HEAT

Maryann Keller

keller

An analyst of the auto industry since 1972, her books include Rude Awakening: The Rise, Fall and Struggle for Recovery of General Motors and Collision: GM, Toyota, Volkswagen and The Race to Own the 21st Century. This is an edited transcript of an interview conducted Jan 24, 2008.

“For Detroit to think, 'Well, we can sit back and not do anything, like in the 1990s,' that will be a losing proposition. China will have world-class global auto companies in less than a decade.”

America's dependence on oil: Can you put that in perspective?

... The United States is interesting in terms of developed economies. Anyone who travels to Europe has to be immediately impressed by the fact that central cities are where people live and work, and the car is really for excursions into the countryside. So if you look at statistics of miles driven per vehicle per year, you find that the United States is really at the top. ... Our central cities are not necessarily the core of where we work, where we go to school and where we live. In fact, we've been spreading out over time.

Places like Phoenix or much of California, the dependence in these areas is strictly on the automobile. There is no alternative to the car. So as population has grown in those parts of the country, our dependence on cars and consumption of fuel has increased incrementally.

So we drive thousands of miles a year.

We drive on average more than 15,000 miles per vehicle per year. ... But compared to the rest of the world, we use our cars very differently. That's the key point. The car is essential to the American lifestyle. It's not essential for a Parisian or a Londoner to have a car. They can get pretty much where they want to get within their cities via mass transit.

And the love affair with the car seems to be part of the iconography of the American dream as well, isn't it? It's not just a practical question.

... Sure, cars became fashion statements. Alfred Sloan understood that about a car, Alfred Sloan being the man who actually rebuilt General Motors after it nearly went out of business; a genius in many ways, ... a marketing genius. He really understood that you had to create a sense of aspiration in car ownership.

If you were just going to make a car practical -- four wheels, an engine, a transmission, two rows of seats -- you'd fulfill that need very much. It would be like your washing machine. (Laughs.) Nobody thinks about having the next generation of washing machine with any great excitement. It's there until it breaks and you can't call the repairman in, and you go and look for the cheapest one that gets your clothes clean. ...

Alfred Sloan's genius was to understand that he could turn cars into something of glamour, a fashion statement, something that would equate with status in life. ...

So we want to upgrade our cars, buy bigger, faster and --

Once manufacturers understood this, the question was, well, how do you define luxury? What are the little incremental touches -- leather upholstery, fancier radios, more power equipment? And this migration of features -- what were referred to as options -- began to creep into the definition of luxury. Luxury cars just had more convenience features. ...

And therein is all the profit in the vehicle. The $20,000 car really doesn't generate that much profit, if any. A $40,000 car, with all of its small, incremental features that in and of themselves are not that expensive, generates a huge profit, because the base vehicles are the same.

Number of pounds of steel is not that different. They still have four tires, four wheels. What really adds the money is the fact that you have purer sound coming out of your CD, or you can go from zero to 60, instead of [in] 8.5 seconds, in 6.5 seconds.

We presumably have trillions of dollars in the car infrastructure here in the States, from the gasoline, the refineries needed for that, the pipelines and trucks that ship it around, the car factories. All this huge volume of investment has to be paid off, I guess, over many years as well.

... The infrastructure that we have is really gasoline-based. It's not an infrastructure that's going to support other forms of energy. A simple gas station, which you see throughout the country, they all look the same; they all have inground tanks. To put in a fuel tank to carry ethanol or -- I believe it's anything more than 15 percent ethanol; I believe they can still do up to 15 percent ethanol, but anything higher ... essentially they would have to rip out an old tank, put in a new tank.

And even the transportation of that product would have to be in different kinds of trucks, because ethanol is highly corrosive. So our infrastructure would have to be substantially modified for any other fuel source other than diesel fuel or conventional gasoline.

So electricity-charging stations, hydrogen or any of the alternatives that people talk about -- immensely expensive to roll that out.

Immensely expensive if you think about them in the conventional way. But the plug-in hybrid or plug-in electric vehicle, as GM has -- its concept vehicle, the Volt -- would have you plugging it in at home. That could be very easily accommodated by the present infrastructure.

Hydrogen -- that's a whole other issue. Are we making hydrogen onboard the car, or are we getting hydrogen in tanks and just using hydrogen already in a tank in the vehicle? We're probably so far away from that that that's really not in present-day discussions. But you could certainly see that if you're going to be selling hydrogen, it would have to be in ... a fueling station like a present[-day] gas station.

Those types of energy sources are probably not going to be in passenger vehicles anytime soon. Most likely -- and here's where there's actually already some experimentation going on -- [it] is going to be in commercial fleets. Some of the best known experiments with alternative fuels are being conducted by the UPSes, the FedExes and DHLs. All of them have ongoing research to try to understand how these alternative fuels might work in a fleet.

And what are they coming up with?

I'm not sure what they're coming up with, but they're trying to understand what the efficiency is, what kind of repair these types of engines would ... require. But the beauty of those things is that they're centrally located, so they could actually do central fueling.

