Page last updated at 00:27 GMT, Thursday, 20 November 2008

Lack of investment clue to Detroit's demise

By Jorn Madslien
Business reporter, BBC News

Listen to the voices from Washington and Detroit - where the Big Three carmakers General Motors, Ford and Chrysler are pleading for a $25bn (16.6bn) government bail-out - and you would think the industry was dying on its feet.

Mini E
The electric Mini E hopes to catch the eye of tomorrow's consumers

Further south, in Los Angeles, a more nuanced story is emerging as the Californian city's motor show gets under way.

Two models in particular illustrate the diverging paths the industry is taking.

On the one hand there is the all-electric Mini with a range of 150 miles per charge, hailed by the company's US boss Jim McDowell as a car that is "anticipating the needs of our world, as opposed to responding".

On the other there is the new Ford Mustang, powered by either a 210bhp V6 engine or a 315bhp V8, which Ford's design president J Mays insists has what it takes to "connect young America with the spirit of the times".

But anyone who actually asks America's young about their current desires will find that many are thirsty for less thirsty cars. Petrol-head passion is no longer the fashion.

Late hybrids

Spotting the next big thing is vital in the volatile car industry, as the Japanese carmaker Toyota has proven in recent years with its hugely successful petrol-electric Prius.

General Motors Chairman and CEO Rick Wagoner, from left, Vice Chairman, Bob Lutz, and President and COO Fritz Henderson
The Volt is dubbed a "Prius killer", but it is arriving late

Its rivals have learnt the hard way that their decisions to scrimp on one particular investment are no longer deemed sensible cost-saving measures, but rather are now seen as a costly mistakes, as GM president and chief operating officer Fritz Henderson explained in a recent interview with the BBC News website.

Earlier this year, GM unveiled a hybrid of its own, named the Volt and widely hailed as a "Prius-killer".

Only it will not hit the road for another year or so, more than a decade after the party started.

"Hybrids are 10 years old," Mr Henderson acknowledges. "Toyota is ahead of us there. They're on their third or fourth generation Prius. We're first generation, as is most of the competition.

"Five to 10 years ago we looked at a hybrid propulsion system, and said: 'hybrid, that means there's two propulsion systems - gas and electric. Therefore it's got to be more costly.'

"So we minimised the investment because we didn't think it was efficient - not a good decision."

Drink in the tank

GM has in recent years instead thrown its weight behind E85 - a mixture of 85% ethanol made from plants and 15% petrol - as the alternative fuel of the future.

Fritz Henderson

The truth is, you've got to invest in all these technologies, or you run the risk of being wrong. And if you're wrong, it can threaten your firm

Fritz Henderson, president and chief operating officer, General Motors

On the face of it, this was a shrewd move.

For starters, there was GM's slim coffers, which made it tempting to look towards solutions that required a low level of investment.

"All first generation new technologies involve higher costs and therefore retracts from margins. The only exception is ethanol, which is relatively efficient. Everything else has some negative effect on margins," explains Mr Henderson.

"The most cost-effective way, the most profit-effective way if you will, to meet our requirements for improved fuel economy is to improve the fundamental efficiency of our existing vehicles," he continues.

"[And as] the changes to make a vehicle run on E85 ethanol are modest... it's the most cost effective way to displace oil, in terms of vehicles itself."

Indeed, if done in the factory it costs less than $500 per car to make them capable of running on E85. Strictly speaking, there is no further investment required.

Added impetus has come from the way ethanol has been given an extra leg-up by government initiatives in Brazil, Sweden and the US, where a switch-over from petrol has been deemed desirable for a slew of different reasons.

"Some countries have basically said 'the single most important thing you can do is reduce oil consumption, and the most effective way to do it is ethanol', because vehicles can run on it and you can make a meaningful impact. You can begin to reduce oil consumption immediately."

But at the end of the day, no market can grow without the consent of the consumer.

"We learned our lesson there, that you don't get a chance to say, in our case, 'we firmly believe in ethanol'," says Mr Henderson - who insists he still believes E85 has a future.

"But just because we believe it doesn't mean it's going to be right."

What consumers choose to do, what governments choose to do, changes over time he points out, which leaves carmakers with no choice.

"The truth is, you've got to invest in all these technologies, or you run the risk being wrong. And if you're wrong, it can threaten your firm."

Big cars, big profits

Much has been made of the way the American carmakers have stubbornly stuck with their large 4x4 leisure trucks, but who can blame them.

Kia electric fuel cell concept, on show in LA
Kia is still investing heavily in its US manufacturing plant

America's love affair with large 4x4 trucks essentially emerged in response to government initiatives during the 1980s aimed at reducing emissions from large "gas-guzzling" cars.

Although widely acknowledged as desirable by policymakers, the switch to smaller cars was not so desirable by consumers who leapt at the chance to instead buy the new breed of sports utility vehicles (SUVs) - essentially trucks with air conditioning and leather seats.

And who could challenge their right to have big engines in commercial - or at least commercially capable - vehicles?

For years, America's automotive giants made some of the best SUVs in the world, and it turned out they were much more profitable than small cars.

As a money-making exercise, it was sheer genius, so Japanese rivals such as Nissan or Toyota soon followed suit, as did the UK marque Land Rover.

Gradually, over a period of years, ever more carmakers got in on the act. Those without a decent SUV offering were seen as missing a trick.

Not dim, just broke

These days, it seems the ones missing a trick are those who have been ignoring the predictable change in consumer tastes, thus allowing their rivals to storm ahead.

Rivals such as Kia, for instance, whose global sales rose 12.7% during the first 10 months of this year compared with the same period last year, and whose $130m US design centre has just opened in California.

Kia is currently recruiting workers in Georgia where it is opening a new $1bn factory late next year.

The contrast with Detroit, where hardly a week goes by without fresh announcements of job cuts by one of the Big Three, is stark.

Burdened by a mixture of crippling pension and healthcare liabilities for former employees, ageing factories and weak demand for the vehicles they have to offer, they are verging on collapse and thus in no position to invest for the future the way many rivals are doing.

Hence, the assertion made by many commentators, that the bosses of GM, Ford and Chrysler have been naive, is not the right one.

They are not dim. Just broke.

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