Top Auto Execs Gather with Obama in Washington to Boast about New Fuel Economy Requirements, But Is Everyone Really Happy?
In a sign of unity rarely seen, high-ranking executives from more than a dozen automakers joined President Obama late last week to throw support behind the administration’s target of raising the corporate average fuel economy level to almost 55 miles per gallon by 2025.
Not all the automakers initially appeared thrilled about potential requirements for higher fuel efficiency. Particularly from the domestics, there has been some vocal opposition. Auto Remarketing learned from various analysts about a compromise made so that all automakers could stand firm together on this issue. And these analysts are taking a bit of an opposing viewpoint to what the administration is claiming.
What prompted the chief executive officers from the Big 3 as well as high-level managers from Japanese automakers and more to come to Washington?
“Most of the companies here were part of an agreement that we reached two years ago to raise the fuel efficiency of their cars over the next five years,” Obama told the assembled gathering at the Walter E. Washington Convention Center in Washington, D.C.
“And the vehicles on display here are ones that benefited from that standard. Folks buying cars like these in the next several years will end up saving more than $3,000 over time because they can go further on a gallon of gas,” the President continued.
“And today, these outstanding companies are committing to doing a lot more,” Obama went on to say. “The companies here today have endorsed our plan to continue increasing the mileage on their cars and trucks over the next 15 years. We’ve set an aggressive target, and the companies here are stepping up to the plate.”
Joining the president on the event platform was a list of executives that read like a “Who’s Who” of the American auto industry. That group included:
—Dan Akerson, chairman & CEO, General Motors
—Alan Mulally, president and CEO, Ford
—Sergio Marchionne, CEO, Chrysler/Fiat
—John Krafcik, president & CEO, Hyundai Motor America
—Jim Lentz, president and COO, Toyota Motors Sales USA
—Josef Kerscher, president, BMW Manufacturing Co.
—Andrew Goss, president, Jaguar Land Rover North America
—Doug Speck, president & CEO, Volvo Cars North America
—John Mendel, executive vice president, American Honda
—Scott Becker, senior vice president, Administration and Finance, Nissan North America
—James O’Sullivan, president & CEO, Mazda North American Operations
—Bob King, president, United Auto Workders
—Secretary Ray LaHood, Department of Transportation
—Administrator Lisa Jackson, Environmental Protection Agency
As Obama mentioned, the OEMs showed off a large collection of vehicles designed to address the fuel-efficiency concerns outlined in the president’s plan, including:
—2012 Range Rover, Model Evoque
—2012 Volvo S60 T5
—2011 Nissan LEAF
—2010 Toyota Plug-In Hybrid
—2011 Hyundai Sonata Hybrid
—2012 Honda Civic Hybrid
—2011 Ford F-150 4x4 with EcoBOOST
—2011 Dodge Ram 4x4 SLT
—2011 Chevy Cruz LTZ
—2011 Kia Optima Hybrid
Congressional members and key audience members in attendance also included:
—Rep. Nancy Pelosi, D-Calif., Democratic Leader
—Rep. John Dingell, D-Mich.
—Rep. Henry Waxman, D-Calif.
—Rep. Ed Markey, D-Mass.
—Rep. Dale Kildee, D-Mich.
—Rep. Sander Levin, D-Mich.
—Rep. Gary Peters, D-Mich.
—Rep. Tim Walberg, R-Mich.
—Rep. Hansen Clarke, D-Mich.
—Tomas Loveless, vice president sales, Kia
—Yoichi Yokozawa, CEO, Mitsubishi Motors North America
“Now for the last few months, gas prices have just been killing folks at the pump,” Obama stressed to the crowd. “People are filling up their tank, and they’re watching the cost rise — $50, $60, $70. For some families, it means driving less. But a lot of folks don’t have that luxury. They’ve got to go to work. They’ve got to pick up the kids. They’ve got to make deliveries. So it’s just another added expense when money is already tight.
