Mpg rule to 'change the way this industry operates'

AP

Chrysler CEO Sergio Marchionne says muscle cars such as the Hemi-V8-powered Dodge Challenger will become "as rare as white flies."

By Paul A. Eisenstein, NBC News contributor
After an unexpected delay, the White House has finalized the biggest jump in the Corporate Average Fuel Economy, or CAFE, standard since the government first set mileage guidelines in 1978.

As part of a broad compromise hammered out between the auto industry, environmental groups and government regulators, the fuel economy of the typical car, truck or crossover will nearly double between now and 2025, to an average 54.5 miles per gallon. That’s a more than 50 percent jump, meanwhile, from the CAFE rules the Obama rules had previously approved for 2016.

“These fuel standards represent the single most important step we’ve ever taken to reduce our dependence on foreign oil,” Obama declared, while also cutting CO2 emissions by an estimated 50 percent.

But far less certain is the impact the new rules will have on the auto industry and on the motorists of 2025. Naysayers have warned that, at 54.5 mpg, tomorrow’s cars will be smaller, largely battery-based and significantly more expensive. Proponents of the CAFE increase dismiss such forecasts as fear-mongering and insist things will change less than people anticipate.

For his part, Chrysler CEO Sergio Marchionne believes the industry will be able to make the new target – even though the rules do provide a mid-term analysis to ensure things remain on track. A future administration could roll the numbers back if there’s trouble.

But Marchionne insisted, the new rules “will change the way this industry operates,” adding his belief that, at 54.5 mpg, it will be difficult to continue producing high-performance vehicles such as the Hemi-V8-powered Dodge Challenger. Such muscle cars, the executive warned, will become “as rare as white flies.”

Maybe we’ll discover more white flies, countered analyst Jim Hall, of 2953 Analytics. The industry veteran points out that automakers have been predicting the death of the V-8 since the first CAFE rules went into effect for the 1979 model-year. Yet, he adds, today’s motorists can buy some of the most powerful automobiles ever produced, including the 1100-horsepower Bugatti Veyron and 600-horsepower versions of the Chevrolet Corvette and Ford Mustang.

The cars on the road by 2025 “will change less than anybody imagines – but more than anyone wants,” Hall suggested, explaining that, just as the industry has done every time new mileage rules have been passed, “They will find a lot of new ways to do things.”

A great example is Chrysler’s new Dodge Dart. The compact sedan makes use of a new turbocharged four-cylinder engine, underbody panels and other aerodynamic improvements, and an advanced 6-speed transmission to boost fuel economy. And Chrysler will roll out a 9-speed automatic next year.

Improved transmissions can add as much as 5 to 10% better mileage, industry engineers note, and are going into widespread use already. So is stop/start technology that automatically shuts off an engine instead of idling. The engine quickly restarts when the driver’s food lifts off the gas. On the upcoming Honda Accord that could boost mileage by 3% or more.

A study by automotive supplier Ricardo, Inc., suggests a number of other likely steps makers will take to meet the new rules, such as:

A total systems approach to optimize not just the powertrain, but the complete vehicle; A wide array of new powertrain architecture and design solutions;Significant downsizing combined with enhanced boost systems;Greater use of lightweight materials along with new approaches to mass optimization.
General Motors recently invested in a start-up firm developing a way to produce significantly stronger, but notably lighter, steel. BMW, meanwhile, has invested heavily in firms working to drive down the cost of producing ultra-light carbon fiber, a material widely used in supercars like the Veyron, and in Formula One race cars.

The real question is how much the industry will have to turn towards electrification. Nearly every major maker now offers at least one hybrid-electric vehicle. Toyota has promised to add a hybrid option to virtually all its models in the next few years. Ford’s new hybrid micro-van, the 2013 C-Max, will be able to get 47 miles per gallon in the combined city/highway test cycle.

A more advanced, plug-in hybrid version, the C-Max Energi, should get significantly better numbers when it comes out next year, the maker hints. Most makers are also working on plug-ins or going all the way to battery-electric vehicles, such as the Nissan Leaf, with such products getting EPA ratings that approach 100 mpg-e, the “e” standing for equivalent, the government using a complex formula to estimate how much battery power is equal to a gallon of gas.

Ironically, it’s the State of California, rather than Washington, that is actually driving the sudden rush to battery cars. The powerful California Air Resources Board has set its own rules requiring a minimum number of so-called Zero-Emission Vehicles from all major automakers. Those guidelines have been copied by a number of other states.

One reason why it’s unclear how much things might change by 2025 is that the new mileage rules are, to some degree, a figment. The government operates two sets of books, in effect. One is based on raw test data. The other has been revised to reflect what vehicles will get in real-world conditions. By that measure, expect passenger cars to average 45 mpg by 2025, light trucks 32.

The other big uncertainty is cost. GOP Presidential Candidate Mitt Romney has hoisted the banner of critics, some suggesting the new CAFE rules will result in price increases of up to $10,000 per vehicle – as projected by Michigan Center for Automotive Research. Skeptics have also warned the result will be lower car sales and fewer American jobs.

