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Tougher U.S. Cafe Won’t Be A Free Lunch For Europe

Plenty Of Wriggle Room In U.S. Rules To Avoid Downsizing.
Hybrids Will Be Big Winners.
Some Experts See Soaring European U.S. Sales, Others Unconvinced.

The first reaction to the U.S. decision to bring forward by 4 years, the corporate average fuel economy standards, already seen as difficult to meet by the original 2020 deadline was said to be manna from heaven for the Europeans.

After all, weren’t all of us on this side of the pond driving around in underpowered little econo boxes, little more than glorified golf carts?

In fact, the standard set by President Barack Obama for an average 35.5 mpg by 2016, representing an improvement of 25 per cent from the current figure, was equal to the fuel efficiency already achieved in Europe. So all Europe needed to do was send in loads of its little golf carts and clean up, not to say dominate, the market.

That’s not going to happen, said Global Insight’s John Wolkonowicz, Senior Market Analyst, North American Automotive Group.

Americans don’t like small cars, and the new rules aren’t quite as tough as first assumed, according to Wolkonowicz.

“This is probably not a license to print money for the Europeans because the way the CAFE laws are written I don’t see much downsizing going on. Powertrain technology is going to meet this and people will be able to purchase vehicles in the segment they like by paying a little extra to have advanced technology like mild hybrids or turbo direct injection gasoline engines,” he said.

Hybrids win
“The winning technology in all this will be hybrids in all shapes and forms. It won’t be the diesel,” he said.

About 50 per cent of all new European cars sold are diesel.

As usual, the devil is in the detail, and there is plenty of wriggle room in the CAFE rules, which define an automobile’s “footprint” in determining how much of an improvement in fuel consumption it must have. For instance, a Porsche sports car which is small and uses a lot of fuel, will be penalized more heavily. The larger the car’s wheelbase, the less stringent will be the demands to improve fuel economy.

Far from being a bonanza for Europeans, Max Warburton, analyst with Bernstein Research, said the new rules are good for the Japanese, bad for the U.S. big three and bad for the premium Germans.

European premium makers prospects negative
“While long-term there may be opportunities for the Europeans to take market share with fuel efficient vehicles – notably the Renault of France/Nissan of Japan affiliates, and Germany’s Volkswagen – the consequences for European premium manufacturers look very negative. BMW, Mercedes, Porsche and Audi may get some flexibility in the 2012-15 period, but all look set to face severe hits to U.S. profitability by 2016,” Warburton said.

The Germans can do three things to mitigate this.

·      Pay more heavy fines for non-compliance, if such a route is permissible under new legislation (Germans already pay fines of $30 million a year for non-compliance with the current rules).

·      Put fuel saving technology into their U.S. cars like stop-start, diesel and hybrid engines.

·      Offer much lower specified vehicles with 4-cylinder engines and smaller cars.

Warburton also points to a complication in the CAFE rules, saying that CAFE fuel economy figures are inflated by about 27 per cent compared with EPA figures which appear on the car’s sticker in the showroom. The new 39 mpg for CAFE translates to 29 mpg on the sticker. It’s hard to understand, but adds to the potential for wriggle room.

Professor Ferdinand Dudenhoeffer of the Center for Automotive Research at the University of Duisberg-Essen is much more upbeat about Europeans’ chances, pointing to the current fuel efficiency achievements. He acknowledges that diesels, which were supposedly about to conquer America because of the technology’s ability to provide more power and better fuel economy, have now lost appeal because of the volatility of the price at the pump, and tough regulatory demands. The Europeans will be at the forefront of strong hybrid and mild hybrid engines, Dudenhoeffer said.

(Strong hybrids allow a limited amount of electric-only power. Mild hybrids simply allow the battery to assist the gasoline engine. The Toyota Prius is a strong hybrid, the Honda Insight is a mild hybrid)

Big European manufacturers like Renault and Peugeot-Citroen of France, even though they have huge fleets of fuel-sipping cars, will find it tough selling in America because of difficulties meeting U.S. crash regulations. Companies like Ford of Europe, whose little Fiesta is scheduled to go on sale in America next year, was originally designed as a world car and is able to meet U.S. regulations.

Why Fiat needs Opel
According to Dudenhoeffer, GM Europe’s Opel was attractive to Fiat of Italy because its cars were designed to meet U.S. regulations.

“If the bid for Opel is not successful Fiat will have to rebuild its platforms for the U.S., (with Chrysler) or try to buy platforms from another manufacturer,” he said.

“We have to accept that Americans won’t fall in love with the diesel. It’s better to concentrate on gasoline engines and make the U.S. public aware that small engines are not bad engines. If we explain to them that even a 3 cylinder of 1.2 litres or 1.9 has enough torque and horsepower, we’ll be on the right track,” Dudenhoeffer said.

Dudenhoeffer predicts European market share in the U.S. will hit one third by 2020, up from under 10 per cent now.

Adam Jonas, analyst with Morgan Stanley, reckons that these new CAFE rules mean that Europeans can finally be in a position to push their “home-field” advantage in fuel economy.

“Renault could benefit through its exposure to Nissan and ability to introduce technologies through its partner. Fiat could contemplate greater opportunities to make its technologies available through its Chrysler affiliate. VW is the highest volume European producer in the U.S. market with leadership in smaller, low emission vehicles. Peugeot-Citroen (which left the U.S. market 20 years ago) may be able to use its leadership in diesel as a “Trojan horse” into the U.S. market as a supplier to other manufacturers with established distribution,” Jonas said.

Gas tax works
Europeans find it difficult to understand why Americans don’t adopt its tax system, which has forced the price of gasoline and diesel up at the pump, and led to its current high levels of fuel efficiency.

According to a study by the PWC Automotive Institute, the average tax on a gallon of gasoline is $5.16 in Germany, $5.02 in Britain, and $4.83 in France. It is 40 cents in the U.S.

The Financial Times’ Lex column doesn’t’ like CAFE.

“CAFE forces manufacturers to meet targets for their entire fleet or pay fines, but does not reduce miles driven. More expensive gasoline would influence which cars are bought and the use of existing ones. The Congressional Budge Office estimated that a 46 cent a gallon tax increase would achieve a 10 per cent reduction in demand. A separate study at Stanford University calculates that direct taxes can achieve an equivalent reduction to CAFE at one-sixth the cost,” Lex said.

European CAFE
European cars are much more fuel efficient than their American equivalents, thanks to high gas taxes. Unfortunately for Europeans, the European Union has decided to impose its CAFE style rules on top of this, scheduled for implementation in 2015.

Global Insight’s Wolkonowicz says the introduction of a swingeing gas tax would be political suicide for politicians. He doesn’t think European market share in the U.S. will be much changed by the new CAFE rules, with any changes in the market for smaller cars, and the loss of output from restructured GM and Chrysler being taken up about a half by Ford, and the rest going to the Asians.

There will though be a radical change in the technology on offer.

“The winning technology will be the hybrid in all shapes and forms. It won’t be the diesel because of concerns about carcinogenic potential of soot, and the price of diesel is likely to remain volatile into the future. By 2016 at least half the vehicles will be some sort of a hybrid, mostly mild hybrids or just stop-start (Hybrids currently have market share of 4.8 per cent going up to seven per cent next year). Mild hybrids, coupled with downsized direct injection gasoline engines, according to our calculations should be able to meet the standards that way,” Wolkonowicz said.

Neil Winton – June 04, 2009

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