Sunday, August 16, 2009

GM's Hollywood accounting

On the day General Motors emerged from bankruptcy with the U.S. government as its new owner, GM vice chairman Bob Lutz emerged from meetings with the Obama administration's auto task force to speak with reporters. He said he had been pleasantly surprised to find the government so cooperative. He said the company would still be making Camaros, Corvettes, and full-size pickup trucks. He had a twinkle in his eye.

Last week we found out what he was twinkling about.

This is what Bob Lutz told Fox News' Jennifer Griffin on July 10:

I was afraid that we would get under a lot of pressure from the government, because that's what everyone was saying. The government is going to make you do nothing but green cars. And my worry initially was if they do that, they are going to make us produce vehicles that the American public does not really want to buy.

Happily, as I got to know the members of the task force, I realized they had one overriding objective only, and that is to make General Motors into a streamlined, successful company.

And they absolutely want us to keep producing Camaros, keep producing Corvettes, keep producing full-size pickup trucks, keep producing sport-utilities, and so forth, provided, and this applies to every other car company, we have to meet the future fuel economy regulations.

So as long as we have the technology in the vehicles that meet the fuel economy regulations, the U.S. government absolutely wants us to keep fulfilling the needs and desires of the American public because they realize this is the only way we are going to be successful, and it's the only way the taxpayer is going to get her money back.
On Tuesday, GM announced that the Chevy Volt will get 230 miles per gallon.

This is pretty.

If you were wondering why GM thinks anyone would pay almost $40,000 for a car that's designed to drive forty miles and then sit in a garage for eight hours with a plug in its side, here's your answer:

They don't.

That's why they're not terribly concerned that the battery for the Chevy Volt isn't even ready yet. The car isn't designed to be driven. It's designed to be averaged.

In 1975 Congress passed the Energy Policy and Conservation Act, which created a giant regulatory stick known as CAFE standards. CAFE is an acronym for "corporate average fuel economy."

Under the law, new passenger cars beginning with the 1978 model year had to meet a government-mandated fuel economy standard, but the rule did not apply to each individual model. It was the average fuel economy of all the company's new passenger cars that mattered.

Since trucks didn't have to meet the same standard, it wasn't long before passenger car sales were seriously dented by the surging sales of light trucks and the sport-utility vehicles that fell into the same government category.

(The boom in SUVs wasn't the only unintended consequence of CAFE standards. As cars were made lighter, the death toll on the nation's roads went up. Heavier cars get lower mileage, but they're safer in a crash.)

The CAFE standards forced car companies to build high-mileage cars, even if company executives believed they wouldn't sell, just to offset the lower mileage of the cars that were selling.

This is a part of the auto industry story that has gone mostly unreported. While Democrats blame the industry's decline on auto executives and Republicans blame it on union contracts, hardly anyone blames the government regulations that forced the carmakers to make bad business decisions for thirty years.

The Congressional Research Service released a report about CAFE standards in 2002 that reads like the medical chart of a patient who's not going to make it. Every couple of years the House or Senate would throw the industry into uncertainty by threatening to change the CAFE standards on cars or light trucks. Here's one example:
There are sharp differences in the Corporate Average Fuel Economy Standard (CAFE) provisions between the House and Senate versions of comprehensive energy legislation, H. R. 4. The House bill, passed on August 1, 2001, includes a provision calling for a reduction of 5 billion gallons in light-duty truck fuel consumption over the period of model years (MYs) 2004-2010. The provision would also require National Highway Traffic Safety Administration (NHTSA) to develop a weight-based system for establishing fuel-efficiency standards. The Senate began debate on comprehensive energy legislation at the end of February 2002. Senators Kerry and McCain reached a compromise to propose a combined fleetwide average of 36 mpg by MY2015. However, on March 13, 2002, the Senate voted (62-38) for an amendment offered by Senators Levin and Bond to charge NHTSA with development of new CAFE standards. The Senate went on to approve an amendment (56-44) from Senator Miller to freeze "pickup trucks" (to be defined by the Secretary of Transportation) at the current light truck standard of 20.7 mpg. This language was in the final version of the Senate energy bill when it passed April 25, 2002 (88-11). On September 19, the conferees agreed to the House-passed goal of achieving 5 billion gallons, but shifted the window to MY2006-MY2012.
We will probably never know how many business decisions -- to locate a factory in this state or that one, to keep a factory open or close it, to fight the United Auto Workers' demands or give in to them -- were influenced by the desire to pick up a few key votes in the House or not lose one in the Senate.

America Wants To Know believes that the government has no business regulating fuel economy in privately owned vehicles, and that the U.S. auto industry would be healthy today if automakers had stood up to the government in 1975 and told lawmakers they'll close the doors and fire everybody before they'll spend the next thirty years on their knees to government regulators pleading for permission to average one mile per gallon less than last year.

But now we have the next best thing, which is the government hilariously in the position of trying to make General Motors profitable.

Yes, the heavenly light pours from the sky and we witness a miracle: government bureaucrats on their knees to the power and the glory of horsepower.

To the surprise of Bob Lutz and everybody else in the car business, the Obama adminstration's auto task force wants General Motors to sell just as many Camaros, Corvettes and full-size pickups as they possibly can.

Of course, there's still the pesky problem of those government-mandated Corporate Average Fuel Economy standards. Camaros, Corvettes and full-size pickups really pull down the average mileage of the fleet.

Not to worry. As the Detroit Free Press pointed out today in its Inside Autos column, "It's difficult to assess miles per gallon in a vehicle that may not be powered by a fuel that's measured in gallons."

In other words, a car that sits in the garage with a plug in its side can be said to have whatever mileage you'd like it to have.

GM says the Chevy Volt gets 230 miles per gallon.

Don't expect the government to take them to court over it. Now that they're in the car business, they just want to sell cars.

General Motors won't get special treatment from regulators. As Bob Lutz said, GM has to meet the fuel economy regulations, "and this applies to every other car company."

Nissan says its upcoming electric Leaf gets 367 miles per gallon.

Mel Brooks couldn't have written this.

Copyright 2009

Editor's note: You might be interested in the earlier post, "The fabulous, fictional Chevrolet Volt."