That and the fact that old GM/Ford used to throw SUV's and trucks at us instead of considering more reasonable transportation.
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The error, in my view, was not investing those profits into diversifying the platform. Even then, kinda tough to get approval...
Yes, I'm taking this point out of your post and emphasizing it because you're absolutely right. Saying you make massive profits on Navigators so that's all you'll build is just idiotic, you're basically necessitating $2/gallon gas and large income families forever. The import brands filled the niche of providing small, efficient transportation because it was a gap that the Domestics created for themselves - if we had the 2012 Ford lineup back in 2004, half the people who rushed to buy Civics and Yari would have stayed in their domestic dealership. If you walked in to Toyota, whether it's now or 5 years ago, you could always get a Tundra, Sequoia, Corolla or Yaris...they had the diversity to fulfill all potential customers.
And you say it was 'the market' that demanded trucks, but I wouldn't necessarily say this is completely true. If you had $30K and walked into a Ford dealership in the early 2000's, the Taurus was garbage, and the Five Hundred was decent but underpowered. The Focus was nothing to write home about, and while I liked the Fusion, it never sold all that well. So why would someone buy a family sedan when they can get an F-150 crew-cab for the same price? That was the mentality they were pushing - just buy a truck! Forget about the 15 mpg, gas is cheap. Today, the Ford Taurus looks great inside and out, and the Fusion is an award winner. The 2012 Focus looks to bring a new level of refinement to the class, and the Fiesta looks like a lot of fun too. And guess what's happening now that there is variety? People are buying sedans again.
Limiting options and pigeonholing loyal domestic shoppers may be the free market we're all after, but it sure didn't help GM/Ford/Dodge when gas went up and so did people's mortgages. It's like saying people choose Windows because it's the best OS and the market demands it...well, not necessarily, there just isn't a lot of options.