Efficiency Regs: Detroit Rides Alone

Former Big Three allies in Washington are now lining up in favor of higher fuel-economy standards

Detroit's auto makers are suddenly getting the cold shoulder from Washington. After years of helping the Big Three beat back stricter fuel economy regulations, their friends on the Hill are abandoning them. Fearful that continued opposition to higher standards will tar them as antienvironment and could cost them control of the House in 2002, many of the industry's GOP backers are dramatically backpedaling, pressing the industry hard to develop more fuel-efficient vehicles.

The defectors include some of Washington's biggest guns. On June 18, Vice-President Dick Cheney signaled General Motors Corp. executives that the White House won't shield the industry from new regulations. Even Senate Minority leader Trent Lott (R-Miss.), a staunch Detroit ally, now says he is "open to reasonable increases" in current fuel efficiency standards, known as Corporate Average Fuel Economy, or CAFE.

The change has huge implications for an industry already facing a profits pinch as foreign competition increases and the slow economy dents sales. The Big Three say that tougher mileage rules--particularly for SUVs--could cost each several billion dollars over the next few years and seriously crimp profits. But stopping the push for higher standards may be hard. Auto makers opened the door for tougher regulations when they didn't ask Congress for a freeze on fuel economy standards this year. Further, they have already pledged voluntary mileage gains for SUVs and will soon launch a wave of highly efficient new hybrid vehicles, so they'll have a tough time convincing lawmakers it can't be done.

New technology alone won't suffice. To meet a higher average-fuel-efficiency level, carmakers will have to start selling many more compact SUVs. Otherwise, they could be forced to limit production of the polluting behemoths to keep overall fleet-mileage standards in line. The drawback? Smaller vehicles are also less profitable. With consumers still craving big trucks, buyers may defect to models sold by Japanese and European carmakers who have no trouble meeting fuel-economy standards. "The imports would be in a good position to pick up customers," says DRI-WEFA analyst Bruce Harrison.

What happened? The sea change is partly a consequence of rising gas prices, rolling blackouts in California, and the lack of a global agreement to move ahead with the Kyoto accord to limit greenhouse gases. All have convinced consumers--and many politicians--of the need to improve gas mileage. In an early June poll by The Washington Post, 90% of Americans claimed to favor tougher standards.

Once improving gas mileage is the goal, SUVs and trucks make a pretty easy target. They get the worst fuel economy of almost any vehicle on the road--as low as 13 mpg on Ford Motor Co.'s (F ) massive Excursion SUV. None of America's 10 best-selling trucks--a category including pickups, SUVs, and minivans--comes close to meeting current mileage standards. And as their popularity has grown, overall U.S. fuel economy and gas consumption have gotten worse. Of the 11.4 million vehicles Detroit sold last year, 59% were trucks.

CROSSHAIRS. That has led to a backlash of new legislation, with trucks and SUVs increasingly in the crosshairs. Both sides of Congress propose that CAFE standards be stiffened for the first time in 15 years. The standards require companies' total mix of vehicles average at least 20.7 mpg for trucks and 27.5 mpg for cars. In May, Senator Dianne Feinstein (D-Calif.) proposed a bill requiring most trucks to match existing passenger-car mpg standards by 2007. In the House, U.S. Representative Lee Terry (R-Neb.) is also about to introduce a bill that would freeze fuel economy standards until 2006. But then he would mandate a 25% increase for trucks, to 25.8 mpg, and a 15% hike, to 31 mpg, for passenger cars.

Detroit had hoped it would get relief from the National Academy of Sciences. Convened by the White House to review the issue, the NAS will report to Congress by early August on whether to raise gas mileage rules. Auto industry executives, who expected the NAS panel to recommend no changes, are in for a surprise. Panel members have told BusinessWeek that they will urge that CAFE be raised. They will also push legislators to close huge loopholes that have allowed Detroit to produce less fuel-efficient SUVs without paying fines for exceeding CAFE. Says one committee member: "We will say that a gradual increase in fuel economy standards is viable and plausible."

With all these moves, Detroit has suddenly realized it has a big lobbying job to do. Several top Big Three execs have already gone to Washington to make the case against raising standards. GM's brass told Cheney that boosting truck standards by even 3.3 mpg, to 24 mpg, would cause it to lose sales of one million large pickups and sport utilities. Those trucks, which include the best-selling Chevrolet Silverado pickup along with the Chevy Suburban and Tahoe SUVs, kick in up to 20% of GM's 4.9 million cars sold and a big chunk of the $5 billion the company earned in profits last year. DaimlerChrysler, too, has said that CAFE increases would cost the sales of several hundred thousand large trucks.

The industry also warns that it won't be the only one hurt. Lobbyists are advising Congress that CAFE increases such as those currently proposed by Feinstein and Terry would add $2,750 to the price of every vehicle. They also say they'll cost up to 280,000 jobs.

Not everyone is making doomsday predictions. Ford Chairman William Clay Ford has boasted of Ford's environmental record. But while Ford has said it will voluntarily improve gas mileage, it still opposes mandatory CAFE increases. Instead, Ford is lobbying for tax credits to help consumers buy new fuel-efficient hybrid cars.

"BUNK." Detroit is also falling back on the old no-can-do line. Snaps Thomas G. Stephens, GM's group vice-president of engine development: "There aren't any technologies that could get us there." But that could be a hard sell. Lawmakers and environmental lobbyists recall how Big Three execs told Congress during the 1970s oil crisis that the original CAFE proposals would be impossible to meet--then made big gains when the standards were imposed. "It's the same kind of bunk the industry has been saying for years," says Sierra Club lobbyist Dan Becker.

Besides, Detroit does have the technology to make big gains--and said so. A year ago, Ford CEO Jacques A. Nasser vowed Ford would improve the combined average fuel economy of its SUVs by 25% by 2005. How? By making its big truck engines more efficient and selling more compact SUVs. In response, GM and Daimler vowed to follow suit.

In fact, GM (GM ) may be leading the Detroit pack in fuel-efficient engines. In 2004, the auto giant will introduce its new V-8 engine for its big pickups and SUVs. By shutting off half the cylinders when the vehicle is cruising at highway speeds, the engine increases the average pickup's mpg to 16. The cost: just a few hundred dollars a vehicle, says David E. Cole, director of the Center for Automotive Research in Ann Arbor, Mich. DaimlerChrysler will start selling a similar engine soon after GM. Meanwhile, Ford has been increasing the average fuel efficiency of its truck fleet by successfully marketing smaller, less thirsty SUVs.

The big winners in any shift to higher mpg standards could well be the Japanese, who feature smaller, more fuel-efficient cars and trucks. Only Toyota Motor Corp. (TM ) sells full-size SUVs and pickups, but sales of smaller SUVs, pickups, and minivans keep it safely below overall CAFE ceilings. "We'll have to make a bigger move on fuel economy than the Japanese will," admits Daimler director of energy and environmental policy Reg Modlin.

Before all is said and done, the Big Three are likely to lean heavily on Washington to limit stricter standards. But given the Capitol's new mood, their time and money might be better spent developing more energy-efficient SUVs.

By David Welch in Detroit, with Kathleen Kerwin, Laura Cohn, and Lorraine Woellert in Washington and Larry Armstrong in Los Angeles

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