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