November 2009, Automotive Fleet - Feature

Brigher Future Ahead for Domestic OEMs

Automotive industry analyst John McElroy is “bullish” about the future of the Detroit 3, forecasting a “perfectly aligned” market for Ford, GM, and Chrysler and record profits in 2013-2015, if industry-wide sales increase again to 14 million units.

By Cindy Brauer & Grace Lauron

AF: Which vehicle segment will benefit as the demand for new cars builds?

McElroy: If we look at what's going on right now, crossovers have been one of the hottest segments of the market, especially compact and mid-size crossovers. We also saw a big shoot-up in compact cars during Cash for Clunkers. But I think that spike is short-lived, unless gas prices really start to go up in a big way, which they're not doing right now. The two areas I'd keep an eye on are compact cars and compact crossovers.

People like SUVs, and what they've come to realize is SUVs are big, they're heavy, and they're gas-guzzlers. But they still like SUVs, and rather than walk away from them altogether, American consumers are looking for vehicles that will give them as much as possible what an SUV provides, but a vehicle that will also get better fuel economy, not be quite as big, certainly on the outside, and maybe not be as heavy. Crossovers fit the bill. So we're seeing good strength in that part of the market, in comparison with the rest of the market.

AF: What was the impact of the federal government's Cash for Clunkers program?

McElroy: The Cash for Clunkers program brought in a great many people who don't normally buy a new car or only buy a new car every 10 years or so. These buyers only came in because of this incredible deal the government offered. They're not likely to come back, and they're the kind of people who can't afford to buy an expensive car. They had to go with the cheapest car available, and those are compact cars.

I think even though we saw a big spike in compact cars in the July-August timeframe, I don't see compact car sales being that strong, unless or until gas prices start to go up again.

AF: What's your assessment of alt-fuel technologies?

McElroy: The huge area to watch here is electric and plug-in cars. All OEMs around the world are starting from scratch with this technology.
The only disadvantage I see for the Detroit 3 is the infrastructure issue with electric vehicles. Even though the grid can accommodate millions of electric cars, it's that last five feet of plugging the car into the grid that's going to have to be installed.

Most people's garages, certainly their homes, are not set up to easily plug in their vehicles. Yes, everyone's got outlets and so on, but are you going to go plug something in during a driving rain or freezing snow? And aren't you going to want 220 volts so you can charge your vehicle in a few hours, instead of waiting all night long to do it? Even if you take it to work or shopping, where are you going to plug this thing in? There is still a huge infrastructure that must be developed and built.

And who's going to pay for that? Every state and the feds are flat broke. Maybe the utilities are going to pay for that, but they're not going to start installing these things until electric cars show up. And people are not going to buy electric cars until the charging stations show up.

It's going to be a slow rollout. Contrast that to say, Germany or Japan, where their federal governments are making a big investment into putting that infrastructure into place. There may well be a bigger market for electric vehicles in Japan and Germany, as an example, than in the U.S. That will give German and Japanese automakers a head start on everyone else.

That said, of all the alt-fuel technologies, the easiest transformation from an infrastructure point will be with electricity, even though we have to wire that last five feet to the car.

Individual homeowners will pony-up the bill. I can see where shopping centers will view charging stations in their parking lots another way of getting revenue, if they see there's enough demand for it.

Contrast that to CNG where big infrastructure has to be put in place, even though much of it is already there. With hydrogen, an even a bigger infrastructure would have to be put in place. The only alternative energy that might be the best from an infrastructure standpoint is the electric grid. Additionally, if cellulosic ethanol really turns out to be everything it is anticipated or if fuel from algae turns out to be everything it's supposed to be, then the infrastructure is pretty much already in place.

AF: What developments would promote a wider acceptance and implementation of electric vehicles and plug-ins?

McElroy: The only thing that I can see will help speed this along is a big increase in the price of oil. Then everybody hits the panic button and wants to see action immediately and decisions get made.

But the problem right now is in this country we still haven't committed to any one kind of alternative. Should it be electricity? Biofuel? CNG? Hydrogen? Until we decide where we're going, we're going to have to put in four or five different infrastructures at a time when every municipality and government is broke. And I just think it's going to be enormously difficult to move forward on this issue, again, until the price of oil skyrockets, and we all hit the panic button again.

AF: Will use of diesel fuel become as widespread as it is in Europe?

McElroy: Diesel will not catch on big in the U.S. as it has in Europe because environmentalists in this country don't like diesel. They're into electric. The one scenario that might change this situation is research now underway to use algae to produce fuel, research that offers a bit of potential in the alt-fuel area. Ten-percent of the land mass in the state of Michigan can grow enough algae to supply fuel for the entire U.S. Researchers are looking into using algae to produce biodiesel.