I think when you've migrated to a completely different kind of energy source, it's probably going to be within this sector that we have the first true picture of how we're going to have to accommodate refueling. And the ideal thing is to have it done in a central location. ... They will be, I think, the lead in terms of determining the practicality of these alternative fuels.

How important is that relative to the whole gasoline market? Is it passenger vehicles or commercial vehicles that are a problem in terms of carbon emissions?

I don't know how it's broken down, one versus the other. I think when you look at our transportation system, it's a little like peeling the onion. The issue of our infrastructure and our roads -- you've got politicians who would like to build more roads. Why? To put more cars on the road so that we're not idling in traffic. The real issue is, for me, is not CAFE [Corporate Average Fuel Economy]. It's going to be the price of energy.

If the price of energy is going to remain high -- and for Americans, $3.50 a gallon for regular gasoline is high. For a European, you know, that was [the] 10-years-ago price, but for us, this is a high price. And for many Americans, this kind of hit to their budgets is unacceptable. Their first reaction is going to be to drive less. They will begin to make adjustments in their lifestyle and their behavior with respect to how they drive their cars.

Editor's note: A few months after this interview was conducted, gas prices surged to $4 a gallon in July 2008 and dropped off a bit in the following months.

I've had car dealers tell me that even people in rural areas, where there is a functional need for owning a pickup truck, have come to buy a smaller car. The reason is clearly they need the pickup truck for is its work capability, but they've also made a decision that they don't need the pickup truck to go to church. ...

I think that there will be those kinds of decisions that will ultimately reduce consumption, and each one of us is making those decisions. I think these are behavioral changes that are already insinuating themselves on our economy. I know that, for example, in the package-delivery industry here, there's been a phenomenal emphasis on fuel economy. And it's not just the issue of "Should we use diesel or some other energy source?" It's been using technology to do many things.

For example, today, because of telematics, they can monitor driver behavior. And I'm not just talking about the FedExes of the world, but even somebody who's delivering appliances or lumber and is making multiple stops. ... Most package-delivery companies look at the items that are in the truck every morning and then actually set a route for the driver so that the driver is not backtracking, and he is driving the most efficient route. And why did this happen? Gasoline is no longer $1 a gallon; it's $3.50 a gallon. Once it becomes $3.50 a gallon, it suddenly gets the attention of corporate America, and they don't like it.

And that hasn't happened for 20, 30 years.

No reason to even pay attention to it when gas was less expensive than water.

Are people doing it because they're afraid of global warming, or they're trying to behave in a more environmentally conscientious manner? No. Some people are, but the vast majority are looking at their pocketbooks and saying: "Oh, my God, I can't afford this." And then they start to think about how they can reduce their spending back to the old level.

Is that enough? I mean, the scientists talk about efficiencies as being useful but maybe only taking us part of the way there. But the cuts, particularly in industrial countries, [that] are needed in terms of emissions are just on the order of 80, 90 percent on where we are today.

That's going to take new technology. I'm not enough of an expert at all in the science of global warming to be able to tell you how much we can cut. All I can tell you is that there is a new mind-set, and the new mind-set comes from expensive energy, and it will take us part of the way. It will also make it easier, I think, for the auto companies to introduce fuel-saving technology into a more receptive market.

One of the arguments that the auto companies have always used about fuel economy and CAFE standards was people wouldn't pay for it; it's expensive. Now I think that there is a more receptive consumer who is going to look at fuel economy as a [criterion] in the next vehicle they buy.

Are we going to go [to] no sport utility vehicles from where we were, which was a huge number of sport utility vehicles? No, we won't. But there will certainly be a competitive benefit to the company that delivers the highest miles per gallon in a sport utility vehicle, even if it comes with a cost penalty. People will pay for that.

All hybrids are not created equal; I guess that's what we're seeing with the Prius.

The Prius, in my opinion, is probably the only hybrid that comes close to making economical sense. The other hybrids don't. ... The Prius was designed from the ground up as a hybrid. And its shape -- you could tell it's aerodynamic, it is a relatively small vehicle, and clearly it was engineered to be a hybrid and to maximize fuel economy.

When you just place a hybrid system in a conventional vehicle, you don't get the maximum benefit from it. It's very interesting to look at fuel-economy numbers on hybrid versus nonhybrid versions of the identical car or SUV. You'll find that, very often, the hybrid will deliver 1 or 2 miles per gallon better in the city and 1 or 2 miles per gallon worse on a highway than the conventional car. So --

So you're getting a hybrid and you're getting worse --

On the highway. It's a tricky technology. I think that there's a lot of excitement about the notion of hybrids, and among politicians, there's this feeling that hybrids are universally great. You know, you get to go in the HOV lane. (Laughs.) I think in Connecticut, you probably get some reduction in sales tax on a hybrid.

It's the silver bullet, and it's not! It's silly. You've got a vehicle that is very, very heavy with a battery life of approximately 100,000 miles, ... whereas the average car today will stay on the road easily 150,000 miles or more. The quality of today's cars is so good that they last a long, long time.

