Detroit's Been in Trouble Before - Why This Time Is Different

The US car companies General Motors (GM), Ford (F) and Chrysler have been in trouble before. Notably, Chrysler, back in the early 1980s when it got a whopping $1.5 Billion dollar loan [Chrysler got the loan approved in 1979, and financed in early 1980] - and appointed Lee Iacocca as the Chairman/spokesman. Chrysler paid off the loan by 1983. Additionally, the US military then bought thousands of Dodge pickup trucks which entered military service as the Commercial Utility Cargo Vehicle (M-880 Series). The most important reason why Chrysler survived was innovation - the introduction of the family mini-van, which was a huge sales success through the 1980s and into the 1990s.

In the past, the car companies would grudgingly offer the public what they wanted, by way of cars. In fact, Detroit was very very slow in hopping onto the bandwagon to make fuel-efficient cars - even during the oil embargo of the 1970’s. The Japanese companies succeeded in making small fuel-efficient cars back then, and they still are in a leading position now (despite Toyota's (TM) woes which are well documented - and have more to do with the financial market than the desirability of its cars). Chrysler “second-sourced” Mitsubishi (MMTOF.PK) cars in the 1970’s when it figured that it could not turn its businesses around as quickly as the marketplace wanted it to.

But this time around, things are different. The big three are not just talking about fuel-efficient cars. They are closing the assembly lines that manufacture the gas guzzlers, and instead are focusing their attention on making fuel-efficient hybrids and gas-electric hybrids - like Chevy’s Volt. As an engineer, I am not too pleased with the impending switch to electric cars (which in California, with base electricity rates at 11.5c/KWH and maximum rates at 38c/KWH - will actually drive people to buying gas-powered cars). In fact, Elon Musk, the founder of Tesla Motors, made the obvious observation that electric cars in California would actually be “natural gas powered”, as 45% of CA's electricity is derived from natural gas. In most of the USofA, the new generation of “electric” cars will actually be coal powered! Talk about getting to the future by embracing one’s past.

But why are things really different this time around? $147/bbl oil was a mental and financial shock even for silicon valley engineers. The same applies to $4.50/gallon gasoline - it is still fresh in our memories. If it can happen in 2008, sure as heck it can happen in 2011 or 2018 or in March of 2009. So, the car companies have to make efficient cars that reduce our dependence on petroleum based fuels. Then again, it does cost energy to make the lithium-ion batteries which will power the electric motors of the cars of the future, and they will be charged by coal-fired electric plants.

People’s buying habits have been altered - at least for now. As long as one remembers paying $100 to fill up their SUV’s tank, he/she will think twice before buying a car that is not frugal when it comes to gas consumption - even if current gas prices are low. In conclusion, things are different because:

1. The car companies are acting differently - they want to make cars that we want to buy.
2. They are in deeper trouble than ever before.
3. Peoples’ buying habits have been altered by $147/bbl oil.
4. This time around, consumers know that $40/bbl can get to $120/bbl in a few short months.
5. Competition from smaller car-makers like Tesla Motors.
6. The car companies are shuttering plants that make the bigger, less fuel-efficient vehicles.
7. Their very survival depends on their actions in the next several months.

Comments

[Stan Wellaway:]

For those who (like me) do actually look forward to an all-electric transport future, and who want to take a stake in it, there is a company listed on the UK stockmarket, called Tanfield Group (LSE:TAN). Easily overlooked because it's main product is aerial work platforms. But they also own Smith Electric Vehicles - the world's biggest and oldest producer of roadgoing EVs.

Over a period of 80 years, Smith have quietly sold an estimated 70 thousand electric vehicles worldwide (!). And in the past year they have delivered more than 400 electric trucks and vans in England alone. Mostly the 7.5ton Smith Newton and the 3.5ton Smith Edison. Plus a few 9ton and 12ton versions. Check out the Case Studies page on their website www.smithelectricvehic...

Their newest (and smallest) product is the Smith Ampere - developed jointly with Ford, and displayed on Ford's own stand at the CV-2008 show last April, in Birmingham, UK. I don't know if this is the 2010 van which Ford intend releasing details of at the Detroit show next month - but if it is, the (currently depressed) Tanfield share price could fly.

Smith buy components from US companies, Valence and Enova. And are about to open van production facilities on US soil.

2008 Dec 14 07:09 AM

[Charles A...:]

The Smith story keeps reminding me that Detroit will face severe competition which it had avoided with its product strategy from 1973 up until today. They do not innovate. That is a culture shift I do not think their management traditions can handle. They are bean counters, marketing men, not engineers; Mallaly excepted; finally. People will not purchase their stuff out of patriotism. GM may not survive here, but their Shanghai investment levels indicates they will as a Chinese company exporting product to America. We are subsidizing that evolution. Their treatment at the hands of Washington will make it happen quicker.

