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Two Auto Makers, Two Roads
05/20/2010 2:00 pm EST
Howard Gold’s column won’t appear this week, and we are posting an updated version of this commentary from last June 25th instead.
You couldn’t find a better illustration of the different paths taken by two of the Detroit Three than in dueling automobile reviews in The New York Times.
The subjects of both pieces were brand-new hybrids from US-based manufacturers. But that’s about all they had in common. One of them, the new Ford Fusion hybrid, got a rave review and looks headed towards a promising future. The other, the so-called “mild hybrid” of the Chevrolet Malibu, is dead on arrival.
These neatly symbolized what may be the fates of their respective manufacturers.
Ford Motor (NYSE: F), which has made some tough choices and didn’t seek government aid, is heading in the right direction. General Motors, which got billions of dollars of taxpayer money and is in bankruptcy court, may find it hard to keep up.
(GM has repaid some of the money the government issued to it, and the reorganized company is preparing to exit bankruptcy.)
“The new gas-electric Fusion is not only a standout among hybrids, it may well share honors—with the redesigned 2010 Toyota Prius—as the most well-rounded hybrids yet,” the Times’s reviewer exulted.
“But it’s time to add the Malibu Hybrid to the growing pile of hybrid failures from General Motors,” the other reviewer wrote. “The [Saturn] Aura and Malibu are so-called mild hybrids, which makes them as authentic as supermarket salsa.”
Reminds you of gushy Paula Abdul and scowling Simon Cowell on the old “American Idol,” doesn’t it?
And one of these contestants already has been sent home: After having sold only 706 Malibu hybrids and a mere 35 Saturn Aura hybrids (its sister car) in May, GM’s brass put the model out of its misery.
Now, there are some big questions about hybrids. But could there be any clearer difference between one company’s ability to take bold initiatives (Ford) and the other’s decision-making by committee (GM)?
“Perhaps the Fusion Hybrid suggests that Ford, the only Detroit automaker to decline a government handout, really can deliver the advanced fuel-saving technology that it has been promising for years,” the Times critic wrote.
(And here I must disclose that my wife holds a very small number of Ford shares, which have more than doubled since the column originally appeared.)
Fuel economy will be increasingly important in coming years. Even if gasoline doesn’t hit $4.00 a gallon again for a while, the days of $1.00 gas are gone for good.
Also, President Obama last year called for higher fuel economy standards that would boost required fuel mileage on US-sold vehicles to 39 miles per gallon on cars and 30 on trucks by 2016 (from 27.5 for cars and 23.1 for trucks in 2009). That will put more heat on auto makers.
Chrysler, the littlest of the once-Big Three, will outsource production of fuel-efficient engines to Fiat, its shotgun-wedding partner. GM wants to leapfrog current technology by moving directly to an electric-powered hybrid car, the Chevy Volt, due in late 2010.
Meanwhile, Ford is plowing ahead with today’s hybrid technology, even though hybrids aren’t exactly flying off the shelves. (The company also just tapped into $5.9 billion of Energy Department loans to retool its US-based plants to make more fuel-efficient vehicles.)
The Fusion hybrid costs about $3,300 more than the conventional model, which gets only two miles a gallon less on the highway. So, you have to do a lot of city driving for it to pay off. And gas prices need to be a lot higher, too.
Even if you drive 5,000 miles a year in busy city traffic like that of, say, New York, Seattle, or Washington, DC, you’d save only $400 a year even if gas goes to $4.00 a gallon, calculates Professor Martin Zimmerman of the University of Michigan, formerly Ford’s chief economist.
That means it would take eight years for a buyer to break even. No wonder hybrids represent less than 3% of vehicles sold in the US—and it’s no surprise GM played it safe.
“They were producing what the consumer was asking for,” says Rebecca Lindland, director of automotive research for North and South America for IHS Global Insight. “The consumer [was] demanding more crossovers”—generally a sport utility vehicle with a car chassis.
That, of course, came back to haunt GM when fuel prices skyrocketed and the recession hit—a double blow from which it hasn’t recovered: It just didn’t have enough cash to survive.
But Ford did. Soon after his arrival in 2006, chief executive officer Alan Mulally shuttered factories, closed down dealerships, negotiated a new union contract, then mortgaged everything to borrow a jaw-dropping $23.4 billion one year before the recession hit. Ford doesn’t have to repay the bulk of that until at least 2013.
Whether a stroke of genius or just dumb luck, that move kept the company out of bankruptcy court and Uncle Sam’s clutches. And although some think GM and Chrysler, with artificially cleansed balance sheets and a lifeline from the US taxpayer, may offer unfair competition, Prof. Zimmerman argues Ford has something more important: flexibility.
The next few years are going to be tough for all US auto makers. “They’re still losing market share; they still have the challenge of getting new buyers,” says Lindland. Even Ford, she warns, isn’t out of the woods.
But at least it’s making serious efforts to innovate and go head to head with its most formidable competitors.
“A company such as Ford, GM, or Toyota has to succeed in the here and now if they want to succeed in the future,” says Professor Zimmerman. “But you also have to be planning for where that future is going to be.”
And really, whom would you bet on to get to that future successfully—a competitive company with a proven management or one whose board of directors is subject to the whims of the US Congress?
Do we even need a show of hands?
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own.
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