Big 3 Forced to Dramatically Increase Fuel Economy

A Senate bill to raise fuel economy mandates by 40 percent would force Detroit’s Big Three automakers to dramatically reduce sales of profitable larger sport utility vehicles and pickup trucks, according to one Wall Street analyst.

Under the Senate bill, fuel economy regulation would raise to 35 miles per gallon for cars and trucks by 2020. Automakers have said that such a mandate would require them to add costly technology, reduce the size of some vehicles and stop selling some larger vehicles.

Automakers added that the Senate bill, passed 65-27 last Thursday, which would be the first increase for passenger car fuel economy in 25 years, would cost them tens of billions of dollars. DaimlerChrysler AG’s Chrysler Group has said that it could bankrupt the company.

“We estimate the Big Three could meet the 35 mpg standard only by dramatically reducing sales of large SUVs and pickups by 60 percent, while improving car fuel economy by about 34 percent and truck fuel economy by 25 percent,” Brian Johnson, an auto analyst with Lehman Brothers in New York, wrote in a recent report.

Environmentalists and supporters of the Senate bill have argued there would be no need for automakers to downsize vehicles to meet the requirements. What is not disputed is that SUV and pickup truck sales have been the bread and butter of the General Motors Corp., the Ford Motor Co. and Chrysler for years. In 2007, 34 percent of GM sales have been large SUVs and full-size pickups. At Ford, it was 31 percent, and for Chrysler it has been 20 percent. By comparison, large SUV and full-size sales have accounted for just 10.5 percent of the Nissan Motor Co. sales so far this year and eight percent of the Toyota Motor Corp. sales.

One major area of concern for GM and Ford is their reliance on large and powerful but less efficient engines, Johnson said. While about 60 percent of the Honda Motor Co.’s and Toyota’s 2006 production were four-cylinder engines, only 14 percent of the Chrysler and Ford engine production was four-cylinder and only 21 percent of GM’s.

The Alliance of Automobile Manufacturers, a trade group that represents the Detroit Three and Toyota among others, said that the report shows there are real impacts to a dramatic increase. “Fuel economy standards need to be increased, but at reasonable levels so workers around the country do not lose their jobs or pensions or other benefits,” spokeswoman Gloria Bergquist said. “As this reports shows, the economic threat is real and it is serious.”

In May, Standard and Poor’s issued a report arguing that tough fuel economy and vehicle emissions legislation would “pose a real risk to global automakers’ financial performance, particularly as some are already under pressure from razor-thin margins.” With the Senate bill passed, the legislation now moves to the House, which isn’t expected to address raising Corporate Average Fuel Economy mandates until the fall.

Tough fuel economy mandate would necessitate the enhancement of equipment to include engines, brakes, radiator, EBC pads, and other auto parts. Ad this would mean additional expense to the recuperating domestic automakers.

On Wednesday, the House Energy and Commerce committee is expected to approve a package of six bills to improve fuel efficiency. U.S. Rep. John Dingell, D-Dearborn, the chairman of the committee and an ally of the auto industry, on Friday called the CEOs of GM, Ford and Chrysler, along with the United Auto Workers president, to talk about the fuel economy bill. He urged the companies to be more aggressive in emphasizing what they can agree to do to improve fuel efficiency. Dingell also held a closed-door meeting with automakers’ top Washington officials late last Monday.

Automakers Forced Into Fuel Efficiency

The minimum fuel efficiency standard for a car manufactures fleet of cars is set by CAFE (Corporate Average Fuel Economy). First created in the 1970’s, this standard was 27.5 mpg.

Falling below this standard results in fines which some high end manufacturers like Lanborghini and BMW don’t mind as their high prices can absorb it. For most major car producers these fines are something to avoid and with no change in the 27 mpg standard it was easy for them to achieve.

American automakers successfully lobbied to keep this 27 mpg standard from increasing for nearly 30 years. Publicly they argued raising it would be bad for their business as the gas guzzlers have higher profit margins than smaller, thrifty fuel efficient cars and hybrids. Despite decreasing market share and massive layoffs for the last 10 years they (Ford, GM, Chrysler) still lobby against increases to CAFE.

In light of Toyota’s and Honda’s tremendous sales success with fuel efficient cars the public and federal politicians have largely begun to disagree with Detroit’s point of view and to the automakers surprise the Senate passed a bill in June 2007 to increase the CAFE standard to 35 mpg by 2020.

To become law the bill now needs to pass in the Senate, which has a large democratic majority and perhaps it’s strongest support. House Speaker Nancy Pelosi (D-Calif.) has already voiced her support and suggested it will pass any week now.

While years of decreasing sales and market share to Toyota and Honda did not convince Detroit to seriously start producing fuel efficient vehicles this bill will force them. I wonder if the employees of the Big 3 are relieved by this legislation? Maybe it will actually stop the bleeding (layoffs).

While not a big 2008 presidential issue at least one candidate proposed a CAFE update, Democratic Senator Christopher Dodd proposed increasing the standard to 50 mpg by 2017. He also proposed making the entire federal fleet of cars fuel efficient. With a customer of that size demanding these cars imagine how fast they would develop.

The bill will also provide for grants and loans for companies to develop technologies to meet the new standards. With 13 years to meet the new standards even the Big 3 should be able to adjust in time.

I expect 40+ mpg now in any new car for a reasonable price. Anything under 30mpg is considered poor by today’s standards, by 2020 it will hopefully by a joke. I can see teenagers of 2020 listening to parents talk of their old cars getting 27mpg, they’ll just shake their head and laugh in amazement, and maybe ask how you can produce a car that gets less than 100mpg.