Fuel Economy Deal in US Congress

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December 1, 2007

It is being reported that a fuel economy deal has been reached by the US Congress with a final bill to be voted on and delivered to the President by the end of the year.

If passed into law, automakers would be required to meet an industry wide average of 35 miles per gallon for cars and light trucks, by 2020. This will be the first time both the car and truck fleet would be combined in the average. Currently they are averaged separately with their own requirements.

For the automobile manufacturers selling vehicle in the US, this is actually good news, as this eliminates "uncertainty". Now all the manufacturers can begin planning to meet the requirements.

Unlike 30 years ago, when Chrysler, GM and Ford dominated the US market and foreign brands sold niche vehicles, today most manufacturers sell a full line-up of vehicles. Toyota, Nissan and Honda sell a range of vehicles from small sub-compacts to a full assortment of pickup trucks and SUVs.

This bill will put a tremendous burden on all the manufacturers to develop new powertrains, advance light-weight vehicle structures and adjust the manufacturing (car-truck) capacity accordingly. However, the new CAFE bill as a whole does not impose a burden that will financially threaten the US industry. The average manufacturer already spends about $5 - $12 billion a year in capital investments. The $100 billion often quoted as the expense to meet this requirement is over-simplified, as these companies will set up joint ventures with each other to share the cost.

In the end, what this gives is the target they need, to begin designing and engineering their fleet. On a bright note, they will be able to charge a premium for low fuel-efficient vehicles because they will not be able to sell this class of vehicles in large numbers.

But at least now, the manufacturers know where they need to be in 2020.

For the US consumer, this most likely will mean driving smaller and more expensive vehicles. I do not believe the public is aware of this not-so-unintended consequence of this bill.

In summary, I believe anytime uncertainty is reduced or eliminated, that is good news for this business. That is the reason why the auto companies signed on to this bill. Suffice it to say, this bill actually levels the playing field for all the manufactuers because they all have a lot of work ahead of them.

Update December 2, 2007 - Detroit News Auto industry backs CAFE deal 


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