Understanding the Challenges of North America
While I’m only about a half of a year into my role of leading GM Europe’s communications and media relations organization, I’m often quizzed by European media on my perspectives about what is happening in the North American market. One big factor in the current market situation has been brought on by U.S. energy policy. Working for more than six years in Washington DC on policy issues has shaped some of the perspective I will share. I in no way mean to say that all of the U.S. manufacturers’ troubles are attributable to the issue of energy policy. But since the oft heard charge in the media by pundits and analysts is that “GM and the other U.S. manufacturers spurned small vehicles and fuel economy to instead focus on gas guzzling SUVs and pickups,” I think I can shed a little perspective on whether this one element is true or not. Did Detroit stupidly and blindly push ahead with trucks and SUVs when the entire world knew better? Let’s look at the facts over the past several years, including a little historic perspective, to frame this premise.
Fact One: The U.S. has run its economy…right or wrong…on the basis of cheap energy. If you don’t believe me, just look at the venomous outpouring of scorn being heaped on the oil industry by politicians with the recent rise in fuel prices. It’s as if cheap gas was part of the Bill of Rights. The U.S. does not tax fuel like governments in most other parts of the world and as a result, petrol is less than half the cost in the U.S. than it is in many other developed markets. As the full impact of fuel economy regulations in the U.S. – set in place in the mid-1970s – took root in the mid to late 1980s, the price of oil and petrol collapsed. In U.S. dollars, the price of a gallon of gasoline dropped below one dollar before the first Iraqi war – that’s about .26 a liter! Moving into the mid-1990s, that price, when adjusted for inflation and looking past the short-term spike caused by the war, stayed pretty constant until the early part of this decade. Can you imagine what might happen to the vehicle markets in Europe if petrol was .26 Euros a liter and all taxation on engine displacement was eliminated??
This price collapse made perfect sense: as you constrain demand for a fungible commodity through a regulatory action (fuel economy regulations), demand for the commodity decreases and prices drop. As prices drop, producers pump more oil to sustain revenues, which lead to another more onerous thing that happened during this time--the U.S. domestic oil industry collapsed. As the low prices meant more expensive domestic oil no longer made sense, the market slid into the hands of the low cost producers (for the most part, OPEC). How ironic that the very regulations created to get the U.S. off of foreign oil actually helped to cause the percentage of imported oil to skyrocket. All of this set the stage for what happened next.
Fact Two: As the price of fuel declined to ridiculous levels, the affordability of the automobile also became vastly better for most families. In simple terms, the percentage of family disposable income needed to own and operate a vehicle went down dramatically during this time. When it got cheaper to drive, people drove more…a lot more. The vehicle miles traveled by the average family dramatically increased with the lower cost to drive. And as people drove more, they wanted more vehicle, with more power and more features. Again, this is a predictable economic reaction. There were other actions taken as well at this time, like the removal of the national speed limit law, which set the maximum speed at 55 mph. Within weeks of the repeal of that law, most states boosted the speed limits on highways by as much at 20 mph to satisfy mobile citizens who were spending more and more time in their vehicles.
It was against this back drop that consumers found their thirst for more vehicles, more power and more utility being met by a category of vehicles that had since been reserved primarily for work on the farm or construction sites – pickups and SUVs. These vehicles were not covered by the same fuel economy regulations and were available with more power and space than was available in passenger cars. They also came to be in a time of economic prosperity that saw many people buying camping trailers, boats, jet skis, snow mobiles and other pleasure crafts that needed to be towed. When this happened, it was GM, Ford and Chrysler with the offerings, while the Japanese and European makers watched the boom from the sidelines.
Fact Three: During this boom, the North American market shifted dramatically to truck-based vehicles. And when it did, it wasn’t just Detroit pulling out the stops to meet demand. Nissan launched a massive pickup and family of large SUVs that dwarfed much of what Detroit had to offer; Toyota launched the Tundra, Sequoia, LX480, Highlander, among others; Honda launched the Pilot and Ridgeline; even Porsche got into the mix with an SUV – Porsche?! And I could go on and on with offerings from Audi, BMW and VW and even the Koreans. The bottom line is that manufacturers responded to what consumers wanted in the North American market. When Toyota really wanted to put the throttle down on its quest for global sales dominance, was it a Prius plant it built in Texas just last year?? No, it was a plant to build a giant pickup and a couple giant SUVs. Clearly, this was not a Detroit-only phenomenon – it was a follow the market phenomenon. But markets change…sometimes quickly.
Again, there are lots of other issues that explain the predicament of the Big Three in the North American market…many of which I’m sure we’ll get into. Two of the biggest are huge legacy costs (health care and pensions) and poor reputation in passenger cars due to the quality malaise of the 1980s and 1990s. But we'll save those for another day…for now, I’m looking forward to your comments and thoughts.
