Trump Cutting Car Fuel Standards May Not Help US Automakers

(Bloomberg Gadfly) -- 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. automakers 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-making.

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 favorite, and most lucrative, products -- helping to offset the drag of a vehicle market that's barely growing overall.

The problem is that, with U.S. vehicle sales largely flat, growth increasingly is found elsewhere. For example, almost two-thirds of GM vehicles sold 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 percent more:

Looking ahead, Bloomberg New Energy Finance forecasts Chinese vehicle sales to rise to more than 33 million units per 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 U.S. to reach 2 million in 2025, versus 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 U.S. was the biggest autos 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 U.S. 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. automakers, 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. America'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 counter-argument here is that American manufacturers could have the best of both worlds, selling more trucks in a relatively loosely regulated U.S. 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 multi-speed 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.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

©2018 Bloomberg L.P.

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