. This seems to align with Prof. Nouriel Roubini’s January prediction (first quarter 2009: -5%; second quarter 2009: -4%; third quarter 2009: -2.5%; fourth quarter 2009: -1%--adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009). Although now "Dr. Doom" Roubini is raising the prospect of a Double-Dip recession, as he thinks that not everything is in alignment for a significant reversal of the recovery trend. Hopefully he is underestimating the impact of all that stimulus money or overestimating the fallout of the public debt burden, because if we are indeed looking at a Double-Dip recession, it will get a lot worse before it gets better.
Global Warming, U.S. Economy and the GM Bailout
Why do I have these three themes in one sentence? That is because I think these could shape each other’s future with a little foresight.
Transportation is the second largest source of greenhouse gas emissions and accounts for a third of all carbon dioxide emission in the U.S. and Canada. Governments the world over are awakening to the fact that irreversible damage is being done to the environment on a global scale, with fossil fuels one of the key culprits. If there is one line item that you are going to find in the budgets of most rational governments the world over, it is investments in clean energy including reducing auto emissions.
President Obama has already made his stance on this clear by saying he hopes to see 1 million plug-in hybrid and electric vehicles on the road by 2015. Many have called this optimistic, but I don’t think so, only that I think President Obama is being myopic in his definition of “road”. I think the U.S. can take a leadership position in the global Hybrid car industry, not just the U.S., by bringing together likeminded Governments that would like to see a reduced consumption of fossil fuels. He said “"The nation that invented the automobile cannot walk away from it." And I agree, but I think “$4 billion in guaranteed loans and tax credits to help U.S. automakers retool for more fuel-efficient cars and to develop batteries for plug-in hybrids that get up to 150 mpg”, is taking a passive stance on the subject. If one American revolutionized the Global Auto Industry with the Model T, no reason why another cannot shape it’s future with making Hybrid technology affordable.
The combination of increased global concern on climate change, public opinion focused on a faltering economy and the current turmoil in the U.S. auto industry provides an alignment that the President should leverage. Especially opportune is the U.S. Government’s investment resulting in controlling interest in General Motors. I have not been fond of bailouts in general, as I favor natural evolution and survival of the fittest, but in this case it could be a good thing. GM is a company that has already made significant investments in hybrid technology (although cars like the 2010 Chevrolet Camaro SS with a V-8 engine bring into question the GM's product development strategy and Bob Lutz's commitment to the longer term). With the might of U.S. Tax payer dollars behind it and a more active rather than a passive Taxpayer role in the Board, this company can take a global leadership role in making U.S. hybrid technology the prevailing currency across the world over the next 5-10 years. This will require the U.S. Government to evolve GM into a largely hybrid car manufacturer. From a macro perspective, this could provide a significant boost to exports in the longer term, balancing the worsening Trade Gap (sales recorded by the global hybrid vehicles market are expected to surge at a CAGR of around 12% during 2008-2015 and focusing on this growth should only enhance Taxpayers’ Return on Investment on GM).
I know from an economic perspective, to make this a profitable venture will require a lot of work. Currently hybrid technology is far from affordable- the GM Volt, which plugs into a household electric socket to charge, is slated to retail for $40,000, nearly the same price as a conventionally fueled Mercedes C Class. As technology improves, this dynamic should change significantly- just look at the Notebook computer industry. And then again this is not just about profits- developing a potentially successful U.S. Hybrid Car Industry has ramifications that will reverberate for more than a hundred years to come, in a global climate that will finally begin the healing process from generations of big-cylinder, gas-guzzling monster cars spewing CO2 into the air.
So is the Government bailout of GM a smart move? Yes- only if President Obama was serious when he was talking about “Change”. If he really is as imaginative a leader as I think he is, he will take this opportunity and score a big touchdown on all three fronts: Global Warming, U.S. Economy and the General Motors.
Transportation is the second largest source of greenhouse gas emissions and accounts for a third of all carbon dioxide emission in the U.S. and Canada. Governments the world over are awakening to the fact that irreversible damage is being done to the environment on a global scale, with fossil fuels one of the key culprits. If there is one line item that you are going to find in the budgets of most rational governments the world over, it is investments in clean energy including reducing auto emissions.
President Obama has already made his stance on this clear by saying he hopes to see 1 million plug-in hybrid and electric vehicles on the road by 2015. Many have called this optimistic, but I don’t think so, only that I think President Obama is being myopic in his definition of “road”. I think the U.S. can take a leadership position in the global Hybrid car industry, not just the U.S., by bringing together likeminded Governments that would like to see a reduced consumption of fossil fuels. He said “"The nation that invented the automobile cannot walk away from it." And I agree, but I think “$4 billion in guaranteed loans and tax credits to help U.S. automakers retool for more fuel-efficient cars and to develop batteries for plug-in hybrids that get up to 150 mpg”, is taking a passive stance on the subject. If one American revolutionized the Global Auto Industry with the Model T, no reason why another cannot shape it’s future with making Hybrid technology affordable.
The combination of increased global concern on climate change, public opinion focused on a faltering economy and the current turmoil in the U.S. auto industry provides an alignment that the President should leverage. Especially opportune is the U.S. Government’s investment resulting in controlling interest in General Motors. I have not been fond of bailouts in general, as I favor natural evolution and survival of the fittest, but in this case it could be a good thing. GM is a company that has already made significant investments in hybrid technology (although cars like the 2010 Chevrolet Camaro SS with a V-8 engine bring into question the GM's product development strategy and Bob Lutz's commitment to the longer term). With the might of U.S. Tax payer dollars behind it and a more active rather than a passive Taxpayer role in the Board, this company can take a global leadership role in making U.S. hybrid technology the prevailing currency across the world over the next 5-10 years. This will require the U.S. Government to evolve GM into a largely hybrid car manufacturer. From a macro perspective, this could provide a significant boost to exports in the longer term, balancing the worsening Trade Gap (sales recorded by the global hybrid vehicles market are expected to surge at a CAGR of around 12% during 2008-2015 and focusing on this growth should only enhance Taxpayers’ Return on Investment on GM).
I know from an economic perspective, to make this a profitable venture will require a lot of work. Currently hybrid technology is far from affordable- the GM Volt, which plugs into a household electric socket to charge, is slated to retail for $40,000, nearly the same price as a conventionally fueled Mercedes C Class. As technology improves, this dynamic should change significantly- just look at the Notebook computer industry. And then again this is not just about profits- developing a potentially successful U.S. Hybrid Car Industry has ramifications that will reverberate for more than a hundred years to come, in a global climate that will finally begin the healing process from generations of big-cylinder, gas-guzzling monster cars spewing CO2 into the air.
So is the Government bailout of GM a smart move? Yes- only if President Obama was serious when he was talking about “Change”. If he really is as imaginative a leader as I think he is, he will take this opportunity and score a big touchdown on all three fronts: Global Warming, U.S. Economy and the General Motors.
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