Failure to Act, Part I: I Hear a Creaking. Do You Hear a Creaking?

By Alex Ricciuti

07.11.2008

A few years ago, I was interviewing a Detroit-based automotive analyst and asked him where he thought the threshold was for gas prices to change the behavior of US consumers. He said it was 3 dollars a gallon. He was wrong. It’s 4 dollars a gallon. And it’s doing a number on consumer behavior right now. (Gasoline prices average $4.50 a gallon in California.)

The current oil crisis (what is it today? 146 dollars a barrel?) is certainly the main catalyst of the sweeping changes we are seeing in the US automotive market today and threatening the very solvency of the Detroit 3 car makers. But it is just that – a catalyst. There are many other pieces that have been in place for years that have led to this crisis for the US auto giants and much of that can be blamed on the short-sighted greed of the automakers themselves, the health-care crisis in America that is beyond their control, the voraciousness of consumers who simply want big cars, and the inertia of the political leadership of the country who for decades understood that US dependence on cheap foreign oil was the soft underbelly of the economy but still failed to do anything about it.

Will oil prices fall back again to manageable levels like they have after previous shocks? And didn’t we weather those just fine in the end? Maybe. But there are two main differences today.

First, the world’s known oil resources have been pretty much mapped out, so we know what we have left, more or less. Any new reserves that have yet to be found will be minimal because technology has allowed us to find all major deposits which we’ve tapped into already. Also, demand is growing in rapidly developing mega-population economies like China and India (1.3 billion/1 billion people respectively who would like nothing better than to be able to shop like a Texan at Wal-Mart or any Westerner at a large box or department store).

Second, even if this is simply a spike similar to previous ones (and that would be good news for the global economy, though, not for the atmosphere) with all the change in thinking about the environment, global warming, dependency on foreign oil, the sedentary nature of a lifestyle dependent on automotive transport, etc., it’s still bad news for automakers. Consumers seem to have made a cosmic shift in their thinking and are looking for ways to insulate themselves from any future price shocks. It is likely they’ll forgo gambling on buying large vehicles and downsize their consumption of fuel by buying more efficient automobiles.

So where does this leave GM? The automotive behemoth that for a while came to define American industry. Well, are you hearing that sound? That thick, creaking metallic sound? It sounds like a hundred tons of steel collapsing on itself. It sounds like an industrial colossus crashing to its knees. It’s GM. It’s going down first.

Some facts to consider:

  • Merrill Lynch analysts recently said it is “not impossible” for GM to face of bankruptcy given its persistent losses
  • GM shares are at less than 10 dollars, the lowest in over 50 years
  • SUV sales in the US are down almost 33 percent in the first quarter of this year. Ford recently reported SUV sales down 55 percent from last year
  • Ford F-150, the nation’s best selling vehicle for 26 consecutive years (yearly sales reaching 950,000 units at one point) is now down 40 percent in sales. In May of this year the F-series was outsold by the Honda Civic, Toyota Corolla and Camry.
  • Asian brands currently have 46.2 percent market share vs 45.8 for domestic US brands. The European brands make up the rest.
  • The world economy needs about 85 million barrels of oil a day – more than 20 of those go to the US alone
General Motors has come inevitably to the only fate it made possible for itself with its decisions to focus on pick up trucks and SUVs back in the roaring 90s. And all the Detroit 3 campaigned against tougher CAFE standards that would have forced them to make more efficient cars and, hence, be more competitive with the Japanese and Korean brands today. As things stand now, if you increase economy standards federally, you’re just giving the Asian automakers even more of a sales boost than they’re already getting from the oil markets.

Also, I’ve always thought that CAFE (Corporate Average Fuel Economy), the federal mileage standards that insanely apply only to passenger cars and not trucks or SUVs, was a silly way to regulate emissions. Directly regulating emission of CO2 and N-O-x gases makes much more sense. Even if it may seem to be essentially the same thing, it isn’t. Certainly for new diesel technologies coming on the market now that can trap noxious gases which are strictly limited by current rules in California and several other Northeastern states. But those CAFE standards did help increase fuel economy in American cars which went from 13.8 miles per gallon in 1975 to 27.5 in 1989 and help stabilize US consumption of oil. The SUV and pick-up craze of the 90s wiped out any progress that change brought in reducing consumption and the number of barrels of oil needed to keep the US economy afloat has increased steadily since 1990.