“Cars will get more expensive, that’s a given,” said analyst Hall, but like most observers he thinks the figure won’t be nearly as great.

Other studies, such as one from the Boston Consulting Group, put the increase at barely $2,000 to $3,000. The government’s number is $2,800. And regulators forecast motorists will save anywhere from $5,700 to $7,400 in gas during the life of those future vehicles. That’s based on a gallon costing just $3.87. Most energy experts predict fuel will rise to $5, even $6 or more a gallon before this decade ends, so the savings from the extra mileage could be substantially more.

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GM’s CEO wants to speed up change

NEW YORK — Dan Akerson is hardly a corporate diplomat.

The chairman and chief executive at General Motors Co. says publicly what other CEOs say in private: he disses competitors' cars and laments his company's lumbering bureaucracy. He's told reporters that Ford should "sprinkle holy water" on its troubled Lincoln luxury brand, and has called Toyota's Prius hybrid a "geek-mobile." His candor often rattles the nerves of GM's public relations staff.

And you know what makes him really mad?

"There is a resistance to change," at GM, Akerson recently told The Associated Press.

By all accounts, though, the auto giant is moving at a faster pace under his leadership as he tries to overcome the resistance.

Akerson is not the first to complain about GM's bureaucracy. But for the first time in years, the automaker has somebody at the top with an outsider's vision and a will to make changes to keep profits flowing and return the company to the glory years of a generation ago.

GM now has a lineup of cars and trucks that are selling well, and it has turned a profit for nearly two years straight. The stock, although trading far below analysts' targets, is once again catching the eye of portfolio managers.

Yet for Akerson, who took the CEO job 15 months ago, the work has just begun, and it hasn't gone totally as planned. He's being tested by a federal investigation into battery fires after crash tests in the Chevrolet Volt electric car, and he's grappling to fix GM's high-cost European operations, which are losing money.

Akerson was recruited by the federal government to join GM's board in 2009 just as the company was leaving bankruptcy protection. The government was majority owner at the time, and Akerson thought his management, financial and engineering skills — he's the former head of XO Communications — could help a company so important to the U.S. economy.

The U.S. Naval Academy graduate, who grew up in Minnesota, admits he knew little about cars in the beginning. But now he speaks with authority on everything from transmissions to batteries.

Akerson, who often uses military metaphors, spoke with The Associated Press in New York about the car industry, the economy, his management style and the future of electric cars. Excerpts appear below, edited for length and clarity.

Q: Would you recall all 6,000 Volts to strengthen the battery?

A: If we find that is the solution, we will retrofit every one of them. By the way, if someone wants to sell it back to us now, we'll take that too. We're quite confident that we'll find a solution.

Q: Do you think the news about the Chevy Volt will harm sales of electric vehicles?

A: This car is safe. There is nothing happening immediately after the crash. I think in the interest of General Motors, the industry, the electrification of the car, it's better to get it right now, when you have 6,000 — instead of 60,000 or 600,000 — cars on the road. We're not the only car company that has liquid cooled batteries out there. There are many. So we think this is the right thing to do for our customers, first and foremost, and it was the right thing to do for General Motors and the industry.

Q: Are you moving past the early technology adopters on the Volt at this point, or has any data surprised you on who is actually buying this vehicle?

A: The average purchaser of a Volt is earning $170,000 a year. About a third of the customers haven't been in a Chevy store in more than five years and half have never been in there. They aren't just early adopters.

Some of them — I think roughly half — are either Prius or BMW owners. So one, you could say Prius owners were probably early adopters in the olden days, but that's kind of passed through. But BMW people want styling, good design, and an innovative powertrain, or power source, and I think Volt is a game changer. And quite frankly that's one reason we want to kind of clear the decks here.

As you may remember, in the early days of Lexus, there were real issues surrounding quality. And they called back 8,000, reworked them, and put them back out. People don't remember that because Lexus is a great car, it's a great brand. I think it demonstrated that Toyota was sensitive to their customers' needs, perceptions, and safety, and it was an analog to what we wanted to follow here.

Q: When are we going to see the electric car as the typical family car?

A: We want to ramp Volt production to roughly 60,000 in 2012. I think Prius in its second year did a lot less than that, half. By this summer we will (be in) what I call the second generation, where we will achieve certain scale and we should see an appreciable drop in the cost of the production of the Volt. So, 2011 was kind of a year to get things aligned and make sure that the car was what we hoped it would be. We certainly see that in our showrooms and our sales and Consumer Reports' acceptance.

We clear up this near-term issue hopefully soon so you'll see 60,000. It's an unanswerable question given what I know today, but people ask me and I say, "Well, I would hope by 2020, 10 percent of the cars sold would be of alternate propulsion." We're also working on hydrogen fuel cell cars which, in the end, are electric as well.

Q: You're gaining market share and your sales are going well. Why is your stock price so far below the initial public offering price? (GM's stock price is currently around a third lower than its IPO price of $33 per share in November 2010.)

