By on June 26, 2015

Screen Shot 2015-06-26 at 7.27.54 AM

I always get a little dismayed whenever I hear a car company talking about sales volume targets.

Yes, sure, reasonable sales targets are OK. Acceptable sales targets. If Toyota wants to say they’re going to sell one billion Camry units this year because they sold 997 million last year, that’s fine with me. If Honda wants to say they’re going to sell 950 million Accords this year because they’re contractually obligated by a higher power to slightly undersell the Camry, that’s fine too. And if Dodge wants to say they’ll sell 100,000 Grand Caravans this year, of which 99,000 are going to Enterprise, and the remaining 1,000 are going to people who don’t know any better, I guess I can accept that.

But I’ve never really understood why automakers set insane volume targets that keep them desperately reaching for sales for the next few decades.

Probably the best example of this is Volkswagen, who announced several years ago that it would sell 800,000 vehicles in the United States by 2018 from its Volkswagen brand alone. This seemed like a totally reasonable goal at the time, because they had just introduced the new Passat, and they would soon be coming out with an SUV, and they were finally starting to understand the US market, and sales were really taking off. Well, last year, they managed 367,000 units, down from 407,000 last year and 438,000 the year before. In other words: 800,000 ain’t gonna happen.

So now Volkswagen is backing off its sales goals, and it looks like an animal retreating from a fight with its tail between its legs. But why did they have to make the goal in the first place? This, I’ll never understand.

I noticed this a lot when I worked in the car world. Automakers were so hell-belt on sales targets and volume goals that they were doing everything they possibly could just to meet these numbers. Fifty fleet sales? A hundred fleet sales? A thousand fleet sales? Turning over employee lease cars more often? Discounted leases? Zero-percent financing? Punching cars as sold the moment they came off the boat? Fortunately, my company never even considered doing most of those – but some automakers weren’t above even that final strategy during the very last weeks of the year.

Here’s what I’ve never understood: it isn’t sales numbers that prove your business is successful. It’s profit. So why the hell are so many automakers targeting sales, and not profit?

The truth is, anyone can sell anything. Pull a random person off the street, put them in a car dealer, and they can sell the entire lot empty in two days if you let them offer their vehicles with a complete disregard for profit. But then the business’s lights won’t stay on, the stock will plummet, the employees will get laid off, etc. etc. etc. It goes on.

From what I understand, Honda seems to be doing it right. My entire life in the business, I’ve been told that the Honda Accord could easily outsell the Toyota Camry, except that Honda refuses to give in to the pressure of profitless, or low-profit, high-volume fleet sales. And this seems to be true: consider every airport rent-a-car station you’ve ever been to, every Enterprise lot, every Budget kiosk. There’s never Honda there. You’re never given a Honda, you never see a Honda in the lot next to you, or the space down the row, or pulling out of the rental car gate. But you do see Toyotas. Honda seems to know these fleet sales are only a way to burnish sales figures, not actually make money. And they’d rather sell those cars to actual consumers at actual dealers who will bring them actual profits.

So I’ve always been curious about this, and now I’m asking you: why the hell does the auto industry focus so severely on sales numbers? Most other industries talk profit: year over year growth, net profits, gross profits, operating income. But in the car industry, we talk sales: overall sales, monthly sales, total sales, with no apparent care in the world whether those sales are making $10,000 per car or $20 per vehicle on a 30-car transaction with Enterprise. Me, I’d rather hear about profits. No, Volkswagen isn’t going to hit its 800,000-car figure. But are its profits increasing? Is it a stable, healthy company? Are they making money? Only then will I be impressed.

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78 Comments on “QOTD: Why Do Automakers Care So Much About Sales?...”


  • avatar
    danio3834

    What did you actually do when you worked for Porsche?

  • avatar
    OneAlpha

    Who knows.

    Maybe SALES is the most-easily-hyped and “loudest” set of numbers.

    • 0 avatar
      sproc

      I think other industries in general have higher margins on their products, giving them the luxury not to stress a single data point. Like supermarkets, commodity automakers have a perishable (cars are only “new” for so long), low-profit product that requires lots of turnover. It’s not like a designer handbag where just a few people buying this season’s model at full price more than pays for the rest of of your inventory ending up at the outlet store.