“And of course, this is not a new problem,” the president acknowledged. “For decades, we’ve left our economy vulnerable to increases in the price of oil. And with the demand for oil going up in countries like China and India, the problem is only getting worse. The demand for oil is inexorably rising far faster than supply. And that means prices will keep going up unless we do something about our own dependence on oil. That’s the reality.
“At the same time, it’s also true that there is no quick fix to the problem,” Obama went on to say. “There’s no silver bullet here. But there are steps we can take now that will help us become more energy independent. There are steps we can take that will save families money at the pump, that will make our economy more secure, and that will help innovative companies all across America generate new products and new technologies and new jobs.”
Overview of Administration CAFE Goals
Friday’s event marked the next phase in the administration’s program to increase fuel efficiency and reduce greenhouse gas pollution for all new cars and trucks sold in the United States. Officials explained these new standards will cover cars and light trucks for model years 2017-2025, requiring performance equivalent to 54.5 mpg in 2025 while reducing greenhouse gas emissions to 163 grams per mile.
Taken together, the standards established under the administration span model years 2011 to 2025.
White House officials contend this plan will save consumers money, reduce the nation’s dependence on oil and protect the environment.
—Savings at the Pump: Thanks to the standards, the administration contends consumers will save an estimated $1.7 trillion dollars in real fuel costs over the life of their vehicles.
By 2025, official believe the standards are projected to save families an estimated $8,200 in fuel savings over the lifetime of a new vehicle, relative to the model year 2010 standard.
—Cutting Oil Dependence: The White House used the savings at the pump projections to reinforce its argument here.
“As our cars and trucks become more fuel efficient, we will need to use less oil,” officials emphasize. “Over the life of the program, the standards will save an estimated 12 billion barrels of oil — nearly four years’ worth of consumption by light-duty vehicles at current levels.
By 2025, the administration believes standards for model year 2011-2025 will reduce oil consumption by an estimated 2.2 million barrels a day — more than the U.S. imports from any country other than Canada.
“As the vehicle fleet turns over and older vehicles are replaced with more efficient ones, the oil savings from these standards will grow, ultimately reaching over 4 million barrels a day — nearly as much as we import from all OPEC countries combined,” the White House emphasized.
“The model year 2011-2025 standards are critical to meeting President Obama’s goal of cutting oil imports by one-third by 2025, contributing over half the savings needed to meet the president’s goal,” officials added.
—Protecting Human Health and the Environment: The White House went on to emphasize these standards will reduce carbon dioxide pollution by more than 6 billion metric tons — equivalent to the emissions from the United States last year, or what the Amazon rainforest absorbs in three years.
“The standards will protect public health by cutting air pollutants such as air toxics, smog, and soot,” the administration contended.
The White House recapped that this plan was developed in partnership with manufacturers, the state of California, the United Auto Workers (UAW), national environmental organizations and other stakeholders.
“These achievable and cost effective standards will bring the nation over halfway to the president’s goal of reducing oil imports by a third by 2025,” administration officials stressed.
“These standards thus represent a key component of the comprehensive energy policy that this administration has pursued since day one, which aims to increase safe and responsible energy production at home while reducing our overall dependence on oil with cleaner alternative fuels and greater efficiency,” they added.
Domestic OEMs Jump on Board with Plan
The mood displayed by the domestics’ top executives was considerably different last week than in previous instances when all three top bosses made the trip to Washington simultaneously.
“We are absolutely committed to continuously improving the fuel efficiency of all of our vehicles,” Ford’s Mulally began. “We support today’s agreement in principle on one national program for fuel economy and greenhouse gas emissions for the 2017-2025 model years.
“We are pleased to have worked together with all the stakeholders to be a part of a solution that benefits the environment while protecting jobs and providing customers with a full range of affordable vehicle choices,” the Blue Oval’s president and CEO continued. “This agreement provides the regulatory certainty we need to design and build fuel-efficient vehicles during the next 14 years.
