Auto Makers Stoic in Face of Pending Mandates

Special Coverage

Making CAFE Work

DETROIT – The road to improved fuel economy and lower emissions has been long and arduous.

And just as the finish line for compliance appears on the horizon, new signposts pop up signaling stricter regulations ahead for a wider array of vehicles.

Still, auto makers bravely view the jerry can as half-full.

“That’s just the cost of doing business,” says Carlos Ghosn, chairman and CEO of the Renault SA-Nissan Motor Co. Ltd. alliance.

“Absolutely it’s going to be difficult; no one is saying it will be easy,” says John Juriga, director-powertrain at Hyundai-Kia America Technical Center Inc. “Can it be done? Can we meet the customer’s wants and needs? Yes, absolutely we can. But it is going to take some work.”

And as much as $52 billion in new technology.

According to government estimates, Ford Motor Co., General Motors Co. and Chrysler Group LLC will be required to make large investments in fuel-saving technologies to meet standards due in 2016.

While the average OEM’s outlay will be about $948 per vehicle, Ford will be compelled to spend $1,231. Chrysler will fork over an estimated $1,329 and GM, $1,219.

Hyundai, which led all U.S.-market auto makers in model-year ’09 fleet-fuel economy according to the Environmental Protection Agency, is expected to spend $745 per vehicle for new technology in 2016 – $203 below the industry norm.

Toyota Motor Sales U.S.A. Inc., the nation’s fourth-most fuel-efficient auto maker behind Hyundai Motor America, American Honda Motor Co. Ltd. and Volkswagen of America Inc., will see its technology costs jump the least – an average of $455 per vehicle for 2016, according to government estimates.

Related document: Addition of Technologies to U.S. Light Truck Fleet Under New CAFE

Ford admits the steps it is taking to become a more fuel-efficient auto maker, such as its EcoBoost engine-downsizing technology and converting truck plants to build more fuel-efficient cars, will be expensive.

“While there are significant costs in making this transformation, it is the right thing for consumers and the environment, and it will enable us to comply with one standard,” the auto maker tells Ward’s in a statement.

According to the new rules, auto makers must begin stepping toward a U.S. fleet average fuel economy of 34.1 mpg (6.9 L/100 km) by 2016. Each year, fleet fuel economy will average an increase of 4%, beginning in 2011 with ’12 model-year vehicles.

As before, the National Highway Traffic Safety Admin. will administer and enforce the corporate average fuel economy rule under the 35-year-old Energy Policy and Conservation Act.

But after declaring greenhouse-gas emissions a threat to public health last year, the EPA now will regulate tailpipe emissions under the Clean Air Act.

The EPA also enters the regulatory mix because CAFE testing does not take into consideration some additional greenhouse-gas emissions, such as oxides of nitrogen and methane, as well as carbon dioxide and hydrofluorocarbons – a byproduct of vehicle air-conditioning systems.

“All the OEMs know what it takes,” Juriga says. “They just have to put their minds to it, put their engineers together and figure out how to do it.”

Against this backdrop, the Obama Admin. announces plans to begin studying stricter fuel-economy and emissions rules through 2025, as well as open rulemaking for medium- and heavy-duty trucks.

Obama offers no new targets for passenger cars and light trucks. U.S. Department of Transportation Secretary Ray LaHood says the administration is “at the starting gate.” The stricter rules would phase in beginning in 2017.

The first-ever medium- and heavy-duty rules would go from 2014 to 2018, with a goal to implement the first batch in 2012.

EPA Administrator Lisa Jackson’s determination tailpipe emissions represent health risk thrust agency into fuel-economy rulemaking.

As with the current set of light-duty rules, the DOT and EPA would collaborate on new targets.

Critics argue auto makers long have been able to improve fuel economy, but with government regulations largely unchanged until last year since 1975, the focus has been on making vehicles bigger and more powerful while leaving efficiency gains static.

“This industry makes (technical) progress at a steady rate,” says John DeCiccio, senior lecturer-School of Natural Resources and Environment at the University of Michigan, and a former director at the Natural Resources Defense Council, an environmental lobbyist.

“It is a question of what they make progress on,” DeCiccio says, noting auto makers have kept vehicle costs at an average annual increase of 2.7% while other consumer goods have grown at a rate of 3.7%.

Some critics of the EPA’s involvement note the agency, unlike NHTSA, does not have to weigh economic factors in its rulemaking. As such, regulating tailpipe emissions sets a precedent for additional CO2 emissions mandates down the road.

But with the EPA taking action on tailpipe emissions, the state of California and 13 other states comprising 40% of the light-vehicle market dropped efforts to legislate at the state level.

