Q & A: Motown Blues

An interview with Wall Street auto analyst John Casesa

The U.S. auto industry is on the brink of collapse, with two of the not-so-Big Three saved from bankruptcy only by a last-minute federal loan. Now President Obama has made it clear that he not only wants to uphold California's emissions standards, which are more stringent than federal requirements, but also build the fuel-efficient cars of the future here in the United States. Ray Wert, editor-in-chief of the online car magazine jalopnik.com, asked John Casesa, Wall Street's leading automotive analyst, if Detroit will be up to the task. Casesa is managing partner of the Casesa Shapiro Group, an independent automotive strategy firm he helped found.

Detroit's in such terrible shape today that I have to wonder if it's possible for it to retool itself.

I don't know. The U.S. auto companies have depleted the equity in their balance sheets and have no more financial reserves. So they have resorted to borrowing as much as they can, selling assets and cutting costs. And you can only do that for so long. "Change or die" is a cliché, but it could not be more applicable here.

So the automakers are going to need more money.

We know they need more money. The question is, what do they need it for? Let them go through bankruptcy. It'll be sloppy, but it's the only way to get these companies competitively structured.

The federal government has already stepped in with loans to two of the Big Three. What will that do to give us more sustainable lineups?

Nothing, unless it's coupled with changes to our energy strategy. The funding so far is a short-term Band-Aid. It's barely adequate to meet operating expenses, let alone investment in sustainability technologies. But it will keep their current programs funded, whether for hybrids or electric cars or more efficient internal combustion engines. In the case of GM, it allows them to push ahead with the Chevy Volt. 

And if the president follows up with additional money?

Greener technologies can be achieved in three ways. One is funding, an extension of the Bush plan. The second is a new energy policy that would require the industry to do certain things to be in compliance-whether it's CAFE [corporate average fuel economy] or whatever. The third way is a combination of the other two: modify energy policy and attach terms to any monetary assistance that will encourage the automakers to comply. My guess is that the new administration will go down the third path.

Ford hasn't received any money from the federal government. At the Detroit Auto Show in January the company revealed a plan to bring four electrics to market starting in 2010. Is that feasible?

I was positively surprised by the range of technologies Ford showed-hybrids, plug-in hybrids, and electrics. Their 2010 Fusion Hybrid will get consumers' attention because 41 miles per gallon is a big number for a car that size. Ford has been talking about these strategies for a long time, but it's a long way from mere concept to high-volume production.
 
Up to now, has the auto industry been more about looking green than actually being green?

Yes. But there's now an immense economic motivation to be green. Consumers see sustainability as a public good, like safety. With safety, consumer advocates like Ralph Nader exposed the flaws in the product, and that forced regulators to respond. So the industry spent a lot of money redesigning its product and inventing new technologies. The same thing is happening with sustainability. The car used to be greatly admired and desired, but now some people see it as something that is not good for us, like tobacco.

Have federal fuel economy standards helped?

CAFE has accomplished its basic goal of getting vehicles to consume less fuel. The way it's structured, though, it limits the ability of companies to respond flexibly to the market. In my mind there are other ways to accomplish this. If we view fuel as a strategic priority, we could use a gas tax and let the market determine what cars people want to buy. When gas rose to $4 a gallon, consumers changed their habits. It also ignited a frenzy among investors and entrepreneurs and helped accelerate the green technology industry. Gas prices have dropped lately, but everyone believes they will go back up again.

How do you get people to accept that sacrifices are necessary?

Our political system doesn't motivate elected officials to ask constituents to sacrifice, and that's what a gas tax does. That's why it's a political third rail. But we as a nation have said that clean air and energy security are public goods, and so some of the things that we think of as the historical attributes of cars-like performance, the sound of a gas engine, the V8-those are going to be increasingly rare commodities. Maybe we're going to have to give up that seven-tenths of a second from zero to sixty.

In a tight domestic market, does it help if you're seen as having a green halo?

I think we're at the point now where you're seen as a dinosaur if you don't have a hybrid, if you don't have an environmental story to tell. But there are risks. GM has taken a great deal of risk by promoting the Volt so heavily in advance of its for-sale date. If the company can't deliver on the promise, that's going to hurt them. 

So you've got the Volt. You've got Toyota working on a plug-in Prius. Honda is working on the FCX Clarity. But they all sound expensive. What about the mass market?

There's a scramble under way to develop a price point for the mass market. I acknowledge that the Volt's market will be limited by its price [about $40,000], and that Toyota probably would not have sold so many Priuses had the company not subsidized them. But the risk of not having competitively priced sustainable technologies is great. It's pretty clear that Honda and Toyota will be there. 

There are also still technological limitations to lower prices.

The fundamental problem is that we still haven't created the battery we need. Some of these technologies like hybrids rely on more hardware in the car, and that's expensive. So only the strongest auto companies can afford to subsidize R&D until the costs come down or the technology breakthroughs are made. Toyota can probably lose money on the Prius for a decade. Honda can afford to lose money on fuel cells. But it's going to be very hard for GM, Ford, and Chrysler.

I just drove from Detroit to Chicago in a Euro Honda Civic Diesel. Great little car. It's comfortable. I got 70 miles per gallon. Of course emissions standards in Europe are very different. Is that a big barrier?

Well, right now, the difference in emissions standards means that European cars are just more fun to drive. There are these wonderful turbo-diesels that are too dirty by U.S.  standards. But there's a dramatic convergence of regulations, and within a very few years I hope emissions standards in the United States, Europe, and Japan will be substantially the same.

What other big changes do you see coming in the next few years?

One big change is that we're running out of room for cars in cities. So we're likely to face more restrictions on automobile use. You've seen it in London, you're going to see it in New York-congestion taxes, smart roads that charge you more to drive at rush hour. That may give rise to new models of auto ownership. Zipcar is very interesting, because it is effectively a car-sharing program.

And what changes do you foresee in auto technology?

I expect immense progress in the area of powertrains. I wouldn't be surprised if specialist companies emerge that only make engines and transmissions or whatever takes their place. The established automakers will be very vulnerable because the newer entrants are likely to take advantage of all this outside technology. There will be consolidation. I would be surprised if there are three independent companies in Detroit five years from now.