General Motors has plenty of good reasons for its decision today to slash $5,000 off the sticker price of its hybrid Chevrolet Volt, a model that analysts say already sells for a loss.
The company needs the model to stay competitive with the Nissan Leaf and Toyota Prius. It has found some ways to build Volts more cheaply in roughly four years of production. It wants to help save the world.
But one reason trumps those all: Chevy is slashing Volt prices because it has been selling a ton of pickups and wants to keep doing so. That probably makes no sense to most car buyers, but the seemingly separate models are linked in the minds of federal regulators and, correspondingly, GM executives.
Through a complicated formula that accounts for various models, weights, and the size or “footprint” of each car, the U.S. government derives a single mileage number for each carmaker—dubbed the Corporate Average Fuel Economy—CAFE for acronym lovers.
The current standard falls around 26 miles per gallon for a combined fleet of cars and light trucks. Under this complex regulatory net, a company that is selling too many gas guzzlers and not enough fuel-sipping compacts faces steep fines. Meanwhile, carmakers that beat their number can book credits to sell or use later. Not only do hybrid cars like the Volt score great mileage points in the federal system, but also in a few years each one will count as two vehicles thanks to a generous loophole in the latest rules.
To date, the penalties have fallen inordinately on foreign carmakers that haven’t been too worried about pushing small, efficient models to U.S. buyers. Uncle Sam just collected a handsome $16.3 million check from Mercedes, because the company was so focused on über-sedans it blew right by its mileage limit.
But CAFE standards will step up steeply in the next few years and almost double by 2025. With truck sales at full throttle, GM and other U.S. carmakers need to sell hybrid vehicles to keep their handsome truck profits from getting dinged by penalties. In the first seven months of this year, GM sold almost 389,000 trucks and only 11,643 Volts.
“If there was no CAFE, GM wouldn’t even be in the small-car game,” says Bloomberg Industries analyst Kevin Tynan. “They would be selling trucks all day.”