$4 gallon gas is a bummer for HUMMER

In a watershed moment for the car industry, General Motors is cutting SUV production and reviewing its iconic Hummer brand. Will the Detroit giants shrink their models in time to keep sales afloat?

General Motors announced last week it will react to the shift in the U.S. market by increasing production of small and midsize cars and reducing production of pickups and truck-based SUVs. The scale of GM’s plight was evident in the news that it was “undertaking a strategic review of the Hummer brand to determine its fit within the GM portfolio.

“At this point,” read the release, “the company is considering all options, from a complete revamp of the product line-up to a partial or complete sale of the brand.” Closure, pure and simple, may be a more realistic option.

The Hummer H2 (modelled on the military Humvee but based on GM’s Tahoe SUV), described by GM as “Like nothing else” and by Detroit News columnist Scott Burgess as “the poster child for needless waste and threat to the environment”, looks a lot less rugged in a $4-per-gallon gasoline market.

$15 billion of cuts

Around 8,000 GM employees will be more anxious about the closure of four North American light truck plants over the next two years. Together with shift cuts at two other US plants, these closures will save GM around $1 billion a year in fixed costs, adding to around $5bn of cost cuts by 2011 that GM announced earlier this year; $9bn of costs had already been cut from GM’s North American cost base in 2006-07.

GM chairman and CEO Rick Wagoner said: “These moves are all in response to the rapid rise in oil prices and the resulting changes in the U.S., changes that we believe are more structural than cyclical.”

He’s not wrong, but not original, either. Ford had announced a week earlier that it was cutting planned North American production and revising downward its short-term North American automotive profit outlook (delaying a forecast return to profit from 2009 to 2010), while planning further manufacturing ‘capacity realignments’, cost reductions and changes to its product mix.

Big Three cut down to size

The same predicament faces all the Big Three members – GM, Ford, Chrysler. It’s a tardy response by Detroit and SUV owners alike to the foreseeable realities of a post-Peak Oil petrol market, coupled with a failure to recognise changing political signals on CO2 emissions.

The year-to-May US market figures from Autodata Corp. show how far US buyers have fallen out of love with ‘light trucks’. In May this year, GM’s light truck sales were down a catastrophic 36.8%. Year-to-date, they’re down 15.9%, in line with the whole US light truck market. It would matter slightly less if buyers were switching to cars (though these yield lower margins), but car sales were down 13.8% in May, and flat year on year for the first five months.

The people behind the FUH2 website may be crestfallen at the demise of their hideous hate object, but to single out GM as the recipient of just desserts for over-reliance on cheap oil to sell gas guzzlers would unfairly let its competitors off the hook – together with US politicians and consumers.

A sense of scale

All US vehicles have been much bigger than their counterparts overseas, including their own-brand foreign cars, since the 1930s. Cheap US fuel led to what was in global terms abnormal consumer expectations, and those change even slower than carmakers’ product plans. In Europe the average per capita annual use of petrol/diesel is only 286 litres; in the US it’s 1,624 litres. And with that thirst in mind, the much fêted hybrid maker Toyota has been as happy as GM, Ford or Dodge to build huge pickups and SUVs for American buyers.

Buyers of Hummers and other big ‘light’ trucks are still entitled by archaic farm support legislation to write off nearly half the purchase price of their vehicles, and their makers are also exempt from publishing fuel economy data – about 10 mpg for a 3.9-ton HUMMER H2 or Chevy Tahoe.

Wrongly vilified?

As the US market leader, GM (and its chief executives) have been vilified in turn by Ralph Nader, Michael Moore, the makers of the Who Killed the Electric Car? movie and plenty of others, but their behaviour has been no worse than industry-standard. True, GM destroyed its few prototype EV-1 battery-electric cars when the leases expired, but they were never going to be more than collectors’ items anyway. Because lead-acid batteries don’t provide sufficient energy storage for a conventional range and are too heavy.

GM’s EV1 electric car was a piece of technological window-dressing and was never going to be fully commercialised with the then state of battery development. It has invested as heavily in clean vehicles – fuel cells, and latterly in hybrids – as many competitors. And as GM announced its truck plant closures, it sweetened the pill by confirming the 2010 commercial launch of the Chevy Volt plug-in hybrid, which is forward-compatible with fuel cell technology and up to speed with Toyota’s latest hybrid developments. Owners of the aptly named Volt are expected to visit petrol stations only for journeys exceeding 40 miles.

Hard times

With last week’s announcement, the inter-faith investor coalition which wants GM to make a vapid climate change commitment comparable to the one it recently wrung from Ford may have had its job done for it by consumers, who have seen red at the petrol pump, if not green.

Investment managers should be at least as worried by the scale of GM’s $3.3bn first-quarter ‘08 loss, and at the prospect of GM losing market leadership in its home market as well as globally to Toyota. Hope that GM can supply more rational products would be bolstered by a better climate for profit.

Commuted death sentence

Before it declined to pass the recent climate change bill, the US Senate got a bill through the Bush White House which demands a Corporate Average Fuel Economy of 35 mpg by 2020. That’s do-able, with effort, for many of GM’s, Ford’s and Chrysler’s cars, with the addition of hybrid technology and engine downsizing. But for their full-size pickups and SUVs, it means trebling typical fuel efficiency; and that’s effectively a death sentence commuted by 12 years – too little time for any hybrid technology to save the day for vehicles so flagrantly at odds with the tenor of the times.

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