Book excerpt: An automaker survival guide in the age of alternative transportation

on April 22, 2014 at 9:07 AM, updated April 22, 2014 at 9:08 AM
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by Micheline Maynard

In her new e-book, “Curbing Cars: America's Independence From The Auto Industry,” Bridge and Forbes contributor and former New York Times Detroit bureau chief Micheline Maynard chronicles how teens and young adults are increasingly seeking alternatives to driving, such as public transportation or relying on car- or bike-sharing services. In an excerpt, Maynard offers four suggestions for how carmakers can remain profitable.

The automobile industry doesn’t have a grip yet on what the driving-light phenomenon means for its future. You can’t expect executives who have spent their lives developing cars to acknowledge that their approach has been flawed. At least publicly, the viewpoint among executives and the analysts who follow the industry seems to divide into two camps.

One: as soon as they have their children, young buyers will be just like their parents, no matter how cool it might seem now to live in a city. Urban schools simply can’t meet millennials’ high expectations for their kids’ education, prompting them to move to the suburbs, or so this reasoning goes. Once there, they’ll have to buy cars, because they won’t be able to function without them. To this point of view, young buyers’ disinterest in automobiles is only temporary, allowed only by lifestyles that are sure to change.

Two: something is going on out there, but we can address it by appealing to buyers with technology. This “my phone comes first” crowd will be inclined to buy automobiles that seem as familiar to them as their electronic devices, this camp believes. Older buyers, meanwhile, will find their lives enhanced by technological advances at a time when they otherwise would have to be putting their keys away. That will address the twin dilemmas of getting millennials and boomers to take home new cars.

These two points of view are why most auto industry officials think that U.S. car sales will continue to grow for the rest of this decade. Toyota, for instance, believes that the industry eventually will return to selling 17 million vehicles per year, as it did before the recession last decade. It cites population growth, especially among Latinos, better economic conditions and moderate gasoline prices as the reason for its optimism. (Toyota cautions that the forecast could change if gas prices spike, as they also did last decade just as the recession hit.)

But simply expecting things to go back to normal ignores an undercurrent. The diminished interest in cars, and a reduction in miles traveled, isn’t only found among the young. It’s also taking root among Generation Xers, boomers and their elders, who are participating in the migration back to cities and to walkable communities. There’s a new recognition that while the suburbs are comfortable, they lack the stimulation that a city can provide. Given this shift, says Chris Hostetter at Toyota, it could be that the auto industry will find itself focusing primarily on family buyers who live in suburbs in order to have green space and good schools, having yielded younger and older consumers to the cities.

No matter how all these societal shifts shake out, let’s be clear about one thing. The automobile industry isn’t going to go away. People won’t be abandoning their cars in droves by the side of the road, as frustrated Atlanta drivers did during the January 2014 snowstorm. Anyone who perpetuates a doomsday scenario for the auto industry is being unrealistic. Cars are an integral part of the American lifestyle, and still reflect many Americans’ personalities. Even if people define themselves less now by what they drive, cars and trucks are still vitally important to millions of people. Countless employees simply can’t get to their workplaces without them.

But the auto industry has never depended on a vast array of Americans for its business. It focuses on a relatively small slice, between 10 and 12%. And increasingly, automobile manufacturers are aiming at an upward slice of the market. It’s almost the flip side of what Henry Ford saw in 1908. Back then, he made it a mission to shift from focusing on luxury buyers to everyday consumers. Now, the automakers know that they can’t survive and prosper unless they go after an upscale demographic.

That’s never been clearer than in 2014, when the record transaction price of an automobile is bumping up against new records. At $33,000, the average price of a car is $10,000 higher in equivalent dollars than the average price of an automobile when Henry Ford began selling the Model T. As we’ve said, gasoline is now 50% more costly, in relative terms, than it was a generation ago. But that rise in prices has come at a time when millions of Americans saw their wealth dwindle as a result of the Great Recession of the late ’00s. The average car loan is now five years, heading for six years, and some financial institutions are making it possible for consumers to take out seven and eight-year loans. That means car buyers who sign up for those loans are lost to the companies until next decade, if they keep the car long enough to pay it off.

