CSM Worldwide: Election Year Promises Will Meet Automakers' Harsh Reality

NORTHVILLE, Mich., Aug. 27, 2008 -- The domestic auto industry is gaining market share this year, at least in the rhetoric of the two presumptive presidential candidates. Both candidates now say they will back domestic automakers with loan guarantees to help the industry restructure, support 'cap and trade' programs to reduce carbon emissions, develop new energy sources and fund the development of green vehicles. But their platforms diverge sharply where the rubber meets the road, according to CSM Worldwide.

"Sen. Obama and Sen. McCain have been focusing on pocketbook issues like $4 gas, global warming and security issues like energy independence. Now the auto industry's financial crisis has their attention," said CSM Senior Economist Charles Chesbrough. "It may seem like the candidates' positions are closely aligned, but they actually have radically different approaches to CAFE, the vehicle technologies they champion and the support they're willing to lend to automakers."

The Obama Plan -- Plugged in But Tuned Out?

On his official campaign website, Sen. Obama has outlined an aggressive approach to improving fuel economy: a doubling of fuel economy standards within 18 years.

Specifically, he said he will increase fuel economy standards by 4 percent per year, and partner with the domestic automakers by offering $4 billion in retooling tax credits and loan guarantees. That's on top of his support for $25 billion in low-interest loans authorized -- but not funded -- by Congress last year under the Advanced Technology Vehicles Manufacturing Program.

Consumers, meanwhile, will be able to claim a tax credit of up to $7,000 for purchasing advanced technology vehicles.

Inside the Obama plan is a proposal to make the entire U.S. vehicle fleet flex-fuel capable and put 1 million plug-in hybrids on the road by 2015, including the entire White House fleet by 2010 and half of all cars purchased by the federal government by 2012.

"Plug-ins are the Holy Grail for fuel economy because they can be driven extended distances on battery power alone and deliver -- in theory -- more than 100 miles per gallon," said Eric Fedewa, vice president, powertrain forecasting at CSM. "However, major players in the industry disagree if plug-ins are the answer. There's also the question if $4 billion for R&D and $7,000 incentives for consumers will be enough to perfect plug-ins and other technologies, put them into mass production and make the vehicles affordable for consumers on an accelerated timetable."

So far, General Motors and Toyota have announced firm plans to produce plug-in hybrids, which rely on expensive lithium-ion battery technology. But neither company is expected to earn a profit on those vehicles, at least initially. Indeed, most industry experts believe that automakers have yet to earn a positive return on today's full-hybrid technology, which uses less expensive batteries.

According to GM Vice Chairman Robert Lutz, the company aims to manufacture 10,000 plug-in electric Chevrolet Volts in 2011, the vehicle's first full year of production, and 60,000 the following year -- and sell them all at a loss. Prices are estimated to be $30,000 to $40,000.

Toyota has said it plans to enter the market in the same timeframe but it hasn't announced volumes or pricing. It took a decade for sales of its current hybrids to reach 1 million units.

Honda and Nissan, for their part, are skeptical of the cost-benefit ratio of plug-in technology, while Ford, which is building a small fleet of plug-in hybrids for a California utility, has suggested that commercialization of its technology is at least five years away.

"Promises made on the campaign trail have a way of moderating if the candidate gets elected, but it's clear that a President Obama will use a 'carrot and stick' approach to force the industry to become as green as possible, and do it faster than they may be able to contain," said Chesbrough.

The McCain Plan - A Bio-Future But Fewer Guarantees

In contrast to Sen. Obama, Sen. McCain is on the record stating that he will enforce existing CAFE standards and raise fines and penalties for non-compliance -- fines routinely paid by automakers like BMW, Porsche and Daimler.

Earlier this summer, he appeared reluctant to endorse federal loan guarantees for automakers as they retool. The rationale, as he explained to the Detroit News in August, was partly his fear that federal intervention could undermine public and investor confidence in the automakers. Now, the campaign is urging Congress to fund the Advanced Technology Vehicles Manufacturing Program.

On his website and in recent statements, he also is calling for a 10 percent research and development tax credit, a $300 million prize for the American automaker that delivers a technology package that would allow for commercialization of plug-ins and zero emissions vehicle technology, and he has pledged incentives of up to $5,000 to encourage consumers to buy green vehicles.

Sen. McCain also has called on automakers to accelerate the introduction of flex-fuel vehicles that can run on ethanol. At the same time, he proposes eliminating mandates, subsidies, tariffs and price supports that focus exclusively on corn-based ethanol.

"While Sen. McCain's endorsement of loan guarantees, R&D tax credits and consumer incentives show support for the industry, his proposal to enforce CAFE rather than increase it may be more important in the long run," said Fedewa. "The industry is making massive investments on borrowed money to meet the stringent fuel economy targets already on the books, and they need to strive for a return on their capital. Increasing CAFE would only increase the risks facing the industry."

The Fallout for Consumers - and Detroit

Regardless of which candidate wins the election in November, Chesbrough predicts higher vehicle prices and lower industry volumes.

"The cost of complying with today's fuel economy regulations alone will make cars more expensive to buy in coming years, and the inflation in vehicle prices will likely outpace wage growth between now and 2014," said Chesbrough. "Consumers will respond by buying smaller vehicles, keeping their cars and trucks longer and financing them for seven or eight years.

"These and other factors are going to keep industry volumes and profits under pressure," he added. "This reality may be what prompted Sen. McCain to reconsider loan guarantees for Detroit, and it may eventually lead Sen. Obama to scale back his calls for a technology revolution, or at least offer more assistance to achieve it."