“Big Three” look at big losses

“It was the best of times, it was the worst of times” to use the words of Charles Dickens to describe the world today.  Perhaps these words are equally true at any time, but they seem appropriate enough today.

In the best of times category, we are seeing the long overdue death of the Hummer and the dying gasp of the SUV, those ultimate symbols of consumerism, disrespect for the environment and the resources of the earth.

The individuals who bought those gas-guzzlers have been pawns in a big marketing game.  GM, Ford and Chrysler knew a good thing by positioning the large vehicles as status symbols with big price tags and profits over $10,000 per unit.  They co-opted the American and Canadian government CAFE standards to allow large vehicles and SUV’s a pass on fuel economy.  The big three automakers are now fighting a wintertime retreat from Moscow.  They are getting massacred by Honda and Toyota among others, who have had a better strategic vision over the years.

GM’s results over the years have varied from a high of $10 Billion in 1984 to a loss of $38 billion in 2007.  In the last ten years, they’ve lost money overall.  Let’s be generous and assume an average $2 billion annual profit over the last 30 years.  That’s not a great return on sales of $200 billion. Recently, GM’s VP Bob Lutz indicated that it would cost an average of $6,000 more per vehicle to meet the new CAFE standards.  If that is the case, GM has a problem as consumers will have less disposable income for cars in the future.  Toyota indicates that it will meet the 35-mpg standards well before the required date of 2020.

The CAFE standards will soon be the least of the American automakers problems.  Higher gas prices will make the standard irrelevant, with consumers demanding vehicles giving 50 to 100 mpg, no matter what kind of silly marketing schemes Detroit comes up with.

What has been the “butterfly effect” of GM on the US and world economy? Obviously, GM is no butterfly but a recent film by the same name or the 1947 film “It’s a wonderful life” with James Stewart illustrates the concept that a relatively small action can have a great effect in the future.

One can only wonder what would be the alternate future if GM had embraced fuel efficiency for both small and large vehicles (SUV’s).  Supposing that the world gas usage (including US) was 2 million or 5 million barrels a day less than it is today.  This would have been a real possibility.  Supply would be greater than demand and the price would still be at $55 per barrel or less.  The world’s oil bill would be $2,300 billion less in 2008 (86 MBarrels *365 day* $75/b difference).  These are large sums by anyone’s standards as the Canadian federal budget is $550 billion per year.  This is equivalent to the entire cost of the Iraq war until 2017.  GM, in turn, would be profitable today.

I see the big three automakers headed towards bankruptcy in the next few years.  GM is burning through cash at a rate that precludes significant changes to their products and cost structures that would be required. Are GM and the others too important to be allowed to fail?  Will the public be interested in a bailout of this size?

Rick Wagoner, CEO of GM, seems to understand that the oil prices are not coming down but does he really understand the implications of peak oil in his bones?  Can someone who earns $15 million a year not fully understand the fuel supply that his products run on?

GM has some new products in development, one being the Volt, an electric car.  The car will cost $40,000 and run 40 km before the backup engine kicks in.  At that price, it is not initially intended as a high volume contender.

This column has mentioned the lack of consumer choice in vehicles that have good mileage ratings and that are available elsewhere.   A car dealer would say that they don’t meet the North American standards, but that sounds like thinly veiled labour protectionism as the climate / emission / safety standards in Europe should be capable of harmonization to North America.  The cars work perfectly well in Europe.

“There are 113 off-shore models (mostly Europe) that get over 48 miles per imperial gallon in a combined rating,” according to an article by MSNBC earlier this year.  The fact that very few are available here is an admission of failure by our government to foresee and manage the liquid fuel crisis.

The big three automakers and labour unions are managing government policy and Canadians are now paying a significant premium for that dubious privilege.  Where are all of the free market pundits when you need one?

I haven’t heard them saying that a little more competition would shape up GM and the others?  Isn’t that their mantra?


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