Detroit Again Attempts to Dodge Pressures for a 'Greener' Fleet By jeffrey ball staff Reporter of the wall street journal

DETROIT -- For years the Big Three U.S. auto makers have dodged any increase in the federal fuel-economy standards their vehicles must meet. Now, amid growing concern in Washington over U.S. dependence on Mideast oil after Sept. 11, the car companies are running out of wiggle room.

So how are auto executives dealing with the looming threat of stiffer Corporate Average Fuel Economy rules? They're trumpeting a futuristic technological crusade they hope will earn them green points -- and big subsidies -- from Washington today. And they are still trying to maneuver, if no longer to block a CAFE increase, at least to structure it so it hurts them less and their Japanese competitors more.

It's a questionable strategy on both counts. Two of the Big Three -- Ford Motor Co. and DaimlerChrysler AG's Chrysler unit -- now are mired in red ink, and General Motors Corp. is only barely in the black. If they succeed in staving off a government requirement to make their most profitable vehicles substantially more environmentally friendly and technologically sophisticated, the companies probably won't soon make that change on their own. The Big Three's failure to innovate has repeatedly helped their foreign rivals. That's how Detroit lost its dominance in passenger cars in the 1970s and 1980s, and since the early 1990s, the same thing has been happening with the cash cows known collectively as "light trucks": sport-utility vehicles, pickup trucks and minivans.

The other danger is that Detroit's bet on a new technology, fuel cells, could take years to pan out, while its Japanese competitors capitalize on their existing edge and pull away. Earlier this month, the Bush administration announced it was launching a program to subsidize fuel-cell research over several decades. The new push replaces a similar Clinton-era subsidy that spent $1.5 billion over nearly a decade to get the Big Three to produce hybrid electric "supercars" getting 80 miles to the gallon. In the end, they never left the lab. Meanwhile, Japan's Honda Motor Co. and Toyota Motor Corp. have begun selling their own hybrid cars and are preparing to put another generation of them on the road.

The CAFE rules were established by Congress in 1975 and implemented a few years later to reduce U.S. oil consumption in the wake of the Arab oil embargo. They apply to all manufacturers who sell cars or light trucks in the U.S. The rules divide the U.S. auto fleet into two groups: passenger cars and light trucks. They require a major manufacturer's fleet of cars each model year to average 27.5 miles per gallon, and its fleet of light trucks to average 20.7 mpg.

The difference seemed logical a generation ago, when light trucks were still relatively specialized vehicles. But today, they account for about half of all new-vehicle sales in the U.S. Their surging popularity, combined with their lower fuel economy, has pulled down the average fuel economy of the country's total new-vehicle fleet to its lowest level in two decades. That has sparked increasingly loud demands from environmentalists that the government close what they dub the rule's "SUV loophole."

Light trucks were among the hottest sellers when auto makers rolled out free financing in the wake of the Sept. 11 attacks. They accounted for 56% of all sales in December, according to Autodata Corp., an industry research firm. But the terrorist attacks also added urgency to the calls for less-thirsty cars and light trucks. Together, cars and light trucks consume about 41% of the oil used in the U.S. economy.

A Toehold for Japan

The Big Three blame the CAFE standards for giving Japanese auto makers a toehold in the U.S. market. Honda and Toyota already were making small cars for a home market that demanded fuel economy, and the CAFE standards ended up constraining the Big Three's ability to keep cranking out the big vehicles they had been selling Americans for years. Over the past decade, the Japanese manufacturers have followed the Big Three into trucks, and many of their biggest SUVs and pickups get no better mileage than the comparably sized models from the Big Three. But the biggest and thirstiest trucks still represent a smaller portion of the Japanese auto makers' total truck lineups than is the case with the Big Three.

The upshot is that the Big Three are running up against the CAFE ceiling. Most Japanese auto makers aren't. What scares the Big Three is that, if the CAFE standard is raised, they would have to spend big to redesign their trucks to make them more fuel-efficient while the Japanese could grab more U.S. market share with their existing SUVs and pickups.

