Ford, for its part, announced delaying the introduction of its redesigned F-150 pickup truck, which for years was the nation’s (U.S) top-selling vehicle. The new 2009 model will instead debut later. In addition, the company said it will reduce by 90,000 its production of pickups and sport utility vehicles in the second half of the year. And even though Ford said it plans to build additional fuel-efficient cars, it expects to produce 25% fewer vehicles overall than it did during the second half of 2007.
Gasoline prices average more than $4 a gallon and consumers worry about the weak US economy. Industry-wide auto sales slowing further and demand for large trucks and SUVs at one of the lowest levels in decades. Ford has taken decisive action to respond to this rapid downward shift in customer demand away from large trucks and SUVs to smaller cars and crossovers.
Certainly, the cost of oil rises and falls based on a wide range of factors. But the factors driving the price higher today such as fears about future supply and increased demand from the emerging economies of China and India appear to be long term elements and have led many economists to conclude that oil prices won’t decline in the short-term. The price of oil is likely to remain high says a Wharton management professor. On the demand side, Chinese and Indian consumers are eager to substitute cars for bicycles or public transportation. On the supply side, geopolitical conflict and scarce refining capacity are creating bottlenecks. Both forces are causing higher prices. High oil prices are here to stay, at least for some time.
Another result of $4 per gallon gas is that Americans are driving less. A Wall Street Journal review of Federal Highway Administration data found that US drivers logged 11 billion fewer miles in March than a year earlier. The 4.3% decline was the biggest ever year-over-year reduction in miles driven. The highway and other data led University of California, San Diego, economist James Hamilton to conclude that US drivers “have reached a tipping point”. There are a lot of hard numbers that show that we have actually reached a point where people are responding.
When gas prices spiked in 1980, the US was making very big, gas-guzzling vehicles. So they were very vulnerable to competition from the Japanese and European manufacturers who were used to selling (fuel-efficient cars) in a market where gas prices were much higher. So the US automakers, having lived through that experience once, might be guarded about letting that happen again.
One reason they might have dropped their guard was the irresistible profit margin in light trucks. The trucks and SUVs had very high profit margins. Even if the automakers saw it coming, it would have been hard to shift resources to build more hybrids. The US auto industry has been struggling with a lot of problems for a long time. They felt that they could not move away from the SUVs and pickups because they needed the profits from those products to cope with the other difficulties they were having.
Labor and benefits costs were one of the largest problems. Those costs also meant that Detroit “was slow to make their factories flexible,” which in turn made it more difficult for them to shift quickly from one product to another. So, when US manufacturers decide to reduce inventories of, say pickup trucks, they generally close one or more of the factories that make them. In their European factories, Ford and GM both make fuel efficient cars that are popular in that market. But the companies have said it would be impractical to ship those cars to the US because of weakness of the Dollar relative to the Euro.
Even if the gasoline prices go down the other factors leading to slowing down of economy may not be able to boost the sales as before. It may take a few months or even a couple of years to settle down to normalcy as before.