Tsunami Devastates Japanese Auto Industry -- And Car Buyers Everywhere

One auto industry observer has suggested that the March 11 earthquake and resulting tsunami that crippled Japan “may ultimately rank as the largest peacetime disruption of world auto production.” Video and photos of the devastation left by the natural disaster still haunt us daily, but one aspect of the disaster that has been largely underreported by the general media is the crippling effects the quake/tsunami has had (and will continue to have) on the global auto industry. Some of the quake/tsunami’s devastation within the car industry was felt immediately, but other effects -- including those that could influence what car you buy -- will not be understood for months or even years to come.

The disaster in Japan will have far-reaching effects because of the interlocking nature of the global auto industry. The supply chain for Japanese vehicle manufacturers has been ripped apart and -- because parts produced in Japan frequently end up in vehicles that are produced in the Americas, Europe and Asia -- the world’s automakers are also suffering from a shortage of parts and other supplies. Those shortages will have substantial effects down the road. Parts that aren’t being produced today will prevent cars that require those parts from being produced tomorrow; those cars that aren’t produced tomorrow will, of course, not be shipped the next day. So, sometime in the next several weeks, vehicles that American, European and Asian dealers were expecting to sell simply won’t arrive. Because of this, you can expect car prices over the next several months to rise.

Certainly, the sharpest increase will come in cars and trucks that are built in Japan. A quick glance at the TV news or a newspaper makes it obvious that it will be extremely difficult for the Japanese auto industry to resume its momentum. The disruptions elsewhere are far less intuitive, but equally real. Ford Motor Company recently shut down its small-car plant in Genk, Belgium, because of a parts shortage. In addition, at least two U.S.-based manufacturers are limiting the exterior colors that can be ordered because of shortages of Japanese pigments. Because of a tsunami-caused problem at a Japanese battery plant, Chevrolet Volt production was disrupted, and, for similar reasons, production of the Toyota Prius has been on-again, off-again over the past two weeks -- just as demand for that vehicle is heating to a boil in the United States. In addition to shattered and flooded plants, Japanese carmakers and parts suppliers also face a critical shortage of electricity to power their plants.

The travails of the Japanese nuclear power industry have topped the international story docket for a couple of weeks now. While potential radioactive leaks are the most frightening potential problem, an associated story is that substantial amounts of electrical generating capacity have gone offline. Since you can’t build cars without electricity, the power shortage is a potentially giant problem that Japanese automakers are struggling to deal with. Rolling blackouts are disastrously inefficient for automakers because they force shutdowns that are essentially random. That not only disrupts vehicle production, but also requires them to pay workers who are not working. The assembly line just stops. How big the problem will become remains to be seen, but there is no doubt that the supply of vehicles built in Japan will be severely curtailed in the next several weeks. Honda and Mazda recently asked their American dealers to cease ordering vehicles built in Japan until they can assess their ability to build vehicles. But the lost production in Japan is only part of the problem. The trickledown effect of a failure to build parts in Japan will result in the production of fewer vehicles in North America, South America, Europe and Asia.

The current gap in production might simply be simply a blip, a shortfall that could quickly be made up by longer hours or additional shifts once the situation normalizes, or it could have much greater implications. Some Japanese parts suppliers might be forced into bankruptcy. The slowdown in production could push vehicle manufacturers who have already been battered by the global recession to the precipice. What it means to you is this: If you’re planning on buying a car in the next six months, you should think about making that purchase in the next few weeks instead. After that time, the supply of popular models, especially from Japanese nameplate manufacturers, will likely become problematical.

