Future of American Car Brighter Than You Think

AutoNation Chairman and CEO Mike Jackson sees IC engine playing dominate role into foreseeable future, but growing niche for electric-drive vehicles.

Published: 23-Jun-2009

Bankruptcy, restructuring, factory closings, dealership terminations, layoffs - and the likely demise of a once-heralded brand like Pontiac.

Those are the headlines about America's car companies today, and they don't make for pleasant reading. The sad truth is that these recent events are the inevitable culmination of years of short-sighted decisions by Detroit's car companies.

But there's a hidden truth. The American auto industry is heading for a bright future, thanks to the painful (and long overdue) restructuring steps that are being taken today. Because of these steps, even a modest recovery in our economy will bring a rebound in the auto industry that could be far faster and more robust than most people realize.

The industry's structure and dynamics will be changed forever, and many of the distressed deals that consumers can get on cars today will go away, too. But cars will hold their value better, the car companies will be stronger, and the country and U.S. taxpayers will be better off as a result.

None of this is conventional wisdom. But as someone who has spent his entire career in the car business, I'm convinced it will happen.

So what can U.S. consumers expect? Three major changes - let's examine them.

Incentives out, but vehicles will hold their value

First, the days of Detroit propping up sales and keeping factories running with extreme incentives, heavily subsidized loans and, most recently, "employee financing" for everyone, whether they worked for a car company or not, are over.

This was good for car buyers, right? Sure, you might think so, because consumers sometimes got discounts of $6,000 to $7,000 or more on Detroit's cars.

But guess again. All these discounts had the unintended, but entirely predictable, effect of depressing the value of used cars of the same brand. A person who bought, say, a 2006 Chevrolet Impala at a discount price would see the trade-in value of that car depressed by the deeper discount that his neighbor got on the same model two months later.

U.S. car buyers are smart, and they figured this out long ago. That's why that new Toyota or Honda holds 50 percent of its resale value after three years, while a new Pontiac or Dodge retains only 33 percent of its value. While deep discounts made it cheaper to buy a Detroit car in recent years, the deeper depreciation usually made it more expensive to own one.

Instead of spending so much money on discounts, Detroit would have been better off spending it to boost quality and develop new technology. Instead, the chronic cycle of excess production and ever-deeper discounts hurt GM, Ford and Chrysler just as much as it did their customers. It destroyed the images of such once-venerable marquees as Oldsmobile, Pontiac, Plymouth and other brands.

All this reached crisis proportions last fall, after the bankruptcy of Lehman Brothers on Wall Street sparked a contraction of consumer credit that collapsed car sales. The current sales pace is below 10 million cars a year, down 40 percent from just a few years ago. We have hit the bottom, and the new vehicle market will recover, considering 13 million vehicles are scrapped each year and over a million new households are formed.

More choices for U.S. consumers

Second, auto companies going forward will produce more choices for American consumers.

We will continue to have many choices, ranging from trucks to small cars, SUVs to Crossovers. But what will dominate our roads in the future depends on the price of gasoline. Americans crave roomy, big, comfortable vehicles, and the industry will need to ensure that consumers enjoy these comforts, even as fuel-economy standards rise.

So, expect the U.S. landscape to continue being dominated by the internal combustion engine. But our roads will see more hybrids, plug-in hybrids and, yes, electric vehicles. Let's take these one at a time.

Hybrids - Examples are the Toyota Prius, Ford Fusion and Chevy Tahoe. Right now, hybrids sell about 2 percent of the new vehicles each year.

Plug-in Hybrids - The next generation of hybrids. Plug-in hybrids are even less dependent on fossil fuels than hybrids because they do not depend on the gasoline-powered engine to recharge the battery. The battery is recharged through an electric outlet.

Electric cars - You'll see more of these vehicles roll out in the next 24 months. One industry-leader will be the Chevrolet Volt. At first, they will be much more expensive. In the next five to 10 years, however, you'll see them reach mass market production status. Depending on where gasoline prices are, hybrid sales could become 10 percent of the market.