Detroit's efforts to minimize the pain of any CAFE increase are complicated by the blurring of lines that once defined domestic and foreign vehicles. Today, Japanese and European auto makers have factories on U.S. soil that employ thousands of Americans, and that gives them clout in Washington. Meanwhile, Chrysler has a German owner, Ford has acquired a passel of foreign luxury brands, and GM this month joined the Japan Automobile Manufacturers Association. The main auto-industry trade group in Washington, the Alliance of Automobile Manufacturers, represents 13 auto makers.

Getting the 13 to agree on any political issue is difficult, and nowhere more so than on what shape a CAFE increase should take. "There is going to be an increase in CAFE," says a DaimlerChrysler official. "You can pretty much design one that brings you a competitive advantage. But your competitive advantage is someone else's competitive disadvantage." And that, he adds, isn't "politically tenable."

One option would be simply to raise the current 20.7 mpg light-truck CAFE standard and require every major auto maker to retool its fleet to meet it by a certain date. But, given the prevalence of big trucks in their fleets, that would hit the Big Three hard.

In the 2001 model year, DaimlerChrysler's light-truck fleet registered an average fuel economy right at the limit: 20.7 mpg, according to preliminary figures from the National Highway Traffic Safety Administration, the agency that oversees compliance with the rule. GM's and Ford's fleets actually fell below the standard, to 20.5 mpg, though under CAFE's byzantine credit system, both manufacturers will be able to apply future- and prior-year credits to that number so they don't technically violate the standard.

By contrast, Honda's 2001 light-truck fuel-economy rating was 24.9 mpg. For Toyota the number was 22.1 mpg. Unlike Honda, Toyota builds pickup trucks and very large SUVs.

As for European makers, CAFE appears to be less of an issue. Bayerische Motoren Werke AG, DaimlerChrysler's Mercedes-Benz unit, Porsche AG and their brethren have been violating the CAFE standard for years and paying the resulting federal fines as a cost of doing business. BMW's 2001 light-truck rating, for example, was 19.2 mpg. BMW paid $13.1 million in CAFE fines in 2000 for its 1999 models.

One alternative idea for toughening CAFE has been discussed for years as a way to avoid hurting the Big Three. It would require all major auto makers, regardless of their current CAFE levels, to boost them by the same percentage over a set period.

It's as if a high-school teacher told the C students they all had to become B students -- but at the same time the B students also had to become A students. That would lock in the Big Three's ability to keep producing a fleet that is less fuel-efficient than their Japanese competitors'.

It also probably would amount to a cost penalty for the Japanese manufacturers. They already have invested more than Detroit in fuel-efficient technologies, so they would have to resort to more-esoteric technologies to maintain their lead.

The United Auto Workers, which represents workers at the Big Three but not yet at U.S. plants wholly owned by Japanese auto makers, endorsed a percentage CAFE increase in testimony before the Senate Commerce Committee last month, saying that as long as it's small enough to be "technically feasible and economically practicable," it "could be achieved without job dislocation or disparate impacts on manufacturers."

Similarly, officials from at least some of the Big Three auto makers say privately that they prefer the percentage model. But they won't say so publicly. One reason is their fear that if they endorsed any kind of CAFE increase, they'd lose control of the political debate and be hit with a big one. Another reason is that doing so would expose publicly a rift that exists privately between the Big Three and other members of the automotive alliance, particularly Toyota.

But the cracks within the industry were apparent at a hearing last Thursday before the Senate Commerce Committee, which is expected within the next two weeks to recommend some sort of CAFE increase. Sen. John Kerry, a Massachusetts Democrat, who has made clear he supports an increase in the CAFE rule, noted that a National Academy of Sciences panel that studied the issue last year concluded that auto makers could make "significant" improvements in the fuel economy of their vehicles. Although the panel cautioned that its conclusions weren't recommendations for a specific CAFE increase, John DeCicco, a senior fellow with the advocacy group Environmental Defense, calculates that the panel's study suggests auto makers could feasibly boost the fuel economy of their combined car and truck fleets to about 32 mpg over 10 to 15 years from about 24 mpg today.

