Thursday, September 22, 2005

Oil Prices and the Greening of Ford Motor Company

In response to rising gasoline prices, Ford Motor Company is greening its fleet. If gas prices stay high, even Dick Chaney may buy a fuel efficient car. But, there is a second social incentive that could encourage people to buy green cars. As the quote below highlights, CEO Ford believes that his company can distinguish itself from other car makers by "going green". Economists are always interested in cases when competition leads to a "race to the top". Environmentalists often argue that competition leads to a "race to the bottom" as companies ignore environmental impacts of their products to minimize the cost of production. The reason why this pessimistic logic is wrong in this case is that vehicle purchasers may feel some social "warm glow" by purchasing a vehicle that does not contribute to climate change. They can drive this green car in public to showoff that they are "good people". I recognize that free rider theory would say that each person is too small to make a difference but the New York Times keeps quoting people who want to experience the "warm glow" effect. The proof will be whether this new generation of vehicles sells.

September 22, 2005
Ford Plans to Build a Lot More Hybrids
By DANNY HAKIM (New York Times)

DEARBORN, Mich., Sept. 21 - The Ford Motor Company plans to increase production of hybrid electric vehicles tenfold, to 250,000 vehicles annually, by the end of the decade, executives said Wednesday.

By 2010, the company said that more than half of its Ford, Lincoln and Mercury models would offer the technology as an option, accounting for roughly 8 percent of the three brands' current sales.

Ford said that it would also increase the number of models that can run on ethanol, a corn-based fuel, and also took a small but unusual step, for an automaker, to counteract global warming.

Ford and other automakers are challenging in court a much more ambitious effort in California to cut car and truck emissions of gases linked to global warming. William Clay Ford Jr., Ford's chairman and chief executive, has long been outspoken on environmental issues but has also been constrained by his company's financial distress. At a news conference Wednesday, he said an environmental strategy would be part of a two-pronged approach to restoring Ford's North American profitability.

Both Ford and General Motors are losing billions of dollars at home, though Ford remains profitable globally. While Mr. Ford is developing a traditional turnaround strategy that will include job and cost cuts, he said his company had to be known for more than that.

"Our road to recovery will really be built on two things," Mr. Ford said. "One will be a cost-cutting, capacity action, which you would consider hard-nosed business decisions. But that also is not enough. Today was about what's going to take us in the future, what's going to differentiate us from other companies and what are we going to be known for."