Drive up the price

It’s understandable, then, that the auto industry’s first strategy in dealing with the new realities of the car market is to go upscale. If Henry Ford created a playground for the mid-market vehicle, then the playground in which his great-grandchildren compete is the luxury car market. This helps explain why GM has been placing so much emphasis on Cadillac, why it keeps building Buicks and GMC trucks, and is pushing Chevrolet to higher price points, through vehicles like the latest version of the Corvette as well as its newest pickup trucks. It is why Ford places so much emphasis on the F-series pickup and keeps trying everything it can to rescue Lincoln, even as the vintage brand has never seemed further removed from the current tastes of luxury car buyers.

Meanwhile, among actual luxury car brands, the competition has never been fiercer. Germany’s BMW, Mercedes-Benz and Audi (along with its corporate cousin, Porsche) are pouring billions of dollars into developing new vehicles, placing an emphasis on their factories in the United States and Mexico, where production is cheaper and easier to modify than at tradition-laden plants back home. Toyota, under its excitement-seeking chief executive, Akio Toyoda, has vowed to sex up its Lexus lineup, even as Toyota also places an emphasis on hybrid vehicles. Korea’s Hyundai stunned the industry last decade by turning out a competitive entry-level luxury sedan, and it, too, has been steadily raising its prices, even though it still focuses on promoting itself as a good value.

The wild card for all these manufacturers as they go upscale comes from a company that wasn’t even a factor a decade ago: Tesla. In 2013, the Model S sedan became a status symbol for the 20,000 or so people who paid $70,000 (and in some cases waited months) for theirs to arrive. The electric car that looks like a luxury model has completely upset the industry’s assumption that electric vehicles are novelties that only eccentric sprout-eating millionaires could love.

It is being marketed (although not sold) in some of the most well-heeled corners of the country, such as Fashion Square Mall in Scottsdale, Arizona, and Chicago’s trendy West Loop. In state after state, dealers have mounted determined drives to keep Tesla from selling directly to consumers, rather than allocate cars through the traditional franchise system. New Jersey recently joined Texas and Arizona in banning Tesla’s direct sales to consumers, despite lengthy negotiations between Tesla and Gov. Chris Christie, although there are some signs in other places of a “Tesla Thaw” allowing direct sales.

Despite miniscule annual sales (Toyota sells more Camrys every month), Tesla has upset the landscape so much that GM has assembled a team to study the company’s operations. Never mind that it was GM, in the late 1990s, that had the opportunity to revolutionize the car business with its EV1 electric model, and broke the hearts of EV1 users by collecting their cars and sending them to a junkyard. Tesla is the topic of conversation in every corner of the industry, as much a technology story as it is an automotive one. Its ability to get wealthy, ecologically minded people to spend so much money on one of its vehicles shows that there is interest in something that’s completely different from a conventional automobile.

This is a company that makes bold moves, and CEO Elon Musk made one of the riskiest ones in recent memory in February. Musk announced that Tesla would build a $5 billion “gigafactory” to produce 500,000 electric batteries each year for Tesla’s electric cars. The company said the plant was likely to be built in one of four Southwestern states — Arizona, New Mexico, Nevada or Texas — and said its goal was to make sure its production is never interrupted by a shortage of batteries, as has happened to Toyota, Ford and General Motors.

Emphasize high tech

Many auto-industry insiders see Tesla as the secret to the second strategy that automakers plan to employ: a focus on technology.

Since the late 20th Century, automakers have embraced, and in some cases abandoned, myriad ways to power their vehicles. There have been efforts to convince consumers that hydrogen fuel cells were the solution to concerns over the reliance on foreign oil. Compressed natural gas has been another alternative. Hybrid-electric vehicles, like the Toyota Prius, were all the rage with the carmakers in the 2000s. Car companies installed hybrid engines on everything from small cars and mid-sized sedans to hulking SUVs and pickup trucks. In doing so, they discovered an interesting lesson.

The Prius was a success not just because it was a hybrid vehicle that got 50 mpg. It also was a success because its owners could make a statement that they were driving a vehicle that got 50 mpg, and didn’t have to sacrifice performance or interior room. In retrospect, the market had room for one hybrid to be successful. Toyota got there and grabbed the spot, just as Tesla subsequently did with luxury electric sedans.

The Prius and the Model S make a twin statement that automakers are now trying to leverage: Americans will embrace a car with unique technology, especially if it is green. Rather than make the technology the story of the car, however, other auto companies are trying to build vehicles that mimic electronic devices. They are betting that consumers want to get into their vehicles, push the start button (since no key is needed), and have the same array of technology options that are available on their smartphones, smart watches and tablets.

