Missing the Turn, Again

It's fashionable to pick on General Motors, and in his New York Times column today, Tom Friedman pulls out all the stops in excoriating them for the gas-price cap promotion I mentioned last week. This program has the potential to be a marketing coup and public relations disaster, simultaneously. Rather than piling on, I want to focus on a different aspect of this issue: the apparent repetition of the product strategies of the 1970s that nearly ruined Detroit once before. The consequences of this go far beyond energy, but they certainly have implications for how much fuel this country will consume for the next 20 years.

When the first energy crisis arrived, with the Arab Oil Embargo of 1973-74, followed by the Iranian Revolution in 1979, US carmakers were caught flatfooted. The typical American car of the time was a massive station wagon with a 350 or 400 cubic inch V-8 engine. Average gas mileage: 10-12 mpg. (Average pre-Embargo pump price for regular gas: 36 cents per gallon, the equivalent of $1.63 today.) Detroit was forced to retool on the fly, resulting in such sterling vehicles as the Ford Pinto, Chevrolet Vega, and Chrysler K-Car. It took a federal bailout of Chrysler to keep the Big Three from becoming the Big Two, while Toyota, Nissan (or Datsun, as it was called then) and Honda filled the breech with small, economical and surprisingly reliable cars, seizing a giant chunk of market share that they've never given back.

It seems inconceivable that we could be poised for a second round of this, but when you look at Detroit's product slate, dominated by SUVs and various truck mutations, it's hard to avoid this conclusion. Just compare the fleet fuel economy of the various carmakers. GM's and Ford's domestic offerings score at just a shade over the required 27.5 mpg average for passenger cars and 21.0 for light trucks. Toyota, on the other hand, exceeds 34 mpg for cars and 23 for SUV/light trucks. Who is better positioned for a world of high gasoline prices? Who will gain market share, and at whose expense?

It didn't have to be this way. Although it isn't easy to gauge what consumers will want in the 3-4 years it takes to bring a new model to the market, Toyota's planners had the same market information to work from as their US peers. In the late 1990s, Toyota invested in hybrid technology as an option to replicate the efficiency advantage it enjoyed in the 1970s. This has been perfected in two generations of the Prius and now deployed to the mass-market Camry. But the Big Three participated in the 1990s Partnership for a Next Generation Vehicle, an industry-government consortium focused on developing the technology for an 80 mile per gallon car. Using the results of that effort, each of these manufacturers demonstrated prototype hybrids that got in excess of 70 miles per gallon.

Today Detroit is belatedly rolling out an array of more economical vehicles, including somewhat thriftier SUVs. Meanwhile, the gas guzzlers that were bought in large numbers while these cars were being designed have expanded our oil imports in a manner that could take decades to reverse. GM and Ford are paying for these product line decisions in reduced earnings and stock prices, while the country pays in the oil portion of our trade deficit, and consumers pay at the pump. The biggest beneficiaries of this second missed turn are the Japanese and Korean car manufacturers, whose dealerships are stocked with broad ranges of sleek, thrifty, and dependable cars--again.