Detroit Auto Show: Supply Grows for Electric Cars; What about Demand?

DETROIT – As the long, long list of gasoline-electric hybrid cars and battery-powered electric vehicles grows, so grows the unease in the auto industry, whether enough people will buy them.

Nevertheless, the industry is moving full speed ahead on “electrification.” Entries at the Detroit show ranged from luxurious models like the BMW Concept 7 Series ActiveHybrid and the Cadillac Converj hybrid, to tiny cars like the Toyota FT-EV Concept, plus hybrid or battery-powered versions of nearly everything in between.

A Detroit auto show press conference here earlier this week was more of a GM pep rally for hybrids. GM employees and Michigan Governor Jennifer Granholm waved signs that said, “We’re Electric!”

GM Chairman and CEO Rick Wagoner also announced at a separate press conference that GM will build its own lithium-ion batteries, a major investment of scarce resources. “The design, development and production of these batteries must be a core competency of General Motors,” Wagoner said.

On the face of it, putting electrification on the fast track is a way to reduce dependence on foreign oil, and a response to the shock of $4-per-gallon gasoline the U.S. economy experienced last spring and summer. Taking an uncharacteristically long-term point of view for the auto industry, reducing dependence on foreign oil is Doing the Right Thing.

However, electrification is also a hot button for the politicians and federal bureaucrats that are in charge of the $17.4 billion in loans allocated so far to bail out GM and Chrysler. Congress will also have a lot to say about whether more money is provided, if it becomes necessary down the road, which I think is highly likely.

Ironically, the buzzword in Washington is for the Detroit Big 3 to demonstrate “viability.” At the same time, lawmakers are also encouraging more and more electric vehicles, which are anything but viable, unless you have a lot of faith that demand will spontaneously appear.

That’s less likely to happen, in the absence of higher gas prices. In a presentation to auto industry analysts sponsored by Deutsche Bank earlier this week, Ford showed that small-car sales generally rose in 2008 when gas prices rose, and fell when gas prices fell. Fullsize pickups moved in the other direction, falling when gas prices rose, and starting to recover as gas prices sank.

Big-time incentives played a role in the comeback for trucks, but it’s clear that gas prices will have a lot to do with determining whether electrification is a for-real solution or just expensive window-dressing.