“We also appreciate the president’s leadership in driving a solution that brings together all of the stakeholders and the bipartisan leadership of the Michigan delegation in advocating for a balanced approach that protects the environment and the economy,” Mulally went on to say.
The sentiment coming outof Detroit struck a similar tone. Like Ford, GM said it has agreed in principle on proposed fuel economy standards from 2017 through 2025.
“This proposed rule presents a path forward that greatly improves fuel economy while preserving customer choice and future industry growth,” the company declared in a statement. “GM plans to pursue the technical challenge ahead and to lead in delivering new fuel-saving technologies in cars and trucks customers want to buy and can afford.
“Reducing fuel consumption and lessening the automobile’s impact on the environment is important to our business because it’s important to our country and our customers,” the OEM continued. “GM has the best lineup of fuel-efficient vehicles in the company’s history. The proof is in vehicles like the Chevrolet Volt electric car with extended-range capability; the compact Chevrolet Cruze Eco, which gets the best highway fuel economy of any gasoline-powered car, and the two-mode hybrid Silverado pickup truck, which gets city fuel economy that rivals a small car.
“While future fuel economy targets are ambitious, the proposed CAFE rule represents a national approach and provides regulatory certainty for our industry,” GM asserted. “Additionally, the proposed rule includes flexibility that recognizes consumer needs and potential changes in technology and economic conditions.”
GM went on to state that it appreciated the strong, bi-partisan support of Michigan’s congressional delegation that “helped bring about an agreement that recognizes how vital auto manufacturing is to America’s future jobs and economic growth.”
Furthermore, just a day after Auto Remarketing reported how Chrysler and Fiat will remain under the leadership of chief executive officer Sergio Marchionne who will oversee a new management structure, the automaker joined its Michigan brethren in applauding Friday’s declarations.
“Chrysler Group supports, in principal, the agreement on proposed fuel economy standards from 2017 through 2025 under a continued national program,” officials shared in a statement. “We remain committed to the goal of a single, national, and coordinated program that will reduce greenhouse gas emissions and enhance our country’s energy security.
“We appreciate the Obama administration’s leadership in bringing together stakeholders to reach agreement on a set of principles,” they continued. “Chrysler Group also appreciates the continuous efforts of the entire Michigan congressional delegation in supporting U.S. manufacturing and jobs, consumers, and the environment.
“The Chrysler Group has actively adopted fuel-saving technologies including cylinder deactivation on V-8 engines, a new MultiAir system that is being introduced on the Fiat 500 today and an eight-speed transmission on the 2012 Chrysler 300 that will be introduced later this year,” the automaker went on to say.
“While the proposed targets are ambitious, the agreement provides a flexibility in achieving CO2-reduction goals that allows us to invest in the development of more fuel-efficient technologies and continue our rich history of creating compelling products that appeal to a wide variety of consumer needs and tastes,” Chrysler added.
Foreign OEMs Share Enthusiasm for CAFE Strategy
Honda, Toyota, Nissan, Mazda and Kia all expressed strong levels of support for what Obama announced in Washington last Friday.
Honda’s Mendel began the support two days prior to this event.
“Honda is proud to have actively worked with the administration as they developed their proposed national fuel economy and greenhouse gas emissions standards,” Mendel shared in a statement posted on the automaker’s website earlier in the week.
“Honda embraces this challenge, which will be good for our customers and for the environment, and we welcome the competition we will have with other automakers that will result from these new standards.”
Like Mendel, Toyota’s Lentz joined the automakers in Washington. It was a much different scene than a previous trip Lentz made back when Toyota was in the midst of defending itself on Capitol Hill during the massive vehicle recall firestorm.
“I am pleased to be in Washington today to demonstrate Toyota’s unyielding commitment to this important process,” Lentz commented. “The long-term objectives of this program are very ambitious, and we intend to meet the challenge.
