The changes affecting the global auto industry are nothing new but they are more serious. Too bad carmakers didn't learn the first time
If hindsight is 20-20 vision, then automotive executives must spend a lot of time looking in the rear-view window.
Like many great industries, the auto sector has seen tremendous achievements, pioneered new technologies, and changed the course of history. But it has also had its share of blunders and missteps; some worse than others. What is different today is that many of these bad ideas are responsible for the woeful state in which the auto industry, Detroit in particular, currently finds itself.
The biggest of these, obvious to anyone who has tried to fill up his sport-utility vehicle or pickup truck lately, is that General Motors (GM), Ford (F), Chrysler and, to lesser extents, companies such as Mercedes-Benz (DAI), Porsche (PSHG), and BMW (BMWG) continued to make fuel-inefficient cars for the U.S. market long after concerns about America's dependence on oil, foreign or otherwise, became known. Like cigarette smokers, they continued puffing away, ignoring the mountain of evidence detailing the dangers.
The Road to Truck Nation
Despite two earlier oil embargoes, in the past 15 years or so the U.S. market steadily became Truck Nation. The domestic automakers made more and bigger trucks, many with gas-guzzling V-8 engines, until it seemed as if no truck was too big, too powerful, or too ostentatious.
As Detroit concentrated on trucks and SUVs, it effectively ceded the market for more fuel-efficient, though less profitable, sedans and coupes to companies such as Toyota (TM) and Honda (HMC). Now that light-truck sales have fallen off the cliff, Detroit is struggling to catch up, if it ever can. So, in an industry that has given the world such paradigms of disaster as the Edsel and the Pinto, the near-sightedness of the decision to ignore fuel-efficiency ranks at the top.
But there have been plenty of other blunders, and not all can be laid at the feet of Detroit. In no particular order, there was Daimler's lame attempt to merge with Chrysler; Ford's misguided—and very expensive—bid to create its Premier Automotive Group by buying up Land Rover, Jaguar, Aston Martin, and Volvo (nearly all of which have been sold at a substantial loss); Volkswagen's (VOWG) decision to build the Phaeton luxury car that no one wanted; and the complete abandonment of a once-proud British-owned car industry. Let's not forget about Detroit failing to take the Japanese seriously, the Hummer, the Ford-Firestone debacle, overproduction, fleet sales, excessive health-care costs, Chrysler's "talking cars" of the 1970s, American Motors, the Pontiac Fiero, Le Car, anything from Yugo, and 0% financing. The list goes on.
Back to the Future
None of this is new, of course, or comes as much of a surprise. But why it is worth mentioning is to see if the auto industry is capable of learning from its mistakes. While there has never been another Edsel, the same problems that bedeviled Detroit during the gas crisis of the 1970s are revisiting us in a slightly more serious manner today. Back then, Motown was still the undisputed auto champ of the world. If Detroit had chosen to spend the money to develop affordable, smaller, well-made cars that got great gas mileage, it could have remained so and continued to laugh at the imports. But it didn't.
Even as recently as the early 1990s, Ford made the No. 1 car in the U.S., the Taurus, hailed for its innovative design. But Ford failed to expand the brand, and the Toyota Camry claimed the top spot, which it continues to hold, in 1997. By 2006, when Ford briefly discontinued it, the Taurus was a shadow of its former self, relegated to rental car parking lots and government fleets. Ford's new CEO, Alan Mulally, revived it last year as a 2008 model car but through May the Camry has outsold the new Taurus by a an eye-popping 613%.
And, like many industries caught up in the bubble of the late 1990s, automakers got used to strong sales and record stock prices. On Jan. 4, 1999, GM's stock reached its all-time high of $87 a share. A few months later, in April, Ford posted a record share price of $36.58. Despite steady encroachment by imports, Detroit was still on top as its pickups and SUVs, each becoming more powerful and more luxurious every year, were flying out the door.
The Auto Equivalent of Tofu
Today, GM's and Ford's share prices have suffered an 81% and an 83% drop, respectively, and their sales have plummeted. Toyota surpassed Ford in terms of overall sales to become the No. 2 seller in 2006 and is on track to become No. 1 in the world this year. (Over this same period, Toyota's share price nearly doubled, to around $100 today.) Why? Because Detroit thought the good times were here to stay. So it kept on doing what it was doing, reasoning that as long as sales were good, profits rising, and stock prices high there was no need to do anything but churn out pickups and SUVs. Sedans were all but ignored, and hybrids were largely derided as the automotive equivalent of tofu.
In the peak year of 2004, light-truck sales reached 9.2 million, or 54.2% of the market. Trucks, including pickups, SUVs, minivans, and crossovers accounted for more than two-thirds of U.S. sales in 2004 for Ford and for then-DaimlerChrysler, and about 60% for GM.
This year through May, total U.S. light-truck sales were down 16%, to about 2.9 million, according to Automotive News Data Center. That's also down 21.7% from the comparable period in the peak year of 2004. Through May, light trucks made up about 47% of light-vehicle sales in 2008. That makes 2008 the first year since 2002 that cars will outsell trucks.
But now, finally, the industry seems more ready than ever to embrace change, even radical change. New technologies from hybrids to hydrogen are being actively pursued. GM is promising to deliver its electric Chevy volt (BusinessWeek, 11/20/07) to market by 2010, and other carmakers are making equally ambitious commitments. The reason is that, unlike in the 1970s, it does not seem as though the price of gas will come down soon, if ever, so car companies need to adapt to the new realities pressuring their business. As a result, Detroit's Big Three are cutting production of trucks and SUVs and ramping up design and production of smaller, more fuel-efficient cars.
It looks as if they are finally learning from their mistakes. Let's just hope it's not too late.
Click here to find out which are the auto industry's worst blunders.