In all fairness, I should mention that as an automotive writer, and disregarding environmental concerns for a moment, some of the SUVs and pick up trucks that GM, Ford and Chrysler put out were great vehicles that offered a lot of value and practicality and were fun to drive too. This is not to criticize every vehicle they put out, even though quality standards and technology failed to keep up with Asia and European cars. It’s just to say, they laid their gamble on the SUV craze and forgot to remember that fads and fashions all come to an end.

GM, in particular, is in real trouble. They’re too big and have too much weight to carry with their responsibilities towards their retirees (health benefits and generous pensions). They just cannot downsize easily because they need to stay big to fund those liabilities. But in this regard it is not their fault. The health-care crisis is one of those things that keeps going on and keeps being ignored because of ideological blindness in the American political culture which refuses to address the issue. So much for Can-Do Americanism. It’s old news now that GM spends more on health-care per vehicle it builds than on the steel it needs for it. That’s insane. And no relief is coming any time soon, no matter who wins the presidential election.

The current shift to smaller cars in the marketplace due to higher gas prices can be the proverbial straw to break the camel’s back. This change in the market should not come as a surprise to anyone, but it’s pretty shocking how quickly it’s moving now. And it’s a boom solely for the Asian brands since Europeans will have trouble selling cars profitably in the US market for some time given the strength of the Euro.

But there is also a lesson here for those CNBC and Wall Street Journal folks who are just so in love with American capitalism. What the hell went wrong with the American auto industry? And why are the European automakers not in distress? Don’t they have even higher labor costs and more regulation and taxation to deal with? And don’t they sell smaller cars with less margins?

The lesson is simple: quality products. Often American capitalism is about sales and marketing and flash and image and branding and all that other crap. The people getting so high on watching their investment portfolios temporarily flourish (“the business of America is business”) on some company selling a cool business plan instead of bona-fide business model tend to forget that longevity in the marketplace requires making something of quality that people want to buy. And those socialistic Europeans are so weighed down by their welfare state and over taxed, over-regulated economy they cannot conceivably compete with American industry, can they? Well, the European automakers are just not as threatened by the Asian brands. They have competitive quality, better technology and more style and performance.

I actually believe, in a Darwinian sense, that tighter regulations and more taxation make businesses more competitive, not less. It’s like someone on a strict diet and exercise regime. It puts them in better shape. It may be too late to save GM but to help free the country’s economy from its dependence on imported oil more taxes, more regulation and government-funded research into sustainable sources of energy is the only way to go.

Alex Ricciuti is a freelance writer and automotive journalist based in Zurich, Switzerland. He writes frequently for Automotive News Europe. He also blogs on all things automotive at eurocarguy.blogspot.com.

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Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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15 Comments

  1. Europeans have higher quality products? That’s funny. Every quality study done over the past 5 years seems to go against your theory except for the case of Chrysler. The reason the Europeans have been able to survive the Asian onslaught is more to do with the fact that they can sell their products at higher prices both at home and in the US due to percieved superiority. Additionally, Europeans are more loyal to their “national” brands than US consumers. If US consumers bought vehicles based on an actual combination of affordability and quality instead of buying higher priced Toyotas and Hondas that can’t justity their premium prices the US manufacturers would be much more stable than they are. Don’t get me wrong, going SUV crazy and neglecting small cars is partially the Big 3’s fault. However, consumers that would actually consider domestic product more oft than not would buy a domestic truck or SUV and compliment it with an import car. The US consumer gave the Big 3 no real incentive to invest heavily into small cars. Even you pointed out the health care cost associated with American manufacurers. The Eurpeans don’t have to deal with that either. So they have at least $3,000 in additional margin on every unit sold when you include their health care advantage and the premium prices they are able to charge and until recently they even had a currency translation advantage. Comparing apples to oranges doesn’t make your opinion very convincing.

  2. What exactly were the US auto companies supposed to do, make small cars when the US consumer didn’t want to buy the small cars? When you have ridiculously cheap gasoline along with actual huge tax incentives for buying vehicles that are over six thousand pounds, what the hell do you expect the companies to make? They were meeting the demands of their market. Yes, they shoulda seen the expensive gasoline coming way before they did, and if they had, they woulda made some more small cars, but you can’t blame what they did just on them. At least some of the blame is because gasoline was cheap because it wasn’t taxed enough, and buyers of SUV’s and pickup truck’s were eligible for large tax credits. I mean, what the hell was the federal government thinking all those years?

  3. vpol and anonymous got some interesting points. However some want to dream of having their cake and eating it too. Like for example, the diesel standards. If CA and NY decide to drop their own diesel standards. It could motive the car makers to bring their diesels engine here. Imagine if the Chrysler 300C diesel and the BMW diesels came here in the US and Canada, some might be tempted to jump to diesel engine instead of a smaller car for those who wants a good mileage with a bigger car.

