What are the possible outcomes?

Well, Congress could authorize some sort of loan.  This didn’t happen the first time the Big Three CEO’s traveled to Washington.  You could argue that they would have stood a better chance if they hadn’t flown in as Brahmans in corporate jets with their hats turned up to catch some of their presumed portion of cash flowing from the treasury fountain.  Instead they were soundly rebuked.  When they returned, ironically as we’ll see in a minute, all driving hybrids all the way from Michigan and bearing plans detailing their approach to returning to sustainable profitability, they were denied again but got a reprieve when congress authorized  a loan from a fund originally intended to fund research into fuel-efficiency technologies – there’s  the irony!

Another possibility is that the GM and Chrysler somehow, miraculously produce a plan and come to agreements with their stakeholders (bond holders, the US Government and their own labor unions) that allows them to stay in business WITHOUT further government assistance.  I haven’t found anyone willing to say that that will happen, although GM didn’t need a $2B bridging loan a couple of weeks ago, which was a nice piece of PR for them.  It remains to be seen what Ford will do going forward since they haven’t yet received any government funding.

And then there’s bankruptcy.  Rick Wagoner thinks that Bankruptcy would be far more expensive for the American taxpayers than other options and there were a couple of articles (one from the WSJ and the other from Nationjournal) that I came across today with that discussion.  Wagoner reiterated his opinion that bankruptcy will seriously undermine consumer confidence in his brand.  Robert Lutz, the retiring GM Vice Chairman of Global Product Development, has admitted that the brands (specifically Pontiac and Buick) are already damaged.  Well, it probably wouldn’t be good to damage them any further then since sales figures are currently at levels not seen since the early 80′s.

Still, Edmund’s Editor-in-Chief Karl Brauer proposed last week that the protections afforded by a traditional bankruptcy could be positive for GM.  I won’t go into all of the details of the WSJ piece (but it’s a good read) and will just point out that many US taxpayers (myself included) have taken a bunkering down approach to the current economy.  Consumer spending and confidence have decreased and we are wary of taking on future national debt to prop up industries that we aren’t sure can survive.  We look at bankruptcy for GM as a way to wash our hands of the situation and ask them to hash it out alone.

The problem is, says Wagoner, that it doesn’t work that way.  I think we can all assume that a bankruptcy at GM (once the largest company in the world) would be complicated and expensive.  Part of the Chapter 11 process is what is called Debtor-in-Possession financing (DIP) which can only be provided by the government (because who else would lend money into such a situation?).  So much for washing our hands of GM and getting on with our lives.  Mr. Wagoner goes on to admit that he expects that GM will require billions (that starts with a “B”) of dollars of additional capital (so much for returning to profitability in the short term) over the coming year(s) to survive, but the DIP situation as well as the fallout to the huge network of suppliers that depend largely on GM for survival would be worse, according to Wagoner.  So, I guess we’re all on the hook at least to some extent and might want to start rooting for GM.

Still, GM admits that it needs to eliminate brands, close some plants, layoff still more workers while renegotiating the contracts of workers that are retained, and secure concessions from bond holders (one current proposal is to swap equity for debt, which is a tough sell at current GM stock values) in order to persist.  Whether we call it “bankruptcy” or simply carry out a structured reorganization and call it something else (as Karl Brauer suggests) becomes an interesting question.

As I said, it will be an interesting 2 weeks.

My idea for starting this blog was to think and write about the future of the automobile in the American marketplace and on the American roads.  There are a number of avenues from which to explore this subject.  As I’ve already alluded to in the introduction, engine technology is a central theme, but equally important are market conditions, preferences of different demographic groups as well as differing regulations and tax structures.  For example, I mentioned that the Prius sales peaked in 2007 before decreasing slightly in 2008 due to general economic forces.  What I don’t need to remind anyone is that the average price of gasoline in the US more than doubled from $1.53 on January 5, 2004 to $3.08 on December 31, 2007.  If we go back to January 3, 1994, US gasoline averaged 99 cents.   It’s probably obvious where this analysis is going.  With gasoline prices increasing at an average annual rate of about 4.5% over the decade prior to January 5, 2004 there wasn’t much negative feedback at the pump factoring into consumer preferences.  During the following 3 years, gasoline prices increased by an annual average of over 26%.  As gasoline prices increased dramatically, market conditions began to favor more economical vehicles.  Correspondingly, sales of lower fuel economy vehicles suffered.  In Forbes Magazine’s list of Worst Selling Cars of 2008, most of these “cars” are actually SUVs.

None of this should be very surprising, but before we move on let’s put a couple more numbers on the table.  In 2007, The Honda CR-V was the 10th best selling vehicle in America trailing such reliable sellers as the Honda Accord and Civic, the Toyota Camry and Corolla, Nissan Altima as well as several pickup trucks which perhaps shouldn’t be included on a list of  “cars.”  The Honda CR-V?  Really?  I would never have guessed this.  It sold approximately the same number of cars as the Prius with 184,003 units according to Forbes Magazine and had fuel economy numbers of 23 city/30 highway and the low-end starting MSRP was $20,600 while the Prius of the same year started at $22,175 and delivered fuel economy of 60 city/51 highway.  Clearly price was not the deciding factor in this discussion and neither was fuel economy.  The Honda CR-V is classed as an SUV, the same class of vehicle that made up the lion’s share of Forbes worst sellers.

