How to save the American auto industry? No time for baby steps!

update: Today, a few newspapers trying to interpret Obama’s remarks on the auto industry make me feel like the President’s auto task force is planning to do exactly what I wrote on November 30th, 2008. Searching Google News you’ll find numerous articles claiming that Obama wants to split General Motors into a “good company” and a “bad company”.

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The United States, Europe and Japan are in recession at the same time. This has never happened since WWII. The global financial crisis, sparked by the housing slump in the U.S., is eroding consumer confidence. In addition to tight credit markets and rising unemployment, car sales slumped to a 25-year low. First, it was sky-high gasoline prices that curbed car sales, now it’s the ailing economy.

However, it’s not just the current crisis that makes Detroit’s Big Three look ill. It’s rather a structural crisis of the entire auto industry, worldwide but particularly in America. The chief executives are already begging Congress for a bailout, but for understandable reasons, Congress first demands GM, Ford and Chrysler to outline their plan of how to return to profitability. President-elect Barack Obama has repeatedly said that his administration will not build a “bridge to nowhere” for the American auto industry. Just pumping money into the inefficient car giants would just delay bankruptcy. Instead, there’s need to make a bold step into the right direction. Further baby steps would mean nothing but wasting taxpayer money.

I am convinced that there is a way for the American auto industry to survive and rise as a phoenix from the ashes. But before thinking about what is the right way to tackle the industrywide crisis, it is important to get an idea of the scope of the problem.

What do you know about the Port of Longbeach, California? Yes, it’s one of the world’s largest shipping ports. But these days the second largest port in the United States is rather a giant parking area packed with brand-new luxury cars from Mercedes-Benz, Toyota and Nissan which currently appear to be unsalable.

About two thousand miles further in the North East, billions of dollars in losses are accumulating in Detroit. In the last quarter, General Motors lost $6.9 billion and Ford $7.7 billion. In need of cash, Ford sold its 20% stake in the Japanese car maker Nissan for about half a billion dollars. GM failed to turn its headquarters, the Renaissance Center in Jefferson Ave, Detroit into cash. Besides, there appears to be no one wanting to buy the Hummer brand which symbolizes the demise of the Big Three which actually started after the first oil crisis in the early 1970s. 

Despite the extremely bleak outlook for the car industry, Bob Lutz, vice chairman of General Motors, still tries to spread optimism about the future of the 100-year old auto industry giant.  Though the oldest manager in the car industry alive – who has already worked for Ford, Chrysler and BMW – does not really consider global warming as a fact and loves muscle cars, he still wants to remain within the company until the much anticipated semi-electric Chevrolet Volt, that should save GM, hits the market in 2010. The Chevy Volt is also aimed at improving the public perception of GM that looks old-fashioned in comparison to Toyota which managed to greenwash its image due to the success of the hybrid car Prius. 

At this moment, however, it’s uncertain whether General Motors has enough liquidity to survive until Barack Obama takes office in January. And no further stimulus or bailout can be expected before his administration takes over control. Analysts are discussing the advantage of pre-arranged bankruptcy. Others highlight the merits of a real bankruptcy arguing that it would give GM enough flexibility to get rid of some of its 8 car brands, get rid of its debt load and shrink its extensive dealership-network. 

On the other hand, GM seeking for bankruptcy protection would mean huge job losses in the Midwest and it would affect many suppliers. Moreover, Chrysler and Ford were likely to follow rather quickly as all of them are running short of cash. A merger between GM and Chrysler were probably the worst scenario, as Chrysler is in worst shape and GM already hast too many brands. Therefore, a merger would mean an accelerated demise. A part nationalization is not either of advantage, as it would limit the company’s flexibility and cost enormous amounts of taxpayer money. Though there is a scenario in which Detroit’s car makers could return to profitability within two years (http://money.cnn.com/2008/11/28/news/companies/auto_rebound/), but to me, this appears to be rather unlikely as this is a structural weakness. All three car makers have the wrong product line-up, have to pay higher wages than their competitors and are packed with debt.

In my view, there’s just one way that bears the possibility of a glorious future for the American auto industry. In order to make American cars competitive again, it takes a comprehensive transition of the corporate concept, a fundamentally different approach. In my opinion, the most cost-effective and  promising way is to divide GM into a “good company” and a “bad company” just as could happen to the struggling Italian flag-carrier Alitalia. The “good company” would produce, equipped with money from investors and the government, electric cars as well as other efficient cars and become a technology leader in this field while the remaining “bad company” would go through bankruptcy. This is the only way I see the possibility of a recovery as the necessary fundamental restructuring could be done. Of course, such a step would mean a gigantic job loss at first, but nothing could avert the collapse without cutting jobs. However, not all jobs would be gone forever. The car maker that is the first to produce electric cars on a grand scale for the mass market will thrive and earn a fortune in the coming decades. The days of the inefficient combustion engine are numbered and electric cars are becoming more competitive every single day as battery technology advances. The “good company” could become the #1 in electric cars in the short term and the largest and most profitable car maker in the world in the medium term. The new company could be called “GMnext” and ensure that the U.S. holds a big stake in the green tech sector which will rise to the main engine of growth for the next quarter century at least. Rick Wagoner, CEO of GM, already said

