The Road to a Stronger CAFE Standard
Since last December, when President Bush signed an energy bill that requires auto companies to achieve a 35-mpg fuel economy standard by 2020, with substantial improvements by 2015, auto executives have been gnashing their teeth while environmentalists have been flashing the V sign for victory.
Three months later, it has become evident the road to greater fuel efficiency is full of potholes. For one thing, the new legislation adds a new level of complexity to the 35-year-old CAFE system (sounds like French for "coffee," but stands for Corporate Average Fuel Economy). Then there's the issue of technology—or lack thereof: Automakers say they don't have the means to make pickup trucks and large sport-utility vehicles much more fuel-efficient than they are now. "We cannot get to 35 miles per gallon with anything resembling the current product portfolio, or with anything resembling current technology," said GM (GM) Vice-Chairman Robert Lutz.
Car companies also warn that the new standard will force them to raise prices on vehicles, which could spark a backlash from consumers. That may be the industry's best hope of getting politicians to revisit the legislation. James Press, who joined Chrysler last year as vice-chairman after a long career at Toyota Motor (TM), says the new bill is "just part of the political process," suggesting the law was all about Congress and the White House trying to show voters they are taking action on climate change and U.S. dependence on foreign oil. Press, who remains a staunch advocate of hybrid technology and reducing the carbon footprint of vehicles, says it may not be the last word on fuel economy.
Will the U.S. Keep on Truckin'?
The Big Three are betting that sooner or later lawmakers will run into resistance from the sizable portion of the U.S. population that is allergic to small econo-cars, and from those who cherish American pickup truck culture. "I'm pretty sure the state of California isn't going to outlaw pickup trucks," quips Chrysler's Press.
He has a point. Even with thousands of suburban weekend warriors shifting away from pickups as gas prices climb, demand from people who need working trucks remains. GM, Ford Motor (F), and Chrysler have a disproportionate amount of that business, though Toyota has its Tundra pickup. So far this year, 61% of GM's unit sales in the first two months were light trucks, including pickups and SUVs, compared with 42% for Toyota.
On the other hand, Detroit may be misreading the zeitgeist. If gasoline climbs above $4 per gallon, and goes on to flirt with $5 or $6, automakers could see demand soar for their more fuel-efficient passenger cars, while SUVs languish on dealer lots. And both Democratic and Republican hopefuls seem more interested in courting voters who want independence from Middle East oil than those wanting to drive Hummers to the mall. If Detroit makes too much noise about the new fuel standard, the U.S. companies may be seen as out of touch and could sacrifice more market share to Asian rivals that can handily meet the 35-mpg target.
Part of the anxiety over the new energy legislation centers on the complexity of the standard. The current system mandates a universal standard for all automakers of 27.5 mpg for passenger cars and 22.2 mpg for light trucks, including minivans, SUVs, and pickups. The standards do not apply to each model, but are calculated as an average over an automaker's entire lineup.
Under the new system, it's different: The 35-mpg standard mandated for 2020 will apply to the entire industry, with no distinction between cars and other vehicles. Companies such as Honda Motor (HMC) and Toyota, which are underrepresented in the pickup and full-size SUV category, will likely exceed the standard, while GM, Ford, and Chrysler, the leaders in trucks and SUVs, could fall short of it. Automakers that don't make the grade will have to buy credits from those that do. But it's SUV and pickup buyers who will be stuck with the tab, suggests Chrysler Vice-Chairman Tom LaSorda. "It's likely to be another big hidden tax on the consumer, as well as small businesses and building trades."
The Big Three, along with Toyota, fought hard against the new fuel economy standard. After Representative John Dingell (D-Mich.), chairman of the House Committee on Energy & Commerce, advised the automakers that a higher standard was inevitable, the companies concentrated their efforts on getting the number lowered from the 40 mpg that was contemplated in an early draft of the legislation. There are also some provisions designed to help defray the cost of implementation, such as cheap federal loans for refitting factories that are at least 20 years old with more advanced technology.
The new law gives inordinate power to the National Highway Traffic Safety Administration, which answers to the White House. The NHTSA will have to arbitrate each company's fuel economy target each year. For example, the agency might assign Honda a higher fuel economy target than GM. That could leave the agency open to political pressure when setting each company's standard.
The Big Three and Toyota are already busy trying to map out strategies for a 35-mpg world. That includes everything from hybrids to plug-ins to clean diesel engines and smaller gas engines that boost fuel economy without sacrificing power. GM and Chrysler are in the process of rolling out a two-mode hybrid system they developed with BMW (BMWG) for pickup trucks and full-size SUVs such as the Chevy Tahoe and Chrysler Aspen. But the technology adds more than $10,000 to the cost of each vehicle, and still only boosts fuel economy to a highway/city average of 22 mpg. Despite advances in engine technology, there just isn't anything else on the horizon that will push pickups and large SUVs beyond 25 mpg, and even that comes at great cost. At GM, Lutz expects that costly gas-electric hybrids will have to make up 80% of the lineup by 2020 to hit the standard. In the meantime, the company is exploring other options: offering a smaller, four-cylinder engine in its forthcoming Camaro muscle car and eliminating altogether some of the gas-guzzler sedans on its drawing board. Ford is readying a new family of gas engines that will improve fuel economy between 10% and 20% compared with the engines they replace.
GM's Lutz, a longtime lover and developer of performance cars and big trucks, believes the plug-in application, even with high initial costs, will carry the most interest for consumers in a new era of fuel economy consciousness. Also, GM and other plug-in developers such as Toyota are betting that the cost of electric recharging will stay well below the cost of gasoline. "I'd much rather respond to the consumer than a regulation," says GM's Lutz.
But even the plug-ins Lutz is championing could face resistance in the marketplace because of price. GM's Chevy Volt, first unveiled as a concept in January, 2007, can go 40 to 50 miles on a single charge of a lithium ion battery, and then a gas motor kicks in to move the car and recharge the battery at once. The company once targeted $30,000 as the price for a Chevy Volt. But the cost of developing the technology is making that an unreachable dream. Lutz now figures a more realistic price for the Volt would be about $48,000. He reckons that $40,000 might be possible, without making any profit. Only government tax incentives could take the price tag nearer to $30,000.
It hardly seems fair to Detroit to compare its efforts in the hybrid arena to Toyota's. Chrysler's Press says when he was at Toyota, "the Japanese government paid for 100% of the development of the battery and hybrid system that went into the Toyota Prius."
Whether they like it or not, the new 35-mpg standard should nudge Detroit's Big Three to become more aggressive in pursuing green technologies. But the question remains: Will Americans be willing to pay thousands of dollars extra for these cars? Consider, for example, that Honda scrapped the hybrid version of its Accord because it didn't offer enough fuel savings to justify the premium price that had to be charged for the technology. Similarly, sales of the big hybrid SUVs from GM and Chrysler aren't expected to make much of a dent, perhaps just 5,000 or 6,000 per year, because of their high costs.
If U.S. politicians were really serious about improving fuel efficiency, they might follow Europe's example. Thanks to steep excise taxes, prices at the pump in some European countries now top $7 a gallon. That's helped drive demand for smaller, more fuel-efficient vehicles over the long term. But the conventional wisdom is that in America, where driving a car, as well as a pickup and SUV, is seen as an inalienable right, a gas tax, which consumers are reminded of every time they visit the pump, would never fly. Says Chrysler CEO Robert Nardelli: "That, of course, is political suicide."