Helping US carmakers help themselves

Obama's new fuel efficiency standards will end Detroit's uncertainty and help make US automakers competitive again

Thomas Noyes
guardian.co.uk, Wednesday 20 May 2009 21.00 BST

Barack Obama had surprising company when he announced new fuel efficiency standards for cars and light trucks yesterday. Standing with Obama were executives from Ford, Toyota, General Motors, Honda, Chrysler, BMW, Nissan, Mercedes-Benz, Mazda and the United Auto Workers.
It might seem surprising, but there are reasons why the automakers would welcome new national standards, if a little reluctantly. Yes the ongoing bailouts of GM and Chrysler make it harder for those companies to argue with the government, but the automakers have other, more compelling reasons to accept stricter mileage standards.
As hard as it might be for free-market fundamentalists to understand, automakers have openly welcomed a consistent, predictable standard they can use for planning and developing their products. The US has had two standards for years: the federal government's and California's, which 17 other states have embraced. Building models to meet two standards is expensive and slows down development.
Even worse for automakers was the uncertainty. Congress mandated new standards in 2007, but the Bush administration never followed through. Automakers have been waiting to see whether they would face one standard or two, making it difficult to develop new models. Now they will be able to move new products from the drawing board to the showroom without having to retool along the way.
For those worried about Detroit's economic health, it's worth pointing out that Cafe (corporate average fuel economy) standards, which have been in place for years, apply equally to Honda, Toyota and Volkswagen, as they do to Chrysler, Ford and GM.
Indeed, the new standards could create an opportunity for Detroit to play catch-up on small vehicles – a market segment ceded to German and Japanese automakers years ago. With Korean companies increasing US market share, and China and India knocking on the door, Detroit may finally realise that it can't ignore such a large market segment without becoming further marginalised.
In Detroit's glory days, GM, Ford and Chrysler offered a full range of products, from small starter cars to big luxury vehicles. They had a strategy of moving their customers up through their product lines, from entry-level compacts to station wagons to luxury sedans. Forty years ago, my grandparents had two GM cars in the driveway: a Cadillac and a small Corvair.
But in the 1970s, Detroit began to lose market share for entry-level vehicles. When I was growing up, we had a VW Beetle sitting next to the Ford or GM station wagon. Detroit's small cars ranged from whimsical (the AMC Gremlin) to dangerous (the fire-prone Ford Pinto).
After Japanese makers gained a foothold selling small, inexpensive cars to Americans, they leveraged their strength in that segment to introduce a wider range of products, until luxury brands like Lexus were seen as superior to their US counterparts.
Years after Detroit ceded the compact market to foreign competitors, and gradually lost market share up and down the product line, US auto executives still treated small, efficient cars as a low-margin afterthought. Being forced to focus on smaller, efficient new cars will give Detroit the opportunity to reintroduce itself to younger buyers, and perhaps build some of the loyalty it started losing a generation ago.
There should be little doubt that automakers can meet the new standards. As they used to say on Star Trek: "We have the technology." According to the US Environmental Protection Agency, fuel economy in the US has actually declined over the last two decades, even though engines have become more efficient.
The drop in fuel efficiency is almost entirely due to the increase in vehicle weight over the period. For years, the only innovation coming from Detroit was to build bulkier SUVs, until passenger vehicles weighing in at three or four tons became common. Truck sales (including SUVs built on truck platforms) grew from 19% of sales in 1975 to 48% in 2008. Only recently have SUV and light truck efficiency increased, after marginally higher standards went into effect.
Automakers will have to change their ways, starting with building lighter vehicles. While this doesn't mean we will all be driving subcompacts, it does mean that we can expect to see lighter cars, trucks and SUVs in the coming years.
But automakers will have to ramp up the innovation. It was only four years ago that GM nixed the idea of building an electric car. For decades most auto companies never moved new technologies past the concept stage. It used to be said that the electric vehicle was the car of the future and always would be. But now automakers are waking up to find that the future is now.