Oil prices have flirted with a record $50 a barrel in recent weeks, and gas still hovers around $2 a gallon across much of the U.S. But in Detroit, it feels like business as usual. In late August, General Motors Corp. (GM) Chairman and CEO G. Richard Wagoner Jr. was on Woodward Avenue in Royal Oak, Mich., watching a parade of vintage Mustangs, GTOs, and other muscle cars -- symbols of a day when companies didn't even bother telling you what kind of mileage their cars got. And to drive home the point that Motown still has gasoline running through its veins, Wagoner brought with him about a dozen copies of a new 390-horsepower version of the Chevrolet SSR sport pickup. When asked if pricey oil was hurting sales of GM's gas-guzzling trucks and sport-utility vehicles, Wagoner was dismissive: "We haven't seen it having an effect so far."
That sound you hear out of Detroit these days is a lot of whistling past the graveyard. For the past decade -- the auto industry's fat years, when average annual sales of 17 million cars and trucks generated big returns -- the U.S. Big Three invested much of their profits in horsepower. The resulting muscle-bound trucks and bulky SUVs proved wildly popular, and probably saved Motown's hide. In the meantime, though, the Japanese and Europeans -- whose home markets have long had more expensive fuel -- were investing in a host of fuel-efficient technologies. So while Wagoner is showing off a new SSR, Toyota Motor Corp. (TM) is boosting production capacity for its 50-mile-per-gallon Prius by 50% and plans the launch of another gas-electric hybrid, the Lexus RX 400h luxury SUV, this fall. Ford Motor Co. (F) will soon launch the first American hybrid, a nearly 40-mpg version of its Escape SUV. But Honda Motor Co. (HMC) is about to sell its third hybrid, an Accord, promising at least 240 horsepower and fuel economy that tops 30 mpg. The Europeans, meanwhile, are pushing clean diesel engines, which get at least 30% better fuel economy. And all foreign auto makers have a jump on selling "crossover" sport-utes, which are built using the understructure of a car, thus offering buyers the cavernous confines of a big SUV but with a smoother ride and better fuel economy.
For now, as gas prices ease off a bit with the end of the summer travel season, Detroit feels like it has a reprieve. But in an age of terrorism, that could change overnight. And if oil suddenly spikes upward, Detroit's fuel-efficiency gap could be reminiscent of the '70s, when young buyers flocked to smaller Toyotas and Hondas, and Detroit was left flat-footed. U.S. carmakers say that won't happen again, that they are already ramping up production of smaller SUVs, launching more hybrids, and charging engineers with finding ways to wring more efficiency out of today's gasoline engines. But little of that is ready for prime time -- in fact, most of the new technology won't be evident for a couple of years.
Even at today's gas prices, customers are starting to vote with their feet against big SUVs. Detroit execs argue that SUV and truck sales are still strong, even for monsters like the 15-mpg Chevrolet (GM) Tahoe and Ford Expedition. Indeed, sales of truck-based SUVs -- which account for most of Detroit's automotive profits -- are up 1.3% so far this year. But look closer: Nearly 50% of consumers who are trading in a traditional truck-based SUV buy something else, says Art Spinella, president of CNW Marketing Research Inc. in Bandon, Ore. Buyers are leaving to make a fashion statement as much as to save gas. But in any case, the vehicles they're choosing -- smaller SUVs and luxury cars -- are more likely to be foreign-made.
Indeed, sales of less-efficient truck-based SUVs are only still rising because auto makers are laying out as much as $6,000 in rebates. That's richer than the deals being offered on any other type of vehicle. Margins, as a result, are suffering for all the U.S. carmakers. Says Detroit-area Chevy dealer Gordon Stewart: "They're overcoming the fuel-cost increase with incentives that you can't believe."
EATING JAPAN'S DUST
For now, many American consumers still crave the SUV's enormous interior cabins and commanding ride height. But if fuel prices become an issue, those comforts could quickly become an expensive -- and nonessential -- luxury. CNW Marketing surveyed consumers earlier this year and the results showed that some consumers will look for more efficient vehicles when gas prices hit $2.25. But they will have a bigger change of heart if prices hit levels of $2.50 or higher and remain there for three to six months. Then, Spinella says, the shift into hybrids and smaller vehicles would accelerate.
Car-like SUVs such as the Honda Pilot already are an attractive alternative. The Pilot gets 19 mpg, a 19% improvement over the truck-based, 16-mpg Explorer. Both seat seven. The Japanese jumped out to an early lead in crossovers partly out of necessity -- Toyota and Honda didn't have big truck frames with which to enter the booming SUV business. But the products were so successful they quickly changed the market. Today crossovers account for 1.7 million sales per year, triple the number sold back in 2000. The Big Three have just 39% of the crossover market in the U.S., compared with their 60% stake of the overall vehicle market. The domestic share is growing, thanks to successes like Ford's Escape, a small crossover that sells almost 170,000 a year. GM has a few, but its bigger push into crossovers won't come until 2007.
The hybrid race is even more lopsided. Detroit waited while Honda and Toyota blazed a trail, adding a small electric motor to boost power and in some instances to take over for the gas engine. Now Toyota and Honda have been selling hybrid-electric cars for seven years, working out the kinks and priming consumers to think of it as trustworthy technology. It will be three years before GM offers a hybrid system on its new full-size SUVs. That will be more robust than the 10% mileage boost that commercial-fleet buyers now get with a "mild" hybrid version of the Chevrolet Silverado truck. GM execs argued that they could make a bigger impact on fuel consumption and tailpipe emissions by adding hybrid systems to their big SUVs than the other guys were through hybrid small cars. But with the shift that's under way, by the time the hybrid trucks arrive Detroit could be defending a smaller market.
To be sure, no one knows how big a market hybrids will become. The technology adds $2,000 to $5,000 to the cost of building each vehicle, some of which gets passed on to the customer. But as gasoline stays close to $2 a gallon, hybrids can only get more attention. Dealers already have waiting lists for the Prius.
If prices shoot back up again, the domestic manufacturers have a few levers they could pull relatively quickly. They could sell more trucks with V-6 engines instead of gas-gulping V-8s. GM is working on a conventional gasoline engine that can improve fuel economy by up to 20% using, among several technologies, an engine that shuts down some cylinders to save fuel when the vehicle is cruising at highway speeds. Chrysler has this in its 300 sedan and GM will offer it in its mid-size SUVs next year.
And as a last resort, auto makers could quickly recalibrate their cars to have less power. Changing the gears to reduce power to the drive axle can cut gas use by 5% to 10%. But the trade-off is a slower car. Therein lies the problem: Foreign auto makers already deliver fuel savings with fewer compromises. After years of pumping up U.S. sales with horsepower and price incentives, Detroit is scrambling to catch up in fuel-efficient technologies. For the next couple of years, U.S. car execs can only cross their fingers, watch oil markets, and hope for the best.
By David Welch