Controversy Over Ethanol

A lot of words have been said and written about ethanol. Some say it is the solution to our reliance on imported oil. Others suggest that, as a green solution to our fuel and carbon dioxide emission problems, ethanol is a sham. But relatively few have talked or written about how corrosive ethanol is. Not only is it harder than petroleum to transport through pipelines and tankers, but it is also harder on internal combustion engines. In fact, it is so potentially harmful to engines that a consortium of engine manufacturers from the automotive, marine, and outdoor power equipment industries have banded together in a new alliance called the Engine Products Group (EPG) to challenge the Environmental Protection Agency’s (EPA) recent decision to approve the sale of gasoline containing 15 percent ethanol (E15) for 2007-model-year and newer passenger cars and light trucks.

You might not realize it, but the gasoline you are using right now very likely contains 10 percent ethanol. When that gasoline mix, referred to as E10, was approved several years ago, it was followed by reports of a variety of maladies, including engine fires and leaking fuel tanks that were tied to the corrosive nature of ethanol. That controversy died down; engine manufacturers adapted their products to live with E10, and all was relatively quiet until an ethanol industry trade-group petitioned the EPA in March 2009 to raise the limit on ethanol in gasoline from 10 to 15 percent. Having been almost literally burned previously, several engine-product and auto manufacturers urged the EPA to refuse the request, or to at least embark on thorough and adequate testing to assure that E15 would not harm existing products or pose safety risks. But after what many observers feel was an inordinately short period of time, the EPA made what seems like a compromise -- a compromise that is proving to be unpopular with those who favor E15, those who don't and those who just want to sell gasoline to the general public.

Instead of approving E15 gasoline for all uses or continuing to forbid its use, the EPA gave the E15 a partial waiver, allowing its use, as mentioned previously, in 2007-model-year and newer passenger cars and light trucks only. It was not approved for older passenger cars and trucks. But anyone who has ever filled his or her tank with gasoline can see the problem with that. What is going to prevent someone who has, say, a 2005 Honda Accord or Chevrolet Silverado pickup truck from filling it up at a pump with E15 gas when there will be nothing but a label on the pump to warn them? And what is to prevent someone with an outboard motor or a lawn trimmer from filling up those product's fuel tanks with E15, even though it might damage them? Even more to the point, how many gas stations are going to install tanks and pumps to handle E15 for newer cars, and E10 and/or straight gasoline for older models?

Almost certainly, as the EPG says, there is a risk that consumers will unknowingly or mistakenly put E15 in products for which it has not been approved. Since the misused gasoline has the potential to harm engines and other related components, you can understand why the organizations involved are working to get the decision overturned. And since there is less energy stored in ethanol than in gasoline, consumers who buy E15 at the same price as E10 will be getting less bang for their buck.

“While all members of the EPG have and continue to support the development and use of safe and sustainable alternative fuels, the action EPA has taken to permit E15 to be sold as a legal fuel, even if limited only to certain products, will have adverse consequences for the environment," said Kris Kiser, spokesman for the Engine Products Group. "A partial waiver, by its nature, necessarily will result in the misfueling of products not designed or tested for E15 use."

To prompt the EPA to rethink its decision, the Engine Products Group has filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit, asking that the EPA’s ruling be remanded back to the agency. Among its assertions is that the Clean Air Act does not authorize EPA to issue any partial-waiver decisions in the first place. It also asserts that the EPA statute passed by Congress in 2007 states that fuels that could cause any failures can't be approved for the market, while there is no dispute that E15 has been shown to adversely affect engines in non-road products and older model-year vehicles -- not to mention causing emission failures. Finally, EPG suggests that there is no assurance that E15 won't damage more recent (post-2007) model-year vehicles, with the exception of vehicles expressly designed for use with flexible fuel.

So what does all this mean? It means that the regulators at the EPA might well have to revisit their decision allowing E15. It means that gasoline retailers and oil companies will be on hold until it is determined whether E15 will go forward or not. And it means that, should the new regulations eventually be upheld, you will have to be careful which gas pump you pull up to.

Are Green Vehicles Overhyped?

