Europification of the Automobile

Welcome to the era of downsizing. And I’m not just talking about layoffs during the current economic malaise. I’m talking about smaller engines and cars. The Department of Transportation handed down some specifics on the proposed fuel economy rules that all auto makers will have to meet starting in 2010. They will likely have to boost fuel efficiency in their cars and trucks by 4.5% a year until 2015. Most auto makers figured it would be a 4% annual increase. So the DOT’s proposal for Corporate Average Fuel Economy, called CAFÉ for short, is more aggressive than the industry thought. By 2015, the proposal would boost fuel economy for cars from the current 27.5 miles per gallon to 35.7 mpg. Trucks would have to hit an average of 28.6 mpg from 21.7 mpg today.

Auto makers say they’ll meet those proposed rules. It will eventually be the law. But it will be a tough road for all of them, even Toyota. The National Highway Traffic and Safety Administration says it will cost the industry a collective $47 billion by 2015. GM Vice Chairman Bob Lutz has said vehicles with big V-8 engines will get V-6’s. And those six-cylinder cars will get four bangers. They may have hybrid systems or turbo chargers attached to boost zip off the line. But the power plants will get smaller. The vehicles might shrink, too. In all, Lutz has said repeatedly, some vehicles will need at least $6,000 in added hardware to meet the new rules. analyst Jesse Toprak said in January that the average run up in costs—and possibly price—will be more like $2,000 to $3,000 a vehicle.

Call it the Europification of the American automobile. In the Old World, small engines and cars are the norm and have been for years. In a perverse way, higher fuel prices may actually help the carmakers. CAFÉ is based on what vehicles the carmakers sell. With oil at $119 a barrel and gasoline hitting $4 a gallon in some places, consumers are already demanding smaller, more efficient cars. The new fuel rules may be tough for auto makers to hit, but consumers were seeking efficiency even before Congress started mulling tougher fuel economy proposals more than a year ago. SUV sales have been sinking for several years. Last month when fuel prices spiked, compact cars commanded a bigger share of the U.S. market than full-sized pickups, which hit their second lowest share of vehicles sold in a month since 2000. At least auto makers won’t be forced to create something the public doesn’t want.

But even with gas prices encouraging efficiency, auto executives contend that the new rules will pit them with a series of quandaries. One GM executive says that the truck CAFÉ targets aren’t attainable for any carmaker, not with today’s mix of suvs. A large pickup will need fuel economy that’s easily 20 mpg. What will it cost? Another question is, will gasoline prices stay high enough to push consumers into the efficient vehicles each company needs to sell to meet the standards? Will the costs of technologies like hybrid cars, electric vehicles and clean diesel engines drop fast enough to make the economics work for carmakers and consumers? Or will the added costs, as some auto execs contend, just make cars more expensive and force car buyers to delay their purchase for a few years? GM Chairman and CEO Rick Wagoner has said that the new rules may simply shrink car sales. Those are the issues that will keep auto industry executives up at night.

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