The Best Selling Car In America

As I drive down my block in my two year old Ford Escape Hybrid, I notice a car sitting on the lawn of my neighbor’s house. I could tell immediately that it was the same make car as the one I bought my son fifteen years earlier. It even had the same color scheme.

My family got a great deal of use out of that car. Even though it was originally bought for my son, when my daughter was old enough, she used it also. Then one day it was stolen from in front of our house. My kids reacted much better about the loss then I did. They just started suggesting replacement vehicles. I then realized that my kids had out grown that first car. I knew very well that it would keep working for many more years. I silently hoped that the family of whoever stole the car got as much use out of it as my family did.

If you have not guessed by now, that car we bought our son was a Cozy Coupe. Even back when I bought my son that Cozy Coupe, I looked to see where it was made. I was somewhat surprised, and delighted to find that it was made in America. At that time I thought that everything plastic was made in China. I was happily proven wrong.

After seeing that Cozy Coupe on my neighbor’s lawn, I decided to see where the Cozy Coupe was now being made. So I went to the Little Tikes website and saw that most of their products are made in America. They even have a navigation link so visitors can limit their search to only American made product, http://www.littletikes.com/toys/made-in-the-usa-toys.aspx.

In researching the Cozy Coupe, I found out that for many years it was the number one selling car in America. Well it would have been if it was a real car and it would still rank in the top five today.

What makes the popularity of the Cozy Coupe impressive is that it is a high quality item in a competitive market that is made in America. Toy sales are not like real car sales. I have spoken to many people who would buy only American made cars, but never ran into anyone who would buy only American made toys.

Little Tikes has been making the Cozy Coupe in America for the past 30 years. Although the company opened up manufacturing plants in foreign markets, they still make products here in America. This is because American made products can compete with foreign products even without a domestic bias.

Do We Have the Energy to Innovate?

In my previous post I wrote about electric vehicles (EVs). As I mentioned in that post, EVs will put a demand on our domestic electricity production and distribution systems due to the higher demand for electricity. As I recall the past problems our nation had with the power grid, I started to look into the “smart grid” that is being hyped. What I found was somewhat encouraging.

Many areas of the country are already involved in “smart grid” projects. From California, which I expected, to Texas, which is probably the last place I expected, “smart grid” initiatives have already taken place. It seems that it does not matter whether you are from a liberal state that needs a great deal of energy or you are from a conservative state that has a great deal of energy, there is probably “smart grid” project going on in your area.

I just so happened that an associate of mine was scheduled to conduct an interview with Steven W. Pullins, President of the Horizon Energy Group. Mr. Pullins currently leads the nation’s Modern Grid Strategy for the National Energy Technology Laboratory. My associate agreed to use several of my questions during the interview even though she was questioning Mr. Pullins concerning security aspects of the “smart grid”.

There are several issues about the “smart grid” that I wanted to know about: Is the support for EV’s being included in the overall design and implementation of the “smart grid, how long would it take for the “smart grid” to be able to support any significant number of EVs, and would the a large adoption of EVs adversely affect energy costs. This last point is the most important since it affect the manufacturing.

Mr. Pullins seemed very passionate when it came to discussing EVs. Mr. Pullins noted that EVs are being accounted for in the development of the “smart grid”. In fact, EVs have a role in the “smart grid” as they are seen as both an energy consumer and a potential energy supplier to the “smart grid”.

As for being able to support EVs, Mr. Pullins feels that it will be 5 – 10 years before the grid is able to handle the demand from a society that has switched to EVs. This timeframe is fine since it will also take about 5 – 10 years before our society switches to EVs in any significant amount. This gives the utilities and the transmission “smart grid” time to ramp up to meet the demand. Mr. Pullins did point out that the energy industry needs, and intends to use, a coordinated strategy between the growth and development of the grid and the growth and development of EVs.

We all know that EVs are more efficient then gasoline automobiles. The amount of power generated by one gallon of gas, at about $2.25 per gallon, is equal to the power generated by $0.75 – $1.00 worth of electricity. The problem is that most of the electricity in the US is produced by methods other then petroleum. In 2006, only about 3.0% of our nation’s electricity was produced by petroleum. Petroleum is one of the more expensive sources of electrical power and is not a practical source for supplying the additional electricity needed.

My concern is that this added demand from EVs will cause the overall cost of electricity to spike. Since energy costs are a significant cost for manufacturing, any spike in prices due to supply and demand issues could cripple domestic manufacturing. Mr. Pullins indicated that no matter what we do, the cost of electricity will go up. I salient point is that if we make the switch to a “smart grid” the overall cost of electricity will increase by a smaller percentage.

Mr. Pullins used the example of Denmark. In 1985 electricity cost in Denmark was $0.15/kWh. That year, Denmark switched their grid to a cellular architecture (Denmark’s equivalent of the “smart grid”). At the rate they had been going, electricity was expected to cost $1/kw hr within 20 years. Because they switched to cellular architecture, their electricity now costs $0.20 /kWh. He compared it with America where energy costs grow 3% – 8% annually.

From some additional research and the answers from Mr. Pullins, I now have a slightly different opinion of EVs. I still feel the same as I did after the previous post, I now more fully appreciate that they are more of a driver of innovation then I initially thought. If just the thought of supporting EVs helps get the “smart grid” in place sooner and, as Mr. Pullins predicts, the “smart grid” reduces the cost of energy then we all win. Most importantly, our manufacturers win with reliable and more economical energy for decades to come.