The truth is Americans love what SUVs provide.  We love cars with 5 doors so we can get at car seats and kids in the back and we love big open cargo compartments to put lots of stuff in.  In fact we’ve always loved this configuration of vehicle even before the SUV was invented (it used to be called the full sized station wagon).  What we clearly don’t love (with $3+/gallon at least) are large SUVs (let’s call these DUV’s for Depreciating Utility Vehicles) that get less than 18 mpg hwy, and that’s probably a good thing.  So, the Honda CR-V is a smallish SUV that gets 30 mpg highway, has 5 doors, ranks quite well in NHTSA safety ratings, and costs a little over $20,000.  Now that I look at the description, I’m less surprised at the sales numbers.

Well, surely there are hybrid SUVs that put the modestly impressive fuel economy numbers of the CR-V to shame!  Well, no.  Not really.  The Ford Escape (and it’s 4WD-only cousin Mercury Mariner) gets better city economy (36 city/31 hwy) but has comparable highway mileage and carries a price tag starting at over $29,000.  In my opinion, that’s fairly impressive around town economy for a larger car and time will tell whether economy of scale will help Ford to bridge the nearly $10k price gap and if buyers will accept a hybrid SUV the way they have a small economy car.

Speaking of the market, another theme that I want to explore is how American consumers are engaged by the car industry.  What do we want to buy?  Do we even know what we want and how much choice do manufacturers have in what they bring to market.  This topic is particularly relevant with regard to the current situation in the market.  We’ve waived a disapproving finger at Detroit for the Big Three’s current economic distress, but the Japanese Big Three haven’t been innocent of taking advantage of the same market by building some of their own DUVs (although the composition of their fleets have been more resilient under current conditions).  With big margins and big sales, who could blame them at the time?  Unfortunately, just like in any industry the market is always changing and products take years to design and large capital investments to bring to market (although the Ferrari Daytona was designed in just 7 days we can probably consider that to be feat that may endure longer that Dimaggio’s 56 game hitting streak).  The inconvenient reality that Americans (in a world with cheap gas) prefer big cars which manufacturers can bring to market with higher margins has led more than once to serious trouble in the industry.  Of course hindsight being 20-20, if automakers had known that after modest annual increases in pump prices for a decade that gasoline would suddenly double in a short time they would have anticipated a market shift and planned accordingly, right? Well, there are a number of directions I could go here, the easiest being that there’s a limited amount of oil in the ground and it’s harder and more expensive to get to it.  It stands to reason then that just like beach property, the price of oil will go up as less of it is available in the world.  The industry could (should?) assume that prices will generally go up and at times these increases will be sharp.

Another avenue to go down is that in the 1970′s we responded to the OPEC oil embargo by creating CAFE standards that mandated a minimum fuel efficiency average for manufacturer fleets.  In 2007, we finally revisited CAFE and, predictably, there was much gnashing of teeth and wringing of hands over the consequences of increasing CAFE standards (I could give many references here.  Suffice it to say, there was significant published opposition to this which can be found with minimal effort by the reader).  OK, so why am I bringing this up in a discussion about marketing?  Well, there is a school of thought that supports that increasing CAFE standards will actually be a boon to Detroit (this is a report from The University of Michigan which I would urge you to form your own conclusions about) and one could propose that by raising CAFE standards incrementally over many years, a number of positive benefits might be realized by the industry related to decrease in dependence on foreign oil and less susceptibility of particular product lines (related to consumer backlash over fuel economy) when periodic fluctuations did occur.  As you might expect, this is an exceedingly complicated discussion and I hope to devote a number of entries to the subject.

A third idea is that the Big Three don’t compete well in the small car market.  The fact is that the Big Three do make small cars, but they’ve had a hard time grabbing US market-share from the Japanese.  When asked to name a good, small car a lot of Americans will answer “Honda Civic.”  There are a lot of theories as to why this is.  A common explanation is that profit margins are too small and that higher labor costs make it impossible for Detroit to compete in this segment.  A very interesting proposed downside to the poor performance of US automakers in this segment is that young American buyers tend to buy small, entry level cars and form brand loyalty that is then difficult for US makers to reclaim.

Back to the point of this column, even though it seems inevitable that the time is coming when many or most cars will be hybrids of some type, as long as each of these autos carry an ICE as their primary power-plant we’re going to be running our cars on carbon-based fuels.  In fact, even the Chevy Volt becomes a modified ICE hybrid once you exceed the 40 mile range of it’s Li Ion battery by using a gasoline powered generator to run the electric motors.  So, we’re stuck with the ICE for the time being and one of the main purposes of this blog is to talk about how to preserve our skies, our world ecologies and our political standing by making the most of the currently available ICE technologies.

Until next time.