New Economy Standards Provoke Controversy

European observers have to wonder what the Americans are up to when it comes to fuel economy. For decades, European countries have limited their use of petroleum by instituting stiff taxes on motor fuel. This takes a big chunk from the earnings of every European driver, but it also cuts down on fuel usage in a fairly direct manner. In contrast, Europeans who understand the American system for curbing petroleum use, the federal Corporate Average Fuel Economy (CAFE), are struck by its obtuseness. And now the Obama administration is poised to kick CAFE into overdrive, proposing a 56-mpg fuel economy requirement by 2025. Should the regulations be imposed, the world’s automobile companies will have to figure out a way to not only build vehicles that can deliver 56-mpg performance, but also persuade enough Americans to buy them. Auto industry experts agree that the latter is much more difficult to accomplish than the former.

In making the new proposal, the U.S. government has spread the word that the proposed standards, which almost double the current requirements, can be achieved simply by adding cost in the vehicle-manufacturing process. Some hybridization here and there and, bingo, cars can meet the new standards. It has also taken the line that the additional costs involved in manufacturing and marketing vehicles that can achieve the drastically higher fuel economy ratings -- costs that presumably will be passed on to consumers -- will be recouped by those same consumers from the cost savings that will accompany higher fuel efficiency.  The story is that consumers will pay more for the vehicle upfront, but they will get that money back in gas savings. Independent observers question how realistic that is, though, because there are several items that the proposal’s proponents either miss entirely or gloss over.

For example, buyers will be forced to pay more for new vehicles than they otherwise would have had to pay for the new, more fuel-efficient technology, but the payback period for that added expense will likely extend well beyond the typical ownership cycle. They’ll pay more initially; that’s clear. But when, or if, they will get that money back is decidedly unclear. The payback period will depend on fuel prices. If fuel prices are $3 per gallon (inflation-adjusted), then the payback period will be far longer than if fuel prices are $5 per gallon. What should be clear is the higher purchase prices for new vehicles will have a significant negative effect on overall demand. If you kick up the price of the average new car by $2,500 -- roughly 10 percent -- it will clobber demand for new vehicles. What happens when demand for new vehicles diminishes? You don’t have to be a Rhodes Scholar to figure out that fewer new cars will be built and sold, and because of that, a number of men and women involved in the manufacturing, marketing and sale of new cars will suffer economically. There is little doubt many will lose their jobs. In reaction to the higher prices for new cars, consumers will continue to drive their current vehicles longer, meaning the new regulations will, in essence, keep older, less-fuel-efficient and higher-emission vehicles on the road longer. The values of used vehicles will go up, making it more difficult for low-income consumers to buy any cars at all.

So, despite the rosy predictions that the higher fuel economy standards are a win-win, there is virtually no doubt that both consumers and the car industry will be hurt if the higher standards are instituted. Those familiar with the European model wonder why Americans don’t simply institute dramatically higher fuel taxes if the goal is to curb fuel use. The answer is that politicians lack the will to do that because it would jeopardize their chances of re-election. Instead, they continue to shift the burden to the car companies and to consumers.

Will Small Cars Hit It Big?

There has been a great deal of talk recently about the green economy, the creation of new jobs by the use of technologies that will also aid the environment. In some quarters, these efforts are seen as keys to economic recovery and future economic growth. With the federal government’s big stake in the ownership of General Motors and its heavier involvement in the auto industry as a whole, this premise will quickly be put to the test. The Environmental Protection Agency has proposed very stringent new fuel economy restrictions aimed at not just limiting fuel use but also curbing global climate change. Soon we will see if consumers will accept the consequences, which may include significantly smaller vehicles with significantly fewer features. If consumers balk at this, it will have major ramifications that will reverberate through the economy.

Asked if they will make sacrifices to aid the environment, consumers most often say they will. But it is the nitty gritty of their actions, not the things they give lip service to, that will really make a difference. So, many question whether American consumers will accept the smaller cars that may soon be forced upon them. 

A just-released study on the future of small cars in the United States shows American consumers are increasingly “interested” in smaller cars but have reservations about size and features. The study underscores the challenge automakers will face in trying to meet the new government-mandated improvements in fuel economy while still delivering what consumers want and will buy. And persuading consumers to buy such cars is the key, since the government has put the onus on the manufacturers not just to offer high-fuel-efficiency vehicles but also to sell them in significant numbers. In response, one expert predicts that tomorrow’s “small cars” won’t be all that small.

“Our research indicates that American car buyers are definitely willing to buy a more fuel-efficient car but that they don’t want it to be much smaller than what they are driving today,” said George Peterson, president of AutoPacific, the research firm that conducted the study. “Tomorrow’s successful small car won’t be tiny. It will be reasonably sized, have increased fuel economy, adequate performance and a full load of customer features.”

The firm’s study, Small Cars in the USA: Planning for the Coming Boom, is based on the results of its annual survey of over 32,000 new-car and light-truck buyers in the United States. The study looked at recent buyers of new small and midsize cars plus people who will consider a compact car the next time they buy. Findings suggest that current small-car buyers want features more in line with the features in larger, more expensive and more powerful vehicles.

“This survey shows that present owners of the smallest cars like the Toyota Yaris, Honda Fit and Chevrolet Aveo want more power and acceleration, more technology and more cargo room next time they buy,” said Peterson. “When they bought these cars, they accepted lower power and cargo room for better fuel economy and a high-value price, but in the future they want something more -- bigger, faster and with more bells and whistles.”

While the world’s manufacturers are hard at work preparing additional small, high-fuel-efficient models for the U.S. market, American consumers show no particular interest in downsizing their personal transportation.  This suggests that all manufacturers, including the struggling General Motors and Chrysler, might find it difficult to meet fuel economy and profitability targets as we move through the decade toward 2020.

“The question is whether American car buyers will avidly embrace smaller-size new products,” commented Peterson. “In our Motorist Choice Awards polling released last month, 106 of the top 107 were large cars, luxury cars, sport utility vehicles, crossover SUVs or minivans. Only one small car, the BMW 1-Series, scored in the top 100, landing in the 35th slot.”