    • 0 avatar
      Sigivald

      “Best-selling car in America” has a certain ring to it.

      And convinces people “it must be okay, or people wouldn’t buy it”, and “they’ll be around” and “there’ll be plenty of parts forever”, if they think that far ahead.

      So it’s not nothin’.

      (Every sale that makes a profit is, well, a profit, even if it’s low-margin fleet sales. And an idle production line ain’t makin’ any money…)

  • avatar
    dwford

    As CEO, announcing sales targets is partly a way to get your troops fired up to meet a goal, and partly it is a way to stroke your own ego. Normally there is some sort of plan in place to make that happen. In VW’s case, there was NO product plan in place to achieve that ridiculous goal, so I don’t know what they were thinking.

  • avatar
    Driver8

    It’s how the suits in management keep everybody fearful/hustling/docile.

    The second prize is a set of steak knives.

  • avatar
    turf3

    Sales volume pays your overhead.

  • avatar
    DeadWeight

    Doug DeMuro’s QOTD for Monday:

    “If you were able to buy an original, pristine Shelby AC Cobra, in museum condition, for $2,500, would you?”

  • avatar
    tonyola

    Impressive sales numbers make the shareholders happy.

    • 0 avatar
      sportyaccordy

      How impressive could sales numbers be if manufacturers started giving cars away for free?

      Shareholders want profits.

      • 0 avatar
        Scoutdude

        No too many shareholders want stock price, they were conditioned to do so by the tech companies starting with Microsoft that didn’t pay any dividends for decades. It peaked with the dot.com boom and by the time it became the dot.gone bust the masses considered the “new economy” the norm. So now for way to many non-institutional investors the key word is stock price at any cost and there are enough of them that they drive the market.

    • 0 avatar
      VCplayer

      Shareholders sometimes don’t know anything about the businesses they’re investing in. As complex as the auto business is, I can’t totally blame them for that. Still, from management’s perspective sales goals are an easy way to convince stockholders that they’re doing something useful with the company.

      That said, management needs to look at profitability too.

      • 0 avatar
        Scoutdude

        The average shareholder has no clue about the business they are investing in other than the name sounds cool or that they like the product and since they know everything everyone else will like the product too and the company can’t fail.

    • 0 avatar
      Scoutdude

      That is it in a nutshell.

      Way too many of today’s investors, do not pay attention to the fundamentals. The go on things like sales growth. It is down from the peak craziness of the dot.gone bust and the recent economic melt down but still there are way to many investors that do not understand valuation. The fact that many of top management’s compensation is tied to stock price and not profits also fuels the fire.

      The entire reason that GM fell was chasing those sales numbers and sales growth while ignoring the losses that it created. The came out with good incentives to kick start the economy after the gov’t failed to do anything in the wake of 9/11. That succeeded in kick starting sales that had ground to a complete and total stand still. The problem was that while it did get things going and got a few used buyers to go new it also pulled demand forward. That was great for the short term sales numbers but as soon as those incentives stopped sales ground to a halt. So they found themselves in a downward spiral, they must keep sales numbers up to keep the stock price up, profit be dammed. Because they pulled so much demand forward that had to pull from farther in the future and convert more used buyers. That meant increasing the incentives and lowering profits even more.

      • 0 avatar
        Sigivald

        On the other hand, individual ignorant investors *don’t matter* for a car company.

        None of them, not even “all of them together”, have enough shares to matter or to drive marketing.

        It’s the big – and well informed – institutional investors and funds that matter, and maybe the occasional Really Rich Investor (likewise typically a little more educated).

        (e.g. GM – 71% institutional ownership: http://www.nasdaq.com/symbol/gm/ownership-summary

        They literally could not possibly care less about impressing small, ignorant investors.)

        • 0 avatar
          Scoutdude

          Like the commercial “that’s not how it works” Plus you are talking about the “new GM” not the old GM.

