Friday, January 06, 2006

Cost of Doing Business

Daimler Chrysler, BMW, and VW do not seem to have any concern with the US environment or US laws. BMW paid $12 million in fines, DC paid $8.5 million, VW paid $3.4 million. The current CAFE laws require an average fleet gas milage to be obtained. 27.5 mpg for cars and 21.8 mpg for light trucks. It does not seem like any of these companies are really concerned with complying to the laws. If an American company had been breaking pollution laws in Germany you would see public outcry and possibly a complaint with the WTO. I propose law makers take the oppurtunity to raise fines for companies who are repeat offenders. Apparently the current fines are not heavy enough to cause a change of action.


LymanSS said...
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LymanSS said...

Dissenting View:

The notion that paying a CAFE fine constitutes a disregard for the US environment or US laws is misguided. Not only does it ignore the fact that environmental impacts are global, rather than country by country, but it also fails to acknowledge the nature of CAFE and how it is (supposed) to work.

CAFE was implemented in the 1970s in response to the oil embargos and mounting environmental pressure. The idea was to place economic pressure on manufacturers to decrease the fuel consumption of the vehicles they produce. There are a host of problems with this, as it relies on supply-side economic manipulation, which is unreliable at best. But more importantly is a problem acknowledged but not fully addressed by the structure of the law.

Trucks consume more fuel than cars. That is because a truck must be a larger, more massive, and sturdier vehicle in order to carry the intended payload or haul large objects. Furthermore they often require larger engines as a result of all this mass. As a consequence they burn more fuel, even when empty. Recognizing this fact, the CAFE regulations call for trucks to meet a different standard than that which passenger cars must meet. 20.5 mpg vs. 27.5.

While that is all well and good, this separation of cars and trucks is not sufficient to address the significant variations among passenger cars. A two seat Honda Del Sol is part of the same vehicle segment as a seven passenger Taurus station wagon. The Del Sol might achieve far superior economy, but that is largely due to its design requirements which do not call for the ability to haul seven people. Likewise the requirement for sports cars and luxury cars are often different from the requirements of an economy car.

Recognition of these differences is what lead to the corporate-wide average. The law could have called for all cars to achieve 27.5 mpg but that would have been absurd, knowing that some vehicle types will always require more fuel consumption that other types. But since the traditional manufacturer always produced a bit of everything, averaging them together made perfect sense. It allowed for the inevitable differences in fuel consumption, and also ensured that an improvement in the economy of any of a manufacturer's vehicles would be reflected in their overall performance. If all vehicles had to meet 27.5 mpg then there would be no point in improving the economy of a given model once it hit 27.5. With the corporate average in place there's still reason to improve.

In many ways this law was well suited to American manufacturers, which traditionally built a wide variety of vehicles for all sorts of needs. As a result their economy cars would offset their luxury gas guzzlers and they would have an average that came out somewhere near the middle. The reality was that this law, combined with the emissions laws and the low octane fuel that was needed for catalytic converters posed a challenge that was nearly impossible to meet for decades after the laws went into effect. But that's another story.

The real issue here is that the lawmakers failed to consider that there are manufacturers which produce vehicles for only one part of the segment. Just as McDonalds produces hamburgers while Subway serves subs, Porsche makes sports cars and Kia makes economy cars. Some manufacturers specialize in different segments of the vehicle market. BMW and Mercedes make luxury cars. So does Cadillac, but it can offset its economy figures using Chevy economy cars. Porsche makes sports cars. So does Ford, but for every GT it sells there are tens of thousands of Focuses. Should all manufacturers have to enter the economy car segment in order fit the profile of a traditional manufacturer? What ever happened to specialization?

The law does make some accommodation for specialty cars. Under title 49, chapter 329, section 32908 of the code, manufacturers who produce fewer than 10,000 vehicles annually can apply for exceptions, and can be assigned an alternate CAFE goal based upon what the manufacturer can "reasonably" achieve. While 10,000 vehicles per year may account for companies such as Ferrari, Lamborghini, Panoz, or Morgan, it ignores large volume single segment manufacturers such as Porsche, Jaguar, or BMW. Of course Jaguar is now part of Ford, allowing it to reap the benefits of multi-segment manufacturing. But before it was it often paid CAFE fines.

