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| Bank on SUVs, Get Hammered by Gas Prices |
July 12, 2005 |
By Jim Harris
U.S. automakers had been living by the gasguzzlers.
Now they will die by them, eaten by more eco-progressive competitors.
It’s been nothing but bad news recently for the oldstyle American automakers:
On March 30, U.S. investment bank Goldman Sachs warned oil could hit $105 a barrel in a “super-spike.”
In April, Ford reported a 38 per cent fall in Q1 profits, and GM, the world’s largest automaker, lost US$1.1 billion in Q1, its worst performance in more than a decade.
In April, Ford warned that, becauseof slumping SUV and truck sales, the company had to slash its 2005 earnings forecast by 29 per cent.
On May 5, debt-rating agency Standard & Poor’s cut General Motors’ and Ford’s debt to junk status. Many investment funds are prohibited from owning junk bonds, and will have to sell billions of dollars of GM and Ford debt. Shares of both companies fell sharply.
By contrast Toyota’s future is bright:
It’s the world’s most valuable automaker.
In May, Toyota’s market cap was greater than that of GM, Ford, DaimlerChrysler, Volkswagen and PSG Peugeot Citroën combined.
Toyota just reported its third consecutive year of record profits.
It’s the only automaker rated AAA by S&P.
The difference?
GM and Ford’s principal source of profits are gas-guzzling SUVs, revenue from which is down about 15 per cent year over year. And the biggest SUVs have been the biggest losers. In April 2005, GM’s fullsize Chevrolet Tahoe sales plummeted 34 per cent and the Suburban 30 per cent; Ford Explorer sales fell 15 per cent, and full-size Expeditions dropped 20 per cent.
GM and Ford’s North America sales have fallen by roughly five per cent in the past year while Toyota’s have risen by 20 per cent. Why? Simple: Ford and GM vehicles have the worst average fuel efficiency of any of the big six automakers, according to the Union of Concerned Scientists.
End of cheap oil
Now add oil to this picture. Oil could spike to $105 a barrel because we have arrived at “peak oil” — a point where world production reaches the maximum, plateaus and then declines. It’s not that we’re out of oil. According to experts, the world’s total supply of oil was 1,850 giga (billion) barrels at the start of 1900. Over the last century we’ve consumed half of it.
But globally we are reaching peak production. As the world demand for oil rises by two to three per cent and production remains constant, or worse yet falls, it will lead to a “super spike,” as Goldman Sachs has warned, and we’ll be thrown into another oil crisis.
The experts agree peak oil is inevitable, so the only debate is whether it is occurring now or will happen in 2010, and how high the price of oil will go.
Given this inevitability, the Detroit automakers’ reliance on gas guzzlers is short-sighted.
The best hope is for North American automakers to hybridize their vehicles — a hybrid SUV can have the same fuel efficiency as a small vehicle. But North American car makers are six years behind Toyota in hybrid development, so they’re now turning to the Japanese to license the technology.
Hybrids are the future
Sales of hybrids rose 81 per cent in North America in 2004. While this represents less than one per cent of the North American vehicle market it is the fastest growing segment, and 96 per cent are produced by Japanese car makers.
If consumer demand for hybrids continues on its current trajectory, and automakers integrate the technology in all product lines, hybrids could reach 20 per cent of new vehicle sales by 2010 and 80 per cent by 2015, according to a report by Booz Allen Hamilton.
The ultimate irony is that in May 2005 American auto executives blamed their corporate woes on the high healthcare and pension costs of workers, rather than taking responsibility for their completely failed strategy.
I have to believe that North American auto workers would be happier building hybrids, knowing they are reducing the rate of global climate change.
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