Posted by: bmeverett | December 16, 2010

Broccoli on a Stick

As the federal government begins to reduce its stake in GM, it’s a good time to revisit what the government take-over of GM has done for us. President Obama promised us that our $80 billion investment would bring us a General Motors that was (a) profitable and (b) manufacturing a fleet of clean, green, fuel-efficient cars. That kind of promise has real political value, at least until reality jumps up and bites you in the trunk.

The December 15 New York Times has an op-ed piece by Edward Niedermeyer, Editor of the car review web site “The Truth About Cars.” Mr. Niedermeyer laments that the new GM seems to behave just like the old GM, and some of his points are valid. Pushing cars out of the factory and into inventory is just a book-keeping trick to make the company’s progress look better than it actually is. On the other hand, Mr. Niedermeyer laments GM’s low fleet fuel economy and falling production of fuel-efficient cars. In 2010, GM’s sales of passenger cars have fallen by 6 percent compared with last year’s low sales, while of trucks, SUVs, vans and crossovers have grown by 16%. Passenger car sales account for only about 40% of GM’s total sales. Mr. Niedermeyer calls this situation “troubling.”

There’s a tendency for car reviewers like “Road and Track,” “Car and Driver” and Mr. Niedermeyer’s “The Truth About Cars” to focus on cool technology and the latest gadgets rather than on the consumer. Everybody likes new high-tech stuff, but for most people, automobiles are the second most expensive purchase after a home, and what they want is value, safety performance and functionality. GM is in fact providing the vehicles that consumers actually want to buy, rather than the vehicles that President Obama and the technological aristocracy think are good for us. The “fuel-efficient car theory” presumes that GM’s low fleet fuel efficiency is the cause of its woes. To hold this view, you must believe that when people walk into a GM dealership and ask for a small, fuel-efficient car, the salesman will tell them, “Sorry, we don’t make those. How about a pick-up truck?” Disappointed, the customer must then walk across the street to the Toyota dealer and buy a Yaris. That’s not only untrue, it’s obviously untrue. Chevrolet makes the Aveo, a small passenger car that gets about 35 miles per gallon and can be purchased for less than $15,000. Believe me, any Chevy dealer would be delighted to sell you one of these cars. Try it. If people bought more of these cars, GM would make more of them.

Consumers in fact like bigger, more powerful vehicles, and a significant segment of American society loves pick-up trucks. GM has a strong reputation for quality and toughness in its trucks, and Toyota, Honda and Nissan have been struggling to expand their share of this big and profitable market. Margins are high for these vehicles because consumers want them, not because that’s all that GM has to offer.

Here’s an analogy. Ben and Jerry’s, the oh-so-eco-conscious ice cream company, sells the product consumers want: high fat, high sugar lumps of self-indulgence loaded with dioxin. Walk along any beach on a hot summer day, and you’ll see lots of people not only eating ice cream cones, but actually feeding them to their kids. Why? Mainly because people have been brainwashed by corporations into buying these poisons pretty much against their will. Why doesn’t Ben and Jerry’s stop peddling ice cream and start selling pieces of nice fresh (and literally green) broccoli on a stick? Would we then see everyone walking along the beach chewing a delicious vegetable instead of synthetic poison on a cone? Probably not. People buy ice cream because they like it. If Ben and Jerry’s were to take the lead in this new green food industry, they would simply go out of business (and quickly), and someone else would sell ice cream on the beach. Ben and Jerry’s employees would be out of their jobs. The only way the government could stop that from happening would be to outlaw ice cream and force people to eat broccoli on a stick. (Sounds far-fetched, but with the health care mandate, who knows?)

GM is in the same position as Ben and Jerry’s. To be profitable, they must sell the vehicles people actually want to buy. Otherwise, GM will go out of business. It appears to me that President Obama actually believes (or at least used to believe) the “fuel-efficient car theory” that GM’s lack of profitability was a result of overreliance on gas-guzzling trucks and SUVs. In fact, GM’s losses were a result of excessive costs, not the structure of its product line. Unfortunately, one of the key aspects of President Obama’s bailout plan was the preservation of high cost union contracts. All GM can do to survive is continue to meet its customer’s preferences and hope that producing a miniscule number of “gee whiz” green vehicles like the exorbitantly expensive plug-in Volt will keep its political masters happy.

It must now be pretty obvious that the “fuel-efficient car theory” is simply wrong. The only way the federal government can transform the car fleet is to either prohibit the sale of undesirable vehicles (the CAFE approach) or place a burdensome tax on gasoline. Looking at the last election, I doubt voters are in a mood to eat broccoli on a stick. Maybe, just maybe, consumers should be allowed to buy the vehicles they actually like.


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