A: That's bothering me. But at the same time, our industry — when I look at Ford, I look at us — we're all down about the same amount, within a percent or two. I don't say that because I take pride in it, it's just sometimes you can't fight city hall or trends in the marketplace.

Last year, when I was on the IPO trip, no one ever said 'sovereign debt issues' to me. I never heard of the word 'contagion' (from European government debt problems) other than about H1N1 (swine) flu. So there are a lot of negative factors here. At the end of the day we sell a consumer product that is somewhat discretionary, and it is an expensive consumer product that's highly complex, has a long product life, hopefully. So I do think there has been a fair degree of concern about what are we going to do and how are we going to do it.

General Motors has made good progress, but we're not nearly what I think we are capable of being. We have a lot of potential. We have a long runway. This is not a quarterly or a yearly project. This is something we're going to do over the next three to five years. We have exceeded (Wall) street expectations so far this year on revenue and profits. I'm proud of that. I'm not happy about the stock, and we're going to do our best to make it better.

But at the end of the day, we need to continue to build great cars that delight — surprise and delight — that have quality, reliability and durability. And in the end, I think it'll all take care of itself.

I have a lot of sleepless nights, but I would say four out of five are on what I would call operational and practitioner issues and the others are about, "Why is the stock not doing better?" But I only can address the things I can manage and I can't manage that.

Q: How has the corporate culture changed at GM since you joined the board?

A: I would say, objectively, having been in the company in one form or another now for almost two and half years, that 90 percent of what we did was good. There is tremendous commitment and loyalty to this company. But it's that the 10 percent or 5 — I don't know how to quantify it precisely — we failed.

Recognize what went wrong, learn from it, move on. The way I describe it to our folks is it's like that squirrel of an uncle you have in your family. You just say, "He's there and we're just going to accept that." I can't change the bankruptcy. It's our interesting past. It's our family collage, if you will. I don't want to obsess on it, but I want to learn from it. And that's the mantra that we have as a team.

So I would say we're making good progress, we're doing surveys on people. What do they see right? What do they see wrong? How do they view the management? We want to know. I want to know. I'm trying to move off the 39th floor. I want to move to the second floor, down with the real people. So in many ways we're trying to change the culture.

I wasn't used to such a command-and-control. I said "We've really got to make Cadillac a global brand." Next thing I know, go to the Geneva (auto) show and we have North American cars, no right-hand drive, no diesel sitting there, and you're going like, "Oh God, why didn't we do that?" "Well, you said you wanted to make it a global brand." You have to know when to launch, when to attack and when to defend.

You don't have right-hand drive, you don't have diesel, you're no good in Europe.

Q: If you could wave a magic wand, what two things would you change at GM right now?

A: I want a miracle solution on Volt in the next week. That's not going to happen. On a more serious note, it all starts and it ends with product. I want sustainable, differentiable product. The generation that you see for the consuming public today is not just competitive, it's very competitive. We're holding our own. We're taking share. We're profiting.

The second thing is, we've got to make sure that the culture evolves to one that's less hierarchal, flatter, more interactive, more participative. When I was at MCI, if we had 30,000 people in the company, we had 20,000 people who thought they were running the place. They wanted to make decisions. They were proactive. They were angry with senior management if they didn't move quick enough. And we need to instill that, a culture like that — that leans forward all the time rather than leans back.

Q: What do you see happening with auto sales in Europe?

A: It's hard to believe this, but it was only three years ago that I think there were many in this country and around the globe that thought the system was coming off the rails. It's amazing how short our memories are when you bring this up. People are going, "Oh, it wasn't that bad." It was bad. And when you fear for your job, that is uncertainty, and it's a negative bias and it undermines your confidence. If you get over that, then the next level of concern is, "Can I afford to spend anywhere from $20,000 to $50,000 on this consumer product?" And you saw it here. We hit a 40-year low in our sales in the 2008-2009 timeframe.

The Europeans, I think, felt about like we do today: concerned, but not threatened. It was an American problem.

I think the roles are somewhat reversed today. The Europeans are feeling a great sense of insecurity, doubt, and I think their consumer confidence is in question. You can see the sales have fallen off for the entire industry in Europe, and so you have to look at your profitability.

One of my four goals is to be profitable in all of our major regions and areas of operations. Last year, at this time, we were losing money. We restructured given what we thought to be the outlook. We're not going to achieve those sales and revenue numbers, so we have to look at our business operations there.

Q: What about China? What do you see happening in the economy there?

A: The Chinese government, I think, is very concerned with inflation. They're obviously a very active, very viable, economy and they've taken everything from reserve requirements to interest rate actions to try to slow it down. In the two years prior to this year, we grew by 20 to 30 percent.

That's a very difficult rate to continue to maintain. But if the market's going to grow on the order of 2 to 3 percent this year and we're going 10, that's fine by me. I do think the Chinese in some ways were prescient in that they saw a bubble creating and they clearly have cooled that down, and I think inflation has dropped off a bit. I think those were prudent actions looking over a longer term. So, I'm cautiously optimistic on Chinese growth and our role in it.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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