Howes: Cheap gas, hot truck sales pressure car business

Daniel Howes

Detroit’s automakers may be in danger of becoming victims of their own success.

General Motors Co. is moving to reduce inventory of slow-selling cars by idling shifts at five car plants across the country, including two in Michigan. The decision signals the unintended effects of the public’s unmistakable bias for pickups and SUVs, thanks partly to low gas prices.

Blame pesky consumers and their audacity for making rational buying decisions clearly affecting the market. That’s not all: the preference for trucks and SUVs of varying size will complicate the industry’s push to meet onerous Obama-era fuel economy targets — not help it.

“The auto companies point out that low energy prices have increased the demand for less fuel-efficient vehicles,” Martin Zimmerman, a former Ford Motor Co. chief economist who is now a professor at the University of Michigan’s Ross School of Business, said in a statement.

“At the end of November, the Environmental Protection Agency formally proposed that the 2022-2025 standards remain unchanged and set the stage to implement that ruling before the new administration takes office. That action will make it more difficult ... to change the standards, though there will be continuing pressure for some modification, perhaps extended deadlines.”

Too many assumptions made when the industry was on its knees eight years ago are proving to be dead wrong. And many of them are likely to be tested in a Trump administration apparently skeptical of regulation unhinged from market supply and demand.

Back then, oil prices were expected to stay high and steer consumers into the vehicles Washington wanted them to buy. Oil markets didn’t cooperate, thanks in large part to the revival of American production, the success of hydraulic fracking and its effect on global oil markets.

American consumers were expected to embrace compact vehicles and such alternative propulsion systems as gas-electric hybrids and extended-range electric cars. They mostly didn’t, despite a continuing proliferation of offerings that still accounts for less than 3 percent of the total U.S. market.

Politically incorrect pickups and their SUV kin were to be consigned to commercial purgatory, except when needed to ferry self-important politicians acting in complete defiance of their policy prescriptions for everyone else. It isn’t working out that way.

Instead, the flexibility and utility of SUVs has morphed steadily into smaller, more fuel-efficient packages, giving buyers the economy of small cars in the shapes of traditional SUVs and crossover vehicles. The net effect is that car sales slump as the industry runs at record sales volumes.

Something has to give. The decision by the Obama EPA to ensure the tough 54.5 mpg-by-2025 standard remains in effect — a decision one industry CEO called “disappointing” — is colliding with the realities of a market that isn’t willing to buy what Team Obama says it should.

Sure, the past year has been all about “mobility” all the time; about the debut of extended-range electric vehicles like GM’s Chevrolet Bolt; about Ford’s belief that mobility will transform life as extensively as Henry Ford’s Model T; about the fact that Silicon Valley is eyeing Detroit’s business because that’s where opportunity and growth lie.

But the grubby little facts are that the traditional car and, increasingly, truck business are still where the vast majority of revenue is booked and profits are made. It’s why the automakers already are pushing Team Trump to rethink federal fuel-economy rules only loosely connected to market and technical reality.

Automakers are in business to make money developing and selling vehicles people want to buy, not the vehicles regulators and politicians think people ought to buy to satisfy preferred policy outcomes.

Detroit is sending a message about its home market, and it says that cars as we’ve known them are not the future. GM is idling production to reduce inventory; Ford is shipping small-car production to Mexico, where the labor arbitrage is more favorable.

And Fiat Chrysler Automobiles NV is getting out of the car business. It’s the most aggressive bet yet that the sectoral shift toward trucks and SUVs is real, is more profitable, and is more likely to yield more repeat customers than forgettable cars like the Chrysler 200 and Dodge Dart.

That may not be the world Washington had in mind when it helped steer the industry back to health. But it’s the real world that Detroit and its rivals must face, whether they like it or not.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.