This push to create mobile devices on wheels is nothing new: as far back as the 1980s, car companies were installing telephones in their products, programming doors to open with codes rather than keys and adding voices to tell them when “the door is ajar.” Back then, however, buyers saw the assistance as more irritating than helpful, and many of the gimmicks soon vanished.

This new round of technology, however, owes itself to the world of apps and other features found on a variety of devices. It’s intuitive, as in the case of the collision avoidance systems that have been developed by manufacturers such as Volvo. It’s programmable, as on the Model S, whose system can be updated by Tesla without the need for taking the car to a service technician.

The technological assistance offered in automobiles takes itself to the extreme when it comes to the discussion of what are known as “driverless cars.” The phrase always brings to mind the vision of vehicles cruising silently on American roads with no one sitting behind the wheel. In fact, the idea actually boils down to assisted driving, in which the automobile makes key decisions about its progress. Assisted driving can determine a car’s speed, its pace, when it stops, how it avoids potential collisions, and warns the driver and passenger of traffic issues and possible ways around backups. While the idea is in its infancy, some city planners already see assisted driving as a way to lessen traffic jams and even, in its most blue sky form, to become a substitute for mass transit.

Donald Grimes, the University of Michigan economist, cites two drawbacks to traditional public transportation: the cost (not just fares, but the expense to cities of maintaining the systems) and the inconvenience to riders who cannot simply hail a bus or a subway when they need one. “But think about the potential for a driverless car as a mass transit vehicle,” Grimes writes. “Envision those driverless vehicles roaming the city. Someone calls a central dispatcher, or sends an email or text message to a computer, which then identifies the nearest driverless vehicle and sends it to pick the passenger up.”

He went on, “As that vehicle is en route to its destination, it can pick up other passengers on the way. It drops the passenger off at his or her preferred destination, and goes on to pick someone else up.” As Grimes put it, “To me, the basis of future mass transit is not buses or trains running on fixed routes, but more of a sophisticated taxi system without drivers.”

That’s probably not what carmakers — or taxi drivers — want to hear. But plenty of city planners are wondering what kind of role driverless cars and assisted driving can play in the transportation setup of the future.

For example, is it possible that Uber, the mobile car-riding service, will bypass its drivers and buy a fleet of driverless cars? Phone up for a ride to the grocery store, and simply wait on your front porch for your ride to arrive. The car doesn’t even have to wait while you’re inside. Once you’re in the checkout line, simply summon the closest driverless car, which will meet you at the door, and pop open its trunk to hold your groceries.

If we’re headed in that direction, somebody is going to have to build those cars, and that’s an opportunity for an automobile company, or two or three, to get that business. Certainly, that’s why all the automakers are talking to Google and other assisted-driving researchers.

The new Beetle — or Model T

But given all of their expertise in building automobiles, wouldn’t car companies be better off simply making a vehicle that people want to buy? In this third strategy, there’s an opportunity for some smart company to build the next car for the masses. There is certainly a precedent for doing so. The original Model T put the car within the reach of the American middle class for the first time, and as cheaper used versions became available, the demographic got pushed down even further to the working class.

From 1910 through 1930, the automobile industry attracted new customers and auto sales boomed. But then there came a 15-year period in which auto sales stalled, first because of the Great Depression, and then because cars weren’t available during World War II.

What happened to revive the American car market? Prosperity returned, of course, but there was also a successor to the Model T that put millions of people into cars they could afford: the Volkswagen Beetle. It was a global, not just American, phenomenon and caught buyers’ attention for a number of reasons. First, it was easy to operate, and fun to drive. Second, it had a unique, endearing shape. Third, the Beetle was much like the Prius later on: it made a statement about the people who drove it. The classic “Think Small” print and television ads produced by Doyle Dane Bernbach for the Beetle still resonate among students of commercials, and even pop up as cultural references in programs like Mad Men.

Those two automobiles—the T and the Bug—convinced people to spend their money on automobiles, some for the first time, others after a long absence from the auto market. For the automakers, it could be the answer once more. But whoever tries it has to think big, and universally. That might appear to go against the trends that are taking place in the car market, where segments are fragmenting and cars can nearly be customized. It also will be a tough sell to people who now look at the overall cost of driving, including parking, insurance and all the other expenses, rather than just the sticker price of an automobile.