Chris Preuss – VP Communications, GM Europe
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- Posted in Business |
- Comments (10)
Comments (10)
Andy said:
As an American living in Germany, I am so glad that someone is finally telling the truth about American energy policy and the American thirst for giant-sized vehicles!
I can't tell you how often I've had Europeans scornfully talk about how wasteful Americans are with their giant vehicles without ignoring the fact that their vehicle choices would be radically different with American gas prices (well, those prices up until a year ago) and American taxation policies. I am sure that the small footprint of the European fleet as dictated by the narrow streets and parking spots would more than be made up for with very powerful, large-displacement engines.
The ironic thing is that cheap gas in the USA actually ended up crippling driving fun from an enthusiast perspective. What joy is there in driving when you are jammed on an interstate packed with commuters who spend hours a day behind the wheel? Isn't the future of individual transport endangered much faster when we rapidly and unnecessarily deplete our resources with oversized vehicles?
Gereon Langlitz (Germany) said:
"I can't tell you how often I've had Europeans scornfully talk about how wasteful Americans are with their giant vehicles..."
Hi Andy,
these statements are based on pure prejudices and misinformation. Some people I have met here in my neighborhood, wondered and asked me how much my 2001 Chevy (Olds) Alero would "swallow" and then they had been amazed as I told them the fuel-consumption. They suddenly had to acknowledge that my car is on par or even better than most of the European vehicles, regarding fuel-efficiency. This also I get confirmed, when I compare GM-vehicles to corresponding European cars at fuelecomomy.gov. But you'll never hear those facts on German TV or by reading our car-magazines. They just repeat all that nonsense. My brother is living in Florida, owning a Pontiac G6 (3.5 - 6 cylinders, 201 HP). His cars also has a lower consumption, than my neighbor's BMW 3-series with a weaker engine. My boss recently told me, that his wife had a VW Touareg as a rental car and averaged embarrassing 6 mpg on the highway. You see, the Europeans have no reason to get upset about a Hummer H2!
A. Woodruffe said:
Mr Preuss, an interesting take on an almost American prerogative of cheap energy as an excuse for disregard of the environment. It seems as if the actions of low taxes of past decades as brought on a certain decadence and a with it; a culture has emerged with the mind set that everything is a commodity and can be bought with relative ease at the touch of a button. Europeans in general, are more in tune to saving the plant than their American cousins. Our refuse is split into glass and plastics that are recycled, bio-degradable waste and even most metal cans, plastic and glass bottles are sold with a return deposit levied against them, so we get money back when they are retuned to shops. We have lights on timers, we unplug our electrical equipment when not in use and we don’t leave the tap running whilst cleaning our teeth. This isn’t because we are a so much better than Americans, it’s because year after year the EU have forced these changes and with we have seen 20% increases in water rates, 30% increases in gas heating and continual rises in gasoline and diesel.
Nearly 50% of vehicles sold in Europe are diesels that produce far less CO2 than their gasoline equivalent. There is no denying that diesels produce particle matter but as BMW, Mercedes and VAG have proved, this can be overcome. We have read and seen enough interviews from GM representatives telling us that diesel engines cost more to produce and that to make them 50 state compliant would further increase the sales price in North America. What puzzles me most about these statements is how can other manufactures bring diesels state-side and not GM. GM have a 180hp / 400nm Twin-Turbo diesel engine that is Euro V compliant that offers 50mpg (imperial). With a bit more development that engine could be Bin5 compliant.
Most people in GM will talk about economy of scale and a product achieving a viable business case, so the question has to be asked. If GM can ship half a dozen 2.8V6 (LP9) engines from Melbourne to Trollhättan, how come they can’t ship 200,000 Twin-Turbo diesel engines to NA so they can be put in the Chevrolet Malibu and Saturn Aura? Are we supposed to believe that it’s cheaper for GM’s German competitors to pay import tax on complete vehicles than for GM to pay the duty on just an engine?
A Chevy Malibu LT returns 30mpg (US/Hwy), can GM not find a business case, that for an extra $2300, the customers gets an extra 11hp, 400nm tourque as opposed to 217 and 42mpg (US)? However, maybe business cases are made to please share holders and not customers at GM, so it might be best for GM to sit on the fence and watch the Germans dominate the US diesel market for a few years instead?
Nobody expected fuel prices to increase at the rate they have done this year but it wasn’t as if we expected fuel prices to go down either. Just because every other manufacturer has continued their SUV products for North America it didn’t mean that GM had to continue theirs. The further point to make is that GM’s competition have far less of their products SUV based. What is actually quite laughable is that Americans are complaining about paying $4 a gallon, when here in Germany for example, we haven’t seen a comparable price of 71 cents a litre since the Euro was introduced back in 2001. One of the reasons Europeans don’t understand the concept of a 5 litre SUV averaging 16mpg is because it’s like throwing another ring on whilst frying you eggs in the morning. Generally when things extend beyond their economic viability we dispose of it. Cars are a bit more complicated because of the residual values and leasing contracts that people are tied into. It just goes to show that if you want to make rapid change you just need to hit people where it hurts most; In their pockets. For a country who’s transport industry represents 6% of the world’s ‘Carbon Footprint’ that change couldn’t have happened soon enough.
