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No easy road for U.S. auto industry

Greener and fuel-efficient cars alone won't save Detroit, experts say. Higher oil prices and more popular designs are needed too.

April 09, 2009|Jim Tankersley

WASHINGTON — President Obama's threat to cut off government loans and bring on bankruptcy has given him unprecedented leverage to realize his vision of Detroit as the world leader in greener cars.

Yet even if the president succeeds in getting domestic carmakers onto firmer financial ground, even if Detroit overcomes decades of consumer skepticism about the quality of its products and begins cranking out fuel-efficient cars that don't damage the environment -- even then the U.S. auto industry could die.

Discussions about what must happen for General Motors, Chrysler and Ford to survive have centered on issues such as reducing labor costs and persuading creditors to scale down the companies' debts.

Beyond that, Obama said recently: "This restructuring, as painful as it will be in the short term, will mark not an end but a new beginning for a great American industry . . . that is creating new jobs, unleashing new prosperity and manufacturing the fuel-efficient cars and trucks that will carry us toward an energy-independent future."

For that vision to be realized, economists and marketing specialists say, offering cars that are greener and get better mileage is not enough. Two other factors will be important in deciding Detroit's fate.

First, oil prices must take off. High-mileage, low-pollution vehicles generally cost more, and demand for them historically has jumped in times of rapidly rising gas prices and faded when fuel becomes less expensive.

Second, the cars Detroit produces must satisfy consumer tastes and preferences. Marketing data show that a vehicle's size and the image it bestows on its driver play major roles in buyers' decisions.

Reflecting those factors, the two most popular import luxury brands, Mercedes-Benz and BMW, snagged nearly 4% of the U.S. auto market in March, selling more than 33,000 cars. That's about 12,000 more vehicles -- and a 50% larger market share -- than all hybrids combined.

In other words, greener and more efficient alone will not ensure a bright future for Detroit.

"You will not get people to buy more fuel-efficient cars unless gas prices go up," said Howard Wial, a fellow at the Brookings Institution in Washington who studies the auto industry. Moreover, he said, "whether the Detroit Three will be the ones to sell those cars . . . really depends on their own innovative capacity."

Case in point: When gas approached $4 a gallon last year, consumers who formerly bought Mercedes and BMWs flocked to the Toyota Prius hybrid -- for its lower operating cost, sleek styling and high-tech features -- said Alexander Edwards, automotive president for the marketing firm Strategic Vision.

Those companies "could take the idea of green and use it to enhance other psychological factors that customers were looking for. . . . [If] you have a sexy, attractive hybrid vehicle, or something innovative like the Prius, that's going to work."

Today, however, with oil selling well off its peak and the economy in the doldrums, Priuses are a glut on the market.

At the heart of the Obama administration's critique of GM, Chrysler and Ford is the idea that they lost a once-dominant hold on the American automobile market because they kept building SUVs and other gas-guzzlers instead of the efficient cars customers wanted. In addition, administration officials and environmentalists contend that global warming and a dependence on foreign oil require shifting away from vehicles powered by petroleum.

History shows that's difficult. Since the 1973 Arab oil embargo, a pattern has repeated itself: Disruptions in world markets -- engineered by producers or caused by events such as wars in the Persian Gulf region -- drive gasoline prices skyward. Consumers respond by looking for cars that inflict less pain at the pump. And every time prices level off, the demand for smaller, more efficient cars fades.

But Detroit automakers long ignored signs that higher fuel prices would shift demand, said Walter McManus, an economist at the University of Michigan's Transportation Research Institute and former sales forecaster for GM.

McManus said he and other GM analysts tweaked projection models when they didn't believe their results.

"We thought we were smarter than consumers," he said -- particularly in regard to fuel economy, the impact of which they minimized "in a way we would never [minimize] horsepower or cup holders."

Japanese and European automakers didn't have that option. High gas taxes in their home markets kept fuel prices up and forced them to concentrate on more efficient cars. They beat their American rivals to hybrid technology and to smaller SUVs.

The gas price increases from 2002 to 2007 explain about 40% of U.S. auto manufacturers' lost market share, according to researchers from the University of Illinois at Chicago and the Federal Reserve Board of Chicago.

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