Hybrids, electrics and other alternative vehicles are dominating automotive news these days. General press hype started the drumbeat. Here at Driving Today, we’ve done story after green story on hybrids, plug-in hybrids, electric vehicles (like the Chevrolet Volt) and battery-electric cars (like the Tesla Roadster and Nissan LEAF). Based on media coverage, you might get the impression that the majority of new cars will soon be alternative. And you might think the gasoline engine is headed down the path of the passenger pigeon.

But that impression is very wrong, according to a new report from market research firm J.D. Power and Associates. The title of the report, Drive Green 2020: More Hope than Reality, offers more than a flavor of what’s contained in it.

Frankly, there’s both positive and negative news on electric car sales for alternative vehicle advocates.

Alternative Vehicle Sales in the Big Picture

On the positive side for proponents of alternative vehicles, the research report predicts electric car sales will shoot up sharply in the next decade. This year, J.D. Power and Associates predicts that fewer than one million alternative vehicles (battery electric and hybrid electric) will be sold worldwide. It expects some 5.2 million alternative vehicles to be sold in 2020. That, obviously, is a big increase. But considering projected market share (the percentage of total hybrids and battery electric sales vs. total vehicle sales), alternative vehicles won’t dominate the market. 

This year, hybrids and battery-electrics are expected to make up 2.2 percent of the 44.7 million new light vehicles sold. While J.D. Power and Associates expects that market share to triple by 2020 -- to 7.3 percent of the 70.9 million car sales forecast worldwide -- that’s still far from dominant

So after all the publicity, after all the talk about green cars and green jobs, why are alternative vehicle sales expected to remain less than 10 percent of total car sales? The report suggests that, for a number of reasons, “it will be difficult to convince large numbers of consumers to switch from conventionally powered passenger vehicles to HEVs (hybrids) and BEVs (battery-electric vehicles).” In essence, the typical consumer has big questions about alternative vehicles. And while vehicle manufacturers can address some of those concerns, others will be much harder to solve.

Consumer Concerns Damper Sales

So what are key consumer concerns? The most addressable include:

  • Styling. Alternative vehicles’ current look and design disdains consumers -- somewhat ironic since auto manufacturers intentionally decided to give their hybrids (including the Chevrolet Volt) and battery electrics distinctive exterior and interior styling. While that gambit might appeal to early adopters and those who want to be seen as environmentally correct, it doesn’t appear to appeal to the mainstream consumer. Of course, manufacturers can address design in new versions of their alternative vehicles.
  • Power and performance. Dissatisfaction with overall power and performance also concerns customers. While current hybrids are far from race cars, they generally perform well. And the latest additions to the alternative-vehicle category, the electric Chevrolet Volt and the battery-electric Nissan LEAF, offer excellent all-around drivability. Both vehicles accelerate better than consumers might typically expect. These are not golf carts. As more hit the road, word will get out.
  • Reliability. Consumers also worry about the reliability of new technologies. While we can’t offer an opinion on the reliability of the Volt or LEAF -- they’re too new to the market -- the overall record of hybrids like the Toyota Prius, Honda Civic Hybrid and Ford Escape Hybrid have been very, very good. Again, as more vehicles sell, the word will spread.

Other consumer objections will prove much harder to address:

  • Driving range. Anxiety about driving range and battery recharge time has always been the bane of battery-electric cars. Current “pure” electrics offer a practical range of 100 miles or so before requiring rather lengthy battery recharge. That might well be a deal killer for many buyers accustomed to driving 300 miles on a tank of gas, filling up in five minutes or less, and going 300 more. The Volt uses an on-board gasoline engine to keep the battery pack at a proper state of charge, increasing theoretical range substantially. But to reach that range, drivers must buy and burn gasoline.
  • Cost. All things considered, the most important reason most consumers are likely to shy away from alternative-energy vehicles is cost. As J.D. Power and Associates said, “While many consumers around the world say they are interested in HEVs and BEVs for the expected fuel savings and positive environmental impact they provide, their interest declines significantly when they learn of the price premium that comes with purchasing these vehicles.” 
“Many consumers say they are concerned about the environment, but when they find out how much a green vehicle is going to cost, their altruistic inclination declines considerably,” said John Humphrey, senior vice president of automotive operations at J.D. Power and Associates. “For example, among consumers in the U.S. who initially say they are interested in buying a hybrid vehicle, the number declines by some 50 percent when they learn of the extra $5,000, on average, it would cost to acquire the vehicle.”

