Pick-up lines...

I was sitting at the bar at our local Bistro last night, enjoying some pizza and reading my book, when a guy came in, sat down next to his buddy one seat over from me, and started talking excitedly. He pointed to a shiny new, full-sized, extended-cab pick-up truck sitting in the parking lot just outside the window, and said "Look at that beauty. Can you believe it? They gave me $7200 for my old truck on a trade-in!!" His friend responded "How old was that piece of shit, '95? It wasn't worth 5 bucks." To which the first guy, grinning from ear to ear about his good fortune, replied, "Yup. I sure fooled them, I hit the lottery on that deal."

The most ironic part of the whole conversation was when the new truck owner turned to me, pointed to my book and asked "whatcha reading?". I handed him my copy of "Twilight in the Desert" and explained it was a book about how much oil might be left in oil fields in the Middle East, and the future of the oil market. He pretended to be interested, for about a second, then said "yeah, okay", and turned back to his buddy to brag more about his new truck. I didn't say a thing, just went back to my book...

The guy in the bar may not know it yet, but the pick-up truck is dead. Today Ford Motors is announcing that they are retooling most of their US plants. For years these plants have been producing pick-up trucks and SUVs. With gasoline prices hitting $4 a gallon, no one is buying a pick-up truck or an SUV. Six months ago Ford's F150 pick-up was the best selling passenger vehicle in the US. Today the number 1 selling vehicle in the US is the Honda Civic. Reading the writing on the wall, Ford has delayed its release of the 2009 F150, and is switching production in their US plants from SUVs and trucks to the compacts and sub-compacts that they currently build in Europe. Ford is telling customers and shareholders that they will be completely retooled and selling a line-up of fuel efficient cars by 2010.

How the Detroit story has changed. Only a few months ago, as Congress was pushing CAFE legislation to raise the average vehicle fuel economy in the US to 35 MPG by 2020 (the average today is about 22.5 MPG), Ford and GM executives were protesting that they couldn't possibly shift so quickly (12 years) to manufacturing fuel-efficient cars. GM's chairman Bob Lutz claimed that the 35 mpg CAFE standard would result in "a net average additional technology cost of $6,000 per vehicle which will have to be passed onto the consumer...(continuing)...it’s impossible to build small cars and sell them at a profit in the United States. " Turns out that such statements were just so much smoke (the auto company execs were talking through their exhaust pipes, so to speak).

As Ford is demonstrating, they can completely revamp their US product line in 18 months, with no additional technology costs. For many years Ford and GM have been making fuel efficient cars for the European market, which they chose not to sell here. That's too bad, because if they had been selling a more fuel efficient line-up of cars in the US, they likely would not be struggling as they are now. While Ford's US sales are down 15% this year , their sales in Europe are up 2%. The best selling car in England (where gas is $8.00 a gallon) is the Ford Focus. In Europe Ford has three cars in the best selling top 10. Their Euro line-up includes the Mondeo (a Civic rival), the Ka (an award winning design similar to the Smart 4 Two), the Focus (one model of which they also sell here) and the Fiesta. Although in Congress's CAFE hearings Ford wept and wailed that there was no way it could meet Congress's CAFE standard of 35 MPG by 2020, in fact their European car line-up would meet that standard today.

Ford and GM's misleading Congressional testimony grossly exaggerated the technology costs and re-tooling time that the new CAFE standard would impose on Detroit. Why would GM and Ford have lied about that? Geez, I don't know, maybe it had to do with money? The average profit margin on a full sized pick-up or SUV is $10,000, while the average profit on a compact car is about $2,000. Or, to put it another way, Americans have been over-paying for SUVs and pick-up trucks for years. That proud pick-up owner I met last night in the Bistro may have gotten $7200 for his old banger in a trade-in, but the dealer got to move a dinosaur off his lot and probably still made $3000 on the deal. Over the next 6-7 years, at $4 a gallon (if gas prices don't rise further), that shiny new pick-up will cost him about $10,000 more in gas than a Honda Civic would. Winning the lottery, indeed.