          Fact is those ignorant investors can drive the share price because they are more likely to try and make the fast buck on trading shares not doing the buy and hold which is what is more common with institutional investors. So with a good chunk of those ignorant investors see that sales report they buy or sell based on whether that report indicated an increase or decrease in sales.

          Amazon is one of the best examples. In the early days every single sale was at a gross loss. If they sold you a book for $5.95 that meant it cost the $6 and that was just the purchase cost that did not include overhead. However as they kept reporting increased sales the stock price kept climbing even though an increase in sales always meant an increase in profits.

          http://www.ibtimes.com/amazon-nearly-20-years-business-it-still-doesnt-make-money-investors-dont-seem-care-1513368

          And despite the fact that Amazon has specifically noted that they have no plans to pay dividends in the future they still have a significant percentage of institutional investor ownership, not that far behind the new GM at 67% http://www.nasdaq.com/symbol/amzn/institutional-holdings

  • avatar
    EquipmentJunkie

    I’ll echo what others said. Sales numbers are something tangible that the troops can get their head around on a yearly/monthly/daily basis. Since dealerships are independent businesses removed from the actual corporate structure, it makes sense to get the dealer motivated to sell more units. More units retailed means more units ordered by the dealer sales manager which means higher volume for the manufacturer.

    Profitability at the corporate level will often be finalized after the year closes which is well after the smoke of the prior year clears. In manufacturing, profitability can be tainted by R&D spending, a major overhaul at a plant, or warranty expenses…let alone all the possible tax implications.

    • 0 avatar
      dwford

      Yeah, at the dealership level the managers are always focused on unit sales, and then when the salesmen hit the goal, they get bitched out for the gross profit being too low and then the pay plan changes because too many salesmen hit bonus.

    • 0 avatar
      OneAlpha

      Not just the troops – the customer base.

      “Best-selling cars in America” sounds a whole lot more marketable than “Most profitable car company in America.”

    • 0 avatar
      VCplayer

      I think it’s more an issue of management drinking their own kool-aid and buying into the “sales above all” model, which leads to the kind of decisions that nearly killed the American automakers.

  • avatar
    DeadWeight

    DeMuro’s QOTD: “Why do automakers produce so many vehicles?”

    • 0 avatar
      Vega

      Bingo. You can count on it no later than tomorrow.

    • 0 avatar
      ItsMeMartin

      Every time I see a post of his I wonder whether he is even aware of the reception he gets among some of us and that more and more of us have seen right through his shtick, but seeing how he seems to just phone in his work I would be surprised if he did. I tried to give him the benefit of doubt at first but now I’m hardly ever reading whatever he writes. As someone has already mentioned, he’s far more Jalopnik than TTAC.

      • 0 avatar
        hreardon

        “seeing how he seems to just phone in his work…”

        I have to agree. I take few exceptions with TTAC as a whole, but Doug’s pieces really are phoned-in-filler for the most part, designed to get us clicking and commenting.

        Hmm….who’s the bigger sucker? Us reading and commenting, or them?

  • avatar
    nels0300

    “But are its profits increasing? Is it a stable, healthy company? Are they making money? Only then will I be impressed.”

    So based on these metrics, which company are you more impressed by, Honda or Toyota?

  • avatar
    Vega

    It’s easy. Profitability is directly linked to volumes.

    Making cars is a fix cost heavy game. Investments in R&D, production sites, tools etc. have to be amortized. Profitability is thus massively influenced by volume, the difference between 75% and 85% capacity utilization can represent the difference between being profitable and being under water.

    This shouldn’t really be news for someone covering the industry.

    • 0 avatar
      VCplayer

      I think he’s getting at the fact that automakers often make poor decisions in the name of volume that prove to be unprofitable. See probably every GM compact ever until the Cruze.

      • 0 avatar
        Vega

        Those poor decisions are just a desperate reaction to the fact that volume is key.
        R&D for most technical subgroups has become so expensive (partly due to safety/environment legislation, partly due to consumer taste), that only extremely high volumes can pay for it. That’s why niche suppliers need technology partners, and why full line suppliers are desperately hunting volumes (making many mistakes in the process). It’s also why Marchionne is on the prowl for a merger.

