Sunday, October 26, 2008

The Big 3's love affair with SUVs is over...and is starting look more like a Fatal Attraction

The latest business news is all about how the nation is facing high unemployment as businesses contract to deal with lowered consumer spending due to layoffs caused by companies suffering under the credit crisis which in turn is the offspring of the subprime mortgage crisis.

When October’s job losses are announced on Nov. 7, three days after the presidential election, many economists expect the number to exceed 200,000. The current unemployment rate of 6.1 percent is likely to rise, perhaps significantly.

“My view is that it will be near 8 or 8.5 percent by the end of next year,” said Nigel Gault, chief domestic economist at Global Insight, offering a forecast others share. That would be the highest unemployment rate since the deep recession of the early 1980s.

Bad news. Remember that this is the index which does not include numbers of people not looking for work nor does it tell us anything about the underemployed. But this post isn't about the general economy. It's about the folly of our obsession with gas-hogging SUVs.

The Big Three are all having extreme financial difficulties. GM appears to be suffering the worst, mainly because they relied so heavily on sales of SUVs.

After losing $18.8 billion in the first half of this year and facing more red ink for months to come, G.M. is now trying to salvage its future through a possible merger with Chrysler, another deeply troubled American automaker.

As of Friday, shares of G.M. were down 76 percent for the year and Ford shares were down 70 percent.

What is clear is that Detroit, among its other miscues in recent years, particularly overindulged its romance with S.U.V.’s, leaving it tethered to a product line that may prove to be the industry’s undoing.

The article explains exactly what has happened, so I suggest reading it in full, but the short version is that GM wasn't competing at smaller cars because they didn't feel the need to. SUVs were profitable for them. They believed in them.

“They told us it would never end, that it was a recession-proof vehicle and we’d never be able to build enough of them,” said Daryl Klemp, who was hired in 1995, when sales of S.U.V.’s were booming.

Well, they were wrong. Wrong in all sorts of ways.

Mr. Wagoner has often been asked whether G.M. miscalculated its need to invest billions of dollars to develop all-new S.U.V.’s. “We, like everybody else, didn’t anticipate fuel prices to go up like they did,” he said recently.

People did predict future price spikes in oil, automakers and buyers just didn't want to hear it. Not like price spikes and shortages haven't been seen before. But people's memories are short, and wishful thinking seems to have ruled America for the past two decades, at least when it comes to automobiles. We forgot the lesson of the seventies, and when the Japanese rolled in with their super efficient little cars, Americans decided they wouldn't compete for that market, they'd just go right ahead and sell gas-guzzlers. Unfortunately, that strategy worked. Fueled by decades of low gas prices, we got used to not paying the real cost of such vehicles. Those days are over.

This is exactly why we should have legislated a reduction in size and gas usage of all vehicles years ago. Don't bother to tell me about CAFE standards, they're a joke. Who cares what the fleet average is? Let me tell you what mandating a real minimum fuel economy standard would have done. It would have insulated us from the past summer of obscene gas prices in two ways: one, if overall US usage was even a few percent lower, it would drive demand down, driving prices down. Two, if more people had small cars, gas prices would hurt them less during price spikes. That could only be a good thing. Free marketers (is anybody still listening to them) told us that these things happen. If gas prices went up, SUV sales would go down. Indeed, that is true. But the idea that we should sit back and let this "correction" happen when we could have forced all US automakers to invest in smaller cars and keep employing Americans is ridiculous. Does anyone think if we'd banned sales of any vehicle that didn't get 20mpg there would have been less vehicles bought? I've made this point before. And lest anyone counter with the argument that this would have cost GM profit, well, look where they are now.

All I'm saying is, government intervention in the economy that actually takes into consideration the best long-term interests of the nation as a whole might actually work out for private industry too. I'm sure no one now would disagree that the short-term thinking of GM and the other automakers focusing on SUVs is exactly what is causing them to be in such financial distress. But hey, that's socialism and we couldn't possibly consider that, now could we?

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