ADVERTISEMENT

Obama Administration Relies on Fast and Furious Rebound in Car Sales

Fuel efficiency rules, ethanol mandates and other government programs depend on a rapid rise in new car sales



FLICKR/VAGAWI

Detroit automakers were caught flat-footed last year as new car sales stalled, leaving dealer lots overcrowded and manufacturing plants idle. Now it appears Washington policymakers are at risk of falling victim to overly optimistic sales forecasts.

The White House finalized new auto fuel economy standards late last month that assume annual new car sales will rebound to levels unseen in the past two years, and will do so in as little as 18 months.

Likewise, congressional lawmakers pushing for more flex-fuel vehicles – cars and trucks capable of running on high blends of ethanol and gasoline – may watch the effects of the proposed legislation fall flat as a result of the significant drop in the sale of new vehicles that is dragging down the cash-strapped industry.

New cars and trucks rolled off dealers' lots last month at a seasonally adjusted annual rate, or SAAR, of 9.86 million units, according to the sales-tracking firm Autodata. That number represented a slight uptick from the previous two months but was still nearly 500,000 units below last December's lackluster SAAR and 3.4 million less than last year's U.S. sales total.

Last week, as President Obama announced the latest government steps aimed at shepherding General Motors Corp. and Chrysler LLC back toward profitability, he pointed to the historic downturn in sales as one of several factors dragging down the industry. "We must also recognize that the difficulties facing this industry are due in no small part to the weaknesses in our economy as a whole," the president said as he signaled his support for new federal efforts to boost auto sales.

Only three days earlier, the Transportation Department finalized new corporate average fuel economy, or CAFE, standards that are based on government estimates that the total number of passenger cars and light trucks likely to be sold during model year 2011 through 2015 would be roughly 83 million, or more than 16.5 million cars and trucks annually.

Those numbers exceed many industry predictions. Analysts at IHS Global Insight and J.D. Power & Associates do not expect U.S. annual sales to reach 16.5 million until 2013, and a third firm, Detroit-based CSM Worldwide, does not expect the sales total to reach DOT's estimates at any point during the five-year window.

"In that time frame, our expectations peak at a level just surpassing the 16 million threshold," said Joe Barker, a senior sales forecaster at CSM Worldwide. "There are going to be a lot of headwinds facing the industry."

He said that the auto industry will not rebound until after the housing and credit markets do. "Until then, we will likely not see sustainable growth in the auto industry," Barker said.

But with model year 2011 autos expected to arrive in dealer showrooms in late 2010, DOT is giving the new car market about a year and a half to rebound from its current rate of less than 10 million units per year to more than 16 million. If the model year 2011 rebounds to only the 2008 level of 13.2 million, the following three years would need to average 17.4 million units each year.

For comparison, the industry sold roughly 17 million units annually from 1999 to 2006, and 17.4 million light units in a single year is the U.S. high-water mark, set in 2000.

While accurately predicting the future when it comes to the new car market will be integral to the Obama administration's efforts to restructure GM and Chrysler, it will also play a role in accurately forecasting the environmental and energy gains from federal policies aimed at curbing fuel consumption and greenhouse gas emissions.

For example, in issuing the CAFE rule, DOT estimated it would save 887 million gallons of fuel and reduce carbon dioxide emissions by 8.3 million metric tons. But if sales stay at more than a third below the level predicted by DOT, the actual gains would likely fall well short of what the agency is predicting will result from the 8 percent bump in fuel economy.

Proposed flex-fuel mandates

Likewise, congressional efforts to create a federal mandate to require a fixed percentage of each carmakers' fleet to be flex-fuel capable would have significantly less impact on spurring demand for ethanol and other alternative fuels if car sales remain weak.

There have been several different proposals floated in both the House and the Senate in the past year, but, generally speaking, the mandates would require half of new fleets to be flex-fuel capable by 2012, with the percentage climbing in subsequent years.

Based on sales rates observed earlier this decade, the 50-percent mandate would put roughly 8.5 million new flex-fuel cars and trucks on the road in 2012, more than doubling the current number of flex-fuel vehicles in the United States. But at the current sales rate, the number of new flex-fuel cars and trucks would fall below 5 million in 2012.

Supporters of flex-fuel mandates argue that the technology is relatively inexpensive to add to fleet offerings and that an increase in the number of flex-fuel vehicles on the road will create the market incentives needed to spur growth of alternative fuel production and distribution, helping to break the nation's dependence on foreign oil.