        Size trumps all, grow or die is the rule. Global automotive market consolidation is far from over.

        • 0 avatar
          Glenn Mercer

          Note that in 1990 the top ten largest OEM groups controlled 82% of world light vehicle production, and in 2014 76% (figures from IHS). So while there was consolidation throughout the 1920-1990 period, it seems to have stalled since then, e.g. with the rise of various Chinese makers, the Koreans breaking in, etc.

          And if “size trumps all” is a solid rule, why did GM go bankrupt and why can VW not break the 2% operating margin level on the VW brand?

          • 0 avatar
            Vega

            Because the absolute amount of fixed cost also matters. If you are a high cost supplier you need high volumes even more. It just means that your break even point is even higher. That doesn’t mean a more efficient producer will not be more profitable at comparable capacity utilization.

            With regards to the number of large producers: Don’t forget that the world market also gained the demand volume equivalent of another North America with the ascension of China. I would bet that the average production volume of the 10 biggest players in 2014 is significantly above the 1990 average.

      • 0 avatar
        nels0300

        But then at the end he compares Honda and Toyota and says “Honda is doing it right” because they don’t sell to fleets.

        Is Toyota not profitable? Successful?

        • 0 avatar
          Vega

          Doug’s fundamental error is assuming that production cost is constant, while in reality it is strongly depending on output volume. Higher volumes -> lower cost per car.

          Doug just assumed that Toyota is not making money on fleet sales, which is an assumption not substantiated by facts.

          Fleet sales obviously have lower sales prices, however if Toyota is smart (and company history shows they are) those lower prices will be offset by the positive fixed cost degression coming from higher capacity utilisation.

          • 0 avatar
            nels0300

            Toyota is the most profitable car company in the world by far.

            It wasn’t a good company to pick to make his point.

          • 0 avatar
            nwa2014

            Yup, no escaping heavy fixed costs in automotive. This is true in other, smaller industries. There’s a rule-of-thumb I remember that the #1 volume seller is very profitable, #2 is good, #3 is slightly profitable, and everyone else is just trying to keep in the black.

          • 0 avatar
            Scoutdude

            If Toyota has half a clue they are probably making more per Camry fleet sale than they do on average per unit for the heavily advertized, heavily discounted/special APR/subvented lease deals that include 3 yrs maintenance retail Camrys.

            Overall I’d say that the Accord (and Fusion) produce more profit overall for their respective mfgs than Toyota sees from it’s “Best Selling” Camry.

        • 0 avatar
          Scoutdude

          Fleet sales can be extremely profitable, particularly to the commercial sector. As others have mentioned the fixed costs are high so even selling a car to a fleet at variable costs plus amortization increases the profitability of the retail cars by keeping the amount of amortization charged to each of those units down.

          Fact is that fleet sales are often just as profitable or more profitable than retail sales. Big fleet sales cut out the majority of the dealer’s cut. They may get a small delivery payment for washing the car and handing over the keys but that is small compared to their normal profit. I know when I got company cars the local dealer got $300 for washing the vehicle, trading keys and paper work and storing the turned in vehicle until it could be picked up by the re-marketing company.

          Fleet sales do not have the huge financing and other discount peaks, they have a nice steady flow at the same net profit. They also keep the line flowing steadily since they are big orders usually with future delivery dates that are often staged. So filter a few in here and there to keep average daily numbers constant.

          Sales to daily rental fleets can also be profitable if done right and with the right by back agreements. Those are the reasons that you now see the higher trim levels at the airport counter. The mfg will agree to buy back a percentage of the cars but only if they can dictate minimum equipment/trim mix/color mix. Those cars in turn get sold again at another profit to dealers to be sold as program cars/CPO. Done right the mfg can actually do better on that daily rental fleet car because they profit from it 3 times, initial sale to rental company, sale to dealer, sale of the CPO warranty.