However, Toyota came up with a global hit, and an entirely new brand, when it developed the hybrid Prius. A Tesla Model S is essentially the same the world over. Neither of these cars is cheap, of course, and they will never be the volume sellers that the Model T and the Beetle were. But they have a consumer trend working in their favor. Americans have shown that once a product is hot, they are willing to buy millions of them. The iPhone went on sale in 2007, and thus far Apple has sold almost 800 million of them.

Of course, a smartphone or an MP3 player does not require the investment of an automobile. But the mindset for buying an appealing mass market vehicle is there, should a smart car company figure out how to leverage it.

That raises a key question: If they build that car, will customers come? All things being equal, if people can afford a car, and have a parking space, and don’t have to deal with traffic headaches, will they buy one? The most devoted car fanatics would shout “Yes! Of course they would!” But, what if they wouldn’t, and the nation is simply seeing the development of a core of people who won’t be interested in automobiles at any price, size or convenience?

Try greenwashing

Should that be the case, the automobile industry needs to face up to a fourth idea: find a role in the new driving-light world. As I’ve been working on this book, I’ve been struck by the lack of serious discussion taking place around this topic. It’s almost as if the thought that people have reconsidered their car use is too explosive for the industry to approach. A friend who works at a major carmaker told me he’s given numerous presentations about the emergence of bike sharing and its popularity among young consumers, repeatedly urging his company to become a sponsor or somehow get involved, to no avail. If they don’t want to buy cars, we don’t have much use for them, the message seems to be.

And yet, driving light offers the companies an opportunity. People may not buy cars by the pound, as they did in the go-go years of the 1990s and 2000s when banks and finance companies would happily provide cheap loans for monster-sized vehicles. But they will still be buying cars. Perhaps, as we’ve seen with the reurbanization trend, they can only keep one car at the condo, rather than the three or four they parked in the garage of their McMansion.

Perhaps families choose to share one vehicle now — even with their neighbors — rather than buying a car or truck for every driver, due to the expense. Maybe it isn’t necessary to have an extra car around if the teen in the house shows no interest in getting their license. However, there’s going to be a need for something with wheels.

However, there are so many options now for people to get around by not owning a car that selling them on cars is even tougher. Why own when you can Uber? Why take on a loan when there’s a Zipcar parked two blocks away? And when gas prices spike, as they seem to do on an annual basis, what better reason to stay away from a vehicle without good fuel economy?

Sponsoring a bike-sharing system might be an opportunity to convince these people that a
company’s vehicle is compatible with the other ways they choose to get around. Bob Burns, president of B-Cycle, says he’s astounded that a car company hasn’t yet stepped forward to sponsor one of the country’s bike-sharing programs.

“It’s a great opportunity for greenwashing,” Burns says of the practice of deceptively labeling products as environmentally friendly. “If I were a corporate director of marketing, I’d certainly be looking at it.” Likewise, Uber just arranged billions of dollars in financing to provide loans so its drivers can purchase new vehicles. It only seems logical that some car company eventually will become Uber’s sole supplier.

Some of this is starting to take place. Toyota has watched the car sharing trend develop and is asking whether its Scion brand, devised to appeal to young consumers, might be appropriate for that market, Hostetter says. BMW, meanwhile, has developed its own car sharing operation, joining other carmakers who are taking baby steps toward the hourly use market.

Auto companies, however, have yet to tread seriously into one of the biggest advancements allowing people to avoid owning their products: apps. All around them, developers are coming up with ride sharing, car sharing, and other types of transit information technology that take their users further away from owning automobiles. Mobility is one of the hottest topics in Silicon Valley and among developers all over the world. Why shouldn’t car companies help a local transit company bring its information to consumers, given that they advertise on all manner of other sites?

It’s a key moment for the automobile industry. The car has gone from being a key to Americans’ freedom to something that keeps many from reaching the places they want to go, quickly and easily. The opportunities are there for automakers to participate in the discussion about the ways that Americans are getting around.

If they miss it, the rescue of GM and Chrysler and the help that Ford and other companies received during the Great Recession might have been a big waste of time and taxpayers’ money. President Obama helped carmakers back on their feet at a time when Americans were wondering if they could get along without them. Their future depends on making sure people include their products in their portfolio of transportation choices.

But banish any doubts: people have a variety of options, and the automobile may never have the same place in their garages — or their hearts — again.

Excerpted from Curbing Cars: America’s Independence From The Auto Industry by Micheline Maynard, available now for download at Amazon and Apple. Excerpted with permission of Forbes Media. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
