Save SUVs First, Then Kill Them Really Dead

The automotive financials that oozed out of Detroit on Friday were disturbing, and not simply because General Motors' and Ford's third-quarter losses were worse than what analysts had expected (but hey -- does anyone expect anything cheery from the crippled U.S. carmakers at this point?). The real problem was with both company's cash burn rates. GM is down to $16.9 billion, and Ford has $18.9, according to the Wall Street Journal. Nobody really knows what's going on inside Chrysler, which is owned by Cerberus Capital Management, a private equity firm. Probably nothing good, given that Chrysler and GM have been deeply engaged in merger talks over the past month (talks that now appear to have foundered).

The options for saving the U.S. car industry at this point appear to be bankruptcy or a bailout. The former Big Three have already appealed to the feds for billions in aid. The first $25 billion of this was ostensibly pegged to retooling plants to build more fuel-efficient vehicles. And given President-elect Obama's comments in his first press conference, it looks as if the idea is to ensure that Detroit, should it get the bailout, makes good on claims that it actually wants to get into the high MPG market.

That would be a truly shocking new direction because traditionally, American automakers have avoided smaller, high MPG cars. Detroit didn't go for gas-guzzling trucks and SUVs in a big way in the 1990s and early 2000s because they wanted to offend environmentalists -- it did so because SUVs and trucks spin off major profit margins. It's on the order of three to four times a smaller, more fuel-efficient vehicle. A few years back, before gas prices began to rise dramatically, observers were speculating that Detroit was out of the small-car business forever, having ceded that territory to upstart imports from Asia.

Assuming a federal bailout, it makes sense that, over the next few years, American carmakers will be re-engaging with the small-car market. But is this really the best way to restore Detroit to some semblance of health -- and of course arrest current job losses and establish the groundwork for job growth in the future? Taking away their profit-driving machines, and re-inserting them in a market they had disdained, isn't necessarily a formula for long-term prosperity, although it may make everyone feel better in the short term.

The main issue is R&D. If Detroit hopes to catch up to Toyota and Honda, both of which are in far better financial shape and are currently selling fuel-efficient cars -- with both conventional engines and with gas-hybrid powerplants -- then it needs to make enough money to begin developing its own next-generation propulsion systems, beyond the current crop of hybrids. The smart thing to do here is to commit to improving fuel-economy across the board, but not forgo profitable vehicle categories. With the price of gas falling, consumers will once again be taking a look at SUVs and trucks. This was and remains Detroit's bread and butter (anyone remember the Chevy Chevette?), and it represents a key component of their strategy to return to profitability. The trick will be in making sure that these profits are transformed into meaningful R&D -- so that within ten years, Detroit won't be as reliant on trucks. Spotting an SUV on the road will then be like spotting a classic car from the leaded-fuel, seatbelts-optional era: an exotic sight.

Detroit has gotten clobbered by a combination of diverse forces: higher oil prices, the credit crunch, out of control legacy costs, and rapidly shifting consumer preferences. Against this tsunami, the domestic carmakers pitted vehicle lineups that were insufficiently diverse, with not enough small cars. The temptation now is to pull the trigger on the bailout and then demand that Detroit engage in a sort of reverse de-diversification: ditch the SUVs and trucks in favor of Euro-rides that all get better than 30 MPG, yet throw off meager profits. That'll be Motown's hair shirt for subjecting us all to this melodrama.

Ironically, a better plan would be to develop a new type of industrial policy, with an unusual timeline. If GM and Ford are bailed out, the carmakers should be able to sell as many SUVs and trucks and they can, at least before gas prices begin to rise again. While this is happening, government benchmarks for fuel-economy targets should be established. These vehicles could enter the consumer pipeline by 2010 or 2011, by which point gas prices will likely be on the rise again.

Finally, it's essential that the federal government do whatever it can to encourage Americans to buy an American car that Detroit can make money off of. For 2009, this could mean providing a tax break for customers who are on the fence about an SUV or a truck. A temporary, crisis-based solution, to be sure. And without a doubt, the last gasp of the hulking gas-hogs.

The U.S. car industry must be transformed over the next ten years. But with the domestic carmakers currently on the ropes, now is not the time for radical change. Sustainable mobility will come, probably faster than anyone currently imagines. But if we want Detroit to play a part -- and no self-respecting nation should want to see its car industry go down the tubes as some kind of Karmic punishment -- 2009 is not the year for the Big Three to change their game.