Ford and GM Seek Further Relaxations : Easing of Standards on Fuel Economy Sought Through 1989
General Motors and Ford scored a big victory in Washington last week when the Reagan Administration formally approved a relaxation of federal fuel economy standards for 1986 model cars, allowing the nation’s two biggest auto makers to continue making their highly profitable big cars without facing the prospect of millions of dollars in fines for falling short of mileage requirements.
Now, however, the two car companies say that isn’t enough. Already, they are asking the government to ease the fuel economy standards for 1987 through 1989 as well.
For GM and Ford, this is such an important and costly issue that they are making rather dramatic threats of what will happen if they don’t get their way.
Plant Closures Threatened
They are saying--as they did when the change for 1986 models was being studied--that they will shut down their big-car plants, throwing thousands of U.S. workers out of their jobs, if the Administration doesn’t agree to the demands. The government is expected to make its initial response as early as next month.
“We’re still not out of the woods even with the change for 1986,” says GM spokesman Stan Hall. “We would still have significant job and production losses if there are no further changes in the standards.”
Such threats may seem no more than bluffs, since much of Ford’s and GM’s profits come from sales of U.S.-built big cars. Critics assume that, rather than closing down their most profitable production, the auto makers will work harder to find ways to improve big cars’ fuel economy. But so far, the Administration has taken the threats seriously, especially since a recent Commerce Department study agreed that restrictions on big-car sales would cost as many as 110,000 jobs.
And, despite protests from Congress, consumer groups and even Chrysler, which meets the existing standards and believes that GM and Ford should too, the government might give in to the Big Two’s demands once more. (The Administration is permitted to roll back the fuel economy standards, within certain limits, without congressional approval.)
But already, industry analysts and company officials say the formal decision announced last Tuesday by the National Highway Traffic Safety Administration to roll back the 1986 corporate average fuel economy standard from 27.5 miles per gallon to 26 miles per gallon will permit GM and Ford to avoid the possibility of paying hundreds of millions of dollars in fines.
“Without question we are pleased with the 1986 decision,” notes Don Buist, director of automotive emissions and fuel economy for Ford.
Ford and GM have trouble complying with the rules because they require that the fuel economy ratings of all cars sold by an auto maker average out to the government’s mileage standard for that year.
Enormous Penalties
If a company’s average mileage rating is too low, the potential for penalties is enormous--for every tenth of a mile per gallon below the standard the firm falls, it must pay $5 multiplied by the number of cars that it sold during the year. So for companies that produce millions of cars each year and still fall short by one or two miles per gallon, the fines can clearly mount into the hundreds of millions of dollars.
Besides the fines, GM and Ford could lose billions in profits if they were forced to end big-car production. “There is an opportunity cost associated with the standards if they force GM and Ford to sell a different mix of cars,” says Michael Luckey, an economist at Merrill Lynch Economics in New York. “They would have to incur the costs of pushing down small-car prices to sell more subcompacts while selling fewer of their more profitable large cars.”
During the late 1970s and early 1980s, when small cars were selling well, Detroit’s auto makers didn’t have any trouble with the standards. But now that big cars are hot and the Japanese are taking a growing share of the sluggish small-car market, the fleetwide mileage averages at GM and Ford have been unable to keep up with the rising federal standards.
GM and Ford haven’t met the government mileage requirements since 1982, when they were much lower, but have so far avoided paying any fines by using credits saved up from earlier years when they exceeded the standards.
But the two firms started exhausting those earlier credits in the 1984 model year and in 1985 started to rely on credits carried back from future years--when they expect to once again comply with the rules--to avoid new fines.
But such “carry-back” credits won’t be valid unless GM and Ford actually do exceed the standards within the next three years, and they admit they won’t unless the Administration lowers them from 27.5 m.p.g. to 26 m.p.g. through 1989. Under the current rules, the mileage standard after 1986 will remain at 27.5 m.p.g. indefinitely, but only by 1990 will Ford be able to comply with the 27.5 m.p.g. level, Buist says.
Both Ford and GM complain that they have been especially hurt by the fuel economy standards because the existing regulations penalize full-line domestic auto makers and benefit small-car producers and importers.
GM spokesman Hall argues that the Reagan Administration’s decision to ease restrictions on imports of small cars from Japan has made it more difficult for GM and Ford to sell more fuel-efficient subcompacts in order to lower their fleetwide mileage ratings. At the same time, the Japanese have built up such huge mileage credits from their small-car sales that they can now move into the big-car market without worrying about violating the fuel economy standards, Buist says. “We think they can go into the large-car market easily as a result, and we think they are planning to do just that,” Buist says.
Japanese Imports
Meanwhile, small, fuel-efficient cars that GM imports from Japan don’t help the auto maker’s fuel economy rating. Under a union-backed provision in the mileage law initially designed in the mid-1970s to stop Detroit from bringing in small cars from Europe to meet the standards, U.S.-based manufacturers can only count cars containing 75% domestic content toward their fuel economy ratings. The mileage ratings for their imports are calculated separately. (Foreign-based car companies, however, do not need to meet the domestic content requirements in the mileage standards.)
But ironically, Ford now hopes to turn that provision around to its benefit in order to try to beat the mileage standards. Buist says Ford has decided to import more parts for its Ford Crown Victoria and Mercury Grand Marquis full-size models, increasing their foreign content to at least 25%. Even though they will still be assembled in the United States, those big cars will then be counted as imports under the mileage rules, allowing Ford to lower its domestic fuel economy rating.
Since Ford also plans to start importing large numbers of small, fuel-efficient cars from Mexico and elsewhere in the next few years, it will also comply with the fuel economy standards on its imports even when the Crown Victoria and Grand Marquis are included, Buist noted.
But the push by GM and Ford for lower mileage standards has come under fierce criticism both in Washington and Detroit, and it isn’t clear how long their lobbying efforts will be successful.
Crosstown rival Chrysler was especially upset by last week’s decision. The No. 3 auto maker, which was forced to shrink its full-size model lines in order to concentrate its scarce resources on developing new compact and subcompact cars during its fight for survival in the late 1970s and early 1980s, today finds itself as the only member of the Big Three in compliance with the fuel economy standards. Now, Chrysler believes that reducing the mileage ratings would give GM and Ford an unfair advantage.
“We proved the technology exists to obey the law,” Chrysler said last week. “We hope that the Department of Transportation, when considering fuel economy standards for 1987 to 1990 . . . determines that no justification exists for further relaxing the standards.”
Consumer advocates are also angry over the Administration’s willingness to agree to the demands of GM and Ford and are fighting back. Clarence Ditlow, director of the Washington-based Center for Auto Safety, said last week that his group will be filing a lawsuit soon to stop the Administration from reducing the 1986 standard.
He said the government’s move “enables Ford and GM to make profits at the expense of the consumer while playing into the hands of the oil-producing countries. It’s outrageous. We’ll try everything we can to overturn it.”
