The Perils of Short-term Profiteering: U.S. Automakers Focus on SUVs Hurts Their Profits and Our Health

With record high gas prices dominating the news, Americans are finally facing the music. The big SUVs and pick up trucks that the US auto industry relentlessly promoted in the 1990s are now economically unsustainable, as well as more accident-prone and polluting than the sedans and compacts that have allowed the European and Asian auto industries to prosper. Though environmentalists have long argued that these vehicles are environmentally unsustainable, for more than a decade, SUVs and trucks had been the top selling vehicles in America. Of course, U.S. consumers shoulder some of the blame for the SUV and large truck craze that has left vehicles languishing in used car lots or drive ways as drivers shy away from a fill-er-up that can top $100. But in the 1990s, the US auto industry spent more than $9 billion on advertising to convince Americans the highly profitable SUVs were safer, more convenient and more manly than the alternatives. In this report Corporations and Health Watch examines how the US auto industry’s desire for short-term gain has led to plummeting profit margins and jeopardized the industry’s future viability while condemning American consumers to unsafe and polluting vehicles.

On the heels of the housing crisis and a declining economy, gas prices have set record highs this spring and summer, with the average price per gallon increasing by more than a dollar since February. As fuel prices rise, Americans are finding ways to cut back on fuel costs by walking and biking, taking public transportation, carpooling, limiting errand trips and curtailing summer travel plans. The Federal Highway Administration estimates that in April, the number of miles traveled on U.S. roads was down 1.8% compared to April of 2007, a reduction in miles traveled on public roads for the sixth month in a row. In March, the number of miles was down 4.3% as compared to a year ago and was the greatest decline in travel on public roads since 1979. At the end of June, MasterCard reported its ninth consecutive week in declining gas sales with overall annual gasoline declining for the first time in over 17 years.

Changes in US auto market

But U.S. consumers are making other changes too: they’re no longer buying as many SUVs and trucks, looking instead for smaller, fuel-efficient cars, a move Ford VP of marketing Jim Farley called “breathtaking.” In April 2008, one in five cars sold in the US was a compact or subcompact car, compared to one in eight a decade ago when SUV sales were booming. Pickup truck sales were down 5% overall from last year and Chrysler saw a 22% drop in SUV sales this year. In May, GM reported that overall sales plunged by nearly 28%. Marketing firm J.D. Power & Associates estimates that annual motor vehicle sales will be the lowest since 1995, with a decline of 1.2 million vehicles since last year.

Meanwhile, Japanese manufacturers report booming sales in many of their lines as hybrid vehicles and other fuel-efficient cars are in high demand. The Toyota Prius was the ninth best selling car in the United States in 2007, selling more than 64,000 of the hybrid vehicles and Toyota has now sold 1.5 million hybrid vehicles around the world and plans to sell one million a year after 2010. In May, Honda passed Chrysler in U.S. sales for the first time and Toyota became the number two American seller. In a first, during the same month, Detroit’s Big Three, GM, Ford and Chrysler, together held only 44.4% of the market share as compared to 48.1% held by Asian manufacturers. Toyota is close to passing GM as the world’s top auto seller.

To encourage sales of large trucks and SUVs, some automakers are offering incentive programs: Chrysler has offered buyers the opportunity to lock-in gasoline prices at $2.99 a gallon for three years and Ford announced it would offer “employee pricing” on their F-Series truck, which had previously been the most popular line of vehicles in the country for two decades. Past promotional sales of this kind have led to increased sales but lower profits, another example of the short-termism that has undermined the US auto industry. The Big Three of U.S. auto manufacturers have also cut back on production, with GM announcing it planned to close four North American plants to focus on bringing fuel-efficient vehicles to market.