          Now of course there are limits to everything and there was a time when the mfgs owned rental fleets so they could use those to write down the value of the car and dump over production on. There were times when you could find that ex rental car with 6k miles or less. Now they keep them longer with the ones that don’t do the mfg buy back on often kept for 3 years and sometimes as many as 50K miles.

  • avatar
    ccode81

    Suppliers needs estimation for how much they need to invest in capacity. Supply chain is big issue for car manufacturing than any other industry.

  • avatar
    mitchw

    I thought the company Doug used to work for went down the sales rabbit hole(Kaninchen loch) when they started marketing SUVs and a sedan with Porsche badges. Butzi couldn’t make it on the 911.

  • avatar
    87 Morgan

    I think the volume comes from in some part the pressure put on the suppliers to supply at such a low cost. I would get the contracts are written with unit production kickers, I.E the more widgets we produce the less we will sell each one to you for. Creating this domino effect where the, as example, 1000th car produced can be done for 4/5 the cost of the first 999. So in and so forth. Could that with the depreciation of the tooling and by the end of the model run you have a car that can be made for ‘free’ except the labor and some of the inputs. See the rental spec Impala that continued production for two years after sales to the ‘public’ were ceased.

    The results are then foisted upon the dealer body who have to sell 100 units a month to hit their top tier retro dollars. Making in essence the sale of the 100th car that month the most profitable car ever, even if it is sold for half of MSRP. As an example, sell 100 Hyundais and you get $400 retro cash per unit. The last Elantra you sell for $14k brings 40k to the dealership in cash. Even though the MSRP of the last car was 19k and flat dead cost of 17.5, the dealer is more than willing to take a $3500 loser on one to make 40k on all as a bonus.

    To answer your question, in any sales organization, volume cures all woes.

    I think the imports are following this Trend far more nowadays. The rental lots are loaded with Toyota, Nissan, & Kia product. You will always have the standard Chrysler mini van bunch, but that is necessity for the rental agencies as much as it is for Chrysler.

    • 0 avatar
      Sigivald

      To amplify, it’s more like the 1st car and the 100,000th car cost the same.

      But it cost you (making up a number for effect, probably a *little* high) a billion dollars in fixed costs to *be ready to* make the first one.

      Your *marginal cost* after you have the R+D done and the line ready is damn near just materials + labor.

      (Materials here, of course, including profit and labor on all the supplier bits you’re buying, but they have the same marginal cost after initial setup structure.)

  • avatar
    TW5

    It evolved naturally. If you want to sell low-volume high-margin vehicles, you end up dumping lots of profit into brand awareness and brand identity. This is the game for luxury manufacturers. Unfortunately for the luxury manufacturers, new brands are always pushing into the hyper luxury segment, which dilutes the potency of luxury brands. Volume is necessary to survive, though, breakeven occurs at lower volume.

    Every company cannot be a luxury manufacturer so low-margin auto manufacturers need to spread costs. Volume is the best way to spread costs, and boasting about sales volume is generally and effective advertising tool as well.

    Cars are commodities. Manufacturers do everything in their power to convince us otherwise, but industry practices speak for themselves.

  • avatar
    seth1065

    Well if every company only shouted out about profits , and they made them the rank and file would want a better share of said profits, as would Uncle Sam, so they throw out sales targets if the company hits them they can tell the rank and file , well numbers made but profits were not so a 2% increase is all we got this year, or #2, company made great profits but we do not want to show them to the gov, so lets write off a fleet of plans the day before the year end, brings down profit, less taxes, less money for raises because less profit, sale targets are easy to tell one person make them, when they make you can say you did a great job but your co workers let you down so no bonus for your hard work.

  • avatar
    mindgymnast

    Remember when Doug used to answer every comment here and interact with the B&B? You know, like he STILL DOES at Jalopnik?

    I wonder why he doesn’t do that anymore. Hmm.

  • avatar
    Toad

    Don’t forget parts and service money. High sales volume locks in a lot of long term parts and service revenue for the manufacturer and the dealer. The Toyota dealer near my house has over 50 service bays, and their hourly shop rate is around $100 per hour; that is over $50,000 per day in labor alone (of course, the bays are not 100% productive, but you get the idea). Each of the cars getting repairs are also generating parts revenue. To generate that kind of parts and service sales you need to have a lot of up front sales volume.

