Ok, here is the thing with autos. There is nothing wrong with them in general and, if you are strictly into drag racing, they are very good (consistant) with the right parts. I dont know about the autos on the DSM,s (new to them), but when i would build an auto to race I would have to put in better clutches and bands, either replace the valve body or put in a plate shift kit, and replace some of the springs (depending on trans) to tighten it up, and put in a stall converter matched to the engine. For all out racing, a trans-brake is the way to go. An auto will generally take more HP to turn than a manual. You would also want a performance shifter with ratchet action (my preference) and reverse lockout (a requirement at most tracks to race). I personally like to shift my own gears on the street plus it doesnt cost as much to build a decent manual. That is my take on it, anyone else?
I wouldn't say that it 'really diminishes' the performance of the car, but it does effect the fun to drive factor. I don't mind my auto, and with some work, can and will be able to take some serious abuse, but I would still take a Manual over an Auto.
Best bet is to work with what you have. Some people do a transmission swap, but those are the people that should have bought an M/T in the first place. An A/T DSM is still a DSM, and they do respond well to mods.
There is a sticky in the Auto Transmission forum that outlines what some of the first mods should be, and answers some of the beginners questions. As far as parts go, pretty much all of us will suggest going to IPT (IPTTrans.com), as they offer many upgrades, and have great service.
1 main variable is the torque converter. It hurts 1/4 mi time and speed because it consists of 2 halfs that are turning at different rates. 1 half is connected to and is turning the same speed as the flywheel while the othher half is continually 'slipping' a certain amount and is connected to the transmission and M/T's don't have this. It's that slippage that hurts quite a bit. IF your TC has a lock-up mode it kicks in at about 50 mph when you're in top gear and ONLY THEN the 'slippage' between the 2 halves of TC cease and it 'locks-up' and your rpms drop about 400 so your highway mileage is improved compared to that of a car that doesn't use a lock-up TC like 1g turbo models. That slippage hurts fuel mileage too and in general A/T's add 50-100 lbs of weight.
examlpe: '06 vette M/T 1/4 mi = 12.5 @ 115 vs A/T's 12.7 @ 110-112 (6-spd vs 4-spd)
Shift kits help by allowing faster shifts but our cars 1-2 shifts are good IMO because on my 1g tsi it would always chirp the tires on higher rpm wot runs and is what you want it to do. The 2-3 shift is decent but can be improved.
If max performance is all you care about def go M/T but the A/T has some obvious and not so obvious advantages.
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