So, will sales of alternative vehicles remain a relatively small subset of the market? Quite possibly -- but one or more scenarios could change all that. Hybrids and BEVs would get a significant boost if gasoline prices significantly increase over the next few years. Alternative vehicles would similarly benefit if government regulations and tax policy does a great deal more to encourage acceptance. A technology breakthrough leading to better, cheaper batteries would help as well.

While these scenarios are possible, J.D. Power and Associates doesn’t expect any to significantly move the sales needle. And that means that hybrids and battery electrics will likely be much-discussed … but not much-purchased.

Putting the Brakes on Ethanol

At first glance, the new ethanol rules drafted by the Environmental Protection Agency (EPA) might seem to be a bold step toward increasing consumers’ use of this renewable fuel, which is often derived from corn. After all, EPA regs now approve the use of E15, a mix of 15 percent ethanol and 85 percent gasoline. But a deeper look shows that, while the new regulations appear to favor increased use of the biofuel,  the finer points of the rules will likely mean little expansion of ethanol use.  

Why? Because the EPA rules limit E15 use to vehicles built no earlier than the 2007 model year. The EPA failed to certify E85 use for by vehicles prior to that -- and this means gas stations and convenience stores may be unwilling to add E15 fuel to their product offerings.

Retailers Already Objecting

The National Association of Convenience Stores (NACS), whose members sell an estimated 80 percent of the fuels purchased in the United States, flatly warned against the sale of E15. The group fears possible liability factors if vehicles are “mis-fueled.”  

In a release, NACS advised that “retailers should exercise extreme caution when considering whether to sell E15 gasoline, following the EPA’s decision today to authorize the use of E15 in vehicles manufactured in model year 2007 and later.”

Confusion over which fuel consumers should use -- plus the storage and dispensing issues that come with  adding another type of fuel -- mean retailers might well steer clear of the whole thing.

“The EPA’s decision to allow the use of E15 in certain vehicles does nothing to remove retailers’ obligations to ensure that all of their equipment is lawfully certified to store and sell this product," said NACS Vice President of Government Relations John Eichberger. "Furthermore, limiting E15 use only to vehicles manufactured since 2007 could expose retailers to a significant liability risk if a consumer was to fuel a non-approved engine with E15.”

Environmentalists Question Age Limit
Currently, fuel retailers are only authorized to sell fuel containing up to 10 percent ethanol. Likewise, most vehicle warranties authorize fuels containing no more than 10 percent ethanol. The new rules authorize the sale of E15 -- but only for use in vehicles from 2007 onward. That’s the rub.

“The EPA’s scientifically unjustified bifurcation of the U.S. car market will do little to move the needle and expand ethanol use today,” said Bob Dinneen, President of the Renewable Fuel Association (RFA). “Limiting E15 use to 2007 and newer vehicles only creates confusion for retailers and consumers alike. America’s ethanol producers are hitting an artificial blend wall today. The goals of Congress to reduce our addiction to oil, captured in the Renewable Fuels Standard, cannot be met with this decision.”

Particularly vexing to renewable fuel advocates is the fact that the EPA’s own testing showed E15 to be safe and effective in all light-duty vehicles. Dineen said the EPA’s refusal to authorize its use in older vehicles made it look “almost as though they pulled the number out of a hat.”

Liability May Hinder Adoption
The Bush Administration strongly advocated ethanol and other renewable fuels, but the Obama Administration changed course to favor battery-electric vehicles. Because of the EPA’s ruling, the RFA says that wholesale adoption of E15 by gasoline marketers and retailers is unlikely.

