CAFE: failed business model foisted on Detroit

Lessons from setting the freight railroads free

Excerpt:

CAFE has done nothing to reduce gasoline usage or oil imports (car owners just end up driving more miles). In 34 years, not a whisper of testimony has come from any quarter that the policy actually works. It only causes U.S. manufacturers to make small cars and dump them at a loss on the public, subsidized with the profits of pickups and SUVs.

Detroit doesn't have to match the transplants in wages and benefits, but CAFE distorted what would have been the Big Three's natural path of adaptation to the natural fact of growing diversity in the marketplace with the arrival of foreign manufacturers. Detroit would have focused on market segments where it could compete profitably even with its higher labor cost -- on bigger, pricier vehicles where labor cost is a lower share of value added.

Unfortunately, Mr. Obama, that freethinker, took to the CAFE fraud like a bat to a belfry. He signaled his arrival on the presidential stage by sternly demanding higher mileage standards early in his campaign. The "change" candidate who might have broken with a generation of political cant about CAFE instead appropriated the fraud for his own careerist purposes.

That tangled web now catches him in a fatal contradiction as he pours tens of billions of taxpayer dollars into the failed business model that CAFE foisted on Detroit.

Comment: Predictions: Now that GM is Government Motors and the Obama administration is the de facto leadership of it. GM will build cars that Obama wants. And when Americans won't buy them, the Dems will raise gas taxes to the point that gas is again $ 4.00 a gallon (or more) and pain at the pump will make small cars economically viable. It's not a pretty picture!

CAFE killed the Big Three

Can the Big Three survive a bailout?

Excerpts:

... [In 1975] the institution of the Corporate Average Fuel Economy requirements designed to limit our reliance on foreign oil in the wake of the Arab oil embargo.

Instead of simply limiting foreign imports or adding federal taxes to fuel costs to give consumers an incentive to buy more fuel-efficient vehicles, the government instituted byzantine regulations that required American manufacturers to build (or at least market) fuel-efficient cars just so they could continue selling the cars and trucks they were already known for.

Since the United States had always been a country of "cheap gas," (a tradition that continues, by the way) American car companies were not geared up to build small, fuel-efficient cars, but foreign manufacturers were. The result was that Americans were almost forcibly exposed to import vehicles, and many American consumers liked what they found.

The CAFÉ regulations accompanied by inexpensive gasoline were analogous to plopping consumers into the middle of a giant candy store and then forcing the candy manufacturers to somehow persuade a percentage of consumers to buy broccoli instead.

When all was said and done, the CAFÉ rules ended up giving a strong leg up to the Big Three's import competitors, putting their market share on an upward curve that hasn't ceased climbing.

Of course, having helped push American consumers into import cars, albeit inadvertently, the federal government then tried to reverse the trend through new intervention.

At the urging of the U.S. government, the Japanese manufacturers adopted "voluntary" restraints on their exports of vehicles to the U.S. beginning in 1981. The goal was to give U.S. companies "breathing room" so they could catch up to the Japanese in producing small, fuel-efficient vehicles. (Sound familiar?)

Again, this might have seemed a worthy plan at the time, but it had several unintended consequences that ended up doing much more harm to the domestic manufacturers than good. In the short term it limited supply of popular Japanese-built vehicles, which resulted in windfall profits for the dealers of the top imports, helping those brands establish very strong dealer networks.

It influenced the import manufacturers to move up-market both by building more expensive vehicles and by establishing luxury brands like Acura, Lexus and Infiniti. And it gave strong impetus for the import manufacturers to build plants here in the United States.

Today a large percentage of the "import brand" share of the U.S. market -- more than 50 percent of the total light-vehicles sold here -- are vehicles built by Americans in foreign-managed factories on U.S. soil. Ironically, to counteract this, the Big Three automakers have increasingly moved production from the U.S. to lower-labor-cost countries like Mexico.

So what are the implications of this history lesson? The first takeaway is that a portion of the woes the domestic Big Three are suffering today are the result of current and past federal government policies, so it seems fair that they be accorded government assistance now in time of dire need.