    As for GM, besides bankrupcy scenarios. It won’t be long before imagining other scenarios like a takeover scenario. Some Chinese or Indian conglomerate might eye GM as well perhaps Carlos Ghosn of Renault-Nissan.

  4. I don’t think it’s fair to compare domestic automakers to European ones, they have very different goals.

    European automakers are niche sellers in the US and this allows them to sell cars for a premium here. Though they may have “competitive quality, better technology and more style and performance.”, dollar-for-dollar domestic products have greater value, but domestic brands will never have the snob appeal or brand cache of a low-volume European maker, which I believe has as much to do with the history and mystique of European culture as it does the products themselves.

    American makers do quite well in Europe (especially Ford) so clearly they know a thing or two about making quality smaller cars. But the problem is trying to sell a large volume of cars in the US when it’s a wide open market and they have large handicaps due to legacy cost structure.

    If VW/Daimler/BMW had to switch places with the Big 3, I’d bet they would be having the same struggles trying to hold onto the US market.

  5. Great responses! Glad to get the debate stirring.

    Let me address a few points here.

    First, anon questions whether European automakers make better products than their US counterparts. There is no doubt about this.

    But maybe he misunderstood what I was saying. I meant European automakers in their domestic markets. Not as niche players in the US market.

    Even within the GM and Ford their products are of superior design, technology and quality in Europe. Sometimes even for the same model such as the Ford Focus which I love (especially the ST version) but I wouldn’t be caught dead in a Focus stateside. It’s a dorky car.

    Also, I review cars here in Helvetialand and see the differential in technology and stylishness and performance between the domestic European brands and the Asian competitors. Toyota may still beat the Europeans on reliability but the difference is slight enough and the comparative advantage in sex appeal keeps the European brands competitive.

    And yes, you do pay a premium for driving a Toyota in the US and if you look at the data, it is well worth it. The things simply do not break down or cost much in long term maintenance.

    Second, as to the question of the responsibility of the automakers. Yes, consumers share the blame and the automakers were just meeting demand but when you run a business, and the people who run these businesses earn millions of dollars, you don’t get to have excuses. You messed up. You should have invested in the technology to make you competitive in the marketplace. And what is really amazing is that those same automakers, Ford and GM, have great products in Europe and are doing just fine here/there. It simply does not make sense.

  6. You gotta wonder where the next spot is on the price graph before people start bailing out of crossovers after the SUV and the pickup. And then where the next delta is after that where a lot of people embrace electric cars wholeheartedly.

  7. If gasoline had been a dollar a gallon in Europe, and vehicles were not taxed by engine displacement, you better believe they would have been driving much bigger and/or faster cars themselves the last 20 years.

  8. Gas isn’t averaging $5/gallon in California. Diesel is, but given that it’s been basically impossible to buy a diesel car here for quite some time, only commercial drivers are really paying that much.

    The going rate for regular unleaded over the past month has been about $4.45-$4.65, and now the average price is down to about $4.45 in San Diego. Yes, it’s only a 10% difference, but it’s intellectually honest.

  9. Euro car guy,

    There you go again. You are quoting perceptions as facts regarding quality between domestic vs. asian import. Take Ford for example. They rank a couple of points behind Honda in the most recent JD power survey. However within that ranking is about 600K F-series trucks of which probably 60% are used for various degrees of work. The other 40%, maybe less, never see anything but commuter like duties. Those 360,000 trucks that are used for what they were designed to be used for are going to be beat to hell and that will lead to more “reportable” complaints. The fact that Ford, in this instance, is compared to Honda, a company that builds nothing that has any semblance of worklike capabilities is not an apples to apples comparison. With the F-series included, Ford is two points behind Honda. How far ahead would Ford be if F-series were excluded and they could compete in quality against Honda car for car. I would guess Ford would not only make up those two points but they would be more in the Porsche territory which is the number one position. The data you refer to is old data that is not supported by current data. Out of 100 cars Ford has two more reportable problems than Honda and that justifies the $2,000.00+ premium that the Honda sells for. I think not. Escpecially when you consider that anything can be “reported”. Such as “the back right tire was underinflated by 2 pounds of air at time of delivery” Or “When it rains my car appears to get very dirty due to all the oily water on the roadways” or the ones that don’t get reported like “I’ve had to replace numerous components in A/C system several times on my Accord but the dealer told me it was my fault so I won’t be reporting it to JD Power if they ask” or maybe “Yea my last Toyota’s engine was sludged up but after me and a few millon other people sued them everything was alright. I didn’t get any money out of it but Toyota pointed out to me that in my case it was my fault since I couldn’t prove that I changed my oil. I know I did but I put my faith in what Toyota says. They are the greatest. My new Tundra has had issues with hopping around when I drive on concrete freeways and the tailgate was bent when I sit my can of beer on it. Regardless I know my Tundra is the best built truck and I will report that to JD Power if they ask me.”