So I think that with hybrids, there's a lot of questions about their longevity and the technology, which is ultimately going to go through a huge evolution over the next few years. We're in the early, early stages of what hybrids are going to eventually be. I think people who have hybrids, for example, living in the South, where you have to put the air conditioner on because it's insufferably hot, get even worse fuel economy, because you're having to use the engine to drive the compressor on the air conditioning system.

... The best use of a hybrid is how my daughter-in-law uses it. She's had a Prius for years. She drives the kids to school. She does all of her local, in-town errands in that car. And I think that her fuel economy is in excess of 50 miles per gallon, because she's using the hybrid technology to its best advantage, which is to use the regenerative braking [to recharge the battery] through stop-and-start driving. If you're driving on the highway at 60 miles per hour, you've got the engine going, and it's consuming gasoline. You're just not going to get very good fuel economy with it. So it is a technology that is good in a specific use. ...

You were talking about CAFE just then. Can you help us understand what is CAFE?

Corporate Average Fuel Economy came into being in the late 1970s, early 1980s, when America was in its second energy crisis. And at that point, the government decided to act and mandate that automakers achieve, ultimately, 27.5 miles per gallon for cars, and then, eventually, a standard of 21.5, and then later a somewhat higher standard was applied to light trucks. In the early days of CAFE, there actually was a significant improvement in passenger-car fuel economy, and it came largely by shifting to front-wheel drive and actually just simply eliminating the very largest, the heaviest American cars, those great big 3-ton land cruisers.

Six-liter engines and --

Six-liter engines, yes. The muscle cars of the late '60s, they all disappeared during that period of time, because, number one, they were on their last legs anyway in terms of popularity, but it really made no sense to try to make them more efficient. ... And remember, we're always talking about averages. We're not talking about every car reaching 27.5; we're talking about an average. So some were better, some were worse. The easiest way to reach that average was to get rid of the worst offenders and then to make modest improvements in the smaller vehicles. ...

In retrospect, the auto companies groaned and moaned about it. But the technology today is just sort of prosaic. ... One of the things about automobile technology is that -- and I think this probably applies to hybrids -- in the early days of a technology, it's expensive, and it's certainly not perfected. It's perfected over time. And in the 1980s, there was quite a bit of new technology thrown into the passenger car.

And at that point, it was very expensive. But in today's world, it's not. It's routine. It's like an air bag. An air bag in the year probably 1990 was probably $1,000 for an air bag in the center of a steering wheel. Today that air bag is probably less than $100. It's just technology. They learn how to make them cheaper. They can mass-produce them. They learn how to refine it, so what weighed 5 pounds now weighs a pound and a half. Instead of using mechanical parts, you use small sensors. It's just the normal evolution of things that have a technological basis.

And I would expect that to happen with hybrids. If we can figure out -- and someone, someday, will have that breakthrough which will enable lithium[-ion] batteries to be used -- then hybrids will probably become very, very practical. We're not there yet, but somebody will make that breakthrough. ...

So [has CAFE] worked?

I would say that CAFE has not worked.

That's what the car companies say.

It hasn't worked. It would have worked, and it did work in the 1980s, because people were convinced that gasoline was going to go from $1 a gallon to $5 a gallon. And the pundits were all saying, "Gasoline's going to $5 a gallon."

So people behaved rationally with that expectation in mind, and bought smaller vehicles for a time. So when the auto companies came out with front-wheel-drive cars, there was very little resistance [to] them. They were smaller, but on the other hand people were expecting fuel prices to ratchet up. So they were making, in their minds, sensible decisions.

Unfortunately, gasoline prices went the other way, and as soon as people realized that gasoline was again plentiful and cheap, their behavior changed. And I actually have sympathy for the auto companies when they are mandated a number, yet the government will not act in the one area which would have made compliance to that fuel-economy number easier, and that would have been to raise taxes on gasoline. That was the simplest, smartest thing to do.

But it's much easier for government to simply say: "They are these bad guys in Detroit, or in Japan, or in Germany, and they just don't want to raise fuel economy. They're the bad guys." It's really just -- you're talking about human nature. If you give somebody something inexpensive, they're not going to cherish it.

So if you give them cheap gasoline or inexpensive highways, they're going to abuse your gift. So the auto companies really were fighting an uphill battle by the 1990s. With ... gasoline in real terms falling for many years in price, there was absolutely no sense of fuel economy being a priority among their consumers. And to have to then achieve a higher and higher standard became increasing difficult.

I mean, how do you do it? They did [it] by, frankly, manipulating the numbers. ... What they did was they defined much of their product line as a truck. So vehicles like the [Chrysler] PT Cruiser or the Subaru Forester -- because it wasn't just the Americans who did it; it was the Japanese as well -- once they were defined as a truck, they would escape the high fuel-economy standard applied to passenger vehicles and fall into the category of the lower fuel standards for the trucks.

Or they would say this vehicle can run on ethanol, or E85, the 15 percent ethanol-gasoline combination. And even though there weren't even any filling stations where someone could buy E85, there was a credit applied for the production of that vehicle.

You go on the government Web site today and look at the number of vehicles that have the E85 designation, and the list is endless and growing every year. And there's only one reason for it. It's not because E85 is the answer to our energy problems; it is far from it. It is because there's a credit applied in the calculation of CAFE for the production of that vehicle.

