Detroit: America's Pusher

"And I walk around, with these tombstones in my eyes, but I know the pusher don't care... if we live- as long as we drive- And I said, God Damn, God Damn that SUV-pushing man"
-Lyrics from "The Pusher" by Van Morrisson, amended slightly to fit the subject of this column.

I was doing a little reading last night in the business section, and I came upon something interesting:
http://www.nytimes.com/2008/05/31/business/31hybrids.html?scp=1&sq=general+motors%2C+hybrid&st=nyt

The first thing I noticed was the term "Land Yacht" that the story lead with, I was delighted to learn of a new sarcastic and derisive term to describe the quintessential mom-mobile, because frankly, "gas guzzler" was starting to become a little hackneyed from overuse. So, first and foremost, thank you Bill Vlasic for writing the article, and as long as I'm thanking you for things, I absolutely love your pickles. They cost a little bit more, you know, because they're in the refrigerated section and all, but they really do taste a lot better and have more crunch. Two tips of the hat to Mr. Vlasic!

More to the point though, this does broach a subject I've been meaning to address lately- the fact that Detroit's business strategy is strangely akin to those of your neighborhood pusher, or "drug dealer" for those of you not familiar with the parlance of our times. Allow me to explain further, some years ago, Detroit got us all hooked on this great new idea in automotive transport...the SUV. The SUV was a perfect fit for so many different demographics it was practically a silver bullet for the all the industries woes. It appealed to moms and dads who felt they needed a bigger vehicle to accommodate their families but were loathe to be 'minivan people'; it appealed nervous or timid drivers because the four wheel drive and sheer size of the vehicle conveyed the illusion of safety to the driver; it even appealed to that notoriously tough to sell to crowd of men trying to compensate for, uh, ahem, something.

Detroit's strategy was brilliant at the time, the cars were bigger, had more horsepower, more room for gimmicks, and had broad consumer appeal. The only drawback was piss-poor fuel efficiency, which probably didn't cross the mind of a Detroit executive or an SUV buyer until maybe 2 weeks or so ago. After all, in the early 90s oil cost $10 a barrel and the average price per gallon of gasoline was around $1. Shrewdly, the brain trust leading the "big three" American automakers made the assumption that like all commodities, the price of oil would stay the same for ever and ever. That's the first thing they teach you in business school actually, that the price of commodities are not the least bit volatile and are not subject to sudden change.

For more than a decade, SUV sales boomed and the "big three" swung back to profitability after years of being Wall Street's version of the "3am after-bar booty call." As the profits began to roll in, Detroit faced a decision, put all their eggs in the SUV and pickup truck basket, or diversify their portfolio of products to ensure that the companies' financial future (and those of their employees) were protected against market risk. In yet another brilliant move, Detroit ignored the first rule of business investment and put all their eggs in the Land Yacht basket.

To be fair, the people running these companies are not stupid, they are all in fact very well educated and shrewd businessmen. The problem is that they were all more focused on their own finances rather than those of the companies they lead. You see, the stock prices of publicly-traded companies like General Motors, Ford, and Chrysler (or as I like to call them, General Fordsler) are not based so much on assets, cash flow, profit margin, market share, or any other voodoo business metric. The fluctuations of stock prices over the short term are almost always based entirely on quarterly earnings reports and sales growth.

As a result, executives have a major incentive to produce immediate short-term growth to appease stock holders as well as to maximize their compensation, because they are paid in large part with company stock. As a result, General Fordsler continued to pour a disproportionate amount of their money and resources into producing SUVs and light trucks to improve sales growth despite steadily rising oil prices and environmental concern over the role of fossil fuels in global warming. General Fordsler also had the added benefit of being protected from foreign competition in this market segment due to a 25% import tariff applied to all imported trucks.
More information on this can be found here under the subheading "the SUV craze":
http://news.bbc.co.uk/2/hi/business/6346299.stm

At the same time that Detroit went all in on their SUV bet, they began to face more competition from foreign rivals- to the point where in today's market, there is not one company selling automobiles in the United States today that does not have at least two different SUV models to choose from. However, as the foreign competitors got in to the game they made a concerted effort to hedge their bets by diversifying their product portfolios with small cars and hybrids, to ensure that if the price of oil increased too much, or if the environmental controversy grew in intensity, they would be well positioned to adjust to the change in the market.

First, Honda introduced the Insight, the first hybrid car to be sold commercially in the United States. Honda followed that with its hybrid Civic and Accord models, Toyota also got in to the act with its Prius and Camry hybrid models. All of these cars have been such huge success stories that Honda and Toyota have actually struggled to meet the demand since their introduction. All these models do between 40-50 mpg city, and 30-36 mpg highway.