But equally important, while the Big Three automakers might well be accused of not correctly gauging the needs and desires of the American buying public, one group that is demonstrably much worse in that endeavor is Congress. If the U.S. government were a car company, it would not only be deep in the red, but also have miserable customer satisfaction scores.

Comment: See SUVs and minivans created due to original mandate

CAFE standards signaled the end of the traditional long station wagon, but Chrysler's Lee Iacocca developed the idea of the minivan, which would fit into the separate truck category and allow automakers to comply with emissions standards. Eventually, this same idea led to the development of the SUV

Autos: The empty rhetoric of the Democrats

George Will: In Detroit, Failure's a Done Deal

Excerpts:

The answer? Do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled, allowing the companies to try to devise plausible business models. Instead, advocates of a "rescue" propose extending to Detroit the government's business model for the nation — redistributing wealth from the successful to the failed, an implausible formula for prosperity.

...

Congress could help the Detroit Three by allowing them, when meeting CAFE (corporate average fuel economy) standards imposed by Congress, to count fuel-efficient cars they import from their overseas factories. Congressional Democrats oppose that because those imports are not made by members of the United Auto Workers. Those Democrats, their rhetoric notwithstanding, really care most about the union. "Saving the planet" comes second and last comes the health of the auto companies.


Some opponents of bankruptcy stress that it might terminate health-care coverage enjoyed by UAW retirees who are too young for Medicare. Think about that. If people want to retire before 65, or 35 for that matter, that is their business. But there is no public interest in protecting the luxury of retirement in the prime of life just because in palmy days a private contract between a union and a corporation established it as an entitlement for all seasons.

Comment: Again the CAFE standards!

Tweak CAFE and help Detroit

Yes, Detroit Can Be Fixed

Excerpt:

... simply have to allow auto makers to meet the fuel economy standards with any mix of autos made in domestic or overseas factories.

Under the nonsensical "two fleet" rule that now applies, manufacturers meet the standards separately with their "domestically" and "nondomestically" produced fleets. What does this have to do with making sure U.S. consumers get good mileage? Nothing. It's a naked handout to the UAW at the expense of the companies and their customers.

How dumb is the two-fleet rule? Nissan, in a petition for its removal, points out foreign brands may actually minimize the domestic content in their U.S. cars so they can continue to count as "nondomestic."

How dumb is the rule? Chrysler might not be unraveling today if not for the two-fleet rule, the real genesis of the Hail Marys it's been throwing in all directions to find an electric car or a small-car partner or to merge with GM. Chrysler has a perfectly salvageable business making trucks, minivans, muscle cars and Jeeps -- doomed only by the lack of enough small, fuel-efficient cars to roll out of a UAW factory with a Chrysler emblem slapped on.

For 30 years, to make and sell the large vehicles that earn their profits, the Detroit Three have been effectively required to build small cars in high-wage, UAW factories, though it means losing money on every car. (That -- not some perverse desire to make bad cars -- is why they skimped for decades on styling, engineering and materials in their family sedans.)

Sure, this bullet would be far from silver and would still cause pain. The UAW might declare war to stop production from being shifted offshore. The Big Three might have to pay billions in job buyouts to use their new freedom. Since 2005, they've had some leeway under Nafta to shift "domestic" production to Mexico and haven't done much about it.

But here's the key: Detroit would finally get what every foreign competitor and just about every other business has -- normal leverage over labor costs. Auto jobs wouldn't automatically flee offshore. The Big Three would rather hire high-quality U.S. workers -- but on the same terms that Toyota or Nissan or BMW do.

Let's not kid ourselves that a taxpayer rescue would be anything but a down payment on a never-ending bailout. The bailout already is never-ending: Chrysler was already rescued once. Forgotten are the Reagan-era import quotas that inflated the price of every car sold in America to help prop up the Big Three. If hooked up to Washington life supports today, Detroit's first assignment would be to "protect jobs" -- job protection guarantees being one of the Big Three's fatal errors in the first place.

Comment: I was watching CNBC tonight and the commentator opined that a Detroit bailout would in essence make GM (and Ford and Chrysler) like Airbus. I understand the the Saturn Astra is a fine small car, but GM cannot make money on it because it is too expensive to be built in the US.