    Give away the razor, sell the blades.

  • avatar
    28-Cars-Later

    Doug-bot pegs his processor to come up with an original question, which happens to be completely inane.

    Why do companies like care about their like sales volume of their products and junk? As if!

    • 0 avatar
      PrincipalDan

      A better question would be “Why can’t anyone in the auto industry maintain discipline with volume?”

      Case studies – Cadillac chasing volume at any cost since the early 1970s, MB doing the same the last few years…

      The reason it annoys me is that when a brand like Cadillac is hooked up to a beast like GM, why does GM give a rats hind end if Cadillac produces huge volume? That is what the rest of the organization is for. Prestige automakers shouldn’t have to keep grow to survive as long as they have a parent company for that.

      • 0 avatar
        28-Cars-Later

        “when a brand like Cadillac is hooked up to a beast like GM, why does GM give a rats hind end if Cadillac produces huge volume?”

        The 933 dealers to satisfy with product.

  • avatar
    Pch101

    I’m sorry, but this whole post is a strawman. Just because automakers don’t include profit goals in their sales volume press releases doesn’t mean that they don’t have them.

  • avatar
    Glenn Mercer

    I’ll have to disagree with most of the comments. The author has a fine point, because if we look at shareholder value and unit sales volume in the auto industry, we see no correlation. Not LOW correlation, NO correlation. See the actual analytical work done on this by Goldman Sachs and Alliance Bernstein. Beliefs about scale are repeated like religious mantras, with few facts to back them up. If scale is dominant, how did GM go bankrupt? How does VW not crack a 2% operating margin with the VW brand? (Audi makes essentially all of VW group’s money, with a small fraction of the volume. And before you say “Well Audi just rides on VW’s volume,” explain BMW and Mercedes.) If unit sales is used as the over-arching metric, then a Mazda equals a Maybach equals a Maruti, and that does not lead to rational profit maximization. And we all know one Porsche Turbo can kick out more profit than probably 100 Tata Nano’s or 40 Cruze’s. And it is not enough to say “Well, management is actually watching profit, too, so they will take care of that at year end.” Because by using unit sales as the guiding metric everyone — employees, dealers, investors, the works — are trained and encouraged to follow that one metric. Thus we get the ridiculous contradiction of various luxury brands simultaneously promising “exclusivity” and touting “best selling luxury brand!” Thus we get GM piling on incentives until it goes bust, in pursuit of volume. “Yeah, we lose money on every unit, but we make it up in volume!” Sure, at the manufacturing level a car plant needs to run at 80% or so of capacity to clear an operating profit, but that does not justify elevating unit output to the top level corporate metric (versus plant metric). And believe me, it is not about purchasing volume, either: virtually every major car company is already at scale for virtually all car parts: if one goes from 2 mm brake cylinders to 4 mm one doesn’t just build a bigger single machine, and spread its capex across more units: the brake company adds more machines. Fixed-cost spreading is minimal for the global OEMs: even Nissan-Renault said this when they hooked up: they saved purchasing money by comparing their price lists, not by leveraging up supplier scale. I’ll concede all this only on one point: one needs massive scale to cover R&D for powertrain, as regulations continue to tighten. But I have to agree with the author: unit sales are a bad metric if they are the primary metric. Maybe it made sense decades ago, when car companies were differentiated more by manufacturing…. but those days are over. The most profitable firms tend to be smaller and more “price maximizing” marketers (see BMW) than larger and “cost minimizing” (see pre-bankruptcy GM) manufacturers. By any unit-sales metric Subaru should not even exist… but it seems to thrive. Okay, end of rant. Let the ad hominem attacks begin!

  • avatar
    Shinoda is my middle name

    “I do not want Honda to be the biggest automaker. I want Honda to be the most profitable automaker.” – Soichiro Honda

  • avatar
    jkross22

    Doug, Can we talk?

