There’s been an awful lot of bloviating about what’s left of the domestic car industry in this country, much of it by folks who really don’t know jack about the history of the automobile industry.  To start with, and in order to grasp how we (and it has been a collective effort) got here, there are some myths that need debunking.  This week we start.

Myth #1:  Detroit has been building gas-guzzling SUVs while the Japanese have been building cute little subcompacts that can run on “free range” hydrocarbon molecules.

Let’s remember why the SUVs sold so well.  In order to do that, you have to recall a basic truth–most Americans (and people in other countries as well, by the way) would rather drive a big vehicle than a small one, even if the small vehicle does a perfectly adequate job of hauling us and our stuff around.  Fuel has generally been cheap here, so Americans have traditionally bought big cars.  Here is another basic fact: it costs about the same to build a small car as it does build a big one–the raw materials that go into building a vehicle are simply not the big a chunk of the manufacturing cost.  The third critical fact (in geometry we call them postulates) is that, all other things being equal, John Q. Average is willing to pay more money for a big car than a small one.  The logical conclusion that these facts lead to is that a company can make more money on each big car sold than on each small car sold.

These basic facts were temporarily overturned the 1970’s by the oil price shock that came out of a combination of the formation of OPEC and the Arab world being pissed off at the West about support for Isreal in the Yom Kippur War.  In response to this development, people in this country stopped buying big cars, and started buying small ones.  Detroit, had, in fact developed two small cars prior to the oil shock–the Ford Pinto and the Chevrolet Vega, which had been in development for years.  These cars had been aimed at taking market share back from the Volkswagen Beetle (the Japanese were, at that time, just starting to break into the American market) and were already in showrooms when the oil shock hit.  One other word about the 1973 oil crisis–it wasn’t that gasoline got that expensive (Republican Richard Nixon was president, so, naturally, we had Soviet style price and wage controls)–its just that there wasn’t any of it.  Gas stations were rationing fuel to 8 gallons a customer, so that if you had a big car that got 10 mpg (that’s really the mileage they got then) you just couldn’t drive anywhere.  So folks started buying small cars, including the brand-new Honda Civic, which was strange because Honda was a motorcycle company.  The problem, of course, was that everyone noticed that the American small cars were really, really lousy.  What people also started to realize was that big American cars were pretty lousy, too, but it hadn’t mattered because they were the only big cars you could buy in this country (other than maybe Roll-Royces, which were, by the way, lousy too).

After this debacle, the price of oil went back down and people started buying big cars again.  Detroit had started to make the big cars more efficient, but the quality, never very good, went down even further as Detroit’s semi-skilled workforce and antiquated manufacturing plants struggled to adapt to new technologies–the variable displacement Cadillac V-8s and GM diesel V-8s were particularly awful.  In order to prevent a repeat of what happened in the 70’s, and, in order to save Detroit from itself, policy makers in Washington came up with two ideas that were both sound but wound up, like so many things that come out of Washington, having perverse consequences.  These were the Corporate Average Fuel Economy requirements (known as the CAFE standard) and the so-called “gas guzzler tax,” which, as the name implies, adds a big sales tax to cars that get poor gas mileage.  The idea was pretty good, actually–a company (these requirements were imposed on all manufacturers, domestic and foreign, but they really only applied to Detroit at the time) could sell big cars, and consumers that wanted to could buy them, but incentives were built in to make cars generally more efficient.  Big American cars did get much more efficient and the  only vehicles still subject to the gas-guzzler tax today are supercars made by the likes of Bentley and Ferrari–the tax is meaningless to customers in that price range in any event.  But they forgot about the trucks.

The intellectual elites formulating automotive policy in Washington and elsewhere during the 70s and 80s have always driven cars.  If, however, they had been more culturally sensitive–by, for example, watching the TV show “Dallas”– they would have realized that a lot of folks in America drive trucks, even if they have nothing to haul around besides themselves.  There were, also, some truck based vehicles, like the Jeep Wagoneer and Chevrolet Suburban (both of which had been around since at least the 50s) that could haul people around pretty comfortably and could be ordered with 4-wheel drive.  More importantly, because these vehicles were classified as trucks, not cars, they were subject to neither the gas-guzzler tax nor the formula for the CAFE standard.  Everything was almost set for the SUV boom, but there was one more dumbass (in hindsight) policy to put in place.