So you don't put any ethanol in it, and you get the credit.

The credit is applied to the manufacturer. It has nothing to do with the customer's behavior. Once the manufacturer makes that vehicle and designates it as capable of operating on an ethanol-gasoline mixture, they get a credit toward compliance with CAFE.

So CAFE, it was just filled with loopholes. But again, I have a degree of sympathy for the auto companies. How do you get people to pay attention to CAFE and to actually help you achieve the CAFE standard if all they want to do is buy your least fuel-efficient vehicles, because gasoline is so inexpensive?

Let's talk a bit about this, the gaming of the system. For a while, there were no standards on light trucks, is that right?

That's right, that's right. The standards came in -- I can't remember exactly when, but it was in the 1980s; mid- to late '80s, I think.

So what, three, four, five years after CAFE.

A little longer than that, yes, because if you think about it, in the early 1980s, ... we didn't use trucks for passenger vehicles. There was a clear demarcation of what anyone was going to drive in to go to church or to work or to school. They were going to go in a passenger car. We all knew what they looked like. But it happened with the introduction of the Chrysler minivans in 1984. They were designated a truck. And shortly thereafter, within the next few years, the popularity of midsize sport utility vehicles began to climb.

And here I have to say that auto companies were just as surprised about that as anybody else. The Ford Explorer -- actually called the Bronco prior to it being renamed the Explorer -- proved to be immensely popular without much advertising by Ford. People just found it. And of course, the Chrysler Corporation bought American Motors strictly for the Jeep brand. They were the first four-door sport utility models, and those vehicles were hugely popular with the American public.

People liked them because they were a little more powerful than some of the cars that were available in that time. They liked them because they had a rugged look. You can carry a lot of stuff in them. So in some ways, the consumer actually led the auto industry into the development of sport utility vehicles as a passenger-car alternative.

I remember interviewing a former president of General Motors, Bob Stempel, when I was writing my first book -- this would have been in the late 1980s -- and I said to Bob, "Why is it that General Motors does not have a four-door sport utility vehicle?" Because at that time, they only had a two-door model. And he said to me -- and I'm paraphrasing -- he said: "Because we never thought that the average American family would want to drive a sport utility vehicle. We saw the sport utility vehicle as a niche product for a predominantly male audience that was going to use it in some work capacity, or because they were hunters or fishermen or had some sort of recreational reason for having that kind of a vehicle."

So that was his answer. It was a very honest answer. The customer really led the auto industry into the production of trucks for passenger vehicles.

And then the car industry, when it realized what it could do with CAFE, was pretty happy to go there.

Oh, it was delighted, because every time they came up with something bigger and more powerful, they couldn't imagine, but they sold more of them. I remember going to see the first Ford Expedition -- and this was built off of their pickup truck platform, just as the [Chevy] Tahoe and [GMC] Yukon come off of the General Motors pickup truck platform -- and I remember they had it in a hotel room in New York City for us to see. And I looked at it, and I said: "I couldn't even get it into my garage. Who's going to buy this thing?" And then when it was launched, it was like printing money.

And it got 10 miles a gallon or something like that?

Probably not any better than that. But then they followed it up with something even larger. ... Had it [been] painted yellow, it would have been a school bus -- the Ford Excursion, a sport utility vehicle. And it sold out. And they made a fortune. The 1990s for the auto industry -- people forget [because] they're in such financial trouble right now -- was just a gold mine. It was a profit bonanza.

And nobody forced the American public, kicking and screaming, and said, "You must buy these." We were happy to buy them, because gas was cheap. It didn't matter. And I think that they were just as amazed in Detroit that every time they made something bigger, more powerful, more doors and more stuff in it, we bought as many as they could build.

Tell me what happened with the Gas Guzzler Tax, [established as part of the Energy Tax Act of 1978,] as well. How did that play into this whole dynamic?

Well, the Gas Guzzler Tax was applied on vehicles that failed to meet a certain minimum standard in miles per gallon, and it --

So these big cars we've just been talking about.

Oh, not just big -- they didn't apply to big trucks.

Another loophole.

Another loophole applied to cars. And the primary ones that paid the penalty were luxury cars -- you know, lots of big Mercedes and BMW. Very high-powered sports cars paid a lot. ... [But] if you can afford $50,000 for a car, another couple thousand for Gas Guzzler Tax wasn't going to deter you.

... [W]hat's the status [of Gas Guzzler Tax]?

It just sort of disappeared. But it is not applied to [trucks, minivans or SUVs].

So it was just there for a little while.

I think it was there for about 10 years, but it had no effect on behavior because, again, the vehicles that had to pay that tax were generally very high-priced vehicles with very high-end consumer[s] who [would] just sort of build that into the price of the vehicle. ...

Are trucks still outselling cars?

That's an interesting question. It's a hard one to answer, because what's happening now, again because of the CAFE loopholes, we have more and more and more products being defined as trucks that any grade school child would say, "That's a car." But they are nevertheless categorized as trucks.

