Henry Ford would probably sigh and shake his head if he saw what was happening to the American auto industry. The industry is not just about jobs but has long been a symbol of American prosperity. It has served well in the past as an indicator of economic health in the pre-financial tsunami era. With the Obama administration granting GM and Chrysler 60 and 30 days respectively to restructure, it would appear that much of what we know about the industry can only exist in our memories and museums.
Car sales is a direct function of oil price
My friend PH explained to me why all levels of the industry, from salespeople that work on commission to management in Detroit, love to sell big cars. Gas guzzling SUVs have a higher profit margin than the practical Chevrolet Cobalt, which is on GM’s line-up because they need to satisfy fuel efficiency and environmental regulations. SUVs enjoyed a few years of popularity when Detroit thought they have proven the world wrong by thinking that Americans wanted small cars. Detroit was right – for a while, until the price of oil kept rising and rising with almost no friction. New buyers didn’t want SUVs and existing owners were eager to get rid of theirs.
You know how the story unfolds. Consumers switch to fuel efficient cars where the Japanese and more recently, the Koreans, dominate. Toyota dethrones GM as the world’s number one car maker. Oh, don’t forget, with the financial tsunami, there is a behavioural change that keeps executives in Detroit up every night; more and more people are taking the bus to work.
The end of the U.S. auto industry or the beginning of a new era of leadership?
While I’m not a big fan of American cars, I would say that the U.S. has all of the ingredients that it needs to become a leader in the next auto age. Some dinosaurs became extinct, but others evolved into crocodiles and alligators that are alive and well today. Whether the Big Three can turn into crocodiles will depend on many variables such as consumer attitude towards cars, the pace of economic recovery and government policies. Some things we can be certain of though. We can be sure that the supply of oil is finite, and environmental regulations will only become stricter. As we sober about economic woes, let us not forget about the hole in the ozone layer.
If we want the luxury of relying on a personal vehicle wherever we go like we did for the most part of the 20th century, we need to power up our cars cheaply and in a manner that won’t stink up the environment. Electric cars have the potential to address both of these questions.
Tesla Motors
Based in California, Tesla Motors designs and builds high performance electric cars. If you still believe electric cars can only hold enough charge to take you to and from the grocery store at a maximum speed of 40km/h, it’s time you’re in for a little surprise. Tesla Motors is already working on the prototype of their second product; the Type S. Requiring only 45 minutes to recharge, the Type S can travel up to 500 km on a single charge and accelerate from 0-100km/h in 5.6 seconds. Running on electricity presents significant savings to your wallet and to the environment (we already have the technology in place to dispose of batteries safely). I suggest you visit their website at http://www.teslamotors.com to learn more about this company and their products. By the way, if you live in a house, you can consider buying a solar panel powered charger to power up your car. The solar power charger gives you enough power to 80km/h a day, giving many commuters the opportunity to literally drive for free.
Obstacles to the path to the new era
While the future of electric cars is promising and exciting, there are obstacles that will slow us down to a new future or simply prevent us from getting there. If you frequently drive long distance between towns, you will probably dismiss the idea of an electric car because you wouldn’t want to be left stranded in the middle of the road. The good news is that it only takes five minutes to swap batteries. This is about how much time you would spend pumping gas in your car. The problem is that we have plenty of gas stations and we don’t have any battery swap stations unless companies (maybe even governments?) are willing to invest capital to develop such infrastructure. The U.S. has tried for a very long time to cure its addiction to oil and the Obama administration has committed to spending on infrastructure. Obama had said explicitly that he would invest in infrastructure to both stimulate the U.S. economy and make the U.S. less reliant on foreign oil. The big question is whether the new infrastructure will be in favour of electricity or some other alternative energy like hydrogen or bio fuels.
The car starts at almost US$50,000. The price tag can scare many people away, but I believe the price will go down if this technology becomes popular. In the meantime, there is a lot of excess capacity in auto production. GM’s plan to close their plants for nine weeks this summer is evidence that this excess capacity exists. If at least one of GM or Chrysler ends up filing for Chapter 11, many things can happen. Tesla could sweep up plants for bargain prices and greatly expand its economies of scale. The lucrative contracts that auto workers of the past had enjoyed (and these contracts are a main culprit that brought down the Big Three) will be a thing in the past. What if Tesla concentrated on design and innovation and outsourced the production of vehicles to Chrysler or GM that will finally have a reasonably priced labour force? Anything is possible. If the U.S. wants to reclaim its title as the leader in the auto industry, this is the time to do it and the first step is to migrate America's auto capital from Detroit to Los Angeles.
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Very well-written. I enjoyed reading it...I hope the electric cars will replace all the existing cars one day.
Looks like the Big 3 will survive since they are receiving a lot of support from the US and Canadian government. However, I think it is no surprise to anyone that these auto companies will shrink significantly in size.
I agree that these auto companies still have good foundation to evolve into significant players as the auto industry approaching to a new age. Unfortunately, it will take years gain back the customers' trust. Good luck to the Detroit 3.
Herman, what are you thoughts on the government's bailout actions to the Detroit Three?
Many people did not agree the government’s bailout actions. Most of these people argue that the government is throwing good money after the bad. In an economic point of view, a company that is poorly ran would eventually fail on its natural course or take over by competitors. The government should not intervene. In the current situation, the US government has been using excuses that these auto companies (and banks) are too big to fail. Beside economy, the US government needs to consider the social unrest that may arise if these companies fail. For example, when unemployment rate is very high, it may trigger higher crime rate since people still need to feed their families. They may have no choice but to take chance. While I do not agree using our tax money to save these companies, I don’t think the US and Canadian government have a choice but to save them.
I have very limited knowledge in cars and almost no understanding how electric car works other than it runs on electricity instead of gasoline. Do you know if these electric cars perform well in cold winter?
My final thought – the biggest obstacle to the next generation car (electric, hydrogen and etc.) will be the oil industry lobbyists.
A very well written article!!! I doubt that American Auto will be the world leader anymore because of the branding effect. Unless US buys Toyota or Honda, otherwise no matter how many cars they sell in US that have the stamps of "Made in Mexico", we still know that Trueno 2050 is a Japanese car when they release Final D (Initial D's last chapter).