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Small Cars Rule Amid Changing Demographics

January 15, 2010 by · Leave a Comment 

If there was one thing conspicuously absent in the launches and unveilings at this year’s North American International Auto Show, it was trucks.

For many automakers, the big news this year was small cars. Ford Motor Co., General Motors Co. and Chrysler Group LLC offered up new compacts and subcompacts, as did many of the foreign automakers, according to The Detroit News.

A number of factors are driving this push toward smaller vehicles: changing demographics, a weak economy, fear of oil price volatility and new government regulations. But with so many placing big bets on small cars, some analysts wonder whether automakers are chasing the market or getting ahead of it.

“The compact car segment will continue to grow,” said Erich Merkle of Autoconomy.com in Grand Rapids. “But the rate of growth won’t be enough to accommodate all the new competitors and products.”

Ford CEO Alan Mulally said Ford’s entries into the domestic small car market are aimed at balancing a lineup that for too long was dominated by big pickups and sport utility vehicles.

“Some people perceive that we are making a big bet on small vehicles. I’d say we are reducing the risk to Ford Motor Co. by having a complete product line,” he said. “We’re the ones that chose to focus on big SUVs and trucks because we didn’t have a competitive cost structure … I want to give the consumer a fabulous choice in every vehicle size.”

That said, Ford’s market research shows that U.S. consumers are increasingly interested in smaller, more fuel-efficient vehicles. Mulally said most Americans know that fuel prices will rise again and want to insulate themselves from that risk as much as possible.

But demographics also are changing. The two biggest customer groups today are Baby Boomers, many of whom are downsizing, and young people who do not yet need the hauling capacity of a larger vehicle. Mulally said both of these groups are willing to consider smaller models — provided they can get the same comfort, features and safety they have come to expect from larger vehicles.

Other automakers agree that fuel economy has become an important purchase consideration.

Tom Stephens, GM’s vice chairman of global product operations, said the world’s oil production cannot keep pace with increasing demand, particularly as the United States and other nations emerge from the recent recession. That will prompt an inevitable rise in gasoline prices, fueling increased demand for more efficient models.

“In the future, consumers will have a need for smaller vehicles,” Stephens said, adding that GM’s new compacts and subcompacts are aimed at meeting this growing need.

Sergio Marchionne, CEO of Chrysler and its new Italian parent company, Fiat SpA, agreed that there is an opportunity to sell more small cars in the United States.

But he said Americans will always want bigger cars than their European counterparts.

“You shouldn’t equate gas prices with size of car. One has to do with the efficiency of the systems that drive these vehicles and that’s one thing that needs to be addressed as a separate issue in terms of the efficiency of the powertrains,” Marchionne said. “I know that in Europe 50% of the market is C-segment and below, but that’s Europe. We’re not going to turn Americans into Europeans. It just won’t work. Distances travelled are totally different. Let’s not confuse them.”

David Cole, chairman of the Center for Automotive Research in Ann Arbor, said it is important not to read too much into the prevalence of smaller cars at this year’s show.

“There obviously is a lot of attention on fuel economy right now, because that is what everybody is talking about,” he said referring to the tougher fuel efficiency standards enacted by the federal government.

“Next year, I don’t think it will be about small cars. It may be about midsized cars or even large cars. Because the intent of the law is not to force people into small cars, but to have all cars become more fuel efficient.”

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Writers Look to Uncertain Future of Auto Industry

December 11, 2009 by · Leave a Comment 

The Auto Channel logoEditor’s Note: Thom Cannell and Steve Purdy from the Detroit Bureau of TheAutoChannel.com provided this insight into the future of the auto industry. The story was titled “Can the US Produce Vehicles to Compete in the World Market and Satisfy Home Markets? and subtitled “The Dichotomy of Political Courage VS Personal Choice.”

This week the think tank and business intelligence company CSM brought its annual predictions to the Automotive Press Association in Detroit. There was nothing as earthshaking as last year’s prediction that Chrysler was doomed – unless you think that adding $31,900 to the cost of your favorite vehicle is news. That is the cost of non-compliance with EPA mandates in the future; and that cost forms the basis for a huge dichotomy.

