by kevin, on November 6th, 2009
In my last post on this issue I wrote about the oil and gas industries. With this post I’ll cover their partners in market manipulation, US automakers.
The original Ford Model T achieved 13 to 21 miles per gallon and could run on gasoline, kerosene, and ethanol. It rolled off the assembly line more than one hundred years ago. But visit the web site of any US automaker today and you’ll find vehicles listed with worse fuel economy. I’ll admit that’s not a totally fair comparison. Cars today are far heavier than those of a century ago. But it raises an interesting question – how would today’s models compare on a mileage per pound comparison?
Fifty years ago, General Motors was the world’s most dominant automaker. The expression – what’s good for GM is good for America – was true. It’s wasn’t just a clever marketing slogan. At the height of its success, GM controlled fifty percent of the market – half of all cars sold. Today, they only have a twenty percent market share and are the number two manufacturer behind Toyota. And Toyota did that with fifteen hundred dealerships compared to GM’s seven thousand. During WWII, General Motors and the other US automakers transitioned their factories from auto and truck production to military craft, armaments, and equipment in a matter of months. It was an unprecedented reshaping of US industry like none other in history. But today the big three can’t even get out of their own way.
Since then US automakers have attempted to block every effort to improve efficiency, reduce emissions, improve safety, and more. They routinely fight government plans to raise CAFE (Corporate Average Fuel Economy) standards. As a result, cars manufactured in the US cannot be sold in other parts of the world. Europe, China, Australia, and others have higher fuel economy standards. How is it that other countries have been able to figure it out, but the best minds in America cannot? Honda, Toyota, and Nissan all have higher fleet mileage than any domestic brand.
With every government effort to improve safety or environmental impact, Detroit has used the time work argument that any change will increase cost passed on to the consumer. In 1994 when California was debating low emission standards they cried wolf again and claimed that modifications would increase each auto by $800. After the legislation passed the price tag per auto was actually $80.
Several years ago I attended a presentation by a Toyota representative where they acknowledged their products rely on a fuel with a dwindling supply. They understand and accept the fact that to be in business fifty years from now their cars will have to run on another fuel. They aren’t waiting for more crude to be discovered, they aren’t resting on their laurels, they aren’t waiting for someone else for figure it out for them, they are aggressively pursuing alternative locomotive options.
What have US automakers done? In the past year, all three domestic brands re-introduced retro 1960s styled muscle cars – the restyled Ford Mustang, Chrysler Challenger, and Chevrolet Camaro. Aesthetically they’re stunning, but do we really need to go back to the gas guzzling mentality prior to the 1973 OPEC oil embargo? The Mustang’s mileage rating is between 16 and 26 mpg, the Challenger’s is between 15 and 27 mpg, and the Camaro’s mileage rating is the best of the three between 18 and 29 mpg. How would those numbers compare to their 60s originals? Those mpg ratings are appalling for 2010 cars. How can that be the best new offering from Detroit?
The Ford Model T mentioned above weighed around 1,200 pounds. The new Ford Mustang weighs around 3,500 pounds. In one hundred years Ford has managed to make a faster, more powerful, more technologically advanced, more comfortable, more reliable, and safer car but hasn’t figured out how to improve the gas mileage. A century ago, the Model T cost $850 (equivalent to $20,091 today). But five years after it’s introduction, the Model T sold for $550 (equivalent to $11,819 today), and $440 two years later (equivalent to $9,237 today). Twenty years after the first assembly line automobile entered the market, the price of a Model T had fallen to $290 (equivalent to $3,191 today). Can you name an American car produced today that costs less than $4,000 brand new?
It’s easy from a distance to suggest US auto companies have been lazy, or short sighted, or many other things. To be fair, a big reason fuel economy wasn’t a high priority issue was price. There’s no need to improve efficiency and burn less of a fuel that’s plentiful and inexpensive. That’s understandable. Yet, how can they maintain the same position after 1974? A gallon of gas cost ¢7 in 1910 (equivalent to ¢77 today). During the past three years it’s peaked above $4 per gallon in some parts of the country. The cost of fuel has grown exponentially, yet US automakers are still behaving like it’s cheap and choosing to launch retro models with mileage no better than one hundred years ago. Ford, Chrysler, and GM do have more efficient vehicles in their fleets, a few hybrids, some alternative flex fuel options, and plans for all electric models, but a gas centric mentality seems to still persist in Detroit.
So how do they deserve any kind of bail out or taxpayer help? In a free market, such dismally poor performance would render them a casualty. In a marketplace where only the best ideas and smartest thinking wins, they would be road kill. The government has provided $81 billion to GM and Chrysler. Although the money is supposed to be paid back, a Congressional Oversight Panel believes the prospect of $23 billion ever being repaid is slim. In addition, consumers have also received government incentive to grease the skids through Cash for Clunkers and tax deductions for state and local sales tax. The government isn’t offering incentives for my clients. Adding insult to injury is how states in the southeast – South Carolina, Alabama, Tennessee – have bent over backwards to get foreign automakers to locate factories there. BMW, Mercedes, and Nissan have all been given huge tax breaks. Protectionist practices through tariffs also drastically tilt the field toward domestically produced cars. Those tariffs are hotly contested and aggressively negotiated between countries. It’s a premium paid by consumers, to the US government as low as ten percent and as high as one hundred percent.
No matter what aspect of the industry you study, there’s no free market at work. It’s manipulated in so many ways at so many levels that it bears little resemblance to free market economics. It’s a farce pretending to be a level playing field. So, if it’s not a free market system at work, let’s use it to get what we need – greater efficiency, reduced emissions, greater safety, a transition to alternative fuels, and lower prices. Why not create incentives for improved battery technology rather than continued dependence on a limited fuel supply? Why not offer tax breaks to automakers who raise fuel economy and safety and/or to customers who buy those vehicles? Why not utilize all the tools currently employed to maintain a century old dinosaur to solve problems rather than perpetuate them?
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