Jean-Charles Jacquemin said:
Hi Gereon and Andy, Mr Preuss,
Please allow me to comment on economic incentives,
I think all of you are right but, excuse me if I may seem rude, I would say you appear myopic.
In the 70's, it was already clear that one day not too far in the future, that is in my own lifetime, I would have to face some crisis based on perceived (not necessarily real) depletion of oil resources.
And the environmental impact of gas emissions was also beginning to be a concern.
And, here we are 30 years later with such problems. Some progresses have been made on the environmental effects but the automotive technology, still completely dependent on fossil fuels is still there.
I must also say that the fiscal policy of non US governments on fossil fuels is not a good thing as it is said by Mr Preuss.
Because of two facts.
First, a very small part of the huge amount of taxes has been used to finance research in alternative energy sources so that we are stuck now as the rest of the world.
Second : the fiscal effect of the use of electric vehicles has not been taken into account and may lead the way to important and brutal fiscal policy swings that I fear.
Thanks for your attention.
Uli said:
Chris,
excellent summary – I guess there’s not a lot to object.
One thing I never understood though is the real logic behind the CAFE system put in place by US government in order to regulate (reduce?) fuel consumption as I understand it. Maybe I see this too simplistic, but why would anybody punish the industry for providing products that large parts of the public desire and can afford? Right or wrong, it should be obvious that in a market driven economy low prices lead to waste while high prices lead to conservation and the search for (cheaper) alternatives. So assuming they truly want to limit consumption and reduce dependencies, what kept and keeps the US governments for decades from going down that “European” route of taxation, at least slowly or in small steps? I hesitate to believe it is just the fear of voter’s revenge. Is there anything else I am missing? The solution could be so easy – and it works as we are painfully witnessing in Europe at $8 or 9 per gallon.
Chris Preuss said:
To Jean-Charles...
Your charge of Myopia is an interesting one. As I remember it, GM actually lead the industry with the most fuel efficient offerings back in the late 1990s and gone to almost all front-wheel-drive platforms. We even had a car called the Chevrolet Metro which got a whopping 53 miles per gallon....better than a Prius. To state the sales success of that car as one auto dealer told me "the Metro is sales proof...it's as if it's bolted to the showroom floor..." In other words, it didn't sell...at all. With gas at a buck a gallon, why would it?
It was at this same time that GM was getting flogged in the financial newspapers that "it had stupidly missed the truck boom" and was going to get passed by Ford for number one, due to the success of the F150 Pickup and the Ford Explorer SUV. So much for the myopia of the press.
My point is this, companies follow consumers...no matter how right or wrong the consumer is as it pertains to societal goals. When you fail to anticipate change, or better yet, drive the market in new directions to the benefit of your business plan, you lose. Clearly, most of the big auto companies were unprepared for the radical rise in fuel prices. But to that end, so was just about every other company out there.
On this issue of the future, I couldn't agree more that we need more fueling options to challenge the supremecy of oil...clearly we don't enjoy being captive to these radical swings in prices. The problem is, liter for liter, ounce for ounce, it is TOUGH to beat petroleum for what it does. If we had spent the past decades relying on batteries or bio fuel and someone all of a sudden "discovered" gasoline, it would be seen as a miracle fuel. Perhaps now that we've had this wake-up call (by that I mean all of society) we'll see a more deliberate move to alternatives.
Chris Preuss said:
To A. Woodrufff:
"We have read and seen enough interviews from GM representatives telling us that diesel engines cost more to produce and that to make them 50 state compliant would further increase the sales price in North America. What puzzles me most about these statements is how can other manufactures bring diesels state-side and not GM. GM have a 180hp / 400nm Twin-Turbo diesel engine that is Euro V compliant that offers 50mpg (imperial). With a bit more development that engine could be Bin5 compliant.
I've sat with Bob Lutz during interviews with this statement...but you've misrepresented it here. The question isn't "can it be done?" the question is can it be economically done. Two issues here...one, to get Bin5 compliant on a larger displacement diesel, you need uria after treatment or a lean NOx catalyst, or both. Secondly, dealing with carbon emissions means fuel is injected into the treatment cycle, further reducing the fuel economy benefit. The bottom line is that when all this is done, you end up with an engine and aftertreatmet system that costs as much as a strong hybrid. That's just a fact.
