CSM Worldwide Testimony: EPA's Public Hearing
As prepared for delivery on March 5, 2009 before the Environmental Protection Agency's public hearing on California's request for a Clean Air Act waiver to regulate CO2 emissions.
Good morning. My name is Eric Fedewa, and I am the vice president of global powertrain forecasts at CSM Worldwide. I'd like to thank the panel for this opportunity to offer testimony today.
CSM is a privately owned, global company. We’re totally independent and an objective provider of forecasting services to 85 percent of the world’s automakers and suppliers since 1991.
We know the OEM and supplier cycle plans, what they're capable of today, what they're planning for the future and how much they can "stretch" to get there. That includes gauging the impact of fuel economy and emissions policy, such as California’s waiver request (A.B. 1493).
There is no question for us that improving fuel economy and curbing CO2 is in the national interest. But our analysis suggests that allowing California and other states to regulate CO2 emissions, and thus fuel economy, will further damage companies that are struggling, like GM, Ford and Chrysler and much of their supply base, and potentially destabilize relatively healthy companies like Toyota and Nissan.
We also are concerned that granting the waiver will create, to borrow a phrase from the National Automobile Dealers Association, a "patchwork" of regulations that will require a unique compliance strategy for each state that follows California’s lead.
The impact of granting the waiver request will be far reaching:
This will put the billions of taxpayer dollars invested in the auto industry at even greater risk for what the Congressional Research Service concludes is a modest 2.5 to 3 percent impact on CO2 emissions nationally and a negligible 0.6 percent impact on global CO2 emissions.
For all of these reasons, we believe that setting a single national standard for fuel economy and CO2 emissions, and aligning other policies to create a robust and stable market for fuel-efficient vehicles, are in the national interest.
As the panel knows, automakers already have committed to a 40-percent increase in fuel economy by 2020, to an average of 35 miles per gallon.
For the initial phase from 2011 to 2015, the Department of Transportation says CAFE will reduce CO2 emissions by 521 million metric tons over the lifetime of the vehicles sold during those model years.
The American Council for an Energy Efficient Economy, for its part, estimates that the standards will reduce CO2 emissions by 47 million metric tons annually by 2020 and 404 million metric tons annually by 2030.
At CSM, we estimate that by 2020, U.S. vehicles will be equal to today’s European and Japanese fleets in terms of fuel economy and greenhouse gas emissions, which is a major accomplishment given the significant differences in driving habits, fuel prices and consumer preferences that exist.
It’s important for the committee and the public to understand that delivering these improvements will be staggeringly expensive to the manufacturers. Many of those costs will be passed on to consumers.
Today, annual R&D in the U.S. auto industry is about $16 billion, which roughly equals the R&D spending the Pentagon funnels through the defense industry.
An increasing percentage of that amount is being spent on fuel economy and emissions technology. Ford, for example, told the U.S. Department of Energy it plans to invest about $14 billion over seven years to produce advanced fuel efficient vehicles.
Every element of the vehicle is being scrutinized, since only about 15 percent of the energy from the gas tanks gets used to move the vehicle down the road. This has yielded relatively affordable fuel-saving technologies like gas direct-injection engines and advanced six-speed transmissions. It also has led to the development of clean diesel and full-hybrid technologies, which can add $2,000 - $3,000 or more in piece cost per vehicle.
In 2006, the Energy Information Administration estimated that the increased adoption of these technologies would sharply increase the average price of a new car in 2016. Adjusted to today’s dollars, the figure is $2,176, and we believe the final figure may end up higher.
To comply with A.B. 1493, manufacturers will need to ship more of these higher-cost vehicles to California and other "green" states.
And based on published reports and testimony by manufacturers including Ford and Chrysler, the availability of larger vehicles likely will be restricted.
From the standpoint of viability, this is no small matter, as the states that plan to adopt A.B. 1493 account for half of the domestic vehicle market.
Consider that last year the Ford F-Series pickup line was the best-selling vehicle line in the U.S. The Chevrolet Silverado pickup was number two and the Dodge Ram was number nine. Combined, sales of these vehicles were more than 1.2 million units.
Based on manufacturer data, we estimate the variable profit per unit of a full-size, light-duty pickup to be about $5,000, so we are talking about a total of $6 billion that is available to fund capital investment, pay salaries and overhead, and fund debt repayment.