In the early 1980s the world economy was in a deep recession, which, of course affected the car industry, like now, except that people were still buying Japanese cars (now nobody’s buying much of anything).  There was much agitating about the fact that the Japanese government had aided its auto industry in ways our’s hadn’t, and that the Japanese market was effectively closed to most American high-value exports (like cars), all of which happened to be true.  So the Japanese manufacturers, the Japanese government and the American Government got together and agreed upon “voluntary” quotas of cars shipped from Japan to the US market.  Except that, once again, they forgot about the trucks–the quotas were for cars only–except that this time SUVs that could seat four or more passengers would fall under the car quota.  What happened next was a classic example of policymaking going haywire–the Japanese manufacturers simply shipped the SUVs to the US without backseats (thus classifying them as trucks), which were then added as a dealer installed “option” to turn the “trucks” back into passenger vehicles (i.e., SUVs).

In the mid-80s the SUV dam broke–the Jeep Cherokee (a smaller version of the old Wagoneer) and Ford Explorer had been introduced in the early 1980s and were flying out of showrooms.  The Japanese entrants were the Nissan Pathfinder, the Toyota 4Runner and Isuzu Trooper, all of which were snapped up almost as soon as the ships from Japan reached the docks in Port Los Angeles and Oakland.  And, remember, they weren’t subject to the voluntary quotas (as long as they were shipped without backseats), so the Japanese manufacturers could sell all the units they could make.  Chrysler, which owned Jeep, came out with the Dodge Durango in the early 90s and it was also an immediate hit.  Ironically, the last American manufacturer to get in on the SUV craze was GM.  It came out with the S-10 Blazer, based on the small Chevy pickup, and the Chevy Tahoe, which was just a shortened Suburban.

As things progressed into the 90’s, all of the American and Japanese manufacturers (along with Range Rover from England) competed to sell bigger, more luxurious and more expensive SUV’s.  Even BMW, Mercedes (with that thing that looks like UPS van and sells for about 100K) and Porsche got in on the act.  Everybody was making so much money that the need for quotas was a distant memory.

What had happened, of course, was that most people still wanted big cars, especially the baby-boomers who had grown up riding to sports practice in huge American station wagons that could not be built anymore because of the CAFE standards.  Those standards created such perverse incentives that Subaru, several years ago, raised the ground clearance on the Outback wagon to get it reclassified as a truck.   SUVs got so big that some of them were even classified as trucks under the Internal Revenue Code, because they weighed more than three tons.  If the vehicle, therefore, was used for business at least part of the time, its cost could be deducted immediately rather than over a period of years through depreciation, which is a huge tax advantage, especially if you are self employed.  Crunchy granola types started to mutter as parking lots at PTA meetings began to resemble freight terminals and the drop-off lane at the elementary school looked like the deployment of a motorized infantry brigade as tiny kindergarteners clambered carefully down the running boards of vehicles that looked more like they had been built by Freightliner or Peterbuilt than Ford or Toyota.  Then oil prices spiked and it all crashed.  Again.

The SUV boom was really the result of a simple policy failure.  The government did not tighten the definition of truck so that it only encompassed truly commercial vehicles.  The gas guzzler tax and CAFE requirements thereby created an incentive to make and sell vehicles that are even worse for the bottom line than the vehicles that were targeted by those policies in the first place.  Moreover, the Japanese manufacturers played a big role in the ascent of the SUV and especially that of the big SUV (think Toyota Sequoya, Nissan Titan).  The Japanese firms, moreover, earned huge profits from those vehcles.  The advantage that the Japanese manufactuers have in building and marketing good small cars is a direct result of their government, which has used taxes to keep gasoline very expensive through taxation.  In addition, Japan has a national healthcare system and a national pension system so the the Japanese firms do not have the enormous retiree and healthcare costs that the Big Three have.

The big problem for the big three, and this really is their problem, is that they lost the art of making cars.  The only reason they still made small cars at all was to make the CAFE numbers come out right, and these were mostly sold to rental and coprporate fleets.  The American manufacturers were, at best, breaking even on small car sales and sometimes taking a loss, so why devote any R&D to small cars?  Because things can change, that’s why.  That is where Detroit screwed up, but they have had plenty of help over the years, from some of those same pontificating congress people we have been hearing from in the bailout debate.