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The US’s car companies – GM, Ford and Chrysler have been in trouble before. Notably Chrysler – back in the early 1980′s when they got a whopping $1.5 Billion dollar loan [Chrysler got the loan approved in 1979, and financed in early 1980] – and appointed Lee Iacocca as the Chairman/spokesman. Chrysler paid off the loan by 1983.  Additionally, the US military then bought thousands of Dodge pickup trucks which entered military service as the Commercial Utility Cargo Vehicle – M-880 Series. The most important reason why Chrysler survived – was innovation – the introduction of the family mini-van – which was a huge sales success through the 1980′s [and into the 1990's].

In the past, the car companies would grudgingly offer the public what they wanted – by way of cars. In fact, Detroit was very very slow in hopping onto the bandwagon to make fuel-efficient cars – even during the oil embargo of the 1970′s.  The Japanese companies succeeded in making small fuel-efficient cars back then, and they still are in a leading position now [despite Toyota's woes which are well documented - and have more to do with the financial market than the desirability of their cars]. Chrysler “second-sourced” Mitsubishi cars in the 1970′s – when they figured that they could not turn their businesses around as quickly as the marketplace wanted them to.

But this time around, things are different.  The big three are not just talking about fuel-efficient cars.  They are closing the assembly lines that manufacture the gas guzzlers, and instead are focussing their attention to making fuel-efficient hybrids and gas-electric hybrids – like Chevy’s Volt.  As an engineer, I am not too pleased with the impending switch to electric cars [which in California, with base electricity rates at 11.5c/KWH and maximum rates at 38c/KWH - will actually drive people to buying gas-powered cars]. In fact, Elon Musk [the founder of Tesla Motors] made the obvious observation that electric cars in California – would actually be “natural gas powered” [as  45% of CA's electricity is derived from natural gas].  In most of the USofA, the new generation of “electric” cars will actually be coal powered!!!  Talk about getting to the future by embracing one’s past.

But why are things really different this time around?   $147/bbl oil was a mental and financial shock – even for silicon valley engineers.  The same applies to $4.50/gallon gasoline.  It is still fresh in our memories.  If it can happen in 2008, sure as heck it can happen in 2011 or 2018 or in March of 2009.  So, the car companies have to make efficient cars – that reduce our dependence on petroleum based fuels.  Then again, it does cost energy to make the lithium-ion batteries – which will power the electric motors of the cars of the future, and they will be charged by coal-fired electric plants.

People’s buying habits have been altered – at least for now.  As long as one remembers paying $100 to fill up their SUV’s tank, he/she will think twice before buying a car that is not frugal when it comes to gas consumption – even if current gas prices are low.  In conclusion, things are different because:

1. The car companies are acting differently – they want to make cars that we want to buy!

2. They are in deeper trouble than ever before.

3. Peoples’ buying habits have been altered by $147/bbl oil.

4. This time around, consumers know that $40/bbl can get to $120/bbl in a few short months.

5. Competition from smaller car-makers like Tesla Motors.

6. The car companies are shuttering plants that make the bigger, less fuel-efficient vehicles.

7. Their very survival depends on their actions in the next several months.

DIsclosures: No positions in any stock mentioned.

© Dec 12, 2008, Bapcha’s Stocks.