Fasten Your Seatbelts It’s Going to Be a Bumpy Ride

For the past five years this column has questioned many aspects of the economy and how well they have actually been doing, notwithstanding the reported official assessments. We all should have questioned the “hot housing market” stories out of California in 2004, reporting that potential home buyers were rushing to houses for fear that they would be sold the day they hit the market, and then bidding thousands of dollars over the owner’s asking price to ensure that they got the offered property. See, what actually should have been reported was how a family with a joint income of $70,000 was purchasing half-million-dollar homes, but now we know: It was the questionable mortgage practices whose inevitable results have so rocked the international financial community.

Of course, that crisis primarily hurt California, Arizona, Las Vegas and Florida. But the housing mess is like a major wreck ahead of you on the Interstate; even though your car wasn’t involved, you’ll still sit there forever while the mess is cleaned up.

We’re starting to see the housing mess’s impact on specific industry companies. In the auto world AutoNation, for example, saw its sales fall and profits drop by 31 percent in the last quarter and blames its stores in Florida and California. However, we are also seeing secondary problems in the next tier up – automobile manufacturers. High-end automakers like Lexus, whose sales are suffering on the coasts, are diverting more of their products into our region. And, as GM and Ford did, Chrysler has announced another downsizing.

Here in Dallas Fort Worth, fortunately, we don’t have to look hard to find automotive success stories. Classic Chevrolet’s January sales were up by more than 20 percent from a year ago, and many local dealers told me that their used car operations were on fire in January. However, in the past two weeks, we’ve also heard that Ford is desperately trying to remake its image with the public; meanwhile, Chrysler executives have announced plans to further cut their model lineup and to slash the size of the company’s dealer body.

Then came a published interview with Charles Maxwell, the only oil analyst who correctly forecast the first oil crisis in 1973. Now 70, Maxwell believes that within just a few years we might be paying $12 – 15 a gallon for gasoline in the United States.

Scary stuff, huh?

And the Better Idea Went Where?

Ford’s desire to reimage itself is by now wishful thinking. Ford actually has the best lineup of vehicles in its history, but it has failed to promote its best vehicles adequately.

The Ford Escape compact SUV is doing an exceptional job of bringing more buyers to Ford and the overlooked Fusion can directly compete with the best from Honda or Toyota. But Ford executives keep seeking ways to make the Ford 500-renamed-Taurus a hit; they’re wasting all of their corporate energies pushing a car that has been soundly rejected.

Besides, it takes two major hit products to create a winning image with the car-buying public. Think about the Civic and Accord for Honda, the Camry and Corolla for Toyota and the 3 and 5 Series sedans for BMW. The only way Ford can reimage itself is to create two more major hit products.

An axiom in sales advises, “Don’t sell the steak, sell the sizzle.” And it’s true – but you still have to deliver a steak to the customer who bought the sizzle.

Chrysler, Confused

Chrysler plans to rejuvenate its old Alpha Program, now renamed Project Genesis, and force any remaining standalone dealers to sell out to direct competitors, leaving nothing but Chrysler-Jeep Dodge stores. At that point, Chrysler can eliminate all the duplication in the models it offers; it’ll be either the Town and Country minivans or the Dodge Caravan, ditch either the Jeep Liberty or the Dodge Nitro, and so on. Sounds efficient – but remember a few years ago, when Chrysler ditched Plymouth? All they had to show for it was a loss of 240,000 sales the next year, or about the number of Plymouths they’d sold in the line’s last year.

In recent nationwide dealer meetings, Chrysler execs have used Boston as the example of how they want to trim the dealer body down to a more manageable number. In Texas they told our dealers there were 22 stores in Boston, a number that would be cut down to 10. At another meeting they said there were 27 dealers in Boston and they wanted only nine. Confused, aren’t they? The fun part is that Chrysler said these stores would all be located 27 to 30 miles from each other – and Boston isn’t big enough to have nine dealerships that far apart. Applying this plan in the Metroplex, you could have one store in Weatherford, one in Fort Worth, one in Dallas and one each in Waxahachie, McKinney and Denton. That would fulfill the competitive distancing that Chrysler wants, but it’s never going to happen.

Chrysler is also pushing its dealers to buy out their competitors, with Chrysler helping them find the financing. Let’s hope that dealers are not foolish enough to yield, because Detroit’s selling them on the dream that if you buy your competitor’s store you will pick up their business. History shows us that the dealer shells out the purchase price, but his overall volumes never increase.

Ultimately, Chrysler is getting its dealers to pay for the company’s lack of new high-volume automotive products. After talking with many Chrysler dealers, I believe the corporation has already gotten them thinking in terms of how to deal with fewer products and a downsized dealer body. But what dealers should have done in these meetings was tell Chrysler to pound sand – and to go do its job of getting more exciting new products to market faster.

Personal Freedom America’s Downfall?

Now, back to Charles Maxwell and his prediction of $12-15 a gallon for gasoline. Had anyone else made this prediction I would have ignored it, but Maxwell does have a track record. And it didn’t take long to find an article he wrote in November 2004, titled, “The Gathering Storm.” In that piece he was calling for oil to average only $70 per barrel from 2011 to 2020, a remarkable contrast to his current prediction that it will hit $300 a barrel in 2020. Moreover, even he admits that the $12 to 15 price for gas will stem from government intervention “to get Americans to let go of their precious freedom of mobility.”

This scenario may be shocking to you, but in a small region of Europe gas is now $10 a gallon; many other countries are paying $8. Even so, Europe is on the cusp of becoming a larger car market than America: High gas prices are not shocking them into giving up their precious freedom of mobility.

I also read the latest energy study from the James A. Baker Institute. While it paints a cautious outlook for energy supplies against demand, it suggests that, with a little intelligent planning, we can muddle through this next decade in a reasonably comfortable fashion. The key operative words to me were, “intelligent planning” – and that fantasy scares me to death.

The fact is that our current energy problems were forecast almost a decade ago and apparently we forgot to plan for it at all.

We Choose Scary Stories Over Thinking

It’s worth noting that, in stories you read about Peak Oil, no one ever discusses Iraq. But consider this: Many believe that Iraq is sitting on 160 billion barrels of oil. Some postulate that Iraq’s reserves might actually be higher than Saudi Arabia’s, or upwards of 240 billion barrels. Using the lower figure, if its oil infrastructure were fixed and new exploration underway, Iraq could soon pump 6 million barrels more a day. That’s more than the world’s demand for oil is growing; and at known reserves, Iraq could keep doing that for the next 73 years — 110 years if their reserves are as big as Saudi Arabia’s. That’s not entirely accurate, because you can’t get every last drop of oil out of the ground, but you get the point.

No, had the war in Iraq gone as planned five years ago, we would already be dealing in lower priced and more abundant oil, which in turn could have fueled our economy in far better ways than the housing bubble, which was intentionally created to boost the economy. Most people still discuss the war in Iraq in terms of political ideology; but, as a business proposition for new oil supplies, which is what it really was, it’s been a disaster.

Ford would still be best known for selling Explorers and F Series trucks if gas were still $2 a gallon or less; Chrysler would be selling far more cars, employment in America would be stronger because companies had smaller energy bills, and so on.

And we wouldn’t have to deal with stories on Peak Oil or government intervention to force gasoline up to $12 – 15 a gallon.

It’s obvious that stories about the end of our world as we know it will always be more popular than rational thinking to deal with our future.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570 @sbcglobal.net