And so if we just look statistically -- are cars outselling trucks, or vice versa? -- we are still at the point where trucks outsell cars. In 2007 there [was] definitely a decline in pickup sales, in midsize sport utility sales and in large sport utility sales. There definitely was an erosion in those product categories that delivered the worst fuel economy in the sport utilities. In the pickup truck category, that's the housing market; about 40 percent of all pickup trucks are purchased by people connected somehow with the housing business. Whether they're contractors or home builders, or they're involved in some of the trades that support the construction industry, obviously they're taking it on the chin.

And so that market went down for two reasons. The sort of fashionista segment, who bought a pickup truck but never got the cargo bed dirty, they're certainly not buying them now. But the practical end of the construction crisis is playing out in fewer pickup truck sales.

But they still are very, very high-volume vehicles. But we're also seeing now the evolution of what are called crossovers. Crossovers are car-based rather than truck-based models, and they are generally better in terms of fuel economy. They generally offer [passenger-seating] capacity comparable to a sport utility vehicle. And this is where the auto industry has placed some pretty heavy bets. And from what I've been able to see so far, the bets are paying off. ...

And, under CAFE, these are cars or trucks?

They're trucks. They're trucks, even though they are car-based. Now, the new CAFE standard may very well change where they fall, because I think there's going to be category-based CAFE as opposed to this car-truck phenomenon that we've been dealing with, which kind of allowed manufacturers to designate something as a truck or a car.

So basically, right now they're allowed to build a big car and get it called a truck and get lower mileage requirements.

There are some small criteria, and frankly I've forgotten what they were. But I know that when I was part of the National Academy of Sciences panel on fuel economy, we wrestled with the definition of a truck. And while that seems preposterous, it was very, very hard to define what a truck was.

You can't do it by tire size. You can't just draw a picture of it and say, "Well, this is a truck, and anything other than this is not a truck." Defining it was very, very hard. And that's why the auto companies had such an easy time of gaming the system. ...

... If you look back over the 30 years you've been working in this industry, there's very much an emphasis on litigation rather than innovation, for example. [The automakers] just seem to fight at every corner and to put massive amounts of money into court cases to try and stop every single change.

That's absolutely true. They fight to prevent any kind of regulatory change. ... I mean, they fought against seat belts because they said seat belts were going to cause injury.

They fought tooth and nail against air bags until [former Chrysler CEO] Lee Iacocca said, "We're going to put an air bag in a car." And he had been one of the great critics of air bags. But he suddenly realized safety could sell. ... It dawned on him after being such an ardent critic of air bags that this could be a great marketing ploy, and it proved to be just that. ...

The idea that you could hit a wall at 30 or 35 miles an hour and step out of the car and brush yourself off as though nothing has happened, it was pretty dramatic to most people, and they decided that sparing themselves a major injury was worth the price. But believe me, that was something that the industry fought as well.

And the industry fought every emissions standard. They fought every incremental improvement in hydrocarbon, carbon monoxide and NOx [nitrogen oxide] emissions. They have fought every single one of them, because, quote, "the technology wasn't available," or the technology was going to be too expensive. And of course, in the first year, it always is.

It just seems ironic. They spend millions fighting these things, ... far more than it would probably cost them to just do it.

Well, I'm not sure that I could say that it's far more, but you're right. What it's done is, unfortunately, it has created the impression that this industry is just so reluctant to change, which then makes them a very easy target for politicians to say, "Well, you won't do it on your own, therefore we have to mandate it; we have to legislate it."...

Right now I find it very ironic that this industry that has dragged its heels on anything that would promote higher fuel economy is now out there advocating higher fuel economy. The millions that are being spent to promote vehicles that may never see the light of day and to be brandishing one's emissions or environmental credentials are amazing. GM has a Web site -- I think it's called GMNext.com -- where they're blogging about the environment and heavily promoting E85, because they've had this great commitment to ethanol. Which is crazy, considering that most of us have no access to ethanol.

Ethanol, by most scientific research, uses more energy to produce a gallon of it than is conceivably saved. And most people, after they use E85 and discover how terrible their fuel economy is with E85, don't use it anymore. And yet GM is out there flogging that.

And GM is pushing the Volt.

Well, we've already seen them sort of back away: The Volt now is dependent on lithium-ion battery development. It always was. But it sure did pretty good getting a lot of attention at auto shows and changing GM's image.

Is that what it's all about then -- the Volt, for example?

I think that they would do it. They would make the car if there were batteries. The question always was, in my mind, was whether or not the batteries were ready. And it doesn't look like the lithium-ion battery is going to be ready by 2010. Therefore, the Volt can't be ready by 2010, because nickel hydride batteries are not going to get you enough range to make a practical car.

And the responsibility for putting the money into the factory research should be theirs, surely, if they want to put the car out.

Well, I think it's not just theirs. The auto industry ... understand[s] internal combustion engines. If you're going to say that the next generation of vehicles is going to be powered by batteries, would I expect the auto companies to have the know-how to understand batteries? No, I don't expect it. I expect that they would have to work in partnership with the battery producers. ... No auto company has that technology embedded in their DNA. That's a whole different industry.

