CNBC European Business | End Of The Road

end of the road

Faced with high oil prices and eco-anxiety, US carmakers are having to rethink their gas-guzzling ways and take some lessons from their European rivals, says Ben Oliver 

rom the top floors of their headquarters in Detroit and Tokyo, Stuttgart and Wolfsburg, the leaders of the global car industry can see two layers of thick, black cloud. The first is the general downturn that has hurt sales in virtually every market, including the emerging economies that until now have compensated for flat sales in Europe and America. But even when this cloud finally lifts, they’ll be left in the gloom of the second: high fuel prices, rising demand for oil and dwindling supplies. 

We’ve been here before, of course. The oil crisis of the early 70s prompted the carmakers to rethink their ranges and gave a leg-up to the nascent Japanese car industry with its affordable, economical products. When oil prices fell again, the carmakers fell back into bad habits. But most experts seem to agree that it’s different this time, and that the car industry that emerges from the current double threat will be permanently changed, even if fuel prices fall. 

“The price of oil is not the whole story here,” says Martin Eberhard, electric car pioneer, founder of Tesla Motors and now entrepreneur-in-residence, specialising in clean-tech, at venture-capital firm Mayfield. “It definitely hurts when you go to the pump in your Hummer, but people are buying Priuses and good gas-mileage cars and looking at electric cars, not to save money but to do the right thing... That’s what will give electric cars the edge, even if OPEC gets its act together and gets the price of oil down.” 

Before these new technologies come to market – and as we’ll see, they’re not far off – the carmakers are taking radical steps to reshape their businesses. The European carmakers are less exposed than the Americans. European cars are typically smaller and more economical, their sales less affected by fuel prices. America’s traditional mass-market, large-engined cars, pick-ups and SUVs have been hit hard by both the credit crunch and high oil prices. These models are where the US manufacturers make most of their profit, and slumping sales have made their dire  financials look even worse. Full-size pick-up truck sales are down a quarter on the same period last year. General Motors posted a $15.5bn (€10.5bn) loss in the second quarter of 2008. Things are so bad it tried to put a positive spin on its August sales figures: they were down an eye-watering 24.5%, but one GM executive pointed out that it was at least an improvement on the 27% slump in the previous month. 

“Americans aren’t shunning cars,” says Adam Jonas, automotive industry analyst at Morgan Stanley, “but the way cars are used and propelled is changing. The US car fleet needs to look a lot more like the European car fleet, and the industry needs to completely retool. If the US carmakers survive the next 12 months, we predict they’ll thrive, but they’ll do it by making their cars look a  lot more European.” 

That survival is by no means guaranteed. The longer the downturn, the more likely the big US carmakers are to run out of cash. The tighter the squeeze on credit, the harder it becomes for them to raise funds with their poor credit ratings, in turn making it harder to commit to the capital investment needed to shift their product portfolios. They are pinning their hopes on at least $25bn (€17bn) in low-cost loans from the US government, which will have to be used to convert plants to build models with significantly better fuel economy; the chief executives of the Big Three – GM, Ford and Chrysler – are currently lobbying to ease restrictions on how the cash can be used. 

That might be all the help they get from government. Analysts like Jonas agree that while it was once impossible to imagine one of the Big Three being allowed to go under, the current climate and the example of  Lehman Brothers means there’s no longer any such certainty.  

Keeping their vast armies of employees in work might be their best argument for more federal aid. Between them they employ 240,000 staff directly, and many more in their supply chains. Ironically, their efforts to streamline, cutting 100,000 staff in the past three years, might count against them if times turn even tougher. 

But radical surgery has already begun. GM has announced that the Hummer brand is up for sale, having seen sales fall by 40% so far this year. GM hopes to raise $1bn for its thinning coffers from the sale. It has also cancelled the replacement for its long-serving Northstar V8 engine and will downsize to a more economical V6 for most of its high-end models. After 2010, you won’t be able to buy a Cadillac saloon with a V8 engine. 

Ford and Chrysler are following suit. Ford’s Explorer America concept unveiled at this year’s Detroit motor show hints that its replacement for its best-selling, full-size SUV will have a lighter monocoque body and optional front wheel-drive for improved economy, and – shock horror – no V8 engine. And the European carmakers, though hit less hard, are also rethinking. BMW recently canned its X7, seven-seat off-roader: it planned to build 20,000 each year, but gauged that demand has now fallen too low. 

But while the carmakers are axing their thirstier models, they’re also responding positively to buyers’ demands for smaller, greener cars. Ford is putting the European-engineered Fiesta hatchback on sale in America. It is tiny by US standards, but in August sales of the Focus hatchback leapt by 23%, while Ford as a whole declined by 26.5% – a smaller car might see even bigger results. Daimler has gone a step further and put the tiny Smart two-seat city car on sale in the US to the benefit of its European factory and suppliers.  

But General Motors has made arguably the most impressive leap. Its new Chevy Volt has been rushed into production and will be the first plug-in hybrid on sale when it is offered in the US in 2010 and Europe in 2012. It will drive at least 40 miles on electric power alone, after which a small and highly efficient petrol motor kicks in to charge the battery and extend the driving range to over 600 miles.  

GM’s research shows that the electric range is enough for the daily needs of nearly 80% of drivers, meaning you may never need to start the petrol engine in your Volt. Virtually all the major carmakers are working on plug-in hybrids – Toyota is likely to be next to market, and most are also working on affordable, all-electric city cars powered by lithium ion batteries and with a range of around 100 miles. 

“One of the reasons this shift is going to be lasting is that these alternative means  of propulsion either exist now or will very soon be feasible,” says Jonas. “That wasn’t the case in the 70s.” 

“What I hope will happen is that we’ll see more vehicles like the Chevy Volt,” agrees Eberhard, “and as electric range increases and the battery pack price decreases, over time the petrol engine will become optional, and  in 20 or 30 years cars will be battery-powered, period.” 

The situation is even more pressing in Europe, where the parliament has gone ahead with a scheme to cap CO2 emissions at 130g/km, averaged across a carmakers’ fleet. The current EU average is 158g. However, low-carbon technology is better established here than in the US. Indeed, analysts agree that the mainstream European carmakers might actually profit from the turmoil in the market, as global demand for smaller cars increases.  

“Volkswagen is looking at building US-specific vehicles from its existing platforms,” says Nagley, “and Ford of Europe could emerge from this very strongly, if Ford of America doesn’t go bust first.” 

“This plays to the advantages of the German, French and Italian makers and the design of their cars,” agrees Jonas. “And they’ll see a return on their investment in fuel-saving technology like direct injection and  turbo-charging.” 

So the car industry is far from dead. But expect it to emerge from its current crisis looking very different.