    Please write more about after market warranties, your buying and dealer experiences with your Land Rover from Carmax, what makes great repair shops and other topics in that vein. When you wander off the reservation with questions like these, it hurts your reputation.

    You’re a solid writer, but this inane stuff isn’t doing anyone any favors. Please don’t do this anymore.

    I think your automotive cheapskate articles are great. Stick with those for a bit.

  • avatar
    deanst

    While it may seem that there is a focus on sales, that is largely due to the fact that those responsible for sales get the general news coverage, and the car blogs can get excited about the annual race for luxury car leadership in North America, while stable EBIT margins are not exactly click bait.

    You can admire Honda for not chasing sales, but the reality of the situation is that Toyota has essentially twice the operating margins of Honda, so they definitely do understand the importance of financial targets.

    Even the Germans, who are some of the worst at getting volume goals in the news are not as bad as you might think. I met with BMW investor relations this week, and page 4 of their presentation had a representation of their historical profit margin and target – which they discussed at length. Page 5 presented sales, but they had no firm targets and only a reference to growth.

  • avatar
    turf3

    Commenting on Glenn Mercer’s points above:

    Key to the decisions a company makes is its accounting system – how they account for fixed and variable costs. Decisions made about accounting will later drive decisions up and down an entire organization.

    It would be interesting to see how product and marketing decisions are made in, say, GM vs. Fiat vs. Toyota vs. Honda (volume producers all, with a range of profitability) and on the other hand Mercedes-Benz vs. BMW vs. Jaguar Land Rover vs. (I don’t know, someone else)(low volume producers). And to see the variations among their accounting systems.

    Just a quick example: At one point I worked for a company that moved from charging overhead to purchased parts, to not charging overhead for purchased parts. It’s pretty easy to see that whereas on Friday the company could improve the numbers by improving plant floor efficiency and insourcing parts so as to stop paying outside vendors’ profit margins, on Monday it looks like you need to start outsourcing parts so they will cost less, because outsourced parts don’t bear overhead. Even though the actual cost to produce has not changed between Friday and Monday, the accounting change has motivated a change in policy.

    Shareholder value in my opinion has almost nothing to do with the quality of a company.

    40% profit on $1M sales vs. 4% profit on $100M sales? Very different results.

    I’m not saying all companies should chase volume. In fact, most shouldn’t. But the question, “why do mass production auto manufacturers chase sales?” could be answered in a couple of sentences by anyone with even the most basic understanding of cost accounting.

    • 0 avatar
      Glenn Mercer

      First, thanks for reasoned and thoughtful comments on my comments… all too rare here on TTAC!

      Second, I think the original author and I were both referring to OEMs chasing UNITS, not DOLLARS. I agree with you 100%, that revenue may be a very good target…. but the companies don’t chase revenue, they chase units. BMW doesn’t say “We had 10% of the revenue Americans spent on luxury cars last year,” they say “10% of the units.” And I don’t see units as a good corporate target. I can always drive up unit sales, for example, by selling hordes of stripped-down cars to Hertz, which will then come back to bite me by cratering residual values. But that strategy would certainly move UNITS.

      Third, if high shareholder value is not a good measure of company quality, I don’t know what to put in its place. Good products? The auto industry is littered with the corpses of companies that made good cars but went bust because they couldn’t manage well. Good managers? Wouldn’t good managers generate shareholder value? Environmental performance? Good wages? I can see many flaws with shareholder value as a metric, but to say it has “almost nothing” to do with the quality of a company, especially without saying what DOES drive the quality of a company, seems extreme.

      Anyway, thanks again for the comments!

      • 0 avatar
        Pch101

        “but the companies don’t chase revenue, they chase units.”

        Read an annual report from an automaker. They spend plenty of time talking about various forms of margin and return.

  • avatar
    Domestic Hearse

    A few more articles like this and we’ll find out if anyone off the street really can sell cars. Doug will have to find his pants first.

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  • randyinrocklin: The best way to ever test drive a car you’re going to purchase is to rent one for a week.
  • Lie2me: I stopped watching, or caring about, Buick a long time ago

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