The forthcoming sale of DaimlerChrysler’s Chrysler automaker unit and the Supreme Court ruling earlier this week requiring the Environmental Protection Agency to police auto emission standards are sure to roil the Big Three Detroit car manufacturers. Both developments are yet another indication that U.S. automakers need to shift swiftly from a business model based on churning out big gas-guzzlers to one that is at once more technologically competitive, environmentally friendly, and in tune with our nation’s energy security requirements.
Because of the business and financial structure of the U.S. auto industry, however, this transformation will not be easy. That’s why Congress has a key role to play, helping the Big Three retool their assembly lines, design shops, and employee benefits packages to regain their competitive edge.
Ford Motor Company, General Motors Corp., and Chrysler Group are all handicapped right now by the need to generate enough cash flow to honor the health care commitments and pension obligations to their current and retired employees. This cash flow-driven business model works when the automakers can sell lots of big, high-priced cars at high-profit margins so that the companies can also enrich their shareholders and invest in new technologies for new car models.
Problem is, gas-guzzlers are out of favor with consumers amid rising gas prices and growing concern about global warming. What’s worse, few consumers want to buy the Big Three’s more fuel-efficient compact or sub-compact car models, which are more expensive to build than what’s on offer by their rivals. This means the three companies must subsidize the sale of these cars for low or money-losing profit margins and then sell as many as they can in group sales to rental car companies to help meet their so-called Corporate Auto Emissions Economy, or CAFÉ, fuel-efficiency standards.
Negative cash flow at the three U.S. automakers alongside mounting losses leaves all three companies unable to cope with competitive pressures from rival auto manufacturers who sport popular hybrid vehicles, such as Toyota’s Prius, or smaller, more fuel-efficient conventional models that are cheaper to produce and thus cheaper to sell than comparable U.S. models. From a public policy standpoint, this mismatch in the marketplace is bad for our country.
Our nation needs to reduce our dependence on foreign oil and help U.S. automakers maintain the good jobs and technology leadership that once defined America’s growing middle class and underpinned the growth of our economy. Allowing the automakers to slip into bankruptcy or fall prey to private equity investors (or both in succession) could well result in even more Americans without health insurance and more pension plans dumped the federal government’s Pension Benefits Guarantee Corporation.
Chrysler, for example, boasts $18 billion in pension and health care liabilities that private equity bidders for the company, which is now on the auction block, would most likely seek to “financially engineer” into somebody else’s liability. Shifting those legacy employee costs onto someone else would go a long way towards restoring Chrysler to positive cash flow and profitability and would help restore the price competitiveness of its more fuel efficient cars, but at a steep social cost.
So how can Congress help the automakers? How about some tough love that’s good for them and good for America. The United States needs to help the automakers help themselves by raising sharply CAFÉ standards on fleets of new cars so that all three automakers start producing automobiles that are environmentally friendly and popular with consumers. The three U.S. automakers must also be encouraged to produce more flexible fuel vehicles that are produced by automakers with slight modifications to their fuel systems to give the vehicle the dual capacity to operate on either gasoline or E85, a blend of 85 percent ethanol and 15 percent gasoline.
Recently, U.S. automakers have made significant commitments to increasing the number of FFVs on the road and have recognized that they must boost their CAFÉ standards. U.S. car manufacturers should be building on this momentum and strengthening their competitive advantage in both arenas—even though this will be financially painful for Ford, GM, and Chrysler.
That’s why Congress needs to help offset the pain with some thoughtful, targeted legislative mandates. The United States should ensure auto companies offer a new generation of highly efficient, advanced technology vehicles by:
- Requiring that all new passenger vehicles sold in the United States are FFVs capable of running on high-percentage ethanol fuel blends by 2015 and starting immediately with a commitment to transform the civilian federal government fleet to flexible fuel and hybrid cars by 2010.
- Encouraging automakers to redouble efforts to make FFVs more fuel efficient and explore the feasibility of utilizing existing technologies, such as turbochargers, to offset the energy content difference between gasoline and renewable fuels.
- Preserving critical U.S. auto industry jobs and giving consumers more options, by offering strong incentives for manufacturers to convert their assembly lines and retrain workers to produce the advanced engines and hybrid cars of the future. For example, loan guarantees and competitive grants to carmakers to ease conversion of manufacturing facilities and relief for legacy health care costs in exchange for producing more FFVs are powerful manufacturing incentives that should be pursued immediately.
- Recognizing the strong public benefits of improved fuel economy and biofuels, advocate for a new “Carbon Alternative Fuel Equivalent” to assess the “petroleum mileage” of current vehicles and strengthen tax incentives for consumers who purchase, and automakers who produce, more efficient and advanced cars such as FFVs while eliminating tax advantages for gas-guzzling cars as a means to protect consumer choice and to foster incentives to put clean cars on the road.
- Encouraging automakers to promptly and thoroughly inform all current owners of FFVs of the capacity of their existing cars to accept both unleaded gasoline and high-percentage ethanol blends such as E85 fuel.
- Encouraging automakers and parts suppliers to dedicate additional resources to improving the fuel economy of FFVs.
Congress should also help raise consumer awareness about these new vehicles. The United States should expand consumer choice and promote innovation within American industry by:
- Creating a program for the certification and labeling of biofuels and bioproducts that recognizes their environmental attributes including oil displacement, carbon emission reductions, and other benefits. The success of the Energy Star program shows that consumers are willing and able to use their buying power to influence producers toward more sustainable practices.
- Fully implementing and funding at $5 million the existing Farm Bill biobased purchasing program to use the government’s purchasing power to increase market demand for biobased fuels and products. The federal government, which spends more than $230 billion annually on products and services and is a major consumer of transportation fuels, can be a major catalyst for change.
In addition, the automakers need help on the road. In today’s marketplace, less than 1,000 of the 180,000 fueling stations nationwide offer E85 fuel pumps. The United States must create requirements and strong incentives that move big oil companies from their current inaction and make E85 reliably available at filling stations by:
- Ensuring that ethanol fuel pumps are built where there is demand, by creating a requirement that in any county in the nation where 10 percent of registered vehicles can run on flexible fuels, 10 percent of pumps must provide E85 fuel.
- Establishing an E85 retail presence at more than 2000 service stations (for owners and branders of more than 25 pumps) by next year and ensuring E85 pumps are at 50 percent of all stations nationwide by 2015.
- Providing low-interest loans and grants to ensure increased retail delivery of E85.
- Providing incentives to facilitate the prompt development of technical standards to ensure Underwriters’ Laboratory and other independent testers approve safe and reliable standards for E85 pumps that will be accepted in all jurisdictions.
- Promoting the installation of new fuel pumps and distribution infrastructure by increasing the tax credit for installing new pumps to $50,000 in 2006 and creating incentives for early action with a $10,000 decline in the credit amount each year until 2010.
- Maintaining high quality standards for E85 production by establishing an industry specification that ensures the quality of gasoline blended in E85 meets industry standards and does not contribute to performance problems with E85.
By taking all of these steps in tandem, Congress could set the stage for Detroit’s Big Three automakers to turn around their ailing businesses, reclaim their cutting-edge technology prowess and continue to provide good jobs and good wages for an important U.S. workforce. Benefits to the broader economy would flow accordingly. It’s a win-win set of policies that Congress should act on swiftly.