    You may laugh at those last two examples but they are closer to reality than you think.

  10. The smaller market share of Japanese automakers in Europe likely has more to do with import quotas that were in effect until recently than any perceived “superior quality” of Euro products.

  11. I like how informed our readers are. This is a testament to the quality of this site.

    Yes, Anon, Ford has been doing well in quality surveys, although I’m not the most confident in JD Power ratings. I prefer the way Consumer Reports rates cars with thorough testing. But those “perceptions” need to catch up with that reality.
    And in business, perception often is reality.

    And I love Ford trucks. They’re were usually the better of the big three and they are, indeed, “Ford tough”. I wasn’t knocking their trucks. Just their ability (and the other big 2) to be competitive in passenger cars.

    My area of quasi-expertise is in marketing/branding issues. So, even if Ford and GM are putting out great passenger cars today, the market will need time to catch up to that. That’s part of the critique of the automakers.

    As for the European brands, they have a more loyal customer base because European consumers are more conservative than Americans and less willing to try something different. That’s a cultural advantage that they have and it is not necessarily due to their competitiveness. Also, quotas and import taxes have helped boost them in the market.

    But you have to drive contemporary cars here, like Alfas, the new Fiat 500, the Focus, etc. to see that these are great products that are competitive in the market. American automakers used to have more romance in their passenger cars (mustangs, GTO, etc.) and they need to restore that to be competitive.

  12. America isn’t Europe. Never will be, we have way too much territory and people use their cars differently to go longer distances. Can you imagine driving cross-country 3000 miles with three other people in a Ford Focus or a Honda Fit? That would be very uncomfortable!

  13. I feel many people and so-called auto industry analysts truly underestimate the differences between the European auto market and the American market. Aside from considerable amounts of reading, I’ve lived in both places and have seen this for myself.
    European companies, and also US manufacturers in Europe, sell their small cars at a much higher profit margin than in the US. The European consumer is both willing and able to spend a higher percentage of their income on a compact segment car. In the US, small car sales are much more susceptible to even small increases in price.

    The reason for this is because people who buy cars in Europe are generally in a higher wage bracket than car buyers in the US. In Europe a car is perceived more as a luxury (thus people are willing to spend more) than in the US where it is perceived as more of a necessity. Many US compact car owners wouldn’t be able to afford even a compact car if they lived in Europe under the same income.

    If you really want to find a root reason here, I would put it down to urban sprawl in the US. The average american lives in a suburb of the city he lives in, while in Europe people tend to live much closer to work, allowing them to use public transportation, thus a car for them is not a necessity. In the US the average joe can’t take the bus to work, so he needs a car, but he is much more price conscious than the somewhat better off British motorist, who will pay more for a B or C segment car.
    Bigger profit margins offer car companies in Europe a much bigger buffer to fluctuations in sales.

  14. anon, I don’t know about San Diego, but I can tell you that gas is over $4 a gallon in Los Angeles and San Francisco. The station I go to in here in Marin is at $4.37 a gallon for unleaded reg. The one next to that, which I don’t go to, is higher. I was just down in L.A. over the weekend – same thing there. Must be the inland stations that are lower, but nobody lives there, so who cares?

  15. We really don�t know whether $4/gal was the threshold for consumer change because that it happened simultaneously with 3 other changes that greatly changed consumer behavior spending. 1) the cut-off of home equity loans used to fuel sales of vehicles as part of years of national joint-marketing campaigns between lenders and the auto industry; 2 the significant loss of ‘paper wealth’ due to plummeting home valuations; 3) the weakening employment picture.
    Let�s test this. Let�s turn back the clock to the Summer of 2005 when the housing market was booming. In Georgia, there was a 24-hour scare on gas availability during Hurricane Rita, and prices jumped. Had that price jump been sustained at $4/gal in the midst of 2005�s housing boom, equity extractions to buy new cars, and rising employment, would we be had seen a wholesale downslide in auto sales, gas purchases and an embrace of gas-sippers? I greatly doubt it. Given both a sense of mushrooming prosperity as well as actual financial proof of it, Americans would have kept their SUV-ways even with $4/gal gas.

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