Sunday, December 7, 2008

Can We Give the US Automakers a Break?

The CEOs of the US Big Three automakers returned to Congress with some plans on how they are going to restructure their companies to become competitive if they receive bailout loans. But when discussing the Big Three, it is often said that the reason Detroit got into trouble was because they built cars that were gas guzzlers and unreliable. And while there are some serious problems to address such as a worldwide recession where sales of all of the major auto manufacturers are way down, I feel the all too common badmouthing of American automakers is a bit over simplistic if not unfair.

Let’s take each on separately.

Detroit builds gas guzzlers. Compared to automakers in other countries, the cars sold in America are less fuel efficient. But compared to other countries in the world that impose heavier gasoline taxes, the US has always had relatively cheap gasoline as detailed in this May 28, 2008 Time article
Think Gas is High? Try Europe.

As American drivers groan over prices nearing $4 a gallon (at the time of this article), the French are paying $8.67 for a gallon of super, compared to $7.10 in January, 2007. A gallon of diesel in French gas stations averages $8.54, up from $5.35 just a year ago. And in the U.K. diesel costs $11.50 per gallon, compared to around $3.90 in the U.S. Across the European Union, the average cost of a gallon of gas runs to about 8.70 — more than twice what Americans are shelling out to fill up.

One big reason for the difference is that European governments put a much higher tax burden on fuel than the U.S. does. State and federal taxes currently make up just 11% of the pump price in the U.S., according to the Energy Information Administration; in France and the U.K., taxes account for an average of around 70%.

And in Japan, the price as recently as July was well over $6 a gallon. So this explains why for Europeans and Japanese, fuel efficiency has long been at or near the top of the wish list for their car buyers. This is why Europeans have long been known for the tiny fuel efficient cars that most Americans were not interested in buying (until perhaps when the price of gas crept up to $4 a gallon).

America has long had a love affair with the automobile. The ones we loved were stylish, comfortable, and had plenty of power. If they got decent gas mileage, that was a bonus. Yes there were those back then that drove cars like the VW Beetle but they were mostly looked upon as being bohemians. It was only when gas prices spiked in the 70s that American car makers had to start paying attention to demands for more fuel efficient autos — demands that European and Japanese automakers were immediately ready to satisfy because of their experience in serving their home markets.

So while it is easy to blame the Big Three for giving us all of the pickup trucks and SUVs that suddenly went out of fashion when $4 a gallon gas came along, it can be argued that they were only providing what the American marketplace was demanding and doing it at a nice profit. And Japanese automakers like Toyota and Honda also got into the SUV and truck business to try and get their share of those profits to be had.

So the problem is that many of the cars that make total sense to manufacture (and buy) when gas is at say, $2 a gallon look like foolish choices for automakers (and buyers) when gas spikes up to $4 a gallon and higher.

The practical difficulty for car manufacturers is that the conversion to smaller more fuel efficient models requires time and money for redesigning and converting its manufacturing plants. So the choice for the US automakers was to go for maximum profits in the short term with their present offerings or invest much of those profits into future fuel efficient cars while gasoline was still cheap.

An excellent NYT article
At G.M., Innovation Sacrificed to Profits discusses this choice that G.M. had to deal with:

G.M.’s biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about returns on investment.

The two views were rarely in sync — in effect, fighting over the steering wheel that controlled G.M.’s direction — and the internal battles distracted G.M. from spotting shifts in the marketplace.

As an alternative to dictating to a company that they must make fuel efficient vehicles, it has been suggested that we do what many other countries like in Europe do, which is to impose a tax on fuel to make conservation and fuel efficient vehicles the only sensible choice for both manufacturers and consumers. In addition, a tax on fossil fuels would help finance and hasten the development of alternative energy sources that we need in order to wean ourselves from imported oil along with addressing the issue of climate change. But a tax on fuel can be a terribly regressive one that hurts less well off people more than others. Perhaps a tax credit based on household income can address this inequity.

Detroit builds unreliable cars. Once the Japanese cars started to penetrate the US market in significant numbers, we started to notice the tremendous difference in reliability between US and Japanese cars. I spent far too much time in the repair shop with GM products I bought in the 80s. Many people who would ordinarily never consider buying a Japanese car were fed up with the reliability problems of US cars and decided on Toyotas and Hondas. For several years, Consumer Reports had difficulty recommending any American cars.

But while Consumer Reports still judges Japanese cars overall to be more reliable, US cars have made significant progress in closing the gap. CR says that Ford’s cars are now as reliable as the Japanese brands with GM's being a mixed bag and Chrysler unfortunately trailing the pack. My present car, a ’97 Pontiac Bonneville with 235,000 miles on it is still going strong. But people who were happy with the Japanese cars they owned are understandably going to be loyal to those brands that have served them well. And frankly, this loyalty is going to present a big challenge to US automakers to get these customers back.

Fortunately, Congress is working on an emergency $15 billion aid package to tide the US auto industry over until the new Congress and Obama Administration comes on board to consider more permanent solutions. While the automakers are far from blameless for the mess they are in, the intense scrutiny and negative feelings aimed at them especially compared to the financial services industry that has gotten mostly a free pass in addition to all that money is more than a bit unfair.

Struggling auto companies from other countries are sure to get help from their governments if needed.
Meanwhile, we in the US need to remember that with the latest unemployment figures showing a massive loss of 533,000 jobs for the month of November and about 2 million for the year, the loss of a great deal more jobs associated with the auto industry would be a catastrophe that we must prevent from happening!

1 comment:

Michael Karesh said...

Insightful post, Tony.

I've similarly suggested that if people want Detroit to produce more efficient cars, then there needs to be a higher fuel tax. It's the only thing that has worked.

On the reliability front, I conduct research in this area. You can see TrueDelta.com's latest results here:

http://www.truedelta.com/latest_results.php