Craig Cather, president and CEO of CSM, introduced his staff’s projections 5 to 15 years out. He insisted that after this past year of unprecedented carnage in the industry “we’ve hit bottom and positive signs are at hand.”

But he worries that the United States has no coherent energy policy. It does, however, have political energy focused in different directions that are perceived by some, but not all, as desirable. One of those is the push for smaller vehicles which could save the US car industry. However that means convincing Americans that buying small cars, vehicles smaller than the Ford Focus, Chevrolet Malibu, equal and smaller than Ford Fiesta and Chevrolet Cruze is what they must do for economic as well as patriotic reasons. Nifty, necessary, noteworthy and highly unlikely if fuel remains inexpensive. Would you rather have a Fiesta or a Flex, a Cruze or an Impala, a Dodge/Fiat 500 or a Chrysler 300? Given low fuel price that particular handwriting is in the sky, not on some back wall in Foggy Bottom. The EPA wants vehicles the size of A and B cars like Fiat 500, Cruze, Fiesta, and smaller to be the norm.

Our CSM experts also insist that for U.S. auto makers to compete internationally we’ll have to be making vehicles that fit into mandates and preferences in other world markets – which, they insist, we are not doing now. They contend that our mandates ought to be reflecting those of the other world markets.

CSM’s VP of global powertrain forecasts, Eric Fedewa, speculated about ways Detroit automakers may become profitable over the next 40 years. His projections attempt to anticipate trends all the way out to 2050, a monumental task to be sure.

Fedewa said we must acknowledge the role of global warming and world leaders’ ambitions of reducing CO2 levels by 80% by 2050. Transportation (including vehicles, mass transit, air travel, etc.) accounts for about 25% of CO2 production. That makes for a huge challenge for the industry. “But it’s not about icebergs,” he insists, “its about economics. And, pollution is a drag on economics”

Will governments substantially subsidize the radical changes that will come in our transportation inventory and infrastructure? And, will the US government subsidize the domestic industry to help them compete in other parts of the world where more strict requirements might be in place?

It will be tough, and perhaps impossible, to motivate the great mass of customers to vote with their increasingly hard-earned dollars for a politically mandated vehicle mix. People always want smaller cars and more fuel efficient cars, particularly in times of high fuel prices, until told that they are the ones who have to buy those small cars and pay for the technology. Then they purchase what makes the most sense for them.

What about electric cars?

Yes they are coming. CMS predicts that 45% of nameplates will have electric vehicles – in some form – by 2020. This includes milder hybrids and other technologies like the cost-effective Stop-Start which stops engines when standing and instantly restarts; Prius, Ford Fusion, Milan, and Escape already have this feature as does Honda Insight. Many other incremental advances will enhance electric cars, hybrids and conventional automobile powertrains.

What about other mandates?

Will government decide that you can only have the number of kids you can fit in your compact car? Will you have to have a business license to have a full-frame vehicle with reasonable towing capacity? Time will tell. What about pickups and large SUVs for families? As explained by CMS, those business-oriented vehicles will remain available but at a price that will, in our opinion, have small businessmen, those with recreational vehicles to tow, horsemen, farmers, and families with more than seven members literally breaking down doors to political will. Come on, an extra $31,900 for your necessary-for-business F-150/Ram/Silverado?

Government strategies will include continued demonization of CO2, continuing to allow the California Air Resources Board (CARB) to set emissions policy, substantial fines (perhaps as much that $30,000/vehicle) for noncompliance with mpg targets.

Some pols pontificate that Japan, Korea, the EU do not have open markets. Some of that is accurate. However, what really kills car sales is the size and thirst of our typical vehicle. While Rangers and Colorados are world-wide business vehicles there are no F-150s or Rams or Silverados anywhere else. Even our mid-sized and full-sized vehicles are luxury-class size in the rest of the world. More damning is carbon emissions and most of the world rates vehicles in grams of CO2 per kilometer. This is an accurate method of expressing both fuel economy and emissions. The current US fleet vehicle produces 105 g/km more than a comparable European vehicle making them unsellable overseas, according to CSM. In 2015 the company says, the gap will shrink to 42 g/km which is better but not enough. By 2030 the difference is expected to be 20 g/km or less, which is an acceptable difference.

