Will Capitol Hill Kill the American Auto Industry?

The U.S. Senate Commerce Committee took an unprecedented step recently when it approved a 40 percent increase in the Corporate Average Fuel Economy (CAFE) mandate over the next decade. While at first glance the move might be seen as a potential boon to consumers who are currently plagued by high gasoline prices, it may have a rather stark, unintended consequence -- a deathblow to the U.S. domestic auto industry.

Is this threat hyperbole or real? One thing on which there is no doubt is that the auto manufacturers who market vehicles in the United States, be they foreign or domestic, are opposed to the change. They feel the move to force them to raise the fuel economy of their individual vehicle fleets -- the array of cars they sell in a given year -- to 35 miles per gallon in 2020 is neither in their best interest nor in the best interest of the majority of their customers.

Former U.S. Congressman, Dave McCurdy, who now heads the Alliance of Automobile Manufacturers, a lobbying group made up of both import and domestic manufacturers, called the measure "unrealistic and unattainable." Environmental groups argue that the proposed standards are not just realistic and attainable, but they are also necessary to address important issues like the production of so-called "greenhouse gases" and our continued reliance on foreign-based sources of petroleum.

Certainly those are important issues, though the constant drumbeat on carbon dioxide and global warming may well prove to be "false science." (See Driving Today feature story, "A Weatherman Looks at Climate Change," April 23, 2007.) One wonders if, in the zeal to address them, environmentalists are willing to sacrifice the domestic auto industry and the hundreds of thousands of workers it employs.

Why is the industry at risk? When McCurdy calls the new standards "unrealistic and unattainable," he is only half right. They might be unrealistic, but they are not "unattainable." It is simply that the stretch to reach those lofty goals in the time frame specified puts the domestic vehicle manufacturers at high risk. The reason is not that they can't build cars that get 35 miles per gallon. Certainly they can, as evidenced by the fact that General Motors currently offers more models that deliver 30-mpg or higher highway mileage than Toyota does. But just try to convince the average consumer of that fact.

It is the perception issue that really places the already shaky U.S. manufacturers on the precipice of doom. Both opinion polls and sales analyses have shown that when U.S. consumers seek vehicles that offer high levels of fuel economy, they look to import manufacturers. This is a reflection of the fact that domestic manufacturers have traditionally placed most of their emphasis on larger, inherently lower fuel-economy vehicles. Similarly, the domestic manufacturers have traditionally reaped the bulk of their profits from larger vehicles, netting lower profits or perhaps even selling smaller vehicles at a loss so they can achieve the current CAFE standards. So the proposed standards present a distinct and real threat to the domestic industry not because those companies cannot, in the abstract, build high-fuel-economy vehicles, but because it is highly questionable that they can, in reality, change consumer perceptions about their wares and their basic business model in time to meet the sales targets of the proposed standards.

To illustrate this, here's an example. Let's say Congress decided that coffee drinking was unhealthy and mandated that coffee retailers like Starbucks and Peet's abruptly curtail their sales of coffee drinks and, instead, radically increase the percentage of green tea drinks sold. Further, assume that if they fail to meet the mandated percentage they would face massive fines or find their ability to sell coffee rescinded altogether. Could they accomplish this? Could Starbucks, known from its beginnings as the place for coffee, suddenly become the "green tea place"? And will individual American consumers decide they should eschew their desire for coffee and switch to green tea in high enough numbers to match a lofty government quota?

While this scenario might seem ludicrous, it is a close analogy to what U.S. automakers are being required to do by the recently approved CAFE standards increase. How this plays out will be the subject of intense scrutiny, as the hobgoblin of unintended consequences is definitely in play, if we decide to deal with it.

A native of Boston, Driving Today Contributing Editor Tom Ripley writes about the auto industry and the human condition from his home in Villeperce, France.