Detroit, as the locals never tire of saying, is back. After several years of uncharacteristic self-awareness and restraint following the auto bailout, domestic automakers returned the annual North American Auto Show to classic form this year, with a display that would not have been out of place in the heyday of the Motor City.
Recently freed from government ownership, General Motors kicked off the quintessential company-town party with a bang, parading a phalanx of Corvettes through Detroit's gritty urban core and sweeping both the North American Car and Truck Of The Year awards with the muscle-bound Stingray and the Silverado pickup. The predictability of these picks was underscored by the Silverado's hugeengine-fire-related recall just days before the announcement, as it struggles to command a price premium over older competitors. (Sales were down 16 percent in December, while the Ford F-series flew off lots.) Now, as in Motown's glory days, reflexive praise of any new Corvette or domestic-brand full-size truck is de rigeur. And luckily for voters, the truck troika of Ford, Chevy and Dodge Ram is only too happy to rotate launch years to keep any overly challenging choices from their ballots.
Still, even among the big trucks, the last bastion of Detroit's oligopoly (and accompanying double-digit profit margins), there were signs of long-overdue change. Ford's debuted a partially aluminum-bodied replacement to its F-150, promising significant improvements in fuel economy for its top-selling vehicle. In the hidebound world of full-size trucks, the idea of replacing steel with a lighter metal is something of a mind-blower.
Predictably, not everyone welcomed the innovation. Former GM Chairman Bob Lutz spoke for the traditionalists, questioning whether rural F-150 buyers might not switch to a "steel Chevy." In response to Ford Chief Executive Officer Alan Mulally's vision of aluminum-bodied vehicles across Ford's lineup, a steel industry group compared aluminum to GM's ill-fated flirtation with plastic body panels in the 1980s and 90s. The old ways of doing business in Detroit do not go away without a fight.
And, unfortunately, the relative strength of America's domestic car market is helping fend off some of the pressure to take innovative risks. As Europe's market retracts and growth in BRIC markets slows, the U.S. is re-emerging as the industry's key source of profits. Though no longer the world's largest market for autos, the U.S. still has an insatiable taste for new ones, showing China-like double-digit growth last year in sales of high-margin trucks and luxury cars. The flood of new luxury models at the Detroit show -- a Lexus with more than 450 horsepower; a Cadillac coupe designed to compete with BMW and Audi; a retro-looking Porsche 911 Targa -- indicated just how eager the world's automakers are to tap into America's post-recession retail therapy.
Profits from these luxury vehicles may keep the good times rolling, but concerns that style may be trumping substance can't be ignored. One of the only production-ready mass-market cars to debut this week, the Chrysler 200, drew praise for its sleek looks but was also criticized for its cramped back seat. Otherwise, Honda's redesigned Fit was the show's sole nod to the reality that some buyers just want an affordable, practical appliance of a car.
This departure from fundamentals is troubling, considering that the good times won't last forever. After all, the major breakthrough underlying the luxury car gold rush isn't some new seat warming technology or the all-electric Tesla Model S, but financial innovation. Auto loans have surpassed credit cards as the second-largest consumer debt category, and with the mortgage market remaining weak, banks and investors are flocking to auto-loan-backed securities. As a result, auto-loan terms are getting longer, lending standards are declining and the subprime market is burgeoning. At least half of all recorded sales of popular luxury models such as the BMW 3 Series are in fact leases. With wages and employment stagnating even as easy credit fuels luxury car sales, it's clear that the profits fueling the auto industry's high times are built on a tenuous foundation. The car business has long been highly cyclical, to use the economist's euphemism for downright bipolar, either generating huge profits or epic losses.
Automakers get into trouble when the heady highs blind them to the inevitable downturn and distract them from the fundamentals of their business. This basic dynamic was responsible for Detroit's crash in the 1970s, and repeated itself most recently when the great SUV boom came to a shuddering halt with the gas-price spikes of 2008. Surveying the glittering, high-priced luxury cars dominating the Detroit Auto Show, and seeing the once-humbled automakers returned to chest-thumping form, it's hard not to worry that the industry is falling into its perennial trap.
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