All of this omits some harsh realities that CSM also disclosed. What happens when GM, Fiat/Chrysler, and Ford make small cars available and they don’t sell as planned? Expect those cars to have high levels of luxury-style content and probably large customer incentives — good for the customer and terrible for the companies.

In other bad news, the payback on your investment in new technology whether Direct Injection, Diesel, Hybrids, or pure Electric is very slow. The best ROI (return on investment) remains the spark-ignition engine with Direct Injection and turbocharging which adds about $1000 cost per car and a 4-8-year payback at current fuel price of $2.50 per gallon. Contrast that with an extended range or pure electric car and a payback that, at $2 per gallon for fuel, takes 10-27 years depending on how the technology is executed.

Even at $4 per gallon it would take 4-10 years to recoup the extra expense. Thus government will absolutely have to manipulate demand, absent a fuel shortage or huge taxes. Seen anyone in Washington seriously sponsoring a bill proposing additional gas tax? Are you holding your breath?

What is most needed, and also least likely, is a pure and defined governmental strategy for sustainability. Business needs defined and stable rules to plan and the auto industry with its 3-10 year cycles even more so. Car companies need stability in order to build and validate appropriate technology in volumes. Of course a sustained spike in fuel price caused by taxes or external factors could make political courage and action moot.

The G8 (and we’re not talking about the Australian Pontiac here), Cap and Trade scheme is expected to generate an ongoing 428 billion dollar per year price tag and 4.2 trillion in expenditures by 2020.

Fuel Cells, still at least 20 years away, may be a game-changer. Japan and others are using home-based fuel cells to produce home heating and electricity and will utilize these years of experience to implement automotive fuel cells. So many unpredictable factors will certainly effect our vehicular future.

During Q&A one of our particularly wise and astute colleagues asked about the risk of a “consumer revolt” as the government mandates result in the production of vehicles we may not want. Perhaps the U.S. auto scene will begin to look like Cuba with just old vehicles populating the highways because no one will want to buy the government mandated ones. As our friend and colleague, Gary Witzenburg, is fond of saying, government can mandate what kind of cars the manufacturers build, but they can’t force consumers to buy those vehicles. At least not yet.

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Cummins Inc. Recalling 400 Workers to Indiana Plant

July 9, 2009 by · Leave a Comment 

cummins_logoCummins Inc. is recalling 400 laid-off workers as it resumes production at a Columbus, Ind., factory, but nearly 300 people lost their jobs when an auto parts company idled a plant in nearby Shelbyville.

Cummins is preparing to resume production of the Dodge Ram engine at its Columbus MidRange Engine Plant with one shift beginning July 13, according to the Associated Press. The company shut down the plant and laid off 720 employees in May after Chrysler stopped vehicle production during its bankruptcy proceedings.

Cummins spokesman Mark Land said the plant would produce engines for the 2009 model Ram through mid-August, but that it would be idled again until Chrysler starts building the truck’s 2010 model. He said workers were expected to be called back again in October.

Land said Cummins has “solid commitments” from Chrysler for the 2010 Dodge Ram.

“We were confident,” Land said of continuing business with Chrysler. “But it’s nice to see that it’s really happening.”

Developments were less encouraging at the Meridian Automotive Systems factory in Shelbyville, where the company told city officials Thursday (July 2)  that it was closing the plant for an indefinite period.

The announcement came less than a month after Meridian announced it planned to lay off 198 workers from the plant in stages over the summer.

The Allen Park, Mich.-based company said then that the layoffs were necessary because it had lost a major customer, which it did not identify. Meridian has made various parts for several automotive companies, including General Motors.

Shelbyville Mayor Scott Furgeson said the new announcement superseded Meridian’s previous schedule of job cuts.

“I don’t know Meridian’s position as a company, so I don’t know their long-term plan with this facility,” Ferguson said. “So hopefully they will continue to keep the plant in their long-term plans and will someday reopen it.”

Auto industry layoffs across the state helped push Indiana’s unemployment rate to 10.6% in May – double from the 5.3% of May 2008 and the state’s highest jobless rate since 1983.

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