Business Forum: Ford can find its way by looking to future
by David Morris
Originally published in Minneapolis Star Tribune, December 5, 2005
The imminent eclipse of General Motors by Toyota as the world’s largest car manufacturer was decades in the making. We will read many instructive tales about how General Motors, and U.S. car companies in general, lost their way. Let me add one more: the dramatically different way the Japanese and U.S. private sector addressed hybrid cars. I emphasize the private sector because in both countries the public sector promoted this technology with equal vigor.
Here’s the story.
Roused to action by the 1991 Gulf War, Japan and the United States each launched initiatives to reduce oil consumption. They targeted the primary consumer of oil, vehicles.
In the United States, the centerpiece of the effort was the Partnership for a New Generation of Vehicles (PNGV), a $120 million-a-year, seven-year program launched in 1993.
In Japan, the centerpiece was the somewhat less handsomely funded Popularization Plan, launched in 1994. Each program focused on developing a new type of automobile that promised substantially higher fuel efficiencies: a hybrid car propelled by both an electric motor and an internal combustion engine.
PNGV funds were available only to U.S. companies. Recipients agreed to unveil a concept hybrid car by 2000 and a preproduction prototype by 2004 and to be in full production by 2010. Ford, GM and DaimlerChrysler happily accepted the money and the terms. In early 2000, each unveiled its concept cars.
Then the U.S. car companies, gorging on the profits from selling ever-larger SUVs, abandoned hybrid cars. Why? Hybrids would lose money.
In December 1997, Japan unveiled its hybrids at the annual car show. Detroit pooh-poohed the Japanese companies’ achievements. “I don’t see six months’ difference in anything that’s being done,” then-GM Chairman John Smith told Business Week. The magazine added, “the only difference, say the Big Three, is that Japanese manufacturers are willing to accept huge losses.”
As late as April 2002, GM CEO and President Richard Wagoner insisted, “How will the economics of hybrids ever match that of the internal combustion engine? We can’t afford to subsidize them.”
Japanese corporations adopted a more farsighted strategy. Each sale of Honda’s original hybrid, the Insight, did indeed lose money, as much as $6,500. Toyota reportedly lost $16,000 per car on its first-generation Prius. But as Hisao Suzuki, president of Honda’s European R&D division, answered when asked why they would sell a car at a loss, “We are investing in the future.”
Despite its initial losses, in 1999 Toyota announced it would introduce the Prius to the North American market in mid-2000, “shocking the domestic auto industry,” industry observer David Chao said.
The rest is history.
Since 2000, hybrid sales in the United States have doubled each year. This year sales will exceed 200,000. More than 90 percent will be made by Toyota and Honda. The best-selling Prius has a five-month waiting list. Booz Allen Hamilton, a global strategy and technology-consulting firm, predicts that hybrid cars will make up 80 percent of the overall new car market by 2015.
Oh yes, and Toyota is making a nice profit on its Prius. In fact, in 2004, Toyota became the world’s most profitable car manufacturer. In contrast, that year Standard & Poor’s downgraded Ford Motor Company’s credit rating to BBB-, one notch above a junk rating. A few days ago, in a desperate move to avert bankruptcy, General Motors announced it would lay off 30,000 workers.
There’s probably little that can be done anytime soon to make GM competitive. This year it finally introduced a hybrid vehicle so primitive and ineffective that it doesn’t even qualify for the new and very tolerant federal hybrid tax incentive.
Ford is a different story. Bill Ford was smart enough to know what his company did not know. He licensed Toyota’s technology for its first-generation Escape hybrid and thus has a state-of-the-art hybrid system. The company is working aggressively to nurture in-house expertise.
Ford is deciding what to do with its St. Paul truck plant and has received overtures from local politicians. But late last week, news reports said the St. Paul plant is slated to be closed, although Ford has not said as much officially.
Here’s my suggestion. Keep the St. Paul plant open and make hybrid trucks. And make them “plug-in” hybrids, allowing them to connect to the electrical grid system. Finally, make it a flexible-fuel vehicle, capable of operating not only on electricity but on any combination of gasoline and ethanol.
The Escape, as Ford’s ads proudly tell the world, can run solely on electricity, at least for short distances, unlike GM and Honda hybrids. With a grid connection and larger batteries, Ford could make electricity its primary hybrid fuel. That would cut in half the vehicle’s operating costs and would give Ford the technological edge even over Toyota, which so far has refrained from making a plug-in hybrid.
Bill Ford wants to make his company a technological leader again. By deciding to convert the St. Paul plant into a “plug-in” hybrid, flexible-fueled truck manufacturer, he can make St. Paul’s auto workers, officials, wind-turbine owners and farmers very happy.
And I firmly believe he will make his stockholders very happy as well.
David Morris is vice-president of the Minneapolis and Washington, D.C., based Institute for Local Self-Reliance (www.ilsr.org).