Skip to Content | Skip to Search | Skip to Navigation
Indiana University

What Does the Future Hold for the Auto Industry?

June 22, 2009

Reprinted courtesy of the Indianapolis Star

If an auto company is to survive and prosper from 2010 to 2020, it must do three things well: offer vehicles that consumers want to buy, make those vehicles at a lower cost than in the past, and make them "greener" than they have ever been before. Even with hard work and creativity, there are no guarantees. A company's fate may be determined by the uncertain future of world oil prices or the future decisions of politicians.

With U.S. car sales slumping from a peak of 16 million per year to fewer than 10 million per year, all of the automakers -- including Toyota and Honda -- are suffering. Rather than let market forces take their harsh toll, the Bush and Obama administrations chose to subsidize a future for a downsized GM and a Fiat-led Chrysler.

Compounding the deep recession is a new regulatory mandate: The industry must boost mileage from 25 to 36 miles per gallon by 2016 -- the largest push for green vehicles in America's history.

A downsized GM needs to focus on building pickup trucks, sport utility vehicles and sedans at lower cost while continuing to expand its profitable Chinese partnerships. The Fiat-Chrysler challenge is more daunting. Fiat specializes in small cars but the U.S. market is already flooded with low-margin small cars from Toyota, Honda and Volkswagen. Chrysler has developed a niche in minivans and trucks, which Fiat would be wise to retain and nurture. Fiat can help Chrysler develop greener engines. Ford is well positioned in the promising market for pickup trucks and fuel-efficient sedans, and is the only sure survivor among the old Big Three.

Contrary to what politicians say, it will not be easy making a profit by offering green vehicles. While fuel prices at the pump are now rising to their summer peak, the global economic recovery is unlikely to push U.S. fuel prices over $3 per gallon for a sustained period of time before 2015. With low fuel prices and politicians unwilling to raise federal and state fuel taxes, most consumers who enter showrooms will continue to favor pickup trucks, SUVs, vans and mid-sized or large sedans. The small-car market, while thriving in most of the world, will not boom in the United States. America's families need larger vehicles, and our highways and cities are designed to accommodate them.

Making larger vehicles more fuel-efficient will be costly: at least $1,000 per vehicle for Ford's "EcoBoost" improvements to the gasoline engine, $1,000 to $5,000 for a clean diesel engine, and $2,500 to $7,500 for a hybrid engine. The added cost for plug-in hybrids may be more than $10,000.

If fuel prices stay below $3 per gallon, none of these innovations will find much enthusiasm in the U.S. marketplace.

It does not make sense for politicians to force automakers to build green vehicles unless government is willing to provide consumers an incentive to purchase them. In the near term, Congress needs to renew the federal income tax credits for consumer purchases of clean diesel and hybrid engines -- credits that expire in 2010. Over time, government needs to offer rebates for high-mileage vehicles and impose fees on the guzzlers.

The new "feebate" system should favor greener vehicles in each size class, rather than simply subsidize the lightest -- and least safe -- cars. A Ford F-150 with an efficient diesel engine should be favored over a thirsty pickup with a gasoline engine. To ensure that "feebates" do not become a tax increase, the total amount of rebates should be set equal to the total amount of fees. If green vehicles are favored on both the supply and demand sides of the market, it will be feasible for auto companies to make a profit while protecting the environment.

by John D. Graham