And if you're looking at Detroit, they probably don't have much money to spare at the moment to do it anyway.

But the battery companies do. ... And if a battery company had a breakthrough, there's an opportunity to sell millions and millions and millions of batteries that conceivably could transform these companies. The company that does it is the stock I want to own (laughs), because that will be huge.

"The fuel-efficiency kings": Is Japan truly worthy of that distinction?

GM is trying to respond to PR campaigns that have enabled the Japanese to be seen as the fuel-efficiency kings. ... I think one of the reasons why you see GM going out and talking about the Volt and talking about its technology and its commitment to the environment is simply -- it's defensive in a way. I do believe that there is an incorrect perception that the Japanese have some sort of superior technology that endows their vehicles with a higher fuel economy. And the numbers just don't show that. Car for car, stack them up, model against model, where their weight and engine displacement are comparable, you'll find that the American cars are equal to or better than their Japanese rivals.

And I think the Toyota campaign surrounding the hybrid, the Synergy Drive campaign, while that environmental badge was appropriately applied to the Prius, it certainly does not apply to any of the other hybrid versions that Toyota makes. And yet there is this aura that surrounds hybrids that just simply isn't true when the issue is fuel economy.

But they've been very successful at exploiting that.

Well, I think that it goes back really 30 years. It goes back to the time in the 1970s when your alternative was an 8-mile-per-gallon, 5,000-pound Oldsmobile or a 20-mile-per-gallon small Japanese car. And when you were desperate to get something that was going to give you more range, you bought the Japanese car. ...

I think that that gave the Japanese this aura that they built fuel efficiency and that this was part of their corporate DNA, that miles per gallon was something that they emphasized in all the vehicles that they developed. And that might have been true for a while, but it certainly is not true today. ...

Where's GM's the Volt going then?

I think that there's a genuine desire on GM's part to build the Volt. I'm just not sure that the technology is going to let them build the Volt. Toyota is now saying that they will have a plug-in hybrid using lithium-ion batteries, and I believe that they've also said sometime around 2010. But they've also said for "commercial applications," so that may mean that there's 10 of them, you know, or 100 of them in some controlled experiment, which is probably the appropriate way. You can't just send this thing off to the unsuspecting private buyer who will have to finance the car..., where there's really no track record of its maintenance and repair or, frankly, even its safety. With lithium-ion batteries, there definitely are safety issues that have to be understood.

Exploding batteries.

Exploding batteries, exactly.

But why should we believe GM now? The Precept, the EV1; the Impact was another one. It seems like every 10 years they roll out this concept car -- 100 miles a gallon, 80 miles a gallon, 60 miles a gallon. They promise the moon --

Well, I think that this time is different. And I believe that GM and Ford, to a lesser extent Chrysler -- though certainly they will have to keep up -- are global companies today, more than they ever have been before. It isn't just for the American marketplace that they have to define their technology; it's for the world. And the European market is certainly dealing with high-priced energy, as is the developing world.

GM produced 9.37 million vehicles in 2007. I believe it was the second highest total ever for General Motors. They built more outside of the United States than they do inside of the United States. They have suggested quite specifically that their growth will be outside of the United States. Now, they can hold more sway over American politicians because they're American companies. Are they going to be able to exert muscle over politicians outside of the United States? Not likely. Are they going to be able to say to the Chinese, "Your fuel-economy standards" -- because I'm sure they will have them, or they will have emissions standards -- "are going to cost us money"? I don't think so. ...

I also think that there's something else that they're going to have to address. I indicated before that the Japanese and American cars or vehicles, really are almost equivalent in fuel economy. ... They are all equally bad or good, however you'd like to define the kinds of vehicles that they're putting in our driveways. But I do think that the Japanese have gotten the message. And one of the interesting things that has always been difficult for Detroit is the speed with which Japan can react.

And they have to take that into consideration. Yes, Toyota probably exaggerates the capabilities of the hybrid and developed an environmental mantle off the technology. They're not very fuel-efficient.

On the other hand, if General Motors thinks for two seconds that Toyota isn't hard at work trying to figure out how to meet the standards for 2020, and [hasn't] already said, "We will do it," then they'd be really foolish, because they're risking, frankly, their corporate livelihoods. ...

Detroit -- it seems like they've got Congress in their pocket. Every attempt at changing CAFE over 30 years was just brushed aside. ... How do we understand that?

Do I think that they had Congress in their hip pockets? There's always a tug-of-war, because Congress would like to deliver something to their constituents, where they promise the constituents: "You are going to get something for nothing. We're going to give you cars that these evil guys in Detroit and elsewhere are producing today with lousy fuel economy -- we have just mandated that they improve it. It's not going to cost you anything."

And that's the fallacy in legislation, because unless they're going to raise taxes on gasoline to make people want to buy some fuel-efficient vehicle and pay for whatever the technology was to invent the product today [that] delivers the higher fuel economy, people won't do it. And there isn't a single man or woman in Congress that's going to raise their hand and say, "Yes, I'll vote for higher federal gas taxes," because they will be voted out of office the next time they run.