Greg Dana, the auto alliance's vice president for environmental affairs, testified that the alliance doesn't want Congress to do anything about CAFE. It wants the issue handled by the Bush administration's NHTSA, which also is studying the issue. The alliance says that's because NHTSA is better able than Congress to consider the complex technical issues of CAFE without being swayed by political emotions. Critics of the industry see a different motive. They note that throughout the late 1990s, when NHTSA was part of the Clinton administration and Congress was controlled by Republicans, the auto industry successfully lobbied Congress to pass annual provisions barring NHTSA from considering any CAFE increase. Only last year did the industry pull back and let the freeze expire.

When, in last Thursday's hearing, Sen. Kerry asked the alliance's Mr. Dana how much auto makers could improve the fuel economy of their vehicles, Mr. Dana declined to answer. "Do you think the industry could do 1 mpg over 10 years?" Sen. Kerry asked. Mr. Dana demurred, saying he wasn't a technical expert. Responded Mr. Kerry: "Don't you think that renders you sort of silly?"

But the representative from Honda, the one big auto company that doesn't belong to the alliance, was more expansive. "There's a lot that can be done" to improve automotive fuel economy, even just by tweaking the century-old internal-combustion engine, said John German, the Honda official, though he too stressed that any CAFE increase should be phased in over several years.

Honda also distanced itself from an argument long made by many other auto makers that requiring light trucks to get better fuel economy will make them less safe because it will force manufactures to make them smaller and lighter. Honda, whose lineup is generally lighter and smaller than the Big Three's, said it recently hired a consultant to study the issue, and that the preliminary conclusion is that reducing the weight of an average vehicle by 100 pounds has a "very small and not statistically significant" effect on the number of traffic deaths.

In the end, the discord among auto makers probably will doom the chances of a straight percentage increase in CAFE, say executives of both the Big Three and the Japanese, particularly since the Japanese manufacturers dislike it and, with factories of their own in politically key states, they have become powerful players in Washington. "The word has come back from Senate offices that that's not going to fly," says a U.S. auto executive.

Another possibility is that the CAFE rule's distinction between passenger cars and light trucks will be replaced by a more complicated system that sets several different fuel-economy standards for vehicles depending on their weight. That would allow a manufacturer to build, say, as many big SUVs as it could sell, though it would be required to make those SUVs go somewhat farther on a gallon of gas.

This approach has critics, too. Chief among them are environmentalists, who note that it could be as ripe as the current system for manipulation. An auto maker, they argue, might be able to avoid improving the fuel efficiency of a vehicle in a particular classification by adding more features to it, thus making it heavier and shifting it to a classification with a less-stringent CAFE requirement.

Before Sept. 11, proponents of a CAFE increase were basically limited to environmental activists and their political supporters. Since the terrorist attacks, however, the voices calling for a CAFE increase have broadened to include those whose focus isn't protecting the planet, but reducing U.S. consumption of Mideast oil in the name of national security.

The auto industry's answer is the fuel cell. The holy grail of clean-car technologies, the fuel cell in its ideal form combines pure hydrogen with oxygen from the air to produce electricity that can power a vehicle's four wheels while producing only water as exhaust. One big practical problem is their cost. Another is how to get pure hydrogen to thousands of filling stations. But even using conventional fuel as a hydrogen source, the fuel cell likely would produce less carbon-dioxide exhaust than an internal-combustion engine.

Although it's a longshot, the auto industry argues the fuel cell is the only technology that has the real potential to significantly diminish the nation's demand for oil over the long term. At the Detroit auto show earlier this month, GM Chief Executive Rick Wagoner rolled out the "Autonomy," a mockup of a fuel-cell-powered car chassis that he said could end up "largely removing the automobile from the environmental equation."

Two days later in Detroit, Energy Secretary Spencer Abraham announce Freedom Car, a new Bush administration program to subsidize fuel-cell research. Freedom Car, he said, will help the nation "invent our way to energy independence," Mr. Abraham said.