In its weekly newsletter from Sept. 17, 2010, the Petroleum Marketers’ Association of America stated, “Limiting the waiver to a specific class of vehicles based on date of manufacture means retailers would be forced by market conditions to carry both E10 and E15 products, thus increasing the risk of consumer mis-fueling.”

Under the Clean Air Act, motor fuel retailers might be considered liable for emissions increases that may occur if E15 is used in non-approved engines. Customers may also attempt to hold retailers liable for damage to engines that occur because of mis-fueling.

All this means that you’re unlikely to find gasoline retailers offering E15 anytime soon.

Battle of the Greenest: Electrics vs. Hybrid Cars

Two words are on the tip of the auto industry’s tongue these days: electric cars. Nissan, which had languished behind Honda, Toyota, Ford and General Motors in the race to bring hybrid cars to market, is currently a media darling on the strength of its soon-to-be-introduced LEAF battery-electric car. Ford is building buzz with its upcoming Ford Transit Connect and Ford Focus battery-electrics. Meanwhile, General Motors, which famously introduced and then withdrew the battery-electric GM EV1, is about to re-enter the competition with its Chevrolet Volt. (GM labels the Volt an electric car because the propulsion is always electric, though it is equipped with an internal combustion engine to recharge its batteries.) All of which leaves Toyota Motor Corp., which is widely acknowledged to be the leader in hybrids, behind the curve in battery-electric cars.

That’s just where Toyota wants to be. The Japanese auto giant hasn’t completely turned its back on electric cars. In fact, it announced plans to build a battery-electric RAV4 crossover vehicle with technical help from Tesla Motors and another battery electric urban vehicle. Regardless, Toyota is committed to staying the course with hybrids. Toyota Executive Vice President Takeshi Uchiyamada told a recent press gathering in Detroit that his company is planning to introduce six more hybrid models by the end of 2012. And he gave special attention to the plug-in version of the Prius hybrid expected to come to the U.S. market in June 2012.

Why put battery-electrics on the back burner? Toyota engineers have serious questions about the viability of battery-electric propulsion for vehicles larger than sub-compact cars, so it’s moving forward with its hybridization strategy. But is that the right course?

The plug-in version of the Prius has what the press described as a “modest” sales target of 20,000 units a year. For any hybrid car other than Prius, that target is ambitious. Then there’s the question of “cannibalization.” Let’s say Toyota sells 20,000 plug-in Priuses. How many of those buyers would have purchased the non-plug-in Prius or another “conventional” Toyota or Lexus hybrid model?

Frankly, even some Toyota staffers are skeptical about the success of the plug-in Prius and other plug-in hybrid cars, because the vehicles don’t seem to offer many advantages over “conventional” hybrids. For example, the plug-in Prius offers an all-electric range of about 13 miles. That’s more than the minimal all-electric range from the current Prius. But is that advantage enough to justify a $3,000 to $5,000 premium over the current non-plug-in hybrid

The larger question surrounding both hybrid cars and electric cars is the size of the potential market. Alternative-propulsion vehicles have never reached 5 percent of the overall new-vehicle market in the United States. The introduction of new models could spur the expansion of the market as more consumers find vehicles that appeal to them and fit their needs. But as long as hybrid cars are significantly more expensive to build than conventionally-powered vehicles -- and that seems it will be the case long over the horizon -- then hybrid cars will have to justify their premium by demonstrating added value to consumers.

It’s an open question whether consumers will find that the improved fuel economy and hard-to-quantify environmental benefits of hybrid and electric cars are worth thousands of dollars. This is especially the case when studies continue to point out that the “payback period” for the technology is very lengthy -- so lengthy many original owners will never reap the monetary rewards.

In the end, building electric and hybrid cars might simply be a matter of business pragmatism. The manufacturers hope to sell enough hybrids and electrics to meet government standards so they’re allowed to sell the conventionally powered cars that actually make them money.