So we have this absurdity where government policy goes after the auto companies but then on the other hand promises people a free ride: "We will build you bigger roads so you could drive farther to work. And we will also allow you to drive farther to work by giving you a more fuel-efficient vehicle." It doesn't make any sense.

Unless there is a coordinated effort between Congress and the auto companies, the auto companies, I think, have a legitimate complaint. There never has been this coordination. I do think that there was an awful lot of pretend that the -- what was that called, the Project for a New Generation of Vehicles? ... That was just ridiculous. We were going to take technology out of the national research laboratories and try to apply it to passenger vehicles in an effort to [create] the 100-mile-per-gallon vehicle. And there was a timetable; I guess it was eight or 10 years.

And this was under the Clinton administration, which is as silly as anything else that's come out of Washington. I mean, the auto companies looked at it and said: "Whew! Relief!" Didn't have to do anything. There's not much there, and we don't have to do anything with it. ...

Nothing ever came of it. But [the] irony of that Project for a New Generation of Vehicles was that it sent Toyota into an absolute tizzy.

Toyota believed it.

They believed it, and that's how they invented the hybrid. Now, they've learned a lot with the hybrid. That's what I meant when I said that the Japanese -- be careful what you unleash. These are not companies that operate in a nice little cocoon between the lack of action by Congress and the inaction by Detroit.

You know, this sort of cabal that we've had for many, many decades, now [the automakers] are competing in a global world, and they can't influence legislatures and governments around the globe the way they can in Washington. And they're going to have to compete against many new companies. Does anybody think that the Chinese auto industry is going to be dependent on us? For how much longer? Twenty-four, 36 months? And then they're going to be starting to invent on their own. ...

The message to the domestic auto industry is that ... the forces of change have been unleashed, and they've been unleashed in areas of the world where there is a lot of technical know-how and many, many, many resources. And the Chinese government will apply those resources to try to solve its pollution problem.

And there are plenty of talented people in India, plenty of talented people in China. And I assure you, the Japanese have now redoubled their effort to try to solve the fuel-efficiency problem, because they know that they can't continue in this way. And for Detroit to simply think, "Well, we can sit back and not do anything, like we didn't do anything in the 1990s," that will be a losing proposition for them. We're looking at a global problem and a global industry. ...

... [We were talking earlier about] how people bought into safety, and it seems that's a very similar concept to climate change --

Yes.

... But at the same time it's less personal. You know, the car, the seat belt, the air bag and so on, you can show images of the family; it's very immediate. And it's a very interesting challenge that companies are now faced with when it comes to wrapping their heads around climate change and what that means for their own strategies --

Yeah, you're absolutely right. ... When it's me, I'll spend the money; I'll spend the money to make myself safer. And that, unfortunately, sometimes runs counter to environmental causes. I'll make myself safer by buying a Hummer or some too-gigantic vehicle, or I'll make myself safer and my family safer by making sure my car has six air bags in it, and I'll spend that money.

Environmental issues are social issues. They are issues for the planet, and they are much, much harder to sell, because the connection is not immediate. I can see driving at 55 miles an hour and hitting something and being spared injury because of the air bag as having an immediate benefit. But driving a smaller vehicle that I don't find as comfortable, that may be less polluting -- what's my tangible benefit?

A lot of people have felt like: "Why bother? Maybe I shouldn't have to sacrifice if it doesn't really exist. Why am I doing it?" Here again, the only answer is, make energy more expensive, and you will change your light bulbs, and you will take your thermostat down, and you will drive less, because it's more expensive. That is the only way to get an immediate reaction among everyone. ...

Second, there actually is -- beyond what GM, Ford and Chrysler, and Toyota, Honda and anybody else might say, or Daimler -- there is a lot more discussion of global warming and many more initiatives to improve energy efficiency generally.

I mean, you have somebody like [Calif. Gov.] Arnold Schwarzenegger talking about it. People do listen. And the state of California is an enormous car market. Eleven to 12 percent of all vehicles purchased in the United States are bought every year in California. How California goes influences the rest of the country.

But also, it's not just what the auto companies are doing and thinking. There's a lot more energy initiatives just in general in corporate America. I think everyone has recognized that this is something that they can influence, sometimes in small ways, sometimes in bigger ways, and perhaps just corporate America standing up and talking about it more. ...

Now, are they motivated because they're good guys? No, they're motivated because this saves them money. This is something that they need to do, because spending a little extra money today on better windows or lights that turn off if nobody is in a room, and they sense that just makes good, common, economic sense. So those kinds of behaviors can, I think -- maybe I'm being naive -- might ultimately influence people.

You mentioned Schwarzenegger, and you talked also about the last eight years in America -- both questions of leadership. Can we expect leadership from Detroit on this?

I think you're going to hear a lot more chatter from Detroit about their innovations and their climate credentials. My fear is that that's talk just like the [Project] for a New Generation of Vehicles was talk. It was nothing. ...

... We spoke with Li Shufu from Geely -- don't know if you know him; one of the big car executives in China -- and he was talking about hybrids and so on, and it struck me that for him [it] was premature. Much of the design they get, I guess, [is] from older models, from Korea and Japan and stuff, and it seems like it's an immature market at the moment. But it is, as you say, just moving at breakneck speed.

