“Since the first of this year, U.S. market and economic conditions have become significantly more difficult. Of greatest concern is the unprecedented rise in oil prices, which have more than doubled over the past 12 months alone. [They] are viewed by most experts as part of a long-term trend toward higher energy costs - a structural change, not just a cyclical change.” -Rick Wagoner, chairman and CEO, General Motors
We‘re witnessing history in the making when it comes to cars and trucks right now - a massive, almost instantaneous shift away from sport utility vehicles (SUVs) and light trucks among consumers. At the same time, automakers are speeding up efforts to bring more hybrids to the four-wheeler market - not an easy thing to do when vehicle development is a process typically measured in years.
Yet desperate times make for desperate measures. When the cost of fuel hit $4 a gallon for gasoline and soared over $5 per gallon for diesel in the U.S., it created all sorts of bad karma for everyone. Some 835 trucking companies went out of business in the first quarter alone this year, reducing truck capacity by 3%, due to the spike in fuel costs. It‘s hitting everyone in the wallet, which is why public transit agencies are witnessing a big hump in ridership - a 3.3% increase so far, which equates to 85 million more trips at this point compared to the same period in 2007.
People‘s car buying patterns are also changing, with all kinds of consequences for automakers - none of the pretty. For the U.S. domestic manufacturers - General Motors, Ford, and Chrysler - it‘s a bad patch, for they all committed heavily to building predominantly SUVs and pickups back in the 1990s, when fuel costs bottomed out at 90 cents a gallon. Now consumers are abandoning those vehicles in droves, forcing the automakers to switch their focus to fuel-efficient cars, hybrids, and alternative fuels - probably for good.
“These higher gasoline prices are changing consumer behavior, and rapidly - significantly affecting the U.S. auto industry sales mix,” explained Rick Wagoner, GM‘s chairman and CEO, in a speech before analysts in Delaware earlier this month.
(It's tough navigating the rough economic waters of today, Rick Wagoner will tell you.)
”We at GM don't think this is a spike or temporary shift; we believe that it is, by and large, permanent,” he said. “Reflecting this rapid increase in oil prices, general economic conditions in the U.S. have changed considerably in recent months. While we remain reasonably constructive on the long-term prospects for the auto industry in the U.S., we view the near-term U.S. economic and auto market environment with considerable caution. These conditions, along with the rapid change in auto industry sales mix, require us to take further actions that will position us for sustainable profitability and growth.”
For starters, GM is green lighting a plan to build 1.0- to 1.4-liter engine, which will be the standard power plant for its new next-generation Chevy compact car. Waggoner also noted GM plans to have 20 hybrid vehicles on the market by 2012, is beefing up investments in two cellulosic ethanol startups to help foster much needed growth in biofuels, and plans to turn its Chevy Volt electric prototype into a mainstream offering by the end of 2010.
(Chevy's Volt sure doesn't look like an electric car, now does it?)
The Volt is critical, because it‘s an electric car with a small gasoline motor designed to recharge the batteries when plug-in power isn‘t available. Dubbed an “extended range” electric vehicle, it could represent a major breakthrough in vehicle design - the ultimate commuter car, so to speak. That would really alter the energy consumption pattern in transportation - if consumers accept it.
“We believe [the Volt] is the biggest step yet in our industry's move away from its historic, virtually complete reliance on petroleum to power vehicles,” said Waggoner. “We also believe the technical goals of the Volt are not only achievable, but achievable generally within the time frame we previously outlined ... and we are convinced that the Volt is an important investment for the future of our company and our stockholders.”
Yet GM also realizes that the shift away from SUVs and light trucks by non-commercial users means other major structural changes are necessary - such as shutting down plants. “We need to address the rapid industry shift away from trucks and SUVs ... so, over time, we will cease production at four GM truck assembly plants,” said Waggoner, by 2009 and 2010. That includes GM‘s Janesville, WI, plant where the Chevy Tahoe and Suburban, GMC Yukon, and Chevy, GMC, and Isuzu medium duty trucks are built. The Toluca, Mexico, plant where the Chevrolet Kodiak medium duty trucks goes silent by the end of this year, as GM sold its medium-duty line to Navistar earlier this year.
(The oversized Hummer is also on the chopping block, according to GM.)
“To reiterate, timing of all these actions is subject to model lifecycles and market demand. If volumes continue to wane, the timing could be pulled ahead,” Waggoner stressed.
Yet it‘s not all bad, stressed Troy Clarke, president of GM‘s North American operations. In a talk given at the Brookings Institution, Clarke noted that vehicle sales are actually growing, especially when one looks at the global picture, and that if electric and hybrid vehicles make up a significant part of that growth in the near future, the pressure on petroleum prices may ease up even faster.
“Despite the current challenges of the auto industry in the U.S., globally our industry is in the midst of tremendous growth,” said Clarke. “There are about 820 million vehicles in the world today; roughly 12% of the world‘s population enjoys the benefits of automobile ownership and driving. As such, we expect that at least 15% of the world‘s population will own a vehicle by 2020 - that‘s a billion vehicles. This expansion is being fueled by growth in emerging markets like China and India.”
While Clarke readily admitted such growth creates serious concerns about the automobile‘s almost exclusive dependence on petroleum, creating issues with supply and availability, sustainable growth, climate change, and even national security, electrification of the automobile could be a solution to all of them.
“Going forward, we can no longer rely primarily on oil to supply the world‘s automotive energy requirements,” he said. “ GM believes that the long-term solution involves a march toward electrification - and the debate has shifted from ‘if‘ this would happen to ‘when.‘”
(Troy Clarke is trying to look on the bright side of the structural changes now occuring in the automotive industry.)
Parallel hybrid automotive powertrains are an important step on the journey, but the real value hybrids bring to the table is that they allow automakers to develop standards, engineering methods and tools, and real world validation models to further advance all-electric cars.
“City transit buses were the exact right place to start with hybrids: City driving cycles; Thousands of stops and starts per day; High up time and reliability requirements; and enough space to package first generation components. This was a great opportunity to demonstrate big fuel savings potential and that we did,” he said. “Over the past five years, we‘ve helped save three million gallons of fuel, and 30,000 metric tons of carbon dioxide emissions.”
This next step represents the transition to a true electrically driven vehicle, Clarke noted, and when you consider that three-quarters of American drivers travel less than 40 miles in their daily commute, a fleet of Volts can have a huge impact on America‘s petroleum dependence.
“The best part is an extended range EV like the Volt can do this while saving its owner a lot of money in operating expenses,” he added. “A conventional vehicle that gets around 30 miles per gallon costs about 13 cents per mile to operate. But, when you do the math to convert a kilowatt hour to cost per mile, an extended range electric vehicle like the Volt will cost about 2 cents a mile for electricity from the grid. So it‘s not going to be difficult for customers to see the advantage in their pocketbooks.”
There are a lot of challenges to work through, such as further improving lithium-ion battery technology so they‘ll last 10 years of life, 150,000 miles in a very rugged and hostile environment. But once that marker is reached, structural change to our transportation environment is really going to accelerate.
“Yes, we want to make an environmental technology statement. But we also want a car that sells and that people aspire to own,” Clarke said. “We want consumers to see the Volt as the game changer it is not only for our business, but for the way the world drives. Once they do, we can build on that success with other creative E-Flex models - but one step at a time.”
All I can say is, let‘s hope they get a move on, for oil prices hovering around $140 a barrel is making mincemeat out of all kinds of household and trucking budgets in rapid fashion.