Ethanol is part of the solution, as up to a 10 percent blend into gasoline. Unfortunately, I see little hope for a true ethanol flex-fuel vehicle, as E85 is not available to consumers conveniently, or at an attractive price. Perversely, the government ethanol subsidies intended to help attract consumers to ethanol are paid to the "blender." Translation: Big Oil. Now that you just can't make up!

That said, one technology that gets lots of speculative, almost sci-fi attention is still far off. That is hydrogen. Hydrogen engines have a lot of practical issues to overcome. It is in the perpetual future - it's been 10 years away for many years, and in 10 years, it will still be 10 years away.

Consumers will need to weigh the cost of the new technologies with the price of gasoline. These innovations will cost up to $4,000 more per vehicle, so consumers need to do the math and decide whether it's an investment they want and can afford to make.

Still, AutoNation's showrooms going forward will have choices that 20 years ago we could not have imagined.

The future will be different for these companies, no doubt. But they're making the painful changes that have been needed for years - and that could make the American auto industry shine again. Today, we are all part of the reinvention of America's automobile industry.

Smaller, nimbler auto companies

The third major change is industrywide - the restructuring of the automotive industry will make U.S. companies smaller, but leaner, more flexible and profitable.

Virtually no car company is making money at this level of sales because of the enormous fixed costs of factories, engineering, sales organizations and other key operations. The companies that were the weakest going into this downturn are getting hit the hardest. Chrysler is out of bankruptcy proceedings, and General Motors has just begun the process. A restructured, retooled GM will compete at these historically lower levels. As the market comes back, GM will be ready to capitalize on these steps.

Despite all this, I'm optimistic about the industry's future, more so than I've been in years. Basically, it's because President Obama's automotive task force is forcing GM and Chrysler - in return for getting government assistance - to make the difficult decisions the companies themselves ducked. Those decisions include killing unprofitable brands, keeping only enough factories to fit realistic sales forecasts, consolidation of the dealer network, eliminating big chunks of debt and rewriting union contracts to reduce billions in retiree health care costs and eliminate burdensome work rules.

One example: Chrysler has new rules requiring workers to put in 40 hours a week before collecting overtime pay. That should have been standard all the while, but things got out of hand.

Ford, the one Detroit car company that isn't getting government aid, is taking most of these same steps on its own, without being forced by Washington. For example, Ford has sold off Jaguar and Land Rover, two luxury brands that have lost money for years. Good for Ford. GM should have done the same with the money losers, but didn't. Ford is well-positioned to lead.

The benefit of eliminating huge swatches of nonproductive costs will be enormous. General Motors and Ford will survive as independent companies. Ford likely will emerge larger than GM (for the first time in 80 years). But GM will still have between 15 percent and 20 percent of U.S. car and truck sales, and a profitable and smaller General Motors is better for everyone than a bigger but weaker company.

As for Chrysler, the proposed new partnership with Fiat represents the company's best chance to come through the current crisis. Dealers will be stronger, too, because there will be fewer of them, each selling more cars than they do now.

The bottom line here is that with leaner cost structures and modest rebound in car sales, these companies could be producing healthy profits far faster than most people expect.

Nobody likes the fact that the federal government will own most of GM and a big chunk of Chrysler (with the UAW also holding large portions), but that was unavoidable. The government was the only party willing to provide the money to keep these companies going through the current restructuring process. I believe President Obama's statements that he doesn't want to run the car companies, and the government will seek to sell its share within a few years.

Mr. Obama's intentions are noble here, but it's almost impossible to get Americans into small cars when gas is cheap. The better route would be to raise gas taxes and offset the impact on Americans with income-tax cuts and gas vouchers. We need a revenue-neutral gas tax to change America's buying habits. A small subset of car buyers will be motivated to buy hybrids because of "feel-good" environmentalism, but most people respond to fundamental economics. That's the potential flaw in the president's new plan.

All this is good for America. This country has been a great force for good in the world because of its unique economic and industrial might, of which the auto industry is a vital part. Yes, the American auto industry includes the Japanese, German and Korean automakers that build cars in America. But the engineering expertise that is vital to our nation's economic prowess has a large and vital base inside General Motors, Ford and Chrysler.

Mike Jackson is chairman and chief executive officer of Fort Lauderdale-based AutoNation, Inc.

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