But E85, the most common form of flex fuel in the United States, can currently be found at only 1,600 filling stations and is not available in five states, according to the Energy Department, leaving a lot of ground to cover for the nation to reach a congressional mandate to expand overall biofuel use to 36 billion gallons annually by 2022.

Conflicting government predictions

In the CAFE rulemaking, DOT acknowledged that current sales were well below the agency's sales forecasts but said the sales slump was only an aspect of the current economy, much like the current gasoline prices, and not a long-term indicator of the prospect for U.S. car sales. "Just as the agency currently expects fuel prices to return to high levels, it expects vehicles sales to rise well above today's rate," the agency wrote.

But Steven Rattner, the former Wall Street financier who is leading Obama's auto task force charged with restructuring the domestic industry, has criticized GM and Chrysler for basing their restructuring plans on overly optimistic sales rates. In plans submitted to Treasury in February, GM forecast 14.3 million new cars and trucks to be sold in the United States in 2011 and did not predict the total to exceed the 16.5 million mark until 2014.

Rattner has said that prior to the downturn, the industry was experiencing a car bubble – not unlike the housing and credit bubbles – and cautioned that sales would not necessarily return to the levels the industry had grown accustomed to. Even once credit markets begin to thaw, consumers and lenders will likely be more cautious, with the current economic turmoil fresh in their minds.

"You had a huge number of cars being sold, so I don't think it is prudent to assume the sale levels are going to go back to those levels," Rattner said in an interview with the Washington Post last month.

The CAFE rule, which governs model year 2011 autos, was based on the "best internally consistent information available," according to the National Highway Traffic Safety Administration. The agency will update the forecasts in future rulemakings and said the follow-on rulemaking for model years 2012 and beyond will be set only after a host of new information and methodology is considered, things it said were not possible to consider for the 2011 rule because of the requirement that the standard be set 18 months before the vehicles affected by it are due in dealer showrooms.

The rule says that it is "reasonable to anticipate" that the new analyses may lead to changes and that ongoing review will include many new concerns, including both the "financial health of the industry" and the nation's "energy and climate change needs."

Buying incentives

Both the White House and Congress have made it a priority to boost sales, largely as a way to boost revenues at Detroit's Big Three to help the carmakers stay afloat and prevent the failure of one from dragging down the industry's vast network of suppliers.

In the $787 billion stimulus package, lawmakers provided tax breaks for the purchase of new cars and trucks – allowing consumers to deduct sales and excise taxes from their purchases – and provided additional incentives for the purchase of plug-in hybrid and electric autos.

Obama also has requested that lawmakers review the stimulus to find federal cash to fund a scrappage plan – often called a "cash for clunkers" program – that would allow consumers to trade in an old, gas-guzzling car for a new, more fuel-efficient one. It is a move supporters say will boost auto sales while speeding up the market penetration of advanced, fuel-saving technology.

"In the short term, the incentives that are currently in place will do very little to prop up auto sales," CSM's Barker said. "But what is currently under consideration, a national scrappage program, is something that we think will have an immediate impact on auto sales."

The modernization programs have been used in a handful of European nations to bolster sagging new car sales. In Germany, February sales jumped by more than 20 percent after the country offered car buyers roughly $3,000 in rebates.

The concept behind the program was considered by lawmakers last summer during the run-up in fuel prices that left Congress searching for ways to boost domestic energy production while curbing fuel consumption. The programs again received attention late last year as the new car sales slide continued and lawmakers looked for ways to entice Americans to buy more cars to help prop up the ailing industry.

The value of the vouchers would range from $2,500 to $5,000, depending on the specific program and the model years of the trade-in and replacement vehicles.

Ford Motor Co. has estimated that such a scrappage program could result in an additional 500,000 cars and trucks being sold in 2009, while GM has predicted the bill could generate as many as 2 million additional units.

Other analysts have taken a more conservative approach.

IHS Global Insight predicted sales rates will remain stagnant at roughly 9.5 million for the rest of the year. Its analysts wrote in a note to investors that while they had considered the impact of new federal incentives such as the scrappage program, they were "giving more weight to the ongoing economic recession and the still-oppressive effects of dismally low consumer confidence levels on new car sales this year."

Reprinted from Greenwire with permission from Environment & Energy Publishing, LLC. www.eenews.net, 202-628-6500

Share this Article:

Comments

You must sign in or register as a ScientificAmerican.com member to submit a comment.
Scientific American Dinosaurs

Get the
latest special collector's edition, Dinosaurs!

Limited Time Offer!

Purchase Now >

X

Email this Article

X