New marketing and production strategies

U.S. automakers are also shifting their marketing and production strategies. For the last two decades, the SUV and the large truck were marketed to the U.S. public as all-around vehicles used for for hauling large or heavy items, for a quick trip to the store and for the family vacations. These oversized vehicles have also been painted as representing safety, security, power and prestige. Realizing the gravity of declining sales, analysts predict that manufacturers will have to reframe the way SUVs and large trucks are marketed, portraying them as supplemental and used for specific purposes, like hauling heavy loads and work. Manufacturers are currently highlighting SUV hybrids, trying to sell them as more fuel-efficient and environmentally sound. Finally, automakers are boosting production of “small crossovers,” or vehicles that look like SUVs but are built on car underpinnings. These moves suggest the U.S. auto industry is desperate to hang onto that sector of new vehicle sales that brings in the most profit, even as other auto makers have adapted to changing conditions.

However, Detroit’s Big Three are also diversifying their offerings, bringing more hybrids and smaller, fuel-efficient cars to the market. Alan R. Mulally, Ford’s chief executive, explained that current shifts are not temporary, but rather “structural in nature.” While some vehicles are new to the market, others are imported from overseas. General Motors and Ford, for instance, are adding smaller vehicles, such as the Saturn Astra and the Ford Ka, sold in Asia and Europe, to its United States offerings. Officials at Ford see the small car market as a growing one and estimate that global car sales will hit 38 million in 2012, up from 23 million in 2002. In the United States, Ford predicts 2012 small car sales of 3.4 million, up 25% from a decade ago. Manufacturers are also developing a number of new hybrid, ethanol-based and electric vehicles for the market. To compete with the Japanese manufacturers that dominate hybrid car sales and are developing electric cars, in 2010 GM plans to begin production of the Cheverolet Volt, a battery-powered vehicle with a small gasoline engine that allows for recharging.

While some are declaring the era of the SUV and large truck over, US manufacturers, as we have seen, are not ready to let go of the big-ticket items for the domestic market. G.M. plans to manufacturer large trucks and SUVs with diesel engines, claiming that this switch can increase the mileage of large trucks by up to 70%. Japanese maker Toyota remained confident in the recovery of the large-scale truck market, with group VP Bob Carter noting that those who needed larger vehicles would not be willing or able to make the switch to smaller cars.

Surprise or closed eyes?

Although auto analysts and environmentalists have been criticizing the US auto industry’s reliance on SUVs for more than a decade, Detroit’s Big Three seem unified in their shock and surprise at the rapidly declining sales in large trucks and SUVs. George Pipas, Ford’s market analyst stated, “This seismic shift in the marketplace has definitely taken us and everybody else by surprise.” Kelley Blue Book executive market analyst Jack Nerad suggested that top U.S. manufacturers saw a shift toward smaller, more fuel-efficient cars coming in years, not in months. Unlike the gas shocks of the 1970s and 1980s, automakers now hold that high oil prices are here to stay and that the shift toward smaller, fuel-efficient vehicles will be a permanent one.

But how much of a surprise is this shift? In Europe, the use of diesel engines has been standard as they are more fuel-efficient than those based on gasoline and new technology has reduced pollution through the development of cleaner burning engines. Given the current state of oil prices and auto sales, European manufacturers are increasingly looking to the U.S. as a market for the newer diesel engine cars. Japanese manufacturers, meanwhile, have long dominated the production and sale of hybrid vehicles, with Toyota introducing the hybrid in 1997. These manufacturers continue to develop new fuel-efficient and hybrid cars for the market. Nissan plans to introduce an electric car by 2010. European automakers are also shifting production toward even more fuel-efficient vehicles. French maker Renault has partnered with the California-based Project Better Place to produce electric cars for markets in Denmark and Israel with the Israeli government promising to cut taxes on the sale of these vehicles to promote their sale.

The Role of Government

But the decisions of U.S. vs. Japanese and European automakers also needs to be seen in light of the different relations between automakers and government. After the oil shocks of the 1970s and 1980s, European governments sharply raised fuel taxes and promoted the use of diesel by taxing gasoline at higher rates. After the crisis, European governments purposefully retained high fuel taxes to discourage consumption, thus encouraging the design and purchase of smaller, fuel-efficient vehicles as well as the use of public transportation – something more heavily supported by European governments that in the United States.

