Obama Fuel-Efficiency Goals Put Automakers Ahead of 100-Year Pace

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Photographer: Chris Ratcliffe/Bloomberg

With the introduction of cars such Nissan Motor Co.’s electric Leaf and the proliferation of Toyota Motor Corp. (7203)’s hybrid Prius, fuel efficiency has gained almost 2 percent a year on average since 2007, according to U.S. data.

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Photographer: Chris Ratcliffe/Bloomberg

With the introduction of cars such Nissan Motor Co.’s electric Leaf and the proliferation of Toyota Motor Corp. (7203)’s hybrid Prius, fuel efficiency has gained almost 2 percent a year on average since 2007, according to U.S. data. Close

With the introduction of cars such Nissan Motor Co.’s electric Leaf and the proliferation of Toyota Motor Corp.... Read More

Photographer: Andrew Harrer/Bloomberg

A Nissan Leaf vehicle is displayed at the New York International Auto Show. To meet Obama’s targets, automakers need to improve cars by 5 percent a year and trucks by 3.5 percent most years. Close

A Nissan Leaf vehicle is displayed at the New York International Auto Show. To meet Obama’s targets, automakers need... Read More

To meet the new fuel rules, carmakers are all looking at smaller engines, said Jeremy Anwyl, CEO of Edmunds.com. In June, Ford sold more F-150 pickups with its turbo- charged V-6 engine than with V-8 engines. Photo: Jim R. Bounds/Bloomberg Close

To meet the new fuel rules, carmakers are all looking at smaller engines, said Jeremy Anwyl, CEO of Edmunds.com. In... Read More

Photographer: Matthew Staver/Bloomberg

Julie Zimmerman, left, and Titus Herschberger, right, look at new Toyota Motor Corp. Prius cars with the help of Stan Hoffman, a sales person, at Stevinson Toyota West dealership in Lakewood, Colorado, U.S.. Close

Julie Zimmerman, left, and Titus Herschberger, right, look at new Toyota Motor Corp. Prius cars with the help of Stan... Read More

When President Barack Obama proposed new fuel-economy standards today, he set a pace that’s more aggressive than the industry has managed in the past four years -- or for any sustained period in the last 100.

With the introduction of cars such Nissan Motor Co.’s electric Leaf and the proliferation of Toyota Motor Corp. (7203)’s hybrid Prius, fuel efficiency has gained almost 2 percent a year on average since 2007, according to U.S. data. To meet Obama’s targets, automakers need to improve cars by 5 percent a year and trucks by 3.5 percent most years.

Accelerating the improvements will be possible with lighter vehicles, smaller engines and fuel-saving technologies such as fuel-injectors and turbochargers. Obama’s plan is for the average vehicle by 2025 to be rated by the Environmental Protection Agency at 54.5 mpg, a level that translates to about 37 mpg on a window sticker.

“The car companies will have to adopt technology at a faster pace than they would like,” said Jeremy Anwyl, chief executive officer of Edmunds.com, a Santa Monica, California- based auto-research website for consumers. “Trucks will get a bit of a break but the standards will still be a stretch.”

Obama has pledged to reduce dependence on imported oil by a third, and he said the standards announced today are aimed at helping him attain that goal as well as reducing greenhouse-gas emissions. California, which has the authority to set its own rules that are stronger than federal regulations, is helping write the national fuel-economy standards.

Not George Jetson

“All the companies have the technology to achieve these standards,” Dan Becker, director of the Safe Climate Campaign, said in an interview. “It will require more extensive use of better engines, improved transmissions, high-strength, lightweight materials, better aerodynamics. But it’s not going to require cars to turn into George Jetson-type vehicles.”

The average fuel economy of new vehicles rose to 29.3 mpg last year from 26.6 mpg in 2007, the U.S. said.

The administration is seeking to more than double the EPA- rated fuel economy of the vehicles sold in the U.S. in less than two decades. Given that the 1908 Model T was estimated to have gotten about 17 mpg, it would be about five times the progress made in the previous century. Some in the industry question whether the increases can be achieved or will be too expensive.

‘Not Doable’

“It’s not doable unless there’s enough in the fine print that they won’t have to get there anyway,” said Eric Noble president of The CarLab, an automotive consulting firm in Orange, California. “It’s not achievable, nor would consumers accept those vehicles.”

Automakers may try to weaken the standards during a mid- term review that people familiar with the proposal have said is included, said Becker, who is based in Washington.

“The automakers insisted on a mid-term review,” Becker said. “We are concerned that that review will be an opportunity for automakers to lobby to try to end or weaken that program.”

The corporate average fuel economy, or CAFE, figure is based on a vehicle’s performance in laboratory tests rather than real-world driving conditions, and is typically higher than the window-sticker figure consumers see when shopping. For example, Toyota’s 2011 Prius hybrid, with a window sticker of 50 mpg in combined city and highway driving, has a CAFE test rating of 71 mpg, according to the Union of Concerned Scientists, an environmental-advocacy group.

