Monday, May 18, 2009

If You Build It, They Might Not Come

As part of its increasing involvement in the auto industry, the Obama Administration made some big news today on the emissions front, according to the NYTimes:

WASHINGTON —The Obama administration will issue new national emissions and mileage requirements for cars and light trucks to resolve a long-running conflict among the states, the federal government and auto manufacturers, industry officials said Monday.
President Obama will announce as early as Tuesday that he will combine California’s tough new auto-emissions rules with the existing corporate average fuel economy standard to create a single new national standard, the officials said. As a result, cars and light trucks sold in the United States will be roughly 30 percent cleaner and more fuel-efficient by 2016.

One problem: What if consumers don’t want to buy them?

The common myth among the chattering classes is that the U.S. automakers are struggling because they allowed foreign automakers to take the lead on environmentally friendly technologies, such as hybrid vehicles.

The New York Times even makes this point at the end of its story.

During the presidential campaign, he gave a speech in Detroit chastising the American automobile industry for doing too little to reduce the nation’s dependence on foreign oil and to improve the vehicles’ fuel efficiency.

"The auto industry’s refusal to act for so long has left it mired in a predicament for which there is no easy way out," Mr. Obama said.

That inaction has brought General Motors and Chrysler to their current dire state, requiring billions in federal bailouts and Chrysler’s forced marriage to Fiat to survive.

I won’t waste your time detailing the real reasons these automakers are in trouble. I assure you, though, that their failure to act on fuel efficiency have little to do with it. The fuel efficiency standards, on the other hand, had a big part.

For quite a while, the Detroit 3 knew how to make cars Americans wanted—big SUVs and minivans. With gas so cheap in the U.S. relative to other countries, Americans have typically been willing to sacrifice fuel efficiency for more comfort. Paying for fuel-efficient technologies — such as hybrid cars — was simply not worth it for many consumers. A purchaser of the much-lauded Toyota Prius, for instance, would need to drive it 4.2 years before he even broke-even with gas savings compared to a Toyota Camry LE, according to Edmunds. It makes sense as a political statement, not as a money-saving vehicle.

Unfortunately, the fuel efficiency standards set by Congress required the automakers to maintain an average fuel economy for their entire fleet. This required producing unprofitable smaller cars, to offset the lower fuel economy of the profitable big ones. Further, the fleet requirements also provided a nice subsidy to the United Autoworkers union by requiring automakers to maintain the fuel economy standards on domestically produced cars separate from those produced in foreign countries. This prevented the automakers from building profitable SUVs in the U.S., while shifting production of smaller cars elsewhere (where they might have been built more cheaply). Don't let the fact that American car companies sold tons of SUVs and truck trick you into thinking they weren't creating small cars, too*. Thinking logically, they would have had to have been building small, fuel-efficient cars to average out for all the big, fuel-inefficient ones they were building, too.

* If you've ever wondered why rental car companies and other fleets buy so many domestics, here's you answer. Car companies needed to unload all these cars somewhere.

Going back to the New York Times article, the reason GM/Chrysler needed a bailout has nothing to do with inaction on the fuel economy. It has to do with the fact consumers aren’t buying cars. Period. Even Toyota and Honda have lost billions of dollars in this economy.

You can blame years of poorly produced cars for the Detroit 3's downfall**. Or an antiquated franchise system. Or way too many brands. Or poor images. Or managerial arrogance. And so on. I don't think a failure to produce fuel efficient vehicles (if this myth is even true) has much to do with.

**Even though their cars are actually some of the best rated now.

Raising the gas tax would easily solve this problem. Consumers would now have incentives to buy fuel efficient vehicles. Because there would be actual demand, carmakers would have an incentive to build them. But why would any politician do the smart and honest thing that might upset the public, when he can just shift the blame to someone else instead.

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