(Bloomberg) -- If what’s past is prologue, Ford Motor Co.’s announcement that it is abandoning its traditional car offerings to concentrate on pickups and SUVs should be setting off alarm bells. The move could end up forcing Ford and other automakers to weather the same gas-price spikes and economic headwinds as they did in 2008, a time that revealed Detroit’s overreliance on trucks and SUVs in dramatic fashion. But the lessons of the past can be a trap, too, and there’s a risk that the traumas of 2008 could lead the industry to fight its last war rather than looking forward to the next.
It’s a different world now than it was in 2008: Government efficiency and emissions standards that had stagnated in the 1990s and 2000s are going up again, continually requiring cars, trucks and SUVs to have improved fuel economy whether the market demands it or not. Hybrid drivetrains have become an increasingly mainstream option. Electric cars may not yet be a major player in the market, but they are increasingly defining tastes at the high end. Finally, an explosion of options offers a dizzying array of new smartphone-based mobility technologies, from ride hailing to shared bikes and scooters and, eventually, autonomous robo-taxis. Though many of these new options are still in their infancies, the emergence of new multimodal mobility options provides an important context for the auto industry.
This flowering of new mobility tech often contrasts starkly to the market for cars, which can be stubbornly conservative. Vehicle sales have been on a tear since their 2008 crash, and trucks and SUVs have been taking an increasing percentage of the market. America’s taste for powerful, spacious vehicles that give drivers a commanding view of the open road and the capability to travel on rough surfaces has been the one constant in the industry’s history, with significant deviations coming only in extended periods of high gas prices.
A look at the Environmental Protection Agency’s fuel economy trend report shows that Americans have been abandoning the smaller-vehicle segments that boomed during and after the energy crises of the 1970s, and the market is consolidating around vehicles with higher interior volumes. This reversion to the car market’s traditional mean is being driven by a fundamental shift that doesn’t get the attention that Silicon Valley’s mobility tech does: Unlike in the 1970s, when fuel economy gains were only possible by reducing power and vehicle sizes and weight, for the last decade, both horsepower and efficiency have improved even as vehicles have gotten larger.
That relentless grind of evolutionary improvement has gone largely unnoticed, not being as sexy as the “disruptive” potential of Silicon Valley’s new mobility tech. For all the predictions of the imminent death of the internal combustion engine, gas burners have become remarkably sophisticated as software enables ever-more-precise control of the complex ballet of ignition, airflow, combustion and gears that still get most of us around. Small four-cylinder engines with direct injection, turbocharging and sophisticated dual-clutch or continuously variable transmissions can now offer more power when you want it than the V8s of the 1960s, as well as the efficiency of an early Prius when you don’t. Automakers have leveraged the returns from these technological improvements into making cars more “American” while also improving their efficiency — hence crossovers, which offer the popular attributes and profit margins of an SUV but the efficiency and practicality of a hatchback or station wagon.
This, in a nutshell, is why a repeat of 2008 seems unlikely: The difference between the slow-selling cars that American automakers are abandoning and the trucks and SUVs that earn them record profits is shrinking. Today’s crossovers are more efficient on average than cars were a decade ago, and the current crop of truck-based SUVs are more efficient than crossovers were then. And because fuel consumption over a given distance is not plotted linearly based on miles-per-gallon ratings, the progress that has been made in truck and SUV efficiency makes a far bigger difference to consumers’ pocketbooks than these numbers would indicate.
As progress on the low end of the fuel efficiency scale improves and the fuel cost gap between the most and least efficient vehicles shrinks, the prospects of a 2008-style crisis seem far less likely. That’s not to say the auto industry has escaped the prospect of a painful and disruptive downturn; such a downturn simply seems more likely to be caused by increasing consumer leverage, lengthening loan terms or the high percentage of underwater trade-ins. The boom in higher-margin trucks and SUVs has been fueled by a wave of cheap and easy credit, and the further buyers stretch to afford the truck or SUV of their dreams, the more likely they will have to wait longer to pay it off before replacing it. The latest Federal Reserve Bank of New York consumer credit report shows that auto loans continue to make up a growing percentage of household debt levels. More than 4 percent of those auto loans are 90 days or more delinquent, and that percentage continues to rise.
Even that fades in significance when you consider the secular trends that are likely to coincide with the next cyclical downturn. A correction in car sales would likely coincide with maturing technologies. The future unfolding before us is likely to be a progression from a monoculture of privately owned gas-powered cars to a radical diversity of technology-enabled mobility options such as electric scooters and bikes, human-driven and autonomous ride-hailing services, on-demand shuttles, and traditional private cars and public transit.
The compact and midsized cars that Ford is walking away from would be hurt by this new diversity the most. But even hot-selling crossovers and SUVs will see demand change as technologies bloom, and a cyclical downturn in a few years may actually be an ideal time for automakers to double down on becoming the "mobility companies" they claim to want to be.
Until then, companies like Ford have only one option: Optimize their existing businesses to the absolute extreme, maximize profits and then pour them into the mind-bogglingly expensive task of preparing for this brave new world. Developing new drivetrains and autonomous drive systems, investing in technologies like sensors and software, and creating the electronic infrastructure to manage massive fleets of smart, connected vehicles are just another cash drain on top of an already capital-intensive yet low-margin business. If the Fords of the world make wise investments, they could not only emerge from a challenging transformation with an array of far more fuel-efficient, on-demand mobility options, but they could also leave behind the cyclical traumas that come with trying to sell the most expensive mass-market consumer goods in the world.
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