“We’re committed to leading our industry on the most important issue we face over the next generation: The development of alternative fuel propulsion.” and “we’re reinventing the automobile” on the occasion of the company’s 100th birthday a few months ago. (check out “We’re reinventing the automobile” – Rick Wagoner, CEO and chairman of GM on the occasion of the grand old car maker’s 100th birthday). This shows that he is aware of what needs to be done and where future growth can come from. But obviously, there’s no chance for a technological breakthrough to come from a company that might face bankruptcy in the matter of weeks.

Next to existing companies in the car business, new players from outside the car industry are likely to start producing electric cars in the future. The most important part of an electric car is the battery pack. The driving range is still a hindrance to the breakthrough, due to a limited battery capacity. Battery manufacturers are therefore the core element on the way to mass production of electric cars. The rest is not too complex. Electric motors are efficient and very simple. There’s not much technological know-how necessary to make an attractive car once there’s a powerful battery. Especially emerging countries like China and India could see the advantages of electric cars soon. Chinese car companies could never catch up with Western competitors making cars with combustion engines whereas they would already be capable of producing an electric car. On top of that, more electric cars would mean that thease countries could stop spending billions of dollars on gasoline subsidies. Another point is that electric cars have zero tailpipe emissions which would have a positive effect on the intense pollution in Asian cities.

It’s not only American car companys that are struggling. European and Japanese auto makers have also slipped into the red, even though they produce cars with a much better fuel economy. This can be attributed to traditionally high gasoline prices in much of Europe and also in Japan. High taxes make European drivers pay a few times more per gallon of gasoline than U.S. drivers have to. When Americans were feeling the pain of gasoline prices above $4 a gallon in July, drivers in many European countries had to pay more than $10 per gallon.

That’s why Europeans have no reason to pride themselves for having a bit more efficient cars than Americans have. It is rather shocking that despite high gasoline prices for decades, nothing had been done about the way we drive. If America had had $10 a gallon for a long time, alternatives to gasoline-driven cars would probably be avaialble in large numbers. 

In the meantime, almost all car makers in the world are working on electric cars. Just have a look at some of my posts and you’ll have a good overview. For example BMW, known for luxury sedans, is experimenting with an electrified version of its Mini. 500 Mini Coopers running on nothing but electricity will be tested in California through a leasing program. I’ll write more on that in the next few weeks.

Next time, I’ll give you an overview of the development of gasoline prices in the U.S., Europe, China, India and some other places. In a recent comment, I was asked to give information about the development of gasoline prices outside the U.S. If you also want to learn something particular having to do with energy, the economy, international politics, etc., let me know.

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/28/AR2008112802505.html

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6 Comments

Filed under Economy, Global Issues, Politics

6 responses to “How to save the American auto industry? No time for baby steps!

  1. tomsax

    The range of an electric vehicle isn’t really a barrier to success, although the perception of electric range may be.

    Cars with a range of 150 miles are easily achievable right now. That’s enough range to handle almost everyone’s daily driving. (92% of US commuters drive less than 70 miles per day.)

    But a 150-mile range is not good enough for extensive road trips. Still, for people not ready to go pure electric (and use an alternative for the occasional road trip) electric vehicles are suitable to two-car households with at least one commute less than 100 miles. The second car can be a hybrid, until there are enough electric vehicles on the road to justify a network of fast charging stations.

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  4. Until viable technology and its required infrastructure is available, we’re stuck with gasoline, at least in part, in some form over the next decade. Fast charging has its limitations, including the effect on batteries when increasing the rate of recharging, although there are some promising developments (e.g., http://www.evdl.org/docs/hawker-fastcharge.pdf). If I were a manufacturer, a couple of the makes/models could be highly efficient gas/electric hybrids with additional batteries in place to capture electricity from the grid. A number of owner of hybrids have already done this themselves. Vehicles could be plugged in overnight and could approach the utility of a car able to make long road trips. They could even put power back into the grid and get paid for it. The big three are really going to be in trouble if they don’t start to innovate, rather than half-heartedly coming up with lame models. They will also need to reassess overall vehicle design, making cars sturdy and well-made, although significantly lighter and more efficient. Coupled with bankruptcy, lowering overhead priced into each vehicle, and building very reliable vehicles may be the only way to go in order to become viable and competitive. We’ll see what happens. Can you image if, in 10 years, people in Europe for example say, “I wouldn’t give up my Chevy for anything. I’ve had had absolutely no trouble with it and it’s so economical”. Paradox 180!

  5. Great read – keep up the great work!

  6. Pingback: How to save the American auto industry? No time for baby steps! | WHAT MATTERS WEBLOG

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