“Fuel-Efficiency Rules Are Already Raising Costs in Detroit” – Wall Street Journal, 22 January 2014

Even though GM and Chrysler have paid off their auto-bailout loans, they are still under the thumb of Uncle Sam; elements of Obama’s Climate Action Plan do not only extend towards power plants, but automakers as well. According to the Climate Action Plan, car companies’ products have to average 54.5 miles per gallon by 2025. This, however, requires huge design changes that are going to be a big blow to profit margins.

America’s best-selling vehicle, the Ford F150, is getting a complete redesign. from the inside out. It will be the first truck and large-volume vehicle to have an all-aluminum body, which will lower its weight and increase its fuel efficiency. Obama’s Climate Action Plan requires full-size trucks to have a better fuel efficiency, up to 30 mpg from the current 20 mpg.

Switching to aluminum, though better for the environment, is an expensive move. As we reported last month, converting to aluminum means higher material costs and new manufacturing machinery. While the price tag is high, Ford can’t fight the new regulations, and is instead doing all it can to effectively market the innovation behind its newly redesigned products, the F150 and Mustang—the latter redesign offers a never-before-seen turbocharged four-cylinder engine. Each sale of the redesigned F150 contributes an additional $10,000 to Ford’s bottom line.

GM, on the other hand, is creating a whole new midsize truck to meet Obama’s requirements, which they believe will be less costly. Chrysler, instead, is spending more on nine-speed transmissions and diesel engines.

Obama had hoped that the market for electric cars would increase; as a bid in that direction, an element of the Climate Action Plan allows automakers to acquire mpg credits for manufacturing zero-emission vehicles. However, the demand for electric vehicles is still low, proving that that kind of car is still a niche product. Pricing for electric cars start at $40,000 and only increase from there.

While it is always painful to have a winner and loser, the “materials selection war” (steel vs. aluminum) is a long-term societal consideration and climate change mitigation, where aluminum is the ultimate winner. These trends will force America to increase the recycling of post-consumer aluminum products—as opposed to landfill and scrap export—and to also increase the design and manufacturing of recycle-friendly alloys.

There is simply not enough expensive and energy-intensive primary aluminum capacity available to meet higher aluminum demand of 100 million, and growing, cars per year.

See also:
Will All-Aluminum Cars Drive Metals Industry?
A Clean Car Boom
GM Planning Strict Diet for New Pickup Trucks

Developed and Written by Dr. Subodh Das and Tara Mahadevan

February 12, 2014

Phinix LLC

Copyright 2013. All rights Reserved by Phinix, LLC.

www.phinix.net    skdas@phinix.net

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One thought on ““Fuel-Efficiency Rules Are Already Raising Costs in Detroit” – Wall Street Journal, 22 January 2014

  1. Dear Subodh,

    This article offers one perspective on new fuel economy regulations. But major factual errors and strongly emotional rhetoric undermine its credibility.

    First, electric vehicle pricing does not “start at $40,000 and go up from there.” Thte best-selling electric vehicle, the Nissan Leaf, has a base MSRP of $29,830, and with the Federal electric vehicle tax credit that’s just $22,830, which is about half of the article’s claim. When I priced the 2013 Volt last summer, it started at $32,500 with a $4000 Chevy rebate and a $7000 Federal tax credit, leading to $21,500 — again half of the article’s claim. Plug-in vehicle sales nearly doubled in 2013 to 96,000, so if “Obama had hoped that the market for electric cars would increase,” his hope has largely been realized.

    Second, although efficient vehicles incur higher up-front costs, they save quite a lot over time in lower fuel expenditures. While we don’t have cost numbers detailed enough to calculate pay-back time, by the greenhouse gas metric the aluminum F-150 body is net positive after 3-5 years.

    Finally, the article is heavy on strong rhetoric which is not helpful to a debate on the merits of higher fuel economy standards. One-liners like “GM and Chrysler… are still under the thumb of Uncle Sam” and “While the price tag is high, Ford can’t argue can’t fight [sic] the regulations” are raw emotional appeals which seem intended to mislead.

    Economically, the optimal solution is to have some kind of price on carbon, whether a carbon tax or cap-and-trade. That way consumers can decide on up-front savings or savings over time based on personal marginal discount rates, or roughly equivalent psychological preferences. As things stand, that is not likely for the United States, and so we must live with inefficient measures like the incandescent bulb ban and fuel economy mandate.

    The good news is that after 30 years of new innovations going entirely to bulkier and more luxurious vehicles with the same fuel consumption, US auto makers are finally directing their technical efforts to actually saving fuel.

    While it’s healthy to hear many perspectives, hopefully future posts will be more factually sound and useful to an informed discussion of the issues.

    Regards, Adam

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