“Toyota has embarked on the most aggressive expansion of hybrid, electric and hydrogen fuel cell cars of any automaker, and we are committed to continuing our demonstrated environmental leadership,” he continued.
“We share the administration’s goal of achieving major advances in clean, fuel efficient vehicles,” Lentz went on to say. “Obviously, there is still a great deal of uncertainty as to how the market will respond and what vehicle technologies consumers will embrace, which is why we are rolling out and testing a range of alternative fuel options. As the rule-making process moves forward, we look forward to working closely and constructively with the administration and other stakeholders to ensure that we realize our shared environmental goals in the most economically-effective and consumer-friendly ways possible.”
Like Honda and Toyota as well as the domestics, Nissan Americas also said it supports the Obama administration’s goal of new nationwide greenhouse gas and fuel economy standards. Nissan’s Becker endorsed this “one national program” approach as essential to future technical innovations across the automotive industry.
“The Obama administration has issued some extremely challenging greenhouse gas reduction and fuel economy improvement targets, but Nissan is a company built on innovation and we’re up to the task,” Becker declared.
“Nissan’s recent product introductions — including the all-electric Nissan LEAF, the Infiniti M Hybrid and improvements to internal-combustion technology — demonstrate our multifaceted approach to meeting consumer demand for increased fuel economy across our product lineup and to achieving these rigorous targets. We’re looking forward to helping achieve the administration’s goals under one national standard, which supports long-term planning and technology development.”
The reaction from Mazda’s O’Sullivan mirrored that from fellow Japanese OEMs but with an additional emphasis.
“The proposed fuel economy standards for 2017-2025 are extremely challenging — especially for smaller companies and those that primarily sell passenger cars, such as Mazda — but we are committed to meeting them,” O’Sullivan stressed.
South Korean automaker Kia also supported the plan coming out of the White House. Byung Mo Ahn is group president and CEO of Kia Motors America and Kia Motors Manufacturing Georgia.
“KMA is one of the automotive industry’s current fuel economy leaders, and we have supported the White House and various Federal agencies in the creation of the new national greenhouse gas (GHG)/fuel economy program for passenger cars and light duty trucks,” Ahn began.
“Kia Motors is committed to providing U.S. consumers with safe, high-quality vehicles that achieve outstanding fuel economy and has worked actively with the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) to develop advanced vehicles while our EcoDynamics philosophy has created a global alternative fuel and powertrain research program to develop and apply innovative fuel-stretching and emissions-cutting technologies,” Ahn continued.
“Kia recently introduced the brand’s first-ever hybrid vehicle in the U.S., and the all-new 2012 Rio and Rio5 subcompacts arriving in showrooms later this year will be the first vehicles in the subcompact segment to offer fuel-saving Idle Stop and Go technology,” Ahn went on to say.
Industry Analysts Skeptical of Administration Plan
Some of the top industry watchers — including Kelley Blue Book, Edmunds.com and TrueCar.com — all had various assessments about what Obama is championing and how automakers are coming out with support.
Jack Nerad, executive editorial director and executive market analyst for Kelley Blue Book, insisted that the rallying cry of many environmental groups was that any significant change in CAFE standards would be facing an uphill battle to get Congressional approval.
Nerad sees 54.5 mpg by 2025 as a compromise issued by the Obama administration since earlier targets of 60 mpg and 56.2 mpg appeared to be unattainable.
“After enduring slings-and-arrows from the environmental forces who felt the administration was getting too soft, and the car companies and other auto industry groups who felt the proposed regulations were impossibly high, the administration edged its proposal down yet another notch, to 54.5 mpg, and threw in several more added fillips to try to turn the tide in favor of ratification,” Nerad surmised.
Nerad contends among the biggest of these amendments to the initial proposal is special treatment for pickup trucks. Rather than hitting the 5 percent annual mpg increases that are required of new cars, the KBB analyst said new pickup trucks will reportedly only have to achieve 3.5 percent annual increases during the first five years of the initiative, finally bumping up to 5 percent over the balance ending in 2025.
