Wednesday, November 19, 2008

Future Of The U.S. Auto Industry

With the current debate focused on whether to bail out the U.S. auto industry or not, the U.S. is in danger of missing the “Big Picture.” The Big Picture here is transportation. Our love with cars began with the idea of having the freedom of movement. The ability to just hop in a car and go anywhere helped to spark the growth of the interstate system and solidified our car-centric culture (click here for a list of popular songs about cars).

A Bit Of History
As our love with cars grew, so did our desire for it to go faster and further while providing ever-increasing level of comfort and safety. How many of us actually remember when cars did not have passenger-side rear view mirror or without remote lock system? While our love of cars grew, we did not pay a lot of attention to the cost of ownership, especially the cost of fuel. With the aftermath of the 1973 oil crisis, did we pay attention to the fuel cost? This paved the way for the Japanese cars to enter the U.S. market with their inexpensive and fuel efficient cars. (It also helped BMW to solidify its foothold in the U.S. market with its fun, fuel-efficient, and sporty 2002.)

The U.S. auto industry, facing its first crisis with the 1973 oil crisis and the influx of inexpensive Japanese cars, shifted gears rapidly to produce more fuel-efficient cars. While their initial efforts were pitiful, such as the Ford Pinto, AMC Gremlin, AMC Pacer, and GM Vega, the U.S. auto industry moved quickly to counter the “Japanese auto invasion” and try to meet consumer’s demand for fuel-efficient cars.

The aftermath of the oil crisis led to the U.S. government establishing the Corporate Average Fuel Economy (CAFE) regulation in 1975. This was an attempt at forcing the U.S. automakers into making more fuel-efficient vehicles and thereby reducing our dependence on OPEC. After another crisis in 1979 with the Chrysler bailout, it would appear that the U.S. auto Industry had learned its lesson: quickly adapt and survive or die.

That brings us to the present
The crux of the two crises that the U.S. auto Industry faced in the 1970’s should have made them stronger, in the vein of Nietzsche’s famous quote: “What doesn't kill us makes us stronger.” However, it appears that another adage is more appropriate for the U.S. auto industry: “You Can Lead A Horse To Water, But You Can't Make It Drink.

Facing a global recession and high cash burn rate, the U.S. auto industry is now begging the U.S. Congress for a $25 billion bailout. But, should they be bailed out? I will leave that debate to the academia and the pundits, as this risk manager thinks that the issue is beyond moot. Once again, the focus should be on the big picture. But first, some facts to set the stage.

First Some Facts
The facts are simple.
Fact 1: Oil is a non-renewable resource that is fast depleting.
Fact 2: Two countries that account for about 50% of the world’s population, India and China, will continue to increase their consumption oil products.
Fact 3: OPEC nations controls two-thirds of the world's oil reserves
Fact 4: U.S. imports nearly 50% of its daily oil consumption (imports 10 million barrels/day and consumes 20.68 million barrels/day).
Fact 5: Transportation accounts for 70% of all oil use
Fact 6: U.S. Consumers use about 9.3 million barrels of gasoline/day
Fact 7: Corporate Average Fuel Economy standards for passenger cars have remained stuck at 27.5 MPG since 1990.
Fact 8: Japanese cars’ average CAFE is approximately 32.2 MPG, or 17% more efficient (calculated using the Japanese cars’ domestic MPG figures for each manufacture and weighting Toyota at 50%, Honda at 30% and Nissan at 20%).
Fact 9: Tesla Motors is producing electric cars that have been EPA-certified at 227 MPG equivalent.
Fact 10: Tesla Motors only needed $105.5 million in private financing to get started.

The Big Picture
If Tesla Motors can produce a street legal sport car that gets 227 miles per electric charge with only $105.5 million in private investment, then why can’t the Big 3 U.S. automakers produce something equivalent? After all, they have billions to burn. Moreover, if the Japanese automakers are producing cars in the U.S. that averages 32.2 MPG, then why can’t the Big 3? After all, the Japanese automakers are employing U.S. workers and making the cars in the U.S.

The U.S. automakers are dinosaurs that will not change the way they conduct business. It is as if the spirit of Henry Ford’s infamous quote lives on: “Any customer can have a car painted any colour that he wants so long as it is black.” This inflexible mind set is the death of the U.S. auto industry.

We, the American consumer, still desire powerful cars with all the “bells and whistles.” However, in the era of high fuel prices, we also desire high fuel economy. Tesla Motors have pioneered the way to satisfy this need. While their initial 248 horsepower electric sports car is expensive at $109,000, with proper funding, it is easy to modify their design, step down the cost, and make it affordable through mass production.

After all, the first automobiles were too expensive for common folks. Only through the mass production genius of Henry Ford could the regular American afford a car. Much in the same way, Tesla Motors have clearly demonstrated that electric cars are viable, efficient, and fun to drive. The next step is to make the same technology affordable so that the middle class could afford one.

Conclusion – the Dawning of the New Automobile Society
The newly elected President could be the catalyst to push the U.S. auto industry into the new era. The days of internal combustion engine are limited. Along with that, the days of the parts manufactures. The electric cars have simple motor design, making them more reliable. Plug, charge, and go.

Gone also will be corner gas stations and many auto repair shops. Yes, there will be job losses but that is inevitable. The positives far exceed the negatives: Cleaner air, lower green gas emissions, no more ground water contamination from gas stations and auto repair shops. One can simply “fuel up” at any electric plug.

Let the trucks and buses idle their engines. There is no more harmful fumes or soot. Yes, we will still be burning fossil fuels to generate electricity but with 85% efficiency of an electric motor, as opposed to 25 to 30% efficiency of a gas-burning engine, we will reduce our consumption of fossil fuels, overall, while being able to drive 300 miles on a single charge.

I can see a day when we would be looking back and asking ourselves: “How many of us actually remember when cars did not have built-in GPS or used ‘gasoline’ to get around?” I see the day when all cars will be electric and have solar panels (for recharging the batteries) and an emergency hand crank (for those times when you run out of ‘juice’ in the middle of nowhere at night).

Until then, I will watch the unfolding of the U.S. automobile industry bailout drama while being reminded of another Henry Ford’s famous quotes: “I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be low in price that no man making a good salary will be unable to own one — and enjoy with his family the blessing of hours of pleasure in God's great open spaces.” – My Life and Work (1922), Chapter IV.

Ed Kim
Practical Risk Manager

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