It's a Cruel Market, and It's Just What We Need

By Warren Brown
Sunday, July 6, 2008

Here's hoping for gasoline at $5 a gallon. May it stay at that level, or higher.

That is the only way the current necessary changes occurring in the North American automobile market will continue.

Legislation won't do it. Regulation won't do it. And moral suasion of the type generated by public interest and environmental groups will do little more than spawn argument.

Only the hammer of the market can change consumer behavior, which determines the success or failure of any technical, corporate or political effort to reduce oil consumption and increase development and production of alternative fuels and the more efficient vehicles that will use them.

To many of you, this doubtless seems like blaming the victim. Pity the poor American consumer struggling to cope with gasoline in excess of $4 a gallon. Look at him cutting short his vacation, or canceling it altogether because fuel costs are high. Watch her take a huge financial loss on her sport-utility vehicle as she dumps it into a market awash with unwanted, consumptive pickup trucks and SUVs. Somebody, do something!

Here's hoping that no one answers the call. Here's hoping that we allow the rigorous cruelty of the market to do what it does best -- rein in outbursts of irrational exuberance and correct the relationship between consumers' demands and corporate efforts to comply with them profitably.

Nothing happening today with fuel prices and motorized personal transport should surprise us. Greed has a way of wearing itself out. We have been greedy.

The litany of that greed has been repeated many times in this column: We consume 24.9 percent of the world's oil. We produce barely 5 percent of it. Even with prices in excess of $4 a gallon for regular unleaded, we still pay the cheapest retail prices for petrol in the developed world. Ours is the world's single largest market for big, personally owned trucks and truck-based vehicles. In fact, by the year 2000, a bit more than 50 percent of all new vehicles sold in the United States were light trucks -- vans, minivans, pickups or SUVs.

Did we need all of those trucks? No. Did someone force us to buy all of those trucks? No. Did we want all of those trucks? Yes. And all major carmakers including greener-than-thou Toyota and Honda, were quite willing to provide them at a profit.

Except, well, Honda largely remained the happy victim of its upbringing. Since its inception in 1946, Honda has specialized in small, fuel-efficient engines for a fuel-starved Japanese market that demanded them. Even when it tried to run from its past, as it did in the United States with its Honda Pilot and Acura MDX midsize SUVs and its Ridgeline pickup truck, Honda couldn't bring itself to go whole-hog with big horsepower. To wit: Honda never introduced a V-8 here, although it is rumored to be planning one for its Ridgeline truck and Acura RL luxury car.

Honda's reluctance to embrace big horsepower for retail sales relegated it to a perennial fifth place in the world's automotive lineup. But its affection for small engines now leaves it sitting pretty, and pretty much alone, with rising sales in a North American market where purchases of big rides are plummeting.

Some in the media have been surprised that those falling sales also include a downturn for Toyota, whose U.S. sales fell 21.4 percent in June. They are surprised because they weren't paying attention.

Toyota has gone after the U.S. Big Three -- General Motors, Ford and Chrysler -- in every way imaginable, chasing customers with big trucks and big horsepower just as passionately as its American rivals. But the media that noticed all of Toyota's successes in those endeavors ignored Toyota's flops.

Toyota's big Tundra pickup, for example, was a flop. And although Toyota strove to outdo the Big Three in sales of big SUVs, it never succeeded in that effort, either.

Now, all of the purveyors of bigger-than-thou trucks are hurting as their once wildly loyal customers run for cover in a market being wrecked by high fuel prices.

Despite media claims of corporate shock and awe, all of the car and oil companies knew this day would come. They do business all over the world, and they knew their businesses were booming in parts of the world long regarded as "undeveloped" or "developing."

Most of the new cars running around Russia, China, Kazakhstan, South Africa, South America and India need oil. That need translates to an increased demand for petroleum in a world that is producing less of the stuff. That kind of disconnect between demand and production yields higher prices for the product demanded.

Speculators, of course, can and often do make things worse, boosting prices higher. But speculators aren't controlling the underlying cause, which has everything to do with what consumers want and what companies can give them at what price.

For decades in Europe and Asia, where oil was hard to come by and petroleum taxes were high, consumers demanded and received very fuel-efficient vehicles. Cynics might note that Italy's Lamborghini and Ferrari automobiles, and models such as Germany's Mercedes-Benz Maybach, are anything but fuel-efficient. But a check of the sales zones of those cars shows that their biggest markets are in North America and the Middle East, which is interesting in itself.

The bottom line is that consumers generally get what they want. In North America, they historically have wanted big cars with powerful, consumptive engines. They got them. One-sided legislative efforts to control that consumption by making car companies produce more fuel-efficient cars and trucks failed -- because the problem was two-sided, involving industry and consumers.

Now, the market is changing all of that. Consumers are being forced to respond to rising gasoline prices. The car companies, in turn, are being forced to respond to consumers.

In the current dynamic, the domestic car companies are down for the moment. But they are not nearly as out of contention as the media would have us believe. All three firms -- GM, Ford and Chrysler -- have experience with flexible manufacturing. GM and Ford have extensive overseas expertise in the design, development and manufacture of fuel-efficient automobiles.

GM and Ford, this column predicts, will survive and do well on their own. Chrysler, this column predicts, eventually will become a part of Nissan. Chrysler will benefit from Nissan's expertise in small cars. Nissan will benefit from Chrysler's expertise in truck manufacturing, a competence that will be needed when the truck market regains strength -- which it will do.

But "strength" is not to be confused with "irrational exuberance."

"Strength" speaks to profitability in a sustainable market -- one maintained by consumer response to externalities, such as high gasoline prices. "Irrational exuberance," by comparison, is what happens when consumer greed mixes with corporate greed to create a market that is dangerously unsustainable. We are witnessing the painful end to that kind of market now.