Friday, May 15, 2009

Auto Restructuring Implications

An article in this week's Economist does a good job of explaining the global nature of the restructuring of the automobile industry, and in particular the role that Fiat wishes to play in aligning with the weakest US carmaker, Chrysler, and GM's ailing European arm, centered on Adam Opel GmbH in Germany. Fiat sees a global consolidation coming, driven by the need to rationalize vehicle manufacturing overcapacity. The enthusiasm of the US government for this match-up is driven by factors that go beyond Fiat's apparently providing the only viable option for extracting Chrysler's assets and employment base from Chapter 11, rather than progressing to liquidation. We've heard a lot about Fiat's fuel efficiency technology, with little specificity about what that means, other than the occasional photo of Fiat's cute retro-style 500 model. I believe the US government, with its new focus on climate change, sees the opportunity to transform America's least energy-efficient domestic car line into its greenest. That seems at least partially feasible, though it depends as much on changing Chrysler's US sales mix as on the infusion of technology the carmaker could probably have acquired just as easily from third-party vendors such as Bosch.

A quick review of the March 2009 corporate average fuel economy data on the NHTSA website reveals that for model year 2008, Chrysler had the lowest fleet average of the Big 3 at 25.4 mpg, compared to 26.3 for Ford and 25.8 for GM. Although final sales for the 2009 model year aren't in yet, the gap appears to have widened, with GM and Ford's passenger car lines improving by about 1 mpg, while Chrysler's fell from 29.5 to 28.3 mpg. Although they have all focused heavily on trucks and large SUVs in recent years, GM and Ford also had a better selection of more frugal models for consumers to shift to, when fuel prices spiked last year. Compare that to Fiat's fleet fuel economy for 2007 of roughly 42 mpg, and the appeal of the Fiat/Chrysler transaction for the US administration seems clear.

In fact in the latest report I found, Fiat tied Peugeot/Citroen for the best fuel economy in Europe, although it's not reported in quite those terms. Instead of fuel economy standards, the EU has tailpipe CO2 emission standards. They have been coming down steadily, from the recent voluntary standard of 160 grams CO2 per 100 kilometers to 140 and eventually to a mandated level of 120 g/100 km--equating to an average of 49 mpg. Fiat's 2007 performance on this measure was 141 g/100 km, and GM-Europe came in at 156 (37.9 mpg). So far, so good. But when you look at how these companies achieve these levels of efficiency, it's not so obvious how much of that will be transferable. Start with size. Fiat sells a wide range of cars in Europe, but few of them are as big as the most popular models Chrysler has been selling, like the 300 sedan--a very well-behaved car that I've enjoyed as a rental--Dodge Caravan mini-van, Durango SUV, and Ram trucks. Fiat's line includes a few larger, van-type models like the Doblo and the 26 mpg (combined city/highway, after converting to US gallons) Multipla, but it is strongly skewed towards the compact and sub-compact classes. Does the White House imagine a future Chrysler model range that looks like this?

Next, consider engine technology. The number one fuel efficiency strategy in Europe has been dieselization. I've commented on this periodically, highlighting the excellent performance and near-hybrid fuel economy improvements enabled by the common-rail turbocharged diesels in wide use there. But converting American consumers to diesel still looks like a tall order, other than for brands with a loyal diesel following like VW, or for large pick-up trucks, where it's prized for its towing torque. Diesel fuel is widely available, and Ford and GM could have brought this technology over from Europe--where half their sales are diesels--any time they wanted. I have yet to hear either one announce a diesel passenger car model for the US, and I can only wonder what their consumer research on this topic has told them. (And by the way, recent losses by Toyota and Nissan should put paid to the notion that US carmakers have been uniquely myopic about market trends.)

So what should we and our leaders realistically expect from a marriage between Fiat and Chrysler? First and foremost, we ought to see a leaner company that is more attuned to younger car buyers, exemplified by Fiat's clever "eco-drive" software that monitors driving habits. We're also likely to find a much deeper infusion of European design and fuel economy philosophy than Chrysler received from Daimler-Benz, which currently ranks worst of European makers on their grams CO2/100 km scale. It's not clear whether Fiat could qualify any of its current models for sale in the US faster than it could remake Chrysler's model line, but in any case the end result will probably include a bit of both. However, the hybrid company will still be selling into a US market that until quite recently has chosen acceleration and roominess over gas mileage, hands down. We also can't forget that Fiat left the US market in the 1980s with an abysmal reputation for quality and reliability. How far the ultimate outcome of this deal will go towards delivering on the government's apparent expectation of a new, green Chrysler will depend heavily on consumer preferences, and on whether the folks who have bought the company's distinctive offerings in the past will see its new Italian flair as appealing or off-putting.

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