If fuel-efficiency standards are eased, Detroit can look forward to selling more of its favourite, and most lucrative, products.
Detroit's auto giants are on the cusp of what looks like a major victory. The National Highway Traffic Safety Administration is considering making drastic cuts to fuel-efficiency targets for future vehicles that were set under president Barack Obama in 2012. U.S. auto makers would like easier mileage standards because improvements from here will raise the cost of vehicles and require selling more electric vehicles, which are currently loss-taking.
Plus, Americans love trucks.
Trucks command higher margins than cars and Detroit dominates the top of the rankings for the best-selling models (Japanese brands dominate for cars). Hence, if fuel-efficiency standards are eased, then Detroit can look forward to selling more of its favourite, and most lucrative, products – helping to offset the drag of a vehicle market that's barely growing over all.
The problem is that, with U.S. vehicle sales largely flat, growth increasingly is found elsewhere. For example, almost two-thirds of GM vehicle sales last year were outside North America. Since 2007, the number of vehicles sold in China has risen from roughly half the U.S. figure to almost 70 per cent more.
Looking ahead, Bloomberg New Energy Finance (BNEF) forecasts Chinese vehicle sales will rise to more than 33 million units a year by 2030, while the U.S. market is set to barely expand to 18.5 million.
And China, along with Europe, is heading in the direction of greater fuel efficiency and vehicle electrification, not less. Just this week, Beijing tweaked incentives for electric vehicles to encourage more longer-range models. In Europe, meanwhile, the push for lower emissions and increased electrification extends from the European Commission all the way down to individual cities, such as Amsterdam and Paris. China and Europe have good reasons to do this, ranging from energy security – no shale-led "energy dominance" for them – to curbing local pollution.
Last summer, BNEF projected sales of electric vehicles in the United States to reach 2 million in 2025, compared with 2.9 million in China and 1.8 million in Europe. Those numbers were predicated, however, on fuel-economy targets staying in place. In other words, China was forecast to be the leading market for this new, fast-growing segment of the industry even assuming U.S. support for domestic development.
When the United States was the biggest auto market in the world and internal-combustion engines the only viable technology, then divergences in fuel-economy standards and other regulations between markets were relatively easy to manage. These things no longer hold true, and there is a growing risk of an increasingly fractured global market.
Indeed, besides China and Europe, the United States must confront internal divisions. California sets its own targets on fuel efficiency and emissions under a waiver from the federal government, and these have been adopted by more than a dozen other states and the District of Columbia. Accounting for more than a third of U.S. vehicle sales, this coalition effectively sets the standard for U.S. auto makers, as a business predicated on scale economics cannot long manufacture two versions of every vehicle to keep everyone happy in one country.
And California is gearing up for a legislative war of attrition should the Trump administration loosen standards and revoke the waiver; Governor Edmund Brown's "State of the State" address last month, in which he raised California's electric-vehicle targets, was an unsubtle salvo.
That brewing clash aside, a splintered global market might provide near-term comfort at home but, over time, could leave Detroit disadvantaged on the world stage. U.S. automotive companies cannot afford to be parochial. As Xavier Mosquet, a senior partner and electric-vehicle expert at the Boston Consulting Group, says:
"If you're a [autos] manufacturer in the U.S., you're looking at the biggest market in the world in China, and you know you have to manage for higher fuel efficiency."
One possible counterargument here is that American manufacturers could have the best of both worlds, selling more trucks in a relatively loosely regulated United States and using the profits to develop other vehicle platforms elsewhere. That's effectively how they subsidize their electric-car production today.
In reality, it's tough to see it working that way as differences between markets widen. A multispeed research and development effort would spawn higher costs as scale economies eroded and ultimately tilt the companies toward the comforts of the past; namely, making more trucks for the home market.
Not only would that risk ceding opportunities for future growth and technology leadership to others, it could leave U.S. manufacturers vulnerable if oil prices jump for some reason down the road. Recall that a big reason two of Detroit's Big Three crashed into bankruptcy almost a decade ago was because their reliance on trucks to fund bloated business models left them caught out when the oil-price spike pushed consumers away from gas guzzlers.
Detroit, be careful what you wish for.
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