Obama’s effect on the auto industry
As if the auto industry didn’t have enough problems already, the Obama administration is planning to up the fuel economy requirements on cars to 35.5 mpg. I can’t even begin to comprehend the logic in this move. In one breath, Obama is touting government involvement to save the dying US auto industry and in the other, he is pushing for crippling regulations on them. This makes absolutely no sense.
Detroit already has issues making cars that people want to buy. So what better way to save them than forcing them to make cars that nobody wants to buy?
Look at vehicle trends over the past few years. The big three rode the wave with the SUV craze. So much so, they nearly completely abandoned development on all other car models. When gas prices soared, SUV sales collapsed and sales of small feul efficient cars and hybrids skyrocketed. Many people think this is still the current state of the industry. Mostly this misnomer due to the hype of the “global warmers”. However, this is not the current market trend. While vehicle sales are poor overall due to the economy, sales of small economy cars have dropped like a rock since gas prices have fallen. Sales of trucks and midsize cars are now topping the market.
What can we learn from this trend? Americans in general do not want tiny cars. The Prius has seen huge sales drops and people are abandoning their orders for SmartCars. Consumers want large cars. They also want fuel efficiency, but sales trends show they are willing to sacrifice some MPG for size and utility. Thus, you are seeing a return to the classic midsized car. If left alone, this is the direction of the free market.
However, the government no longer believes in the free market. Instead, Obama is pushing for this new 35.5 MPG CAFE law that will take effect by 2016. Let’s think about this for a minute. How many cars on the market currently get 35.5 MPG? Most hybrids struggle to get those numbers. What makes the government think that the auto industry (already broke) can make those technological advances in six years?
So realistically, what is going to happen to the auto industry? To answer that, you first have to understand that the CAFE law is an average of the MPG of all the cars that an automotive company produces. The key word is “produce”. So basically, if you produce a gas hog, you have to produce a highly fuel efficient vehicle to balance it out. Now nobody said anything about how many of these vehicles you have to sell. The goal of the auto industry is to sell cars. If the consumers demand midsized cars that do not meet the government’s high CAFE standards, the auto companies have to offer an econobox or two to offset the MPG of the popular models. So in this scenario, a car company needs to develop and produce a high volume car that meets consumer demands as well as develop and produce a low volume car that serves nothing more than to meet government requirements. Doesn’t it sound stupid? Well, welcome to socialism!
So what does this mean to the US auto industry and their vehicle offerings? We’ll probably see an end to the big gas guzzlers that we dream of owning. Large SUVs and muscle cars will probably all but go away. Some of the more popular of these, like the Mustang, will survive in a lesser form. V8s will be replace by V6s in these models. As a whole, the auto industry will focus on midsized cars and CUVs. This will be the bulk of their sales. However, don’t expect to see 35 MPG in these cars anytime soon. It’s just too expensive to meet these goals. Instead, expect to see many new “tiny” car models hit the market. Not interested in these cars? Few people will be. The goal is only to make them available to meet the CAFE laws. Most companies will import cars built by other manufacturers to avoid in house development costs. Chrysler will leverage their new parent Fiat, Ford will use their European operations, and GM has already announced plans to import from Asia. Also, expect to see more hybrid options in midsized cars… but don’t expect these to be standard. They are expensive to produce, so they will continue to be premium options on most models.
This move clearly puts the US auto industry at a disadvantage. Companies like Toyota and Honda are well equipped to offer high MPG cars in the US even at low volumes. Chances are at least one of the big three won’t make it. Or at least will emerge in a form that is very different than they are now. Gone are the days that the United States was a dominant force in the automobile world. We could have returned to power, but overbearing government regulations will ensure that we will not.
So what does this mean for you and I as the consumer? Simple. Expect to pay more. Fuel efficient technologies cost more to develop. The price will be passed on to the consumers. Also, thanks to the government, you will be paying a premium on the midsized vehicles you want to support the low volume economy cars that you do not want. If you have the means, now is the time to buy a car. Choose wisely and get a car that will last a while. Chances are, the selection of cars to choose from in a few years will be far less desirable and will cost a premium.
On a final note, isn’t it interesting that this new CAFE law will take effect in 2016? Two years after the 2012 Presidential election.