One might argue that Sports and Luxury cars should still be required to meet the standards, and shouldn't be exempt simply because customers want a fancy car. However this is not the goal of CAFE. Even those manufacturers who meet the CAFE requirements don't usually do so with their sports cars. The Honda S2000, the Pontiac GTO, the Ford GT, the Dodge Viper, the Mustang GT, the Mazda RX-8... Not one of these cars averages over 27.5 mpg. Even the Chevrolet Corvette which has miraculously high economy for a car of its performance capabilities only manages 28 mpg on the highway; this being the best effort of the world's largest automobile manufacturer.

The fact is that it simply is not possible to expect all vehicle segments to achieve the same average that we use to judge the industry as a whole. Should all manufactures have to enter the economy car market in order to be judged fairly? I say no, they should not. For this reason it is downright unfair to criticize a company for failing to meet the CAFE requirements without taking into consideration the segment of the market to which they are catering.

Cope said...

Even taking into account the very educational and much appreciated CAFE overview, it would seem that since DaimerChrysler and VW both have diverse model lines, they should be able to meet the requirements. I think that CAFE is a relic of a time significantly different from our current situation and I believe that a thorough reworking is in order. However, given the premise under which the laws were formed, it would appear that Daimler Chrysler and Volkswagen both fall under the "traditional" manufacturer moniker and sell vehicles blanketing a wide swath of the market. The fact that they still do not meet the requirements certainly reveals a few things about their design focus.
The matter of international trade "fairness" is another one entirely.

LymanSS said...

There is no doubt that CAFE is outmoded and in severe need of a redesign. No argument there. That is all the more reason not to fault manufacturers for failing to contort their model line-up to meet the whims of the CAFE requirements.

Mr. Cope is correct that VW and Daimler Chrysler are both full-line manufacturers. Each of them has models ranging from the economy segment up to the luxury segment. However this does not necessarily imply that they meet the profile of the traditional manufacturer envisioned by the CAFE regulations.

The Daimler Chrysler merger is still recent history, and while the company has a full line of vehicles it still serves some parts of the market more heavily than others. The Mercedes brand is one of the world's premier high-luxury marques, selling far more cars in the $75,000 and up range than Ford or GM ever has. These are the sorts of cars that simply must burn more fuel. For DC to overcome this they would have to either limit production of their high end cars, or sell more Neons to offset the low economy of all those S-Class sedans. Turning away good business is never a wise move, so there's no sense in asking them to simply not produce the caliber of luxury cars that they've spent over a century producing. And they certainly aren't deliberately turning in insufficient sales of their economy cars. They sell as many as they can. It's just a tough market. The simple fact is that they are the result of a merger between a classic full-line manufacturer, and a segment specific luxury manufacturer. The end product is a company that serves the a disproportionately large chunk of the premium market. Should we fault them for this? If Mercedes customers couldn't buy a Mercedes they'd simply buy a BMW or an Audi, neither of which can produce cars which equivalent cars that are significantly more efficient.

Volkswagen is a different story. First we have to recall that most of the cars VW sells are intended for multiple markets. While Ford and GM can count on most of their sales coming from the US market, VW has to keep in mind that its primary market is Europe. So instead adjusting their products to meet our arcane and outmoded environmental laws they have to adjust them to meet arcane and outmoded European environmental regulations. This means smaller displacement engines to avoid the European displacement taxes. In order to make acceptable power these engines need to have inefficient multi-valve valvetrains, multiple power robbing camshafts, and high rev limits. That is not the way to make great efficiency numbers. So does that mean that all Europeans are forced to drive inefficient high revving engines? No. They do make more efficient engines for their home market. They are called diesels, and we refuse to buy them here. In fact most of them are about to be banned because they can't run on the filthy sulfur laden diesel fuel we serve here. So we only buy their “high performance” models, which are not economy oriented, thereby shifting their economy numbers downward.

My point in all this is that the regulations are basically idiotic. And concluding that a corporation is irresponsible for failing to meet them is just silly. They aren't attempting to lie or cheat their way out of making better cars. They are simply responding to the demands of the markets they serve, and paying fines when their technologies and business plans don't allow them to meet the customers' needs and the governments' needs at the same time. Until consumers are demanding efficient cars we are going to see this conflict continue. The consumers will continue to demand high powered, spacious cars rich with amenities and safety features (all of which add mass and decrease efficiency) and the government will continue to fine the manufacturers for providing the products demanded of them.