“This move shifted the domestic Big 3 from opponents of the plan into supporters, and it also prompted the United Auto Workers to close ranks behind the newest version of the proposal,” Nerad emphasized.
So what does the whole CAFE revamp really mean? Nerad tried to clarify further.
“While it seems that there is something in the proposal for each of the big, organized constituencies — environmentalists, domestic car companies, union labor — one group has been largely ignored — the American consumer,” Nerad declared.
“The proposal, if it wins approval, would be the most ambitious fuel economy measure ever instituted, essentially doubling the current CAFE standards over the relatively short span of 14 years,” he explained.
“The May 2009 agreement on CAFE that will result in a 34.1 mpg standard in 2016 is estimated to cost $51.5 billion dollars, so one has to assume that getting to 54.5 mpg would cost at least that much, and who is going to pay the bill? American consumers,” Nerad continued.
With Nerad seeing potential buyers being forced to eventually pay for all of this new regulation, what could it mean for franchise dealers trying to move new metal?
“On the micro level, we have a hard time believing that the typical new-car customer will be happy about spending $2,000 more for his or her new car than they otherwise would for fuel economy benefits that may or may not pencil in their favor over their ownership period,” Nerad responded. “And we’re not alone in feeling that way.”
Kelley Blue Book cited a recent online poll conducted by another firm showed that 72 percent of buyers say they support the higher fuel economy standards. But when told that vehicle prices would rise $2,000 to make that happen, support for the higher standards dropped to just 34.5 percent.
Nerad acknowledged that “Certainly we all endorse the idea of better fuel economy and less reliance on foreign-sourced petroleum, but at what cost? And, how will this effort affect our already limping economy? What will it do to an industry that always has been one of the key drivers of commerce and prosperity?
“That remains to be seen, but there is no doubt it is a bold experiment,” he insisted.
Like Nerad, two analysts from TrueCar.com aren’t so certain the plan rolled out by the Obama administration is going to work well.
Scott Painter, CEO of TrueCar.com, began by stating, “Government regulation is generally the least effective and potentially most punitive way to stimulate change. In this case it would uniquely and negatively affect American automakers given our historical bias towards heavier and generally lower mpg vehicles.
“As a result the exceptions in the standards are necessary in order to establish a level-playing field,” Painter continued. “The existing capitalized investments — almost exclusively by American carmakers — in current product alone needs to be allowed to extend through the anticipated product lifecycle before a regulatory change can be fairly implemented.
“Based on the transactional analysis that we conduct at TrueCar.com, the U.S. consumer is hyper-reactive to market conditions,” Painter pointed out. “A change in interest rates or a spike in gasoline prices has an immediate impact on consumer preference and purchase behavior. As a result the best way to create effective and lasting changes to what carmakers produce is through market forces — not regulation.”
Jesse Toprak, vice president of industry trends and insights at TrueCar.com, offered another pitfall federal officials should consider when discussing CAFE standards.
“Electric vehicles will impact fuel efficiency standards for automakers but infrastructure is a major concern as charging stations are not readily available,” Toprak noted.
“With diesels having a 50 percent penetration rate in many countries, new clean diesels could nicely compliment manufacturers’ efforts to achieve the ambitious mpg goals and have an immediate impact with a lower incremental cost, along with the investments made in the emerging technologies,” Toprak suggested.
Meanwhile, Jeremy Anywl, CEO of Edmunds.com, took his critique of the Obama administration’s plan even further. Earlier in the week, Anwyl sent a letter to Lisa Jackson, the top administrator at the Environmental Protection Agency.
Anwyl used the letter to explain how Edmunds.com has been bombarded with inquiries about the potential impact of the proposed standards on consumers. The site leader contended that automakers told him they have had to agree to secrecy as a condition for being included in how the plan was constructed.
“I understand the politics of being able to announce proposed standards at a press event with the major car companies in attendance. But there is a dark side as well. The optics of negotiating a deal in secret are horrible,” Anwyl wrote to the EPA.
