What's Up in the Automotive Industry
May 2, 2012
Our automotive thermal-processing issue is our annual opportunity to take the pulse of the automotive-industry sector of our market. Reviewing the news of the day seems to result in several topics: market health, fuel options, material developments and new technologies. Let’s have a look at each.
This seems to be a mixed bag, depending on where you look. February was a great sales month for the auto industry. It was the highest monthly sales rate in the past four years. Sales have been running at a 14.2 million annual rate, which is the best since 2007 when rates exceeded 16 million units for nine years running. Needless to say, while we are ahead of the past few years, we’re just getting caught up.
The automotive industry is global, and the struggling world economy has resulted in overcapacity, price pressures and an increasing number of mergers/acquisitions. The GM/PSA Peugeot Citroen partnership is a recent example. Overcapacity, for perhaps a different reason, also resulted in GM’s temporary (about a month) production suspension of its Volt electric car, resulting in a layoff of 1,300 people.
The auto-parts industry has not benefitted by the health of the domestic auto industry. Why? Primarily because subsidies and other WTO violations have allowed China to take a large bite out of this market. In fact, imports of Chinese auto parts have increased by 25% in each of the past two years.
The Volt news provides a segue into a discussion of fuel options. I seem to run across many stories about hybrid technology, plug-in electrics and natural gas vehicles. Recent history has shown that government subsidies of these various technologies are not a very good indicator of market acceptance. The previous report on the Volt is a case in point. Pennsylvania Congressman Mike Kelly summed it up recently when he said, “When the market is ready … it won’t have to be subsidized.”
For as much as we are hearing about these “advanced-drive” models, their portion of the total market was 3.2% in February, which was only the fifth time it was ever over 3.0%. With the Toyota Prius making up 56% of this market segment, all the rest share the remaining 1.4%. The Prius sold more in three days during February than the Volt or the Nissan Leaf did during the entire month.
I saw an interesting discussion recently involving electric cars. In order to make these more viable, a better battery is needed. Current battery technology requires a recharge after 30 miles. The government has estimated that the cost of the improved battery would be $33,000 each. Of course, the government also says that with tax credits and stimulus funds (can you say subsidize?) the consumer cost will be around $10,000. Let me ask the astute reader: Who is paying the other $23,000?
Let’s do a quick calculation. The subsidized $10,000 price for this battery, assuming $4.00/gallon gas, equates to 2,500 gallons. It’s estimated that the cost of electricity is about $0.75/gallon in gasoline equivalence. If the car goes 30 miles to the gallon, the battery cost would get you the equivalent fuel for 75,000 miles of driving. But in that much driving, the electricity cost equates to another 14,000 miles of driving at $4.00/gallon. So, that means you could drive 89,000 miles in a 30-mpg gasoline-only vehicle before breaking even with the new battery. Keep in mind that’s only if the cost of the battery is subsidized to the tune of $23,000 each! This sounds like a bad investment to me.
Alternatives to gasoline, such as natural gas, are promising, but government shouldn’t decide the winners and losers like they did with ethanol. Did you know that ethanol subsidies in 2008 totaled $4 billion, which resulted in replacing only 2% of U.S. gasoline supplies? We don’t need to subsidize natural gas if it’s a true winner. Let’s let the market decide.
Another quote that helps to summarize the government involvement in our free-market system is from Thomas Jefferson, who said that the government should leave a behavior alone “if it neither picks my pocket nor breaks my leg.”
Material Development and New Technologies
This month’s Now You Know discusses a number of the material developments taking place to improve fuel economy. Like the average of my personal vehicles, the average age of a car in the U.S. is 11 years. If you are looking to replace an older model with a new one sometime soon, expect the following changes: everything is now digital, cars have fewer cylinders and transmissions are mostly highly efficient automatic with six to eight speeds. Also, don’t expect to see a spare tire or a CD player. For better or worse, change happens, but what will we do with our CDs? IH