Column: Emission standards benefit Detroit

Alan Baum

Recently, in an announcement that appeared to signal its intent to weaken vehicle emission standards, the Environmental Protection Agency restarted its review of the standards. As independent automotive analysts, we wanted to cut through the noise to ask a simple question: Are strong gas mileage requirements good or bad for Detroit?

Our new analysis finds that fuel economy standards have not hurt the legacy automakers’ financial performance. And weakening fuel economy standards would only damage U.S. automakers and suppliers as they try to compete in a fast-evolving market.

It’s no secret that American consumers want to go farther on every gallon of gas. The Alliance of Automobile Manufacturers’ own polling shows support for strong fuel economy targets, with two-thirds of respondents saying the government should set high standards. And under strong standards, economies of scale will reduce the costs of fuel savings technology.

Despite consumers’ preferences, some automakers point to their weak stock prices and need to cut costs as evidence that the U.S. should shift into reverse on fuel economy standards. However, we conclude the opposite: that the standards will enhance the U.S. auto industry’s global competitiveness, and incentivize new employment and products from independent suppliers.

Overall demand for passenger cars and trucks is declining modestly. But that’s because the pent-up demand from the 2007-09 Great Recession, which resulted in record 2015 and 2016 sales, has been largely satisfied. Even so, current auto sales and profits remain strong.

Of greater import is what could be an existential crisis for legacy automakers (including the Detroit Three): game-changing innovations in technology and new business models. The rise of autonomous vehicles, clean vehicles, and the shift to ride and car sharing models are forcing the industry to change their business models.

The auto industry faces competition from upstarts such as Tesla and Uber, as well as from potential new, deep-pocketed competitors such as Google and Apple who are eyeing the automotive market. Given the importance of operating costs and the synergy between autonomous vehicles and electrification, fuel efficiency and electrification are key to succeeding in this new world.

Our analysis suggests that investors remain skeptical of legacy automakers’ ability to adapt to a new era of personal mobility. The smart money sees the dawn of autonomous, electrified vehicles and ride sharing services as poised to shake up the automotive market. It observes that the U.K. and France plan to ban gas and diesel engines by 2040, while China sets a target of 40 percent “new energy” vehicles by 2030 and India announces a goal of 100 percent sales of zero-emission vehicles by 2030.

But instead of innovation, investors see some automakers seeking to weaken the standards and trying to hold back the tide of change by clinging to a vision of the future that doesn’t embrace these new trends.

Nobody likes being told what to do. But fuel economy standards establish a level playing field for all competitors, and encourage the innovation needed to succeed.

Fuel economy standards provide automakers and suppliers the regulatory certainty necessary to stimulate investment in advanced technologies, such as electric vehicles and fuel saving technologies, that are necessary for automakers’ long-term financial health. That’s especially true given the volatility of the oil market.

Regulatory certainty is important for automakers, which employ about 200,000 Americans. But it’s even more important for automotive suppliers, which employ 500,000 Americans, provide over 80 percent of fuel savings technology, and have made the bulk of investments in research and development.

The future is global, and it prizes efficiency and clean vehicles. By 2025, we project that only one-third of Detroit Three vehicles will be sold in North America, while two-thirds of sales will be overseas.

Our automotive future includes strong growth overseas in an increasingly competitive market, growth in electric vehicles, ride sharing, and autonomous vehicles. Automakers can thrive in this coming new era of personal mobility. But for that to happen, automakers and their friends in Washington must stop looking in the rear-view mirror, and keep their eyes on the road ahead.

Alan Baum of the research firm Baum and Associates is an independent automotive analyst.