Seven Models

Seven models currently available for sale get 39 mpg or more, about what would be needed to meet the 2025 standard. That’s more than twice as many as three years ago, because of new entries, such as Ford Motor Co. (F)’s Fusion hybrid and General Motors Co. (GM)’s Chevrolet Volt plug-in hybrid.

While the technologies will add to the price of a new vehicle, the Boston Consulting Group say that the cost could be as low as $2,000 per car. In the past, automakers have opposed CAFE rules even as fuel economy has improved and vehicles became more affordable.

“The new rules won’t change how cars behave,” said John German, a project manager with the International Council on Clean Transportation, an environmental public-policy group in Washington. “Consumers will have to pay more for vehicles up- front but they will get back the cost in fuel savings.”

The new rules will add more cost as automakers offer more technology such as hybrid-electric systems, turbochargers for smaller engines and lightweight materials. They will also shrink engines to boost efficiency.

Estimates Vary

Analysts differ on how much costs will rise to pay for that technology. The EPA estimates that it will cost about $2,400 a vehicle to improve fuel economy by 5 percent a year from 2017 to 2025.

Boston Consulting Group estimates that it would cost about $2,000 a vehicle to improve fuel economy from a 26 mpg today to 39 mpg by 2020.

The Center for Automotive Research in Ann Arbor, Michigan, estimates that it would cost $8,214 a vehicle to hit 56 mpg. CAR predicts that the government will have to revise the standards downward because the costs will be too high for consumers, said Jay Baron, the group’s president.

The costs should be lower than $8,000 a car because new technologies will get cheaper as automakers spend more time developing them, said Jim Hall, principal of 2953 Analytics Inc., a consulting firm in Birmingham, Michigan.

While vehicle prices will increase, it’s too early to tell by how much, said Jim Lentz, president of Toyota’s U.S. sales unit.

“The million-dollar question is what type of technologies are going to be embraced by the consumer,” Lentz said in an interview after Obama’s announcement.

Tough Stuff

“Is the regulation tough? You’re damned right it is,” Hall said. “You’ll get smaller engines and some cars will get lower performance. Costs will go up, but I can’t say that they will be more expensive in inflation-adjusted dollars.”

Because the proposed rules don’t take effect for six years and govern cars sold in the next decade, it’s difficult to accurately assess how much more cars could cost, Hall said.

Which estimate is correct will make a big difference for consumers. In five years of ownership, EPA estimates consumers will save $4,710, twice its cost estimate, and CAR sees savings of $4,363, or half of its projected expense.

While vehicles became more efficient over the last four years, their cost relative to wages declined. It took 23.2 weeks of median family household income to earn as much as the average vehicle price in the first quarter of this year, down from 24.7 weeks four years earlier, according to Dallas-based Comerica Bank.

To meet the new fuel rules, carmakers are all looking at smaller engines, said Anwyl, the Edmunds.com CEO. Pickups are already selling in higher volumes with V-6 engines.

In June, Ford sold more F-150 pickups with its turbo- charged V-6 than those with V-8 engines for the first time since the 1980s. Ford is also working on a turbo-charged three- cylinder engine for its Fiesta subcompact and Focus compact, both of which run on a four-cylinder engine now.

GM, Luxury

GM is pushing hybrids and diesel cars to the U.S. market. While diesel-powered passenger cars have typically been the domain of European carmakers like Volkswagen AG (VOW) and Daimler AG’s Mercedes-Benz, Chevrolet plans to sell a diesel version of its Cruze compact in 2013 that may get more than 40 mpg.

GM is also putting an electric motor and lithium-ion battery pack in the Chevrolet Malibu sedan in early 2013 to get 38 mpg on the highway.

Luxury cars may need to make the biggest adjustment to meet future regulations. Already, luxury carmakers are downsizing their engines and adding turbochargers to give well-heeled car enthusiasts the power they want while meeting regulations. Mercedes is looking at four-cylinder engines for its hulking S- class flagship sedan, said Andreas Dinger, partner in the Munich office of Boston Consulting Group.

BMW is also looking at technology that uses heat from car exhaust to generate electricity on board a car to operate the electronic climate control, audio and other appliances, said a person familiar with the company’s plans. That would save about 15 percent of the fuel used, said the person, who asked not to be identified before the plans are announced.

Tom Kowaleski, a spokesman for BMW declined to comment on product plans.

“We are already seeing luxury carmakers downsize engines,” Dinger said. “They can get the same performance using turbochargers and other technologies.”

To contact the reporters on this story: David Welch in Southfield, Michigan at dwelch12@bloomberg.net; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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