New Fuel Law Creates Haze for Automakers

On top of restructuring, GM and Ford now have to revamp their products.
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A sweeping piece of energy legislation signed into law this week by President Bush will, among many other things, demand a dramatic transition in U.S. automakers' product lineups that promises to create more pain for an already beleaguered industry.

A centerpiece of the new law requires the auto industry to raise the corporate average fuel economy standard, or CAFE, to a fleet-wide 35 miles per gallon by 2020 from the current standard of 27.5 miles per gallon.

Currently, the national fleet-wide CAFE for light trucks and cars combined is at an average of 26.4 miles per gallon, according to the U.S. Department of Transportation. Only two vehicles that currently are sold in the U.S. meet the 2020 target, according to J.D. Power and Associates: the

Toyota

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Prius and the

Honda

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Civic hybrid. Those vehicles make up a tiny slice of the automobiles on the road in the U.S. now.

In other words, Detroit has a lot of work to do, but the new standard is hardly unattainable. After all, the European vehicle fleet today already achieves more than 40 miles per gallon, on average.

But U.S. automakers

General Motors

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,

Ford

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and

Chrysler

are in financial crises, embarking on painful restructuring efforts while they bleed market share in North America. On top of it all, the macroeconomic outlook is bleak, with U.S. auto sales expected to slow next year amid a nasty downturn in the housing market.

Automakers can pay fines to the U.S. Treasury for failing to meet CAFE standards. Since 1983, manufacturers have paid more than $675 million in CAFE civil penalties. Greg Martin, a Washington-based spokesman for GM, says the auto companies also face damage to their reputation if they're delinquent on the standards in an age where geopolitics and global warming fears have made fuel conservation a popular aspiration for the public.

Martin says GM has products in the works using new technologies like hydrogen, fuel cells, hybrids and electricity that will help it reach the new standard. Ford and Chrysler did not respond to inquiries on the matter.

"I don't think GM, or any manufacturer, can tell you with any great precision or certainty how they're going to reach the new standard 13 years down the road," he says.

Automakers lobbied hard on Capitol Hill in the run-up to the legislation, but they wound up embracing the new law. David Cole, chairman of the Center for Automotive Research, says companies with a strong global presence, like GM and Toyota, are well-positioned to transition their fleets to the new standards, but Ford, and particularly Chrysler, are less so.

"If something is going to be tough for you, but even tougher for your competitor, maybe that's a good reason for you to do it," says Cole. "For GM and Toyota, this is probably good competitive news for them, because they have stuff teed up that can make this happen. It's going to be much more painful for some of the others in the business."