Going for the bad business hattrick, General Fordsler largely ignored the market until their gas-guzzling golden goose was all but dead and the writing was on the wall:
http://online.wsj.com/article/SB120957431268556721.html
http://online.wsj.com/article/SB121200752206127227.html

Facing a decling population of junkies, the General did what any good pusher would do, figure out a way to get people hooked again! Ford was the first, introducing the Escape hybrid in 2005. The Escape's green credentials were modest though, because the car was built on the Escape SUV platform. Hybrid or not, SUVs will never be able to compete with small car fuel effeciency- particularly small car hybrids- because they're just bigger. The bigger they are, the more energy they take to move, simple as that. But now GM and Chrysler are also introducing hybrid models, and guess what? None of them are cars either!

As the Bill Vlasic piece linked above points out, GM and Chrysler decided to up the ante on Ford by building not a smaller, more fuel effecient hybrid, but bigger and less fuel effecient hybrids. In addition, they have all yet to debut a hybrid car to compete with Honda, Toyota, and even Nissan, who recently started selling their Altima hybrid model nationally.

Not surprisingly, GMs Yukon and Tahoe hybrid models have not been successes in any sense of the word- a Hyrbid that gets only 20 mpg seems to be stuck in market purgatory: it doesn't appeal to traditional hybrid buyers due to unspectacular fuel economy and it doesn't appeal to traditional large SUV buyers due to unspectacular pricing as compared to a conventional model.

Perhaps another approach will work better?
www.chrysler.com/refuel

The "Let's Refuel America" sales pitch is Chrysler's attempt at ignoring the increasing cost of energy and duping consumers into their old buying patterns. Unfortunately, Chrysler didn't do a very good job of disguising this as a good deal:
http://www.thestreet.com/s/is-chryslers-299-gas-deal-a-good-bet/newsanalysis/business-news-update/_msnh/10418752.html?&cm_ven=MSNH&cm_cat=FREE&cm_ite=NA

According to research by TheStreet.com, Chrysler gives you the option of large cash allowance (i.e. discount off sticker price) and no gas guarantee, or a small cash allowance with the gas guarantee. In the example given by TheStreet.com, if you bought a Dodge Ram pickup truck, you'd pay $2500 upfront for the gas guarantee. Seeing as how most of us finance our cars these days, that $2500 you didn't get in cash allowance would be financed and you'd pay interest on it which, unless you had a really good interest rate, would almost certainly outweigh any potential cost savings from paying $2.99 per gallon for gas (up to 12,000 miles per year) for three years. In fact because most car loans these days are 5 year loans, you'd likely still be paying for the $2500 you didn't get off the original price of the car long after the price guarantee expires.

By contrast, if you had taken the extra $2500 cash back and put it into a savings account, it could earn interest for you and over a few years might be enough for a downpayment on a hybrid car that might seem a hell of a lot more appealing when gas is $5, $6, or $7 dollars per gallon. A possibility that doesn't seem that far-fetched if the price of oil continues to rise.
http://www.marketwatch.com/news/story/goldman-sachs-raises-possibility-200/story.aspx?guid=%7B4B702F7F-41F8-45F0-A133-630F12F2C764%7D

Certainly this isn't the first time that a commercial enterprise has tried to fool consumers with a shell game of some kind, so what makes this noteworthy? There's a larger point here. We import almost 10 million barrels of oil per day, and a lot of it comes from places with less than sterling democratic credentials (like Canada) and/or well-known reputations for not liking America (like Canada). Some of the others we import from, to name a few, are Saudi Arabia, Nigeria, Venuzuela, Kuwait, Russia, Iraq, and Chad.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html

As the price of oil increases, its becoming harder and harder to ignore (even though we're all trying really really hard!) the fact that every day we send billions of dollars worth of our national wealth abroad. Instead of recognizing this as the economic and national security threat that it is, Detroit has mostly pussyfooted around (with Washington's complicity) with small and mid-sized cars because they only have a 2.5% import tariff advantage in that segment, not the 25% advantage they have with trucks and SUVs.

In light of this, I think Chrysler should rename their gas guarantee gimmick plan the "Let's refuel the jumbo jets of the Saudi royal family."

No matter how many sales gimmicks or half-assed attempts at fuel effecient vehicles General Fordsler rolls out, it won't change the fact that the price of oil will continue to go up, and as it does, us oil junkies will be just like any other addict: at the complete mercy of our pusher.