During the oil shocks, the United States witnessed the first ever fuel economy standards and reductions in speed limits. Small car sales in America increased temporarily with an attendant rise in fuel economy. When gas prices dropped, however, larger vehicles sales increased, due in part to heavy promotion. The United States was the only major developed nation to increase oil consumption during this period and not until this past spring, after 32 years, did Washington lawmakers again pass new energy laws requiring new cars and trucks, as an average, to meet a standard of 35 miles per gallon by 2020. With some of the lowest gasoline prices, lowest energy taxes and most fuel inefficient vehicles in the developed world, “about a quarter of the world’s oil goes to the United States every day, and of that, more than half goes to its cars and trucks,” reports the New York Times.

And in Japan, where fuel taxes resemble those of Europe rather than the United States, making small cars more popular, lawmakers have encouraged the sale of hybrid vehicles over the last decade by offering buyers a $3000 rebate for choosing the more fuel-efficient cars. Seven years before the United States pushed through stricter emission standards, Japanese regulators required manufacturers to achieve gas mileage of 35.5 miles per gallon by 2010. During the mid 2000s, sales of larger vehicles declined in Japan due to the passing of stricter diesel emissions standards that prompted Japanese manufacturers to shift away from the production of trucks or to look to the U.S. for markets. By and large, Japanese and European auto manufacturers who have not relied on big-ticket, large vehicles for the bulk of their profits are now not in the position of dealing with plummeting sales and growing inventories of vehicles. Currently, four out of ten of the fastest-selling vehicles in the U.S. are hybrids, with the Toyota Prius moving quickest with sales occurring, on average, just four days after arriving in dealers’ showrooms.

The China Solution?

Rather than taking a lesson from Europe and Japan, U.S. automakers are turning to China as a new market for big, gas-guzzling vehicles. According to the International Energy Agency (IEA), the world’s demand for energy will increase by 65% during the next twenty years with petroleum remaining as the top energy source. While the United States remains the top energy consumer, the IEA predicts China’s oil demand will double by 2030, with much of this increase being due to the increasing demand for cars. Between 1990 and 2006, the number of vehicles in China increased sevenfold and China now represents the second largest car market in the world and may overtake the largest market, the United States, by 2015. Given this, U.S. and other automakers are looking to China as a strong market for the SUVs and large trucks that Americans are now refusing to buy. During January and February of this year, sales of SUVs in China rose 38% as compared to one year ago. At a spring auto show in Beijing, executive VP of Shanghai General Motors – a partnership between GM and a Chinese partner – Robert Scocia stated “we’re all trying to get into this market.” Looking increasingly toward Chinese markets for growth, GM plans to sell and export over $1 billion in vehicles to one if its Chinese partners while Ford plans to sell over 30,000 vehicles plus transmission components in its own joint venture. However, China does not present an entirely rosy picture for manufacturers committed to producing these high-ticket, gas guzzling vehicles: the Chinese government is increasingly demanding that automakers increase fuel economy, including by producing electric and gasoline-electric hybrid cars. China also recently imposed vehicle taxes based on engine size. Despite these measures, however, China sets price controls on the price of fuel which helps increase demand for larger, fuel-inefficient vehicles associated with prestige as has been the case with the United States.

The World Health Organization reports that 800,000 people die each year from the effects of air pollution. A variety of diseases including cancer, asthma, cardiovascular disease and stroke have been attributed to air pollution. Under pressure from automakers, U.S. lawmakers, particularly under the Bush Administration, have lagged behind European and Japanese governments in passing stricter fuel economy standards and promoting the use of smaller, fuel-efficient cars by raising gasoline taxes. For almost two decades, U.S. automakers focused on the production and marketing of big-ticket, gas guzzling vehicles, contributing to increasing health and safety problems and contributing to global warming. The result: plummeting sales, massive lay-offs of workers and a serious threat to the future viability of the auto industry, previously a central force in the US economy.

In the last 30 years, US businesses have led a concerted and largely successful campaign to get government “off its back” and allow its executives and market forces to solve any economic and social problems that arise. The current plight of the US auto industry may lead some observers to question the wisdom of this strategy and to ask whether the US auto industry, its shareholders, US drivers and the environment would be in better shape today if government had provided more forceful oversight of its business decisions.