Secondly, because of the regulations for fleet averaging, there are scarce numbers of European diesel engines being sold in the U.S. ... far less than hybrids....the emissions performance means you have to cap it to stay within fleet averages. Right or wrong, U.S. consumers love hybrids as being and wonderful, they see diesel as dirty and old...which leads to my next point....
Third, and most importantly, Americans simply don't like diesel the way Europeans do. Governments here have heavily subsidised the cost of the fuel, making them a logical choice. Right now, diesel in the U.S. is almost 30 percent more expensive than petrol....thus the economic equation for your Malibu case falls apart. We'll have more diesels in the U.S. for sure...but how many will depend on how the clean air regs develop. Europe has accepted a much lower smog standard to date than the U.S. to keep diesel in the picture...the U.S. would likely do the same.
On this point: "What is actually quite laughable is that Americans are complaining about paying $4 a gallon, when here in Germany for example, we haven’t seen a comparable price of 71 cents a litre since the Euro was introduced back in 2001. "
Having lived in Zurich for the past several months, I couldn't agree more. It's also the reason I ride my bike 50k round trip to work everyday :-).
Chris Preuss said:
To Uli:
"I never understood though is the real logic behind the CAFE system put in place by US government in order to regulate (reduce?) fuel consumption"
CAFE attempts...illogically....to cheat the laws of economics. US politically thinking is also predicated on the idea that you must give something for the cost of nothing to the voters. Hence, where all the rest of the world helps to get a societal benefit by investing the consumer in the regualtory equation (taxation), the U.S. system thinks it can deliver the benefit for free. The problem is articulated in my post...CAFE distorts market dynamics by throwing the supply and demand equation out of balance. Just this week at the Traverse City management auto summit in Northern Michigan, the US National Highway Traffic Administration showed charts that the fuel economy average for the US fleet is at its highest point in recent history. This had nothing to do with CAFE and everything to do with the price of fuel. Even here in Europe, as you point out with fuel at about $8 per gallon, we still have an auto industry, we still have cars. But the type of cars is vastly different...as the market demands, based on cost of ownership. Good observations.
A. Woodruffe said:
Hi Chris,
Thank you for replying to my comment and shedding more light on diesel vs. gasoline in the US. As I mentioned before it does still seem odd that Volkswagen are introducing a 50 state compliant diesel Rabbit to the US market and GM are not offering a diesel variant in a vehicle that from a consumer point of view has a stronger business case. It is without doubt that Volkswagen have calculated the costs too and recognise a market requirement. If you read any GM orientated forum, GMinsidenews.com or Trollhatansaab.com where the majority of members are US based their views are very pro-diesel.
To your first point about costs effectively equalling a ‘strong’ hybrid solution, I would propose it is about customer choice. Your initial post draws attention to how customer needs have shaped the American SUV market. If the motor industry truly follows the consumer then it would seem logical to offer both hybrid and diesel. I do not wish to mention VW again however, the company has a hybrid in the pipeline due for 2009 / 2010 launch. Potentially this engine could be offered along side their current diesel for added choice or depending on demand replace the diesel altogether. Naturally I have far less experience in what influences marketing policies and so I am at a disadvantage in not having a grasp of a bigger picture. Even though diesel is more expensive than gasoline the mpg plus the extra low-end torque advantage also offsets cost and a good example is the UK where diesel vehicles are more popular despite the fuel costing more than petrol.
Like you have mentioned; it isn’t a case of can, a diesel solution boils down to economics and regulations for fleet averaging is best reason I have heard for not having diesels in the US. However; diesels do have something that hybrids do not to have; a proven track record of long life reliability. If any hybrid runs like my lithium-ion mobile phone battery then it will have a half-life of about 5 years. I would hate to think of the cost to replace an e-flex battery pack. Hybrid technology is very innovative and I think it’s great that GM are working on adaptable EREV solution but the industry is entering down the ‘rabbit hole’ with no history of reliability and extended-life durability. I suppose the real question is what do the American public want? 30-40mpg Wagons and hatchbacks, which they simply don’t like either or 30-40mpg SUVs? I would guess the latter and I would also expect a Twin-Turbo 4th Generation common-rail diesel to produce those figures for a Lambda based vehicle. Could a ‘Strong’ hybrid variant produce the same figures for it’s complete predicted life-span? Without statistical history on the hybrid’s part I would guess it is difficult to say.
Interesting that you mention your 50K commute, Cannondale bike company have said they have seen a hike in bike sales recently in the US, with customers specifically asking for US built bikes. Maybe others should also think more about reducing energy expenditure instead of how to use more for less money.
Seriously; hats off to you Chris. Over 8,000km per year on a bike is some going. Next time you’re in Rüsselsheim let me know, I’d like to buy you drink.
Regards Anthony
Jean-Charles Jacquemin said:
Thanks Chris,
Your answer clarifies the debate.