“Perhaps most disappointing is that you have conferred with environmentalists and with automakers, but neglected car buyers — the very consumers who will be asked to buy this new generation of vehicles,” he continued.
“Consumers are voicing real concerns. How will their choices be limited? Will prices rise? By how much? Adding to this angst is the sheer complexity of the proposed standards,” Anwyl insisted.
These concerns prompted the Edmunds.com chief to ask, “Shouldn’t a goal of any new standards be that they are easy to understand? Presumably individual consumers can weigh in after the proposed standards are actually announced. But it stretches reason to the breaking point to think that any consumer concerns will be taken seriously after a deal has already been struck.
Anwyl wrapped up his letter to the EPA saying, “President Obama campaigned that he would bring transparency to Washington. Judging by this process, I can only conclude that his administration still has not lived up to this promise.”
More Doubt about Potential CAFE Reformation
After Friday’s event, the Competitive Enterprise Institute — an organization that calls itself a non-profit, non-partisan public policy group dedicated to the principles of free enterprise and limited government — gave a harsh assessment of the administration’s plan.
CEI said new fuel economy mandates on cars and trucks announced by Obama will “lead to more traffic fatalities, compromise auto reliability and increase costs for consumers."
In elaborating on these points, CEI general counsel Sam Kazman began with, “If these super-efficient, yet-to-be-produced cars will be all that great, then we wouldn’t need a federal law requiring them. That’s why this ultra-CAFE represents wishful thinking in its most lethal form.
“The auto industry will meet these requirements,” Kazman explained, “but it’s consumers who’ll pay the price. They will end up with more expensive, less useful, and much less reliable new cars. Worse yet, some consumers will pay with their lives, because the downsizing required by ultra-CAFE will mean that many of these vehicles will be far less crashworthy than they otherwise would be.”
Another CEI expert thinks if OEMs have to bring more hybrid vehicles to the market, that’s problematic, too.
“Even a 25-fold increase in hybrid vehicle market share may not suffice to meet the standard without mass reductions that reduce vehicle safety. Obama is pushing a dramatic and untested departure from what people are actually buying,” added Marlo Lewis, a CEI senior fellow.
Which Brand Is in Best Position to Handle New CAFE Standards?
Even before Obama and the automakers rolled into Washington for last week’s announcement, LeaseTrader.com conducted an online poll to gauge opinions about what nameplate is best positioned to handle the 54.5 mpg mandate.
Site officials discovered 63.6 percent of respondents believe Hyundai is best positioned to meet these standards even before the proposed date.
Conducted between July 18 and 22 and incorporating 1,138 responses from drivers across the country, LeaseTrader.com also found:
—72.4 percent of respondents say they are in favor of higher fuel standards.
—That level drops to just 34.5 percent approval if it means vehicle prices will rise more than $2,000.
—69.8 percent of respondents feel automakers already have the technology to significantly improve the fuel standard technology.
—63.6 percent of those polled believe Hyundai could meet these fuel standards before the government deadline.
—47.2 percent of those questioned also believe the domestic automakers can be profitable under these fuel standards.
LeaseTrader.com pointed out demand for Hyundai vehicle leases is at the highest level ever in site history. Hyundai vehicle leases represented 8.3 percent of total searches in the LeaseTrader.com online marketplace during the month of June — compared with 6.9 percent in June of last year.
The site added customers polled feel Kia (57.2 percent) is next best-positioned OEM to meet new fuel standards before proposed date, followed by Honda (55.6 percent). Ford was the top domestic automaker in this category getting 47.3 percent of customers polled.
“A lot of Hyundai’s success has more to do with the way it builds cars than anything Mother Nature has done recently to the automotive industry,” noted Sergio Stiberman, CEO and founder of LeaseTrader.com.
“Our demand for Hyundai leases has risen considerably over the years and we only see that demand going higher in the future,” Stiberman added.
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