NAFTA – A Hit with Manufacturers

I was talking to a small domestic manufacturing company owner the other night and I asked him what he thought about NAFTA. His answer surprised me in that he was neutral to slightly positive about the effect of NAFTA on his business. In fact, I was so surprised that I had to ask the question again to make sure I heard the answer correctly the first time. When I asked why he said that he had some improved access to additional markets, but in general it did not affect his business.

I started thinking back to all the bad things I remember hearing about NAFTA. One of the main complaints was that all our manufacturing jobs would migrate either south or north of the border to Mexico and Canada.

I also remember hearing that Mexico’s unions were strong supporters of NAFTA. I, like many Americans, assumed that it was because then knew that jobs would just start moving across the border almost immediately. So I asked the manufacturing company owner if he saw increase competition from other companies based in or that had relocated manufacturing to Mexico or Canada. His answer was that he has always had competition and that it was not significantly more or less after NAFTA.

Personally, I did not expect that all manufacturing jobs would be transplanted to Mexico, and to some extent Canada. What I did expect was that fifteen years later, since NAFTA went into effect in 1994, we would have seen some erosion of our manufacturing base and an overall negative view of NAFTA. I could see multinationals being positive on NAFTA, but not the smaller domestic manufacturers.

So with conflicting information I did what almost anybody would do, I started to Google for additional information. I found a report published in June ’08 by Deloitte Research titled Made in North America. That report indicated that 49% of the responding manufacturing companies felt NAFTA had a positive impact on their business. In addition, another 41% were neutral on NAFTA. To be fair, the poll taken included Canadian and Mexican manufacturers, but 45% of the poll participants were American companies.

The report and my manufacturing contact both seem to reflect similar views. NAFTA did not kill American manufacturing as feared. That is not to say that some jobs were not lost or that America is not losing manufacturing jobs at an alarming rate. It is just that we can not blame it on open trade agreements like NAFTA.

The Innovation Myth

There are a plethora of articles that discuss the innovation economy. The articles usually come to the conclusion that the US economy can flourish as an innovation economy. That is as long as we improve our education and keep our capital markets open. I have skepticism about the merits of the innovation economy.

To try to address my skepticism I need to find an innovative product that was invented in America, but mostly manufactured elsewhere. Such a product would give us a good measure of the merits of an innovation economy. A quick read of my “Follow the Money” post provides the perfect product, the iPod.

If you did not read that post, the iPod is a product where most of the intellectual property was developed in the US, but most of the manufacturing was done elsewhere. I would also add that the iPod is a good example since it is neither to complex nor too simple. In short, the iPod is a pretty good product to use in deciding if innovation only is enough to power the domestic economy.

If we use the iPod, the merit of the innovation economy does not match the hype. A final point of the “Follow the Money” post was that the iPod was actually a net negative on the economy. Due to the size of the US market, so many more iPods are sold here then in other markets combined. This translates into more dollars leaving the US economy then coming in due to foreign iPod sales.

Does this mean that education and capital markets are not important? In fact, it is quite the contrary. The iPod’s drain on the economy would have been much worse if it was invented somewhere else. That is why the iPod is a vastly superior choice then a Japanese or Korean MP3 player. So I guess the articles are right, education and capital are the cornerstones of the innovation economy, but what they leave out is that we are still in a losing battle.

The problem is that the innovation economy is just not sustainable. The problem is exacerbated by the fact that more of the high level design work is moving offshore. The more of the product development, support, marketing, etc that is done offshore the worse it is for the domestic economy.

The good news is that it is not a fata compli just yet. There is still enough of a manufacturing base in America to overcome the problem. Keep in mind that if only one of the major components of the iPod was manufactured in America, it would turn the iPod into a net positive. That is why it is so critical that we all make informed decisions on our buying.

Follow the Money

If you read the news and believe many economists, it seems that America does not need to have a strong manufacturing base to be a viable economy. The argument is that as long as we are a center of innovation the economy will be fine. There are different components of an innovation economy, but how do you show its value. To explore the innovation economy, I decided to look at the electronic and specifically the iPod. I decided on the iPod for several reasons; The iPod is the innovation of an America company, but it is manufactured in the pacific rim. The iPod has excellent market share in both the domestic and international markets. There is a great deal of data available about the iPod. The majority of information about the value distribution is taken from the paper Who Captures Value in a Global Innovation System? The case of Apple’s iPod, at http://pcic.merage.uci.edu/papers/2007/AppleiPod.pdf.

The 30GB 5th-generation iPod has a retail price of $299, with $190 of that cost being gross margin for Apple ($80), retailer ($45), distributor ($30), major component manufacturers ($34), and minor component manufacturers ($1). If the product is sold in America, then up to $163 of the gross margin goes to American companies, or about 54.5% of the retail cost. The numbers change if the distributor and/or retailer are foreign owned. The hard numbers for American companies are the $80 for apple and the $7 for the “chips”, or about 29%. This number could rise if some of the minor components had ties to American companies.

Let’s look at some numbers, if $1,000,000 worth of iPods is sold in America about $455,000 (45.5%) of those dollars leave America. To make up those dollars, Apple has to sell $1,569,000 worth of iPod in other countries to bring in 29% needed to match money leaving the country. To put it another way, Apple has to get 63% or more of their iPod sales internationally for the product to be a net positive for the American economy.

Since the point of this post is not to determine whether the iPod itself is a net negative or positive on the American economy, I will not delve into the domestic verse international sales numbers. The point is to get a “high-end” number to work with when discussing manufactured electronics. The iPod represents the “high-end” due to the relatively high gross margin they command due to name recognition.

Even with a higher gross margin, the iPod still requires almost a two to one ratio of international to domestic sales to be a net positive for the economy. I can only speculate what the ratio is for lower margin items, such as cellular telephones.