The CAFE and emissions rules target individual vehicles, arriving at a “footprint-based” standard by multiplying wheelbase by track width.

Each auto maker will face a bogey based on the mix of vehicles it sells, with the entire fleet reaching a 34.1 mpg (6.9 L/100 km) goal by 2016.

The EPA will apply the same footprint-based approach. If all auto makers comply, the fleet will emit an average of 250 g/mi or less of CO2, which translates to 35.5 mpg (6.6 L/100 km).

The government arrives at two different fuel-economy levels because, unlike NHTSA’s CAFE standards, the EPA’s tailpipe limits extend credits for improved air-conditioning system performance.

And NHTSA will continue to grant credits to auto makers selling flex-fuel vehicles (FFV) capable of burning gasoline with higher ethanol content. Auto makers will be allowed to trade credits with competitors or within their own fleets to meet the standards of each program.

The government argues the elasticity built into its new regulations will help keep the cost burden to each manufacturer low.

Without such flexibility, the government expects auto makers to make technological outlays of some $52 billion between 2011 and 2016. But with those credits, the cost shrinks to $37.5 billion.

In the end, consumers still will pay the difference and brand loyalty may suffer, says Mike Herrington, chief legislative counsel for the National Automobile Dealers Assn.

“You can regulate fuel economy,” Herrington tells Ward’s, “but it is not cheap. And a family that has always bought Fords, for example, may find they can’t afford one any longer.”

Or worse, consumers might have money to spend but make a conscious decision to hold back.

Historically, regulators have cared more about fuel economy than consumers, says Scott Kunselman, Chrysler Group LLC’s senior vice president-engineering.

“Consumers would always like more fuel economy,” Kunselman says. “That’s not a mystery. What I really mean is they rarely are willing to lay dollars on the table to pay for it – unless they can find the value tradeoff.”

Jim Kliesch, a senior engineer with the Union of Concerned Scientists, which played a role in crafting the rules, says the mandates are equitable among auto makers and will not limit consumer choice.

“The end result is going to be great news for consumers, and it will not be too onerous on the auto makers,” he says.

According to government forecasts, the U.S. fleet will have an average fuel economy of 29.7 mpg (7.9 L/100 km) in model-year ’12, up from 27.3 mpg (8.6 l/100 km) in ’11.

CO2 levels are expected to decline to an average of 250 g/mile by 2016, from 305 g today.

For comparison, Europe will require vehicles to emit no greater than 120 g/km by 2015, a standard many other countries around the world are expected to duplicate. But European rules consider weight instead of footprint.

Final CAFE and emissions standards could fluctuate, government documents show, because some auto makers may choose to continue paying civil fines for not complying, while others may move more aggressively into FFV production.

According to government estimates, five auto makers will not meet the CO2 emissions limits: BMW of North America LLC, Tata Motors Ltd., Daimler AG, Porsche Cars of North America Inc. and Volkswagen. BMW and Daimler face the smallest shortfalls, between 5 and 6 g/mi, while Porsche encounters the largest at 40 g/mi.

Related document: Estimated Average Fuel Economy Required by Model Year for Passenger Cars

Related document: Estimated Average Fuel Economy Required by Model Year for Light Trucks

Unlike CAFE, auto makers not meeting emission targets cannot simply pay fines. Instead, the government assumes they will trade credits between their car and truck fleets to achieve compliance.

The nation’s mix of vehicles also will change over the years, the government estimates, moving from 7 million cars and 6.8 million trucks in 2008 to 9.4 million and 7.2 million, respectively, in 2016. In short, the mix shifts from 50/50 cars and trucks today to nearly 57% cars in 2016.

But by and large, the government contends its footprint-based approach will leave consumers with roughly the same breadth of vehicle choice in 2016 as they enjoy today.

Over the lifetimes of the cars and trucks sold in model years ’12-’16, the government estimates the new regulations will save 1.8 billion barrels of oil and slash CO2 emissions by 1.1 billion tons (960 million metric t).

Safety should improve, too, the government says, because with its footprint-based approach auto makers will no longer build “smaller” small cars to meet CAFE.

“There’s not a dichotomy in the market,” Hyundai’s Juriga says of the long-standing notion auto maker’s would have to skimp on safety, quality, value, performance, creature comforts and even profitability to add fuel-saving technology.

“In fact, from our standpoint, we see the need to embrace fuel efficiency as an indisputable social good that is right thing to do for the customer, for the environment…for all the reasons you’ve been hearing.

“So why not pursue that path and make it a fundamental concept when you design the vehicle, as important as all the other aspects.”

– with Christie Schweinsberg and Eric Mayne

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