I went to China for the first time in 1979, and I remember walking on the Bund in Shanghai and people walking up to me and touching me because I had white skin and blonde hair. And at that time, there were hardly any cars on the street. The mode of transportation was the bicycle. Everyone was dressed in the same sort of navy blue jackets.

And then with each successive visit to China, I felt like I was in a different world. The change in 25 years -- I mean, they've leapfrogged from the 19th century into the 21st century in 25 years. And no one should for a second think that Chinese auto companies are going to be happy and content taking our old designs and modifying them a little bit.

China will have its own technology, and it will have it very quickly, because I think that they're smart enough to understand that the way to get access into the U.S. market is not to make cheap imitations of our cars. It's to make something different and better.

GM at the moment, I think their biggest seller [in China] is the Buick, a big, old, heavy ... version that's discontinued in America, isn't it?

Yes, yes. Sure. ... It's an old car with old technology and sort of recycled tooling. But again, how long do you think they can get away with that?

You've got Chinese auto companies, and they're not ready for prime time, but they're coming here to show off their cars. They're learning very, very, very fast. Anybody who thinks that China is going to be buying our old cars five years from now ought to be removed from the executive suite of whatever company they're in, because that's not going to be the case. China will have its own designs. China will have world-class global auto companies in less than a decade.

And at the same time, that's pretty scary in terms of climate. ... You're talking hundreds of millions of cars coming into the Chinese market --

... There will never be 100 million cars in China. There's no air to breathe there now. I could not imagine that they're not working feverishly on trying to solve this problem [of climate change], recognizing that the whole world would probably come to their doorstep and buy it if they were able to do it.

And in India, the ... Tata Nano. ... what's your reaction to that?

I was fascinated by Honda's reaction to it. Honda's reaction to it was, "India has no roads, and therefore the most appropriate vehicle for an upwardly mobile Indian is probably a motorbike or motorcycle." And there's probably some truth to that.

I've been in India, and unless India went on some massive road-building campaign, it's certainly not a country that's going to accommodate a vast number of motor vehicles anytime soon. There's just no road infrastructure there.

They are in the middle of a road-building program, but I guess it's moving pretty slowly compared with what's happening in China.

Well, China has this motivation to build all these roads in advance of the Olympics this year.

Turning to GM, ... one of the things that struck us was we asked Beth Lowery how she would rate GM in terms of its performance on the environment and on climate, and she said ... they'd give themselves an A, at least for effort. What's your take on that?

Well, I would not give them an A, for sure. I would probably give them something like a C-plus, again recognizing that General Motors is trapped in this environment in North America of cheap energy, until recently, and having to, as they would always say, deliver what the customer wants to buy.

And there's a lot of truth to that, but the reason why I did not rate them lower than that is simply because, pound for pound and car for car, they're right up there with the Japanese. What they're missing in their product line are cars like Scion and [Toyota] Yaris and Honda Fit. But if you were to look at their pickup trucks versus the [Toyota] Tundra, they're better. If you'd look at the [Chevy] Malibu versus the [Toyota] Camry and the [Honda] Accord, they're right there; not a whole lot a difference.

So I would say that car for car, model by model, they're no better or worse than their rivals. Now, does that mean that I would rate the entire industry a C-plus? ... I probably would, because I don't think anybody in this industry -- there's no Japanese company, there's no German company, no French company and no American company that I think has made fuel economy a priority, not one.

I mean, Europe, for all of its high-priced energy, ... how long did it take Europe to get emissions standards on cars? A long, long time. So the motivations of governments are usually allied with their local producers.

And biggest employers.

And biggest employers. And I don't see that that's going to change that much. The one thing that I do think is different this time is that this is a global business, and I do believe that today many auto companies, especially aspiring auto companies, understand that they're not going to ever be a success building a $2,000-cheaper version of what we have in our garages. It's just not going to work anymore.

The Koreans are a perfect example of why it actually doesn't work very well. The Koreans came to North America, Hyundai and Kia -- Hyundai came in about 1985 -- and they came in with the same strategy that the Japanese had in the 1960s: same kind of car, we just sell it a little cheaper, and we kind of buy our way or earn our way into the market. We give you better value for the money.

And it didn't work, because the first cars were terrible. And Hyundai has now been in the United States for going on 23 years, and they have never achieved their sales targets. They have not achieved the number of dealers that they wanted to have. They have a factory in Alabama that has not been operating at the capacity levels that they've targeted.

I think that they demonstrate just how hard it is for someone to use the "I'm cheaper and better value" theory in today's world. I think that companies that aspire to be internationally accepted have to offer more. They have to really offer superior technology. ...

There's one Chinese company that's talking about building a factory in Mexico already. So clearly, they're on a tear. They're determined to establish themselves, and they're going to have to do it, in some cases with technology. Otherwise there's no reason to buy their cars. There is no reason that anyone has to buy a cheap Chinese car unless it offers something really superior. And climate might be one of the drivers to go down that route. ...

posted october 21, 2008

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