Interview with Dave Sargent
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Please define VLI, what it entails and how you and your team were able to identify the factors that go into a successful launch?
VLI stands for Vehicle Launch Index. An index is a way of taking a vast amount of data and rolling it up into a single overall metric that everybody can understand. We took over 70 new vehicle launches that happened during 2006 and 2007. For each of those, we had about 250 different metrics of real-time market performance as to how those vehicles performed in the marketplace in terms of sales volume, revenue, incentives credit quality of customers, trade-ins, their ability to conquest from other vehicles and so on. We took each of those for 12 months. We have 70 vehicles, 250 metrics and 12 months. For the math, that is 210,000 data points that we were analyzing in this data cube. Our experts plowed through the data and reduced that down to the most important metrics. Then we went back, did some fine-tuning and boiled down the metrics into the six most important outputs, which are the ones that are best able to differentiate between a launch that is going to be successful and a launch that is going to be less successful. We know pretty early in the process, based on the metrics, if the automaker is going to get the level of launch success that they want.
So what are those six key metrics?
One is inventory turn. With inventory turn, what you obviously want is the fewest days to turn as possible. Lower days to turn generally equates to a successful launch because you do not have to force vehicles through the system. Dealers can sell them in a disciplined way and you don't have a distressed situation where you are trying to get rid of the vehicles as quickly as possible. It is a very good early indicator of whether a launch seems to be going successfully or not.
Two is dealer gross, or how much the dealer makes on the front end of the deal. Again, if we start to see that going south early in a launch because the dealers are having to give money to the customer, it is an early sign that things aren't going particularly well. Dealer gross is a very good measure of the health of a product throughout the launch.
Number three is vehicle revenue, the revenue that the automaker gets from the dealer. Falling revenue during a launch is a sign that the vehicle mix is getting weaker; customers are buying more low-end vehicles than earlier in the launch, reducing the average revenue to the automaker. What we are measuring here is not the absolute revenue but the ability of the manufacturer and dealer to keep the revenue stable or even increasing throughout the launch.
Four is incentive spend; and we take all elements of incentive spend. It is not just money on the hood, but it is all the ways that dealers and manufacturers can incentivize the vehicle. We add those all up together. Lower is clearly better but it's really the ability to keep incentives from increasing over the early months of a launch that is most important. If the manufacturer doesn't have to incentivize the vehicle at all, or doesn't have to increase incentives over the early months of the vehicle again, it is a sign the launch is going well. In other words it is a good sign that supply and demand are in balance.
Fifth is residual value. Residual value is critical because it drives a lot of things. It obviously drives lease payments, but it also drives the confidence that the customer has in a vehicle. Residual values are set right at the beginning of the launch. We would expect to see those in a good launch continue to hold pretty steady over time relative to other vehicles in the segment. If we see those residual values start to fall because manufacturers are putting a lot of money on the vehicle just to shift it and we know that the retained value on that vehicle is not going to be so good three years out, that is a sign of a vehicle that is not being well accepted in the marketplace and there are going to be financial problems down the road.
Number six is the credit quality of the buyer. Each manufacturer has range of customers in terms of credit worthiness. If we start to see a higher proportion of sub-prime customers during the launch, it means that the manufacturer and the dealers are having to bring in less credit worthy customers to help sales, which is one sign that the demand is not out there for the vehicle.
What would be a good vehicle index and a poor one?
The six metrics roll up into a single score. We score all of the launches on a scale from zero to 1000. One thousand would be an absolutely perfect launch. The average that we have in our preliminary scoring is about 580. Half of the vehicles are above that, and half are below that. We will see some vehicles up around 700 and even 800. That is a very, very good launch. If we see scores below 400, that is a really poor launch. There is a range and we expect most vehicles to fall within a range of maybe 400 to 700. When you start to get above 700, here we are looking at the best launches, the ones that really are defining success.
Can you tell us how the initial rankings came out and how you arrived at it and what the impact of that has been?
These rankings are really of interest to the manufacturers and the dealers. The consumer interest in this rank is not like our quality studies or our satisfaction studies. The initial rankings come from all of the launches over a two-year period; 2006-2007. We looked at the corporations which had had multiple launches during that time frame and then we looked at how many of those vehicles were better than average, how many were worse than average. Toyota Motor Corporation actually performed the best among the launches that we saw during this time period. Of the ten launches that it had over this two year period, nine were above average. That is outstanding performance; vehicles like the FJ Cruiser, the Lexus LS and ES, the Scion XB, the 2007 Camry. These were all well above average. Honda and GM also performed well, with some of GM's most-recent launches such as Enclave, Acadia and Malibu performing particularly well. Twice-yearly, starting in July 2009 we will announce the results of the most recent launches.
There were three domestics and three Asian manufacturers. Do you have any comment about that overall?
I think what we find is that good launches are not the exclusive domain of a certain manufacturer. All of the manufacturers had some very good launches. All of the manufacturers we looked at had some less than good launches. No one has yet come up with a process that is so good that they can absolutely guarantee the success of a launch of a product. Our goal is to help them understand why a launch has gone well or poorly, or (more importantly) is currently going well or poorly, to help them improve their performance and increase the likelihood that their vehicles are going to launch successfully into the marketplace.
BIO: Dave Sargent is Vice President, Auto Research at J.D. Power and Associates. He oversees all of the company's syndicated automotive research in the United States, including the Initial Quality Study (IQS), Automotive Performance, Execution and Layout (APEAL) Study, Vehicle Dependability Study (VDS), Customer Service Index (CSI) Study, Sales Satisfaction Index (SSI) Study and the company's media studies. He also oversees the coordination of all syndicated IQS, APEAL and Customer Satisfaction Index studies worldwide. Mr. Sargent is based in the company's Troy, MI, office.
EMAIL: david.sargent@jdpa.com
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