2008 Dec 14 09:16 AM

[BobMichigan...:]

Tessla Motors is competition to GM? You do understand that even today, GM sell more cars and trucks than any other manufacturer in the US, including Toyota.

GM Lordstown made Friday more vehicles than Tesla will make next year.

Keep smoking whatever you are smoking, and have a good laugh at whoever pays you to write that drivel.

"People will not purchase their stuff out of patriotism." How about self preservation? Do you people think that this depression (it took the feds a year to figure out it was a recession, sooner or later they will figure out what this really is) was caused by a couple of banks? We have been running on borrowed money as the real wealth of this nation, manufacturing, has gone from 20% of the economy to 10% over the last decade. If you are upset about your 401k, all the for sale and forclosed signs on your street, look at the Honda in your driveway and repeat after me: "I did this to myself."

We "stupid buy American first" people have been saying this for years, but you people are too thick to listen. Are you listening now?

2008 Dec 14 11:30 AM

[belseware:]

Enough with the "CARS THAT WE WANT TO BUY" myth-- wrt "1. The car companies are acting differently - they want to make cars that we want to buy." Shame on Congress, too.

The domestic automakers developed products that fit their financial situation...with higher costs (labor, legacy) they could not compete with the transplants in small, efficient cars. (Those they have made--some wonderful--are losers forced on them by CAFE).

The domestic automakers have been forced by their situation to build products that actually could give them a profit...trucks, SUVs, large and luxury cars.

So pleeeez don't make it sound like they capriciously chose to make something no one wanted.

Thank you.

belseware

(I randomly chose this article to post the comment I've been meaning to make for some time...)

2008 Dec 14 12:02 PM

[CLH:]

Belseware---good comment. The US made the right cars in the eighties --way ahead of Japan. If they stop SUVs they are making a mistake to make the Democrats happy (tin cans with good milage). The real problem is not the wrong cars but the greedy unions. Until the US can stand up to the unions there is no hope for US cars.

2008 Dec 14 02:35 PM

[Paul Scott:]

As one who has been driving a Toyota RAV4 EV for 6 years, I can assure you that electric drive will take over, and do it fast. The advantages are that you use much cheaper domestic energy that is already cleaner than gas and getting cleaner as the grid gets cleaner. Night time electric power is very cheap and that's when people charge their EVs. There's enough excess capacity today to charge over 180 million EVs at night without adding any new power plants.

In our case, we installed 3 kW of solar just before getting the EV and for 6 years, our electric bill has been under $50 for the year, and that covered both the house and car. At this rate, the system will pay for itself in less than 9 years, but will last for 40-50 years. None of my money goes to the Saudis.

The EV has not had one whit of maintenance and the only repair was replacing the rear shocks at 63,000 miles. The car performs better than a new 2008 model gas RAV4, not to mention a gas one that was bought in 2002 with 65,000 miles on it.

Every car maker in the world is developing EVs and plug-in hybrids. Between the two technologies, 100% of American driving needs can be covered with virtually ell the energy coming from domestic electricity and home grown bio-fuels.

It's best to get on the bandwagon and get in line for the first ones to hit the market in the next couple of years. The pent up demand for these cars is going to soak up production fast.

2008 Dec 14 10:20 PM

[Stan Wellaway:]

Regardless of my enthusiasm for electric vehicles, I wouldn't pretend that EV-related stocks are favourite. The majority of them struggle to make any headway. Tanfield Group has seen its share price crash from overhyped levels to what is now a pitifully low level. (Though they do actually make a profit and have no debt - so are better placed than some to survive the current gloom. Their net asset value is high enough to sustain a sizeable increase in the share price)

If it turns out that Ford has used its close working relationship to milk Smith of expertise, and to go it alone (or with some other) on the EV front, the Tanfield share price is doomed to stay low. But if Ford's promised announcement at the Detroit show 4 weeks from now does confirm Smith as their EV partner, I believe the Tanfield share price will soar. In the UK there are certainly plenty of investors listening very closely for any leak of information at present. On a purely speculative level, with its price so low, I believe it to be worth holding a few. Though obviously, everyone should do their own research.

2008 Dec 15 04:37 AM

[Stan Wellaway:]

Ford duly mentioned the Tanfield Group name during its press conference at the Detroit show on Sunday. And the Tanfield share price duly responded this week. Local newspapers based close to the company's north-east England HQ seem increasingly convinced that something is afoot.

See www.durhamtimes.co.uk/.../

Jan 17 09:49 AM

[Stan Wellaway:]

And so it proved to be! Ford confirmed that Tanfield's Smith division would be their chosen partner for the US electric van. A huge endorsement of Smith Electric Vehicles.

Feb 12 07:43 AM