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Automakers Are Crazy to Bet Everything on Price of Oil

Automakers Are Crazy to Bet Everything on Price of Oil
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Tuesday, 24 July 2018 10:28 AM Current | Bio | Archive

The Detroit Three have always had a tough time competing with Asian auto makers in the markets for mid-sized and compact sedans.

Often superior Japanese product designs and a field crowded by smaller rivals too, make sedans the toughest competitive arena in the industry. Margins are thin too.

Compounding these issues, improvements in vehicle design, which reduced the gas-cost penalty of driving a car-based sport utility vehicle relative to a sedan, and lower gas prices — the national average price fell from $3.30 in 2008 to $2.25 in 2017 — caused sedans' share of overall vehicle sales to fall to 37% in 2017 from 47% a decade earlier. In June, sedans accounted for just 31% of total vehicle sales.

In 2011, auto makers got a break on mileage standards. Although miles-per-gallon requirements were rising, the Obama administration permitted auto makers to meet separate standards on a size of platform basis-the bigger the perimeter of the four wheels the lower the MPG target.

Consequently, the Detroit Three no longer need to sell sedans to hit EPA targets for fleet averages, and early in May, CEO Jim Hackett announced Ford (F) will phase out virtually all sedans in favor of SUVs and pickups with Chrysler and GM soon to follow.

This decision may prove shortsighted for four reasons.

  • Affordability and market share

The average price of a vehicle is about $36,000, and above $40,000 for Ford even though it sells, for now, a lineup of lower-priced sedans. With the median household income around $60,000 a year, that is simply too expensive for at least one-quarter of families, and they will have to continue buying sedans or older used SUVs and trucks.

Though facing tough times selling sedans too, foreign competitors continue to invest in those less expensive vehicles, and not all of the domestically branded sedans canceled will be replaced by new sales of Detroit's SUVs and light trucks. If Detroit stays on course, it will lose considerable market share to Japanese, Korean and German manufacturers and eventually the Chinese as folks on limited budgets seek their sedans.

  • First buyer advantage

Lots of young people enter the market buying a sedan and if their experience is favorable, they buy up to SUVs and light trucks within that brand as their incomes and families grow. Ceding the Dodge Dart, Chevy Malibu and Ford Focus market to Toyota and Honda just about guarantees fewer customers 10 years from now for Ford and GM SUVs.

Look for the Asians to beef up SUV and crossover offerings too and to gain some market share even as they boost their sales more immediately through the sedan market.

  • Shale boom isn't everything it's cracked up to be

Investors are placing tougher demands these days on shale producers and although they responded to OPEC and Russia cutting production, America remains a net petroleum importer and U.S. gasoline consumption is rising again. Add in the state entropy in Venezuela and U.S. sanctions limiting Iranian exports when those become fully effective later this year, and gas prices could rocket to $3.50 a gallon.

That's good news for the much-awaited plug-in hybrid and all electric revolution, but even those technologies are more workable in lighter sedans than heavier SUVs and pickups.

Gas, hybrid or electric, sedans have lower oil price tags, and should oil prices jump, an auto maker without sedans could be as out of place as football equipment at the World Cup.

  • Supply chain flexibility

These days more moderate-sized SUVs and crossovers may be made on the same platforms as cars but despite what you may have read about flexible manufacturing, rolling out new sedans would take years once those are gone from Detroit's lineup.

Shifting regulatory requirements and competition to incorporate newer technology precludes simply taking old vehicle designs off the shelf. It could take many years to get back into the sedan market with a competitive product.

Essentially, Jim Hackett and his colleagues at GM and Chrysler are betting the price of gasoline will permanently ease from recent highs of about $3.00 a gallon. To be less polite, they are gambling the stockholders' money on the price of oil.

That's an odd preoccupation for folks paid to make cars, not speculate.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1.

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If Detroit stays on course, it will lose considerable market share to Japanese, Korean and German manufacturers and eventually the Chinese as folks on limited budgets seek their sedans.
four, reasons, detroit, sedans
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2018-28-24
Tuesday, 24 July 2018 10:28 AM
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