My colleague Michael already brought up President Obama’s always-sage counsel on the auto industry (OK, it was nothing short of typical Obama milspec ignorance), but it was just so bad that it needs to be spelled out, in excruciating detail, just how utterly clueless our president is — and how he is Constitutionally incapable of admitting that he might not know everything.
Let’s take that last point first, just so we have some solid ground on which to build. This is the president who reportedly declared:
“I think I’m a better speech writer than my speech writers,” he reportedly told an aide in 2008. “I know more about policies on any particular issue than my policy directors. And I’ll tell you right now that I’m . . . a better political director than my political director.”
Now, for the quote that Michael picked up on:
“You can’t just make money on SUVs and trucks,” Obama said during a town hall forum in Cannon Falls, Minn. “There is a place for SUVs and trucks, but as gas prices keep on going up, you have got to understand the market. People are going to try to save money.”
I’m an amateur scholar of the auto industry, and let me tell you: auto makers can and did make money off SUVs and trucks. And they did hand over fist, for as long as they could.
There’s a rule of thumb in the auto biz: everything added adds profit. Because everything is added at a markup.
You want a larger vehicle? Ka-ching.
You want all-wheel drive? Ka-ching.
You want a decent stereo and entertainment suite? Ka-ching.
You want extra gadgets and convenience items? Ka-ching.
And here’s the most important rule of the auto industry: if you offer the customers what they want, then they’ll buy it.
Where the automakers don’t make money is on the little econoboxes with high mileage. Because in those, the whole purpose is to strip out everything that adds weight — and all those things come with healthy markups. Take out the options, there go the profits.
Think about it. For almost two decades (the early 90’s through the last couple of years), it was the era of the SUV. Lots of people wanted them, and nearly every car maker offered at least one. Even Porsche, Mercedes, and BMW got into the SUV racket. And every single customer who wanted one went in knowing they got crappy gas mileage — but they didn’t care. OK, maybe they did care, but they had higher priorities. They wanted the solidity and perceived safety of a large vehicle. They wanted the cargo and towing and passenger capacity. They wanted the security of all-wheel drive. They wanted the perceived prestige and cachet. And for that, they were willing to pay a premium. Several premiums — the markup and profit margins on SUVs were substantially on lesser-demanded vehicles, and some were even subject to the “gas guzzler” tax.
On the other hand, hybrid electric vehicles were starting to come in. These offered very high gas mileage — but at a price. They were new technology, so they were expensive. Toss in that the new technology wasn’t proven, and all the risks contained within. (I knew a guy who picked up a 2004 Honda Civic hybrid. Last year, he was told that in order to pass inspection, he’d have to replace the battery — to the tune of almost six grand. On a conventional car, you could probably replace engine and transmission.)
The costs were somewhat offset by tax breaks and subsidies on these vehicles. Which means that the government was paying people to buy these. Versus the SUVs with the worst gas mileage, where people were paying the government for the privilege to buy them.
Obama loves electric cars like the Chevy Volt (which his administration basically ordered GM to produce) and, to a lesser degree, the Nissan Leaf. Or the Toyota Prius and other hybrids — when it came out that he owned a gas-guzzling Chrysler 300, he traded it in for a Ford Escape Hybrid (a smallish SUV). But those vehicles are heavily subsidized — meaning, again, the government is paying people to buy them. Further, it’s clear that the Volt is still being sold at a loss, when it’s selling at all.
Obama, for all his genius, simply refuses to grasp the most fundamental rule of business: if you want to make money, offer people things they want. Don’t make stuff you think people ought to have, if they were only smart enough to know it, and tell them that this is what they ought to buy. If he’d ever spent any time in the retail market — even at a convenience store — he’d know that.
But he hasn’t. He’s had a lifetime of academia and theory, coupled with a lifetime of being told how smart he is. Which means he not only doesn’t understand these basic concepts, he rejects them as being false, and won’t listen to those who do know.
For years and years, the Ford Explorer was the best-selling vehicle in the American market. And while it was a decent vehicle, it wasn’t awesome. (I should know, I owned two.) But what it was, was what people wanted. And that, in a significant part, was why Ford didn’t need a bailout when GM and Chrysler did.
Sometimes in the retail business you can people that they should buy what you think they need, instead of what they want. But you can’t get away with telling the people what they can buy, and can’t buy what they want.
Not unless you either have no intention of making a profit, or are the only game in town.
Which, come to think of it, sums up Obama’s actions pretty well so far.