The question on the agenda

The question on the agenda

Can domestic automakers succeed commercially while pursuing tighter CAFE standards?

Robert Brooks
Editor

A ny reasonable analysis of the U.S. automotive sector over the past three decades must address the unsettling effects of Corporate Average Fuel Economy (CAFE) standards on the industry’s fortunes. Relying on no specific design expertise or technical capability, and without consistent objectives over these 35 years, the federal government (specifically the U.S. Congress, working through the Environmental Protection Agency and National Highway Traffic Safety Administration) have imposed their prerogatives on automotive design by escalating the average fuel economy that domestic manufacturers must match with the products they sell, in order to avoid penalties.

In simple terms, all the cars and light trucks that each manufacturer produces and sells each year must meet a mandated average level of fuel economy. The 2011 CAFE standard is 30.2 mpg for cars: some vehicles will perform better than that and some will not, and the manufacturers must pay a $5.50 penalty for each 0.1 mpg that they fall short of the target (multiplied by their total domestic production, naturally.)

The current standard will rise to 39.0 mpg for cars by 2016 and even higher beyond that. Negotiations are underway between the domestic producers and federal officials, it is reported, to raise the 2016 standard by 5% annually from 2017 through 2025, to achieve an average of 56.2 mpg for cars and light trucks by 2025. There were 5.7 million vehicles produced in the U.S. in 2009, and with a rising population it’s not likely that number will drop significantly, so while its certainly technically feasible to produce a car that will achieve that level of fuel efficiency no one knows how to organize a company to produce millions of vehicles that will do it and maintain commercial viability.

Oh, have I mentioned commerce? It’s revealing that the CAFE standards are applied to vehicles produced rather than vehicles sold, because the disjunction between these two measurements is an effective framework for understanding why domestic automaking always seems to be facing some new crisis. Automakers are only half-listening to their customers because they are waiting to be told what to do by their regulators.

It’s no coincidence that the expansion of CAFE standards parallels the decline in the Detroit automakers’ share of the domestic market. A former generation of automotive executives dared to criticize the CAFE program that made designing, manufacturing, and selling vehicles more complicated by imposing standards that were unachievable or unpopular, but two of the domestic automakers owe their continued existence to the federal government thanks to bailouts they accepted in 2009, so the outcome of the current negotiations isn’t hard to predict. In any case, the legislators and regulators don’t have to sell the cars they dream about.

In practical terms, those dreams require billions of investment capital to develop concepts and products that can be produced and, theoretically, sold. Over the past decades this was accomplished by using the better-selling models to offset the cost of producing the smaller, more fuel-efficient vehicles. As the CAFE standard rises and its scope widens to include more products, that balance becomes more difficult to identify. Automakers are still waiting for consumers to go wild for the various electric and hybrid vehicles they have developed, so how they will fund their way toward 60.0 mpg has to be a serious concern.

It is conceivable that the legislators and regulators can goad the automakers this way for another decade. No one is threatening their future livelihood over bad design or poor production, and they have been involved in this gambit for so long that they see it as their purpose. Most of them probably don’t recognize their role in the commercial fortunes of the industry.

But the car buyers will have the last word. No one can compel them to buy underpowered hybrids or plug-in two-seaters, or smelly natural gas fueled cars, or whatever combination of offerings helps the automakers meet their CAFE quotas. If there are enough buyers willing to invest $30,000- $40,000 for something that meets their particular expectations for affordability, safety, utility, comfort, or whatever combinations of standards they select, those vehicles will arrive somehow.

The question to be answered is whether the domestic producers can be successful as they proceed this way without some validation from the car-buying public. Without that, they are operating with an agenda, not a strategy.

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