General Tsao’s Motors

November 30th, 2008 · No Comments

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The popular Chinese Buick

A considerable amount of trees (and bytes for that matter) have been soaked up debating the merits of an automobile bailout. From what I have read there has been an almost unanimous animosity towards the US automobile industry and the executives in particular. The only defense I have seen is that the collapse of the industry will certainly result in a ripple effect that will destroy millions of down stream jobs and a vicious ripple effect mirroring the demise of the steel industry in the 20th Century.

It is certainly hard to gather sympathy for the car manufacturers themselves who in most people eyes (writer included) are mostly responsible for the situation they now face. It is hard to deny their near universal intransigence to any sort of regulation, from obsessive determination to ignore the CAFE (Corporate Average Fuel Consumption) by driving a truck literally through the exemptions, to pouring millions into lobbyists and lawyers to defeat any meaningful emissions control either from the EPA or from the State of California, to watering down of safety regulations and any meaningful investment in alternative fuel vehicles.

[Photo: Plug in America]

However the seeds of their destruction was in their burying of the Saturn EV1. With the destruction of the vehicle in crushing machines on the West Coast they also crushed their only legitimate claim to the future. The EV1 is symbolic of Detroit’s contempt for a future that was to be shaped by alternative fuel vehicles. Although General Motors made what they thought were legitimate arguments as to the demise of the vehicle, the success of the Toyota Prius has rendered these moot, and ultimately painted General Motors as disingenuous no matter how much they point to the Chevy Volt. The face of General Motors and Detroit is now a face of an old flaying drunk who promises that this time he will go to rehab.

However the biggest amount of vitriole should be for Congress and their failure to create a stable and reliable market for new vehicles. As we have seen in the last 8 years, the price of gasoline is a major determinate of the fleet mix in the United States. Most other industrialized countries use a mix of consumption taxes on fuels to keep the prices relatively stable with a floor to keep prices level and sustainable in normal times. The reason the floor is there is no only to promote stability of pump prices but also to reflect the enormous externalities that exist in extracting and processing petroleum products. The most obvious is environmental but less obvious is the significant cost of securing access to oil and oil production. This alone accounts for tens of billions of dollars each year.

In Detroit News they discuss how difficult it is for car companies to predict the future:

But there’s no guarantee that the new business model would be any more viable than the current one. Automobile experts estimate that the battery in a plug-in vehicle could add at least $8,000 to the cost of a car, maybe considerably more. Most Americans will be unwilling to pay the extra price, especially if gasoline prices languish around $2 a gallon.

That’s why one of the mysteries about GM’s plans to introduce the Volt in 2010 is how much it will cost to buy one. “What’s the Volt going to cost? I would be happy to answer that if you can tell me the price of oil in 2010,” said Robert A. Kruse, GM’s executive director of global vehicle engineering for hybrids, electric vehicles and batteries. “I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions.”

What the car companies crave most is stability and predictability. While congress is asleep at the wheel and incapable of understanding their role in the failure of the industry and their inability to create a stable and (somewhat) predictable environment for car companies to work under, it will indeed be a bridge loan to nowhere.

However despite John Dingell being ousted, the future of the car industry in North America has largely been painted. Over the next 20 years, the big three will leave the United States (and Canada) and the epicenter of car manufacturing will move to Asia. Like the television industry, the cars will have familiar brands but they will be made in Shanghai, Kuala Lumpur or even Hanoi.

What is truely over is the concept of the American car. Cars that are not able to be sold on a global basis and reflect the needs of a global market will be relegated to museums and enthusiasts. Cars that can’t sell equally well in Sedalia Missouri, Mumbai and Wagga Wagga will simply be memories of the golden days of push rold V8s.

Perhaps most significantly is that the big three will cease to be well the big three. Ford, the closest to homogeneous global car production will survive with it’s continued Europeanization of it’s fleet, Chrysler will be sacrificed by the hedge fund billionaires that have little appetite for hard work and even lesser for sustained losses.

The General Motors that we have known for the last 80 years will end up having to abandon it’s multi band strategy. GM will be relegated to Chevrolet and Cadillac and will sell the rest of the brands or close them down.

What we do know is that the Detroit we have known is dead. They are as cooked as General Tsao’s chicken……

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