Automakers: Desperation in Detroit

Chrysler Jeep vehicles at a Corte Madera, Calif., dealership. (Justin Sullivan/Getty)
The Obama administration gave with one hand but took away with the other.

Detroit — Just six years after the Obama administration bailed out Chrysler with $12.5 billion in federal loans and handed it to the Italian automaker Fiat, the company — now called Fiat Chrysler Automobiles (FCA) — is nervous about its future. CEO Sergio Marchionne has been knocking on doors this summer seeking a marriage with General Motors or another major automaker.

How did this happen? The reasons are many. The Chrysler division’s sales are strong, but mother ship Fiat is bleeding cash in Europe. The auto industry’s return on investment is notoriously poor these days compared with those of other industries.

But, perversely, perhaps the biggest threat to FCA is the same government that saved the company in 2009.

While the Obama administration was throwing a life preserver to Chrysler, it was also tying an anchor around its legs in the form of new standards to combat global warming that require automakers to more than double their average fuel-economy rating, from 25.5 mpg in 2010 to 54.5 mpg by 2025.

Yet in the last two decades, fuel economy gained by just 4 percent. According to Professor Michael Sivak of the University of Michigan Transportation Research Institute, average vehicle fuel economy is down to 25.4 mpg this year, “consistent with the increased market share” of sport utility vehicles (SUVs).

With 2025 less than two product cycles away, the government’s 54.5 number is a pipe dream. But as Margo Oge, the former director of the EPA’s Office of Transportation and Air Quality, discloses in her insider’s account of the 2009 mpg negotiations, Driving the Future: Combating Climate Change with Cleaner, Smarter Cars, the Obama administration wants to use the mandate to force a fundamental change in engine technology, in the same way that federal lighting standards were aimed at eliminating the incandescent bulb.

If automakers build alternative-fuel vehicles, the EPA will award credits to soften the mpg diktat. As a result, automakers are spending billions on electric-vehicle (EV) technologies to game the government rules — even though EVs have been met with a collective shrug by consumers.

Marchionne and his executive team are outspoken about the unsustainability of such spending.

“The entire industry is going more towards electrification,” says Reid Bigland, FCA’s North American vice president of sales. “It’s really the primary way to be compliant with the 2025 standards. That is consuming a significant amount of capital in this industry.”

The global-warming rules have created a two-tier market.

Automakers are churning out money-making sport utility vehicles at a record pace to keep up with popular demand. SUVs (“utes,” as they’re known in the trade) now account for 54 percent of market share — a 15 percent increase in the last five years. Yet production of money-losing battery-powered vehicles has also soared — even as their market share has remained flat at 2.2 percent.

The numbers tell a perverse tale of government incentives. Manufacturers have introduced 31 all-new ute models to meet demand since 2009. Meanwhile, despite stalled sales of EVs, automakers have flooded the market with 50 new hybrid and electric models.

“The automakers are beholden to two masters,” says long-time auto investment analyst Joe Phillippi of Auto Trends Consulting. “The companies are responsible to their customers and shareholders, yet the government wants its own way but with responsibility to no one.”

The rules are particularly punishing for U.S. brands like FCA’s Jeep, GM’s Chevrolet, and Ford, which dominate the truck market and depend heavily on utes for their profits.

“FCA’s problem is compounded by the fact that their gas-guzzling Wranglers and Grand Cherokees are hugely successful,” says Bob Lutz, former product-development chief for both Chrysler and General Motors. “Normally a situation you like, but problematic in a market distorted by [mpg] regs.”

Since Chrysler sells few small cars, it makes little sense for it to invest billions in battery technology, which is most useful in those cars. “Chrysler did not have the funds” to invest in EVs before bankruptcy, continues Lutz. “And even now they can’t divert‎ scarce capital and engineering money for these money-losing ‘compliance vehicles.’”

“What’s really driving the portfolio of American automakers is carbon-dioxide regulation,” Marchionne told the Detroit News earlier this year. “It’s the CO2 stuff that’s wagging the dog.”

The Detroit bailouts were a key part of President Obama’s 2012 election strategy, because they kept United Auto Worker funds flowing into Democratic-party coffers.

The Detroit bailouts were a key part of President Obama’s 2012 election strategy, because they kept United Auto Worker funds flowing into Democratic-party coffers.

Yet the president’s global-warming rules are hurting UAW workers. Ford, for example, would be better off investing in profitable truck plants. Yet it must build “compliance” EVs like the C-Max Energi and Focus Electric, which aren’t selling. Last month Ford announced it is moving production of those vehicles to Mexico in order to save on costs — even though it received a $5.9 billion Energy Department loan in 2009 to build them in Michigan.

Democrats decry the outsourcing of manufacturing south of the border, yet their green policies only accelerate the trend. Worse, as automakers divert resources to unprofitable EVs, they will be ever more dependent on trucks for profits. But trucks too — which account for an estimated 80 percent of Ford’s profits — are under pressure from the EPA. Ford is light-weighting its trucks with aluminum skin to meet mpg standards — a move that has added $1,000 in variable costs to its popular F-150 pickup.

President Obama touts his love for America’s automakers, yet his lead mpg negotiator, Oge, lays bare her agency’s contempt for Detroit carmakers in Driving the Future.

“The weakened bargaining position of the now crippled automakers” in 2009, Oge writes, gave the administration the opportunity to impose the mpg mandates. Oblivious to consumer tastes, much less manufacturer profitability, the agency went for the jugular in demanding 5 percent a year increases in fuel economy to force, as Oge puts it, “game-changing full electric vehicles or fuel cells.” She mocks automaker complaints that the regulations are unworkable. “They will always estimate that any regulation will cost far more than it actually does,” she writes.

Six years later, we can all see that the costs are real. Marchionne’s desperate search for a partner foreshadows the long-term threat that EPA mandates pose to the industry.

— Henry Payne is auto critic for the Detroit News and a freelance writer.



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