Therefore, even a 10 percent reduction in pickup truck sales has a potential cost of more than half a billion dollars in a below-trend, 13.1 million-unit sales industry.
An increase in the sale of more fuel-efficient vehicles will offset this somewhat, but these vehicles have significantly lower contribution margins.
For example, we believe C-segment cars like the Ford Focus carry margins well below $1,000 per unit.
And on a fully accounted basis, we believe many small and mid-size cars and all full-hybrids lose money, even at higher industry volumes than we see today.
In the case of Ford Motor Company, its current sales mix of 70-percent trucks and 30-percent cars in California will flip-flop to 70-percent cars, 30-percent trucks. Sales will see a double-digit drop.
With the tremendous financial stress the industry is under today, a revenue and profit impact of this magnitude will further test the viability of many companies in the auto industry.
The distress reaches into every corner of the industry.
In fact, the Motor & Equipment Manufacturers Association has told the Treasury department that approximately one-third of all suppliers are in imminent financial danger.
It’s at the supplier level that you begin to see how interconnected the auto industry is, and how the fate of one company like GM can impact the entire industry.
CSM recently completed a study showing that 58 percent of GM’s North American suppliers also supply Asian automakers. Among Chrysler suppliers, 59 percent also supply Asian automakers. Among Ford suppliers, the figure is 65 percent.
What all this means is that California’s regulatory agenda could start a domino effect of business failures reaching into every corner of the auto industry and the national economy.
While my testimony to this point has focused on the risks of allowing California to independently regulate CO2 emissions, I would like to reiterate what I said at the beginning of my testimony: It is in the national interest to improve fuel economy and reduce CO2 emissions.
That’s why I will conclude by underscoring the importance of incorporating incentives for the consumer to embrace fuel-efficiency in a national approach to CO2 regulation.
Speaking in the aftermath of the 1973-1974 OPEC oil embargo, President Ford said that to provide "critical stability for domestic energy production in the face of world price uncertainty," prices should not be allowed to fall too far. He knew that cheap oil would work against the long-term goal of energy independence.
It was, after all, price floors on sugar that helped pave the way for the development of Brazil’s ethanol economy. And it was high fuel taxes that drove European and Asian automakers to build the world’s best small cars.
Indeed, as fuel costs as a percentage of disposable income surged past 3 percent in the late 1970s and early '80s, the penetration of four-cylinder engines topped 50 percent of the U.S. car fleet.
But President Ford was prescient: As memories of gas lines and record high prices receded, consumers once again began demanding large vehicles and powerful engines.
Fuel prices, in constant dollars, declined nearly every year from 1980 to 1999, and spending on transportation fuels as a percentage of disposable income fell by roughly half. All of this led to a dramatic increase in miles driven, a much higher mix of larger vehicles and the consumption of even more oil.
Today, just like in the 1970s and 1980s, automakers are scrambling to accelerate their plans to bring out fuel-efficient cars again – this time with government assistance. But what happens if we return to an era of cheap oil?
It’s very possible that the number of consumers willing to sacrifice comfort, space and power in the name of fuel economy will fall and investment in green technologies will dry up - just like it did in the 1980s.
It is simple economics: consumers and investors are not likely to invest in fuel-efficient vehicles and capital-intensive new technologies if a sharp fall in oil prices undercuts them.
It may already be happening:
These are ominous signs because if automakers and green energy investors can’t earn a return on their investments, then the holy grail of energy independence and reduced CO2 will remain elusive.
This brings us back to President Ford’s prescription. One sure way to stimulate demand for fuel-efficient vehicles is to make filling the tank more expensive.
We believe a variable fuel tax that effectively sets the minimum price per gallon of regular unleaded close to $3 per gallon would help ensure that there is no backsliding by consumers away from fuel-efficient vehicles.
At this price level, green technology pays for itself much faster through savings at the pump. For example, the breakeven point for a Toyota Camry Hybrid is about 9 years at $3 per gallon, versus 13 years at $2 per gallon.
In addition, the tax revenues can help fund research and development or reduce the deficit. The carbon cap and trade system the administration is considering would have a similar effect of keeping energy prices higher than they are today. It should be seriously studied.
Either way, both programs would give automakers something they desperately need: a measure of certainty that there will be market demand for small, fuel-efficient vehicles - and thus hope for a return on their multi-billion dollar investments.
Thank you for your time, and I am happy to respond to any questions you may have.
