4 new myths of the auto world

  @FortuneMagazine October 15, 2012: 10:01 AM ET
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(Fortune)

Your understanding of the world shifts in immeasurable ways when you learn that something you have always believed to be true isn't. For instance, I've lately discovered that wet heads don't cause colds, stretching before exercise is unnecessary, and changing your oil every 3,000 miles is an expensive waste of time.

But this isn't a column about health care, personal finance, or car maintenance. Recently, we've gotten fresh analysis and new information that seriously undermine what has been considered the gospel truth in the auto business. Here are the auto world's four new misconceptions:

Myth No. 1: When the U.S. economy catches a cold, Detroit gets pneumonia.

For years, we've held that Detroit has led the U.S economy into recession. Car purchases are a near-perfect barometer of consumer confidence; they are expensive, and their purchase is usually deferrable. At the first sign of a business downturn, auto sales swoon.

But not this time. Despite sluggish GDP growth, high unemployment, and the squeeze on the middle class, car and truck sales are rising. In September, they came close to an annual rate of 15 million, the fastest pace since early 2008. What's going on?

Tom Libby, North American forecasting lead analyst for R.L. Polk, says the performance of the car business is becoming increasingly detached from the state of the economy. Reason: "The dynamics we see here in the U.S. stem in part from the patterns of international economies as well as from actions taken by global auto manufacturers who happen to be doing business in the states."

As evidence, Libby points to the foreign automakers whose presence in the U.S. is growing and whose fortunes are improving because of factors unrelated to the economy: Toyota (TM) and Honda, which are recovering from last year's tsunami; a resurgent Volkswagen, focusing anew on the U.S market; and Hyundai/Kia, which, despite inventory shortages because of recent labor problems, has produced many months of double-digit sales gains.

Concludes Libby: "While some local, North American trends play an influential role in the behavior of the U.S. new vehicle industry, there are other, broader global factors at work. A look at the worldwide strategies of the automakers and the patterns of the global economy frequently reveals the underlying causes for the results we witness here in the U.S."

Myth No. 2: The world is running out of oil.

For years, it has been assumed that oil is a finite resource that the world would soon exhaust. One prevalent theory was "peak oil." At some point, global oil production would hit a high point and then decline, causing grave shortfalls. Pessimistic predictions had that either the peak had already occurred or that it would occur shortly.

In fact, a new report by The Royal Institute of International Affairs in the U.K., informally known as Chatham House, finds that the threat of oil running out is no longer imminent, and the concept of peak oil increasingly looks like a bad idea. The world is faced not with a finite amount of oil but merely needs to accelerate the speed at which surprisingly large resources of oil can be converted into proven reserves for potential production. (Thanks to the web site The Truth About Cars for alerting me to this report).

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The amazing fact is that because of higher prices and better technology, we keep finding more oil that we can extract. From 1980 to 2011, the report says, the world produced 100 billion more barrels of oil than there was supposed to be in the ground, and proven reserves remaining for future production more than doubled.

Moreover, even with no further discoveries or additions, a 54-years supply of oil is left at current rates of consumption. In reality, the petroleum industry can expect an even longer life because more oil will be found in existing deposits, there will be new discoveries, and consumption will decline as prices rise.

This new analysis has enormous implications for the global auto industry, which has been racing to meet increasingly stringent government fuel economy regulations. Issues of climate change aside, if there is going to be plenty of oil available in the future, why burden companies -- and eventually consumers -- with the cost of fuel-saving technologies that are expected to add several thousand dollars to the price of a new car?

Myth No. 3: Americans will never buy small cars

You've heard it for years: Except when gas prices spike, Americans don't want small cars. It is a big country, we're big people, and we don't want to give up our SUVs and pickups.

Not any more. Small cars are selling big, and it isn't just because of fuel prices. "Traditionally small cars were purchased by people who couldn't afford anything else," Jesse Toprak, an industry analyst for TrueCar.com, tells Bloomberg. "Right now, that's not the case. We see people choosing them because they find them more appealing."

Part of the reason they are more appealing is small cars are better. Japanese manufacturers have forced Detroit to upgrade quality and include features like airbags and satellite radio, while European automakers have proved that small cars such as the Mini Cooper and the BMW 1-series can go for premium prices.

Among the top 20 sellers in all categories in September were 10 small cars and crossovers, defined as compacts or smaller, from eight different makers, led by Chevrolet Cruze, Ford Escape, and Toyota Corolla. In all, small cars commanded a fifth of the market, their best showing in nearly 20 years.

Myth No. 4: Auto companies suffer when they don't diversify into new markets.

With sales in North America growing only slowly and Europe gripped by a deep recession, global automakers have been rapidly expanding into developing markets like China, India, Russia, and Brazil.

That has put Ford Motor (F, Fortune 500) at a disadvantage with investors because it has been slow to move into China and remains heavily focused on North America. In fact, it's estimated that just about 100% of Ford's profit from automobile production comes from a single product sold mainly in the U.S: the F-series pickup truck.

Veteran analyst Adam Jonas of Morgan Stanley knows all this -- and believes it is a good thing for Ford, at least in the short run. In a new report, he points out Ford is losing $1 billion a year in Europe and making little or nothing in South America and China. As a result, he writes: "We believe the next 12 to 24 months may not be the worst time to have a low exposure to the Chinese auto market. While we do not doubt industry volume will remain a key driver of the global auto sector, we have our near-term reservations about the quality and profitability of that growth."

Meanwhile, he sees a dramatic upturn coming in residential construction that will sweep the automaker and its pickups along with it. Instead of viewing Ford as dangerously dependent on a single market, he views its stock as a massive -- and potentially very profitable -- play on a U.S. housing recovery. To top of page



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