MNN vs. Slate, round two: Selling cars in 2015

 

Matthew DeBord: Let’s start with some math. No one seems certain of what the size of the North American auto market, much less the global market, will be in the future. Will North America support 14 million new cars annually? Or 16 million? Or will it be smaller than that? This is important for our 2015 projections because there may not be enough demand to keep Ford, Chrysler-Fiat, and New GM in business. Here’s what the new Chrysler CEO, Sergio Marchionne, said last year: “We’re going to end up with one American house, one German of size; one French-Japanese, maybe with an extension in the U.S.; one in Japan; one in China and one other potential European player.” According to Marchionne, each of these survivors will need to produce 5.5 million cars per year in order to survive. That would suggest that by 2015 we might have fewer players, or that no one will ever recover to the levels of market-share domination that GM enjoyed in its heyday. So who's going to make it, and it what form? The automaker I’m most concerned about is GM. I think it needs to radically re-invent, not simply try to come back as a smaller version of its old self.

 

Jim Motavalli: I think the car market may take a decade to recover, or it may never get back to 16 million. But I’m not sure I agree with Marchionne that bigger will be better in the new auto industry. GM’s size was one of its problems. It could, for example, spend $300 million developing the EV-1 electric car and then more millions trying (successfully) to kill the market for the car in California. I like the model of smart and mobile auto startups hawking EVs from Silicon Valley. They’re headed by some of the same entrepreneurs whose previous venture ended in “.com.” I predict that in 2015 we will still have much-reduced versions of the Big Three, but they will be joined by the Small 20. I think companies like Tesla, Bright Automotive, Brammo, Coda, Think Global and Fisker will be players, along with new names we haven’t heard yet.

 

DeBord: The Small 20! I love it. However, I don’t think small is going to be the new big in the auto industry. I think medium will be the new big. Market share along the lines of what Toyota has in the U.S. — under 20 percent — will make more sense, as new players enter the game. I look for Hyundai, some of the Chinese manufacturers, and even Tata to join the fray. I'm far more skeptical about the prospects of the Silicon Valley-oriented startups, although Tesla continues to surprise me. I don’t think the innovation will necessarily go away, but I think it will be absorbed by ... what should I call them? The Medium 10? And of the survivors of the recent meltdown, I’m most optimistic about Chrysler-Fiat. Of the newbies, I have the least confidence in Better Place, the company that wants to transform the filling station into a battery-swapping station.

 

Motavalli: Maybe the Medium 15 is a better name. There won’t be hundreds of players, but definitely a lot more than there are now. The smart companies are the ones that find and exploit a niche — that’s why I’m betting on Bright Automotive, which will build fleets of plug-in hybrid panel vans and sell lots of them to cost-conscious customers like Coca-Cola. I agree that China (and, to a lesser extent, India) loom large — the Chinese already has electric cars on the market, and they’re likely to have a charging grid before North America does, too. A new report by Pike Research, “Electric Vehicles on the Grid,” says that by 2015 the global EV charging network market will be at $1.9 billion annually, and China will account for almost half (47.8 percent) of total sales. Shai Agassi of the aforementioned Better Place (I also have a problem with the company’s battery-swapping model) told Wired Autopia that China is on the verge of green-lighting electric cars in a big way.

 

DeBord: I’m glad I’m not alone on Better Place! But to your points, that $1.9 billion figure actually makes me even more skeptical about the pace of electrification. In the grand scheme of things, it's a small number. I like to remember that, by comparison, the global market for car seats is $52 billion. (The battery market is also relatively tiny.) I also think that the vast majority of new car buyers aren't going to be able to afford EVs, although China in particular may decide to commit to widespread electrification as a strategic move. But back to the more conventional automakers. If GM has to become much smaller and more focused on, say, plug-in hybrids like the Volt and its international business, while Toyota, Honda, Nissan et al. duke it out to absorb GM’s lost share, where does that leave Ford? Has it cracked the code by having a good U.S. truck business, a forward-looking plan for hybrids, and a sort of lab in Europe for cars that can thrive in a world with $10-$12 per gallon gas?

 

Motavalli: While you were writing that I was on the phone with T. Boone Pickens, who says we have only one option to get off foreign oil: Natural gas, first in large trucks and then in passenger cars. The 13 million barrels of oil we import daily from the Middle East is “a huge security problem for America,” he said, and who can argue with him. But, of course, we need a network of stations for natural gas cars. There appears to be bipartisan support for major natural gas vehicle tax breaks, so that may help get them off the ground. But from what I see right now, we’re going to wire America instead for battery cars and create a nationwide plug-in network. Yes, $1.9 billion is a small number. I think the EV charging market could be bigger by then. I wish the big carmakers were moving faster: Their slow pace is why they might lose out to the faster-moving startups.

 

And I’m betting that Ford is better positioned than GM or Chrysler: It has a smart new vehicle in the Taurus, good small cars in the Focus and Fiesta, and plans for a credible small battery car and a plug-in hybrid. If you don’t think tomorrow’s automakers will plug in, go talk to Bill Ford. He’s a believer. He told me so.

 

DeBord: By 2015, I expect to see widespread hybridization of all the remaining automakers' fleets, as well as a growing plug-in hybrid market. That's a game that everyone is going to have play to survive. I like the new version of the Pickens plan, with its focus on freight transport, far more than the old plan, which aimed to use natural gas to run the whole transportation grid. Still, I’m not in favor of “freeing us from a dependence on foreign oil” — I think we should continue to be engaged in the global oil economy, not least because oil is still by far the best energy source to fuel mobility. If the U.S. opts out, other economies will quickly obtain the competitive advantage that oil provides. So where does this leave us? Well, Ford’s fortunes look good, although it does have a lot of debt to manage. Toyota will come back strong, although Honda and Nissan could struggle. Chrysler-Fiat will be very interesting and potentially agile enough to do some damage in a variety of segments (small cars, trucks, luxury sedans, and yes, minivans!). But the real breakout story for 2015 will be Tata Motors. They’ll be the Volkswagen of the developing world. And once again, Jim, thanks for engaging in a spirited discussion.

 

Motavalli: And wide-ranging, too! In conclusion, I see the market of 2015 as being much more diverse than it is today, with the biggest change the addition of Chinese players, including BYD and Chery. Keep in mind that BYD has the advantage of being vertically integrated — a battery maker first and a carmaker second. It’s ideally placed for the heavily electrified auto future — access to battery supply will rule. Chrysler will be a branch of a foreign automaker — like Volvo today. Ford will be smaller, but still independent and proud. GM, stripped to maybe just Chevrolet, Cadillac and GMC Trucks, will be a shadow of its onetime self. I hold in my hands a 1947 GM Annual Report to Employees, The company had $3.8 billion in revenue that year, and $288 million in profit. Four out of 10 cars sold in the U.S. in 1947 were made by GM. “You and I can be proud of the fact that we work for a company that can earn a profit,” the report said, atop a graphic of smiling workers waving their fat paychecks. It’s enough to make you weep. The company’s adjusted net loss in 2008 was $16.8 billion. Giants once walked the earth. In 2015, we’ll look at their remains — shuttered factories with names like Detroit Engine Plant #9 — as if they were dinosaur bones.

 

 

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