Why Crash Tests Have Auto Makers Looking to 2017 Unless the Obama auto-mileage rules are rolled back, all cars will be small cars

Why Crash Tests Have Auto Makers Looking to 2017

Unless the Obama auto-mileage rules are rolled back, all cars will be small cars.


Jan. 24, 2014 6:50 p.m. ET

In the strange world created by the government’s highly irrational policies toward the auto industry, car makers got some good news-bad news this week. Their new minicars were found to be sadly lagging on safety by an independent testing lab.

Among the teensy euro-style cars flying off the assembly lines, only the Chevy Spark rated “acceptable” by the vaunted Insurance Institute for Highway Safety in a common type “front overlap” crash at 40 miles an hour. Ten others, including the Fiat F.MI -3.41% 500 and theToyota 7203.TO -1.37% Prius C, were rated “poor” or “marginal.”

This bad news, which has been all over TV the past few days, is good news for an industry gearing up for the lobbying fight of its life—the 2017 “mid-term review” of President Obama’s strict new fuel-economy rules. The review was the key concession ceded to auto makers when the White House had the industry by the throat in 2009.

Economists puzzle over the matter in a world of yo-yoing gas prices and advancing technology, but let’s just say a back-of-the-envelope estimate is that the 40-year-old fuel-economy regime known as CAFE, or corporate average fuel economy, has never secured any real benefit for the United States. Consider: The mileage targets went unchanged from 1990 to 2009 and yet the U.S. light-vehicle contribution to global greenhouse emissions fell from a negligible 3.3% to an even more negligible 2.6% for reasons beyond Washington’s control.

But one thing is certain: However much government agencies keep insisting lighter cars don’t have to be smaller and more dangerous cars, vehicles would get a lot smaller under the Obama out-year targets. In 2013, the average vehicle tipped the scales at 4,041 lbs. By 2025, the average vehicle would hardly be heftier than today’s 2,500-pound minicars—about 2,976 lbs., according to an MIT study.

Voters may not care about auto-industry profits, but they do care about safety and comfort. Auto makers make a near-riskless bet that Washington will rein in the rules before they really bite. In the 1990s and 2000s, pols carved out the SUV loophole to keep auto makers and car buyers happy. Only one big question lingers, on which millions in lobbying fees will be spent, and that’s the exact form Washington’s climb-down will take.

Indeed, CAFE shows how terrible government policy, like ladies of the night and oversize oil paintings, can become respectable with age. The Bush White House once routinely criticized the rules in its annual economic report. When President Bush got in trouble in Iraq, he seized on higher mileage targets as a kind of recognizable currency to show that his only approach to a messy Mideast wasn’t to send in the troops.

President Obama, for his part, routinely blames Detroit’s focus on selling big cars for its financial meltdown. This is complete nonsense, of course. Big cars earn all of Detroit’s profits. But Mr. Obama is borrowing the logic of cognitive linguist George Lakoff, who teaches Democrats to say what voters want to hear. And liberals and environmentalists want to hear that Detroit’s bankruptcy was punishment for SUVs.

As a House GOP investigation would later find, the current target of 54.5 miles-per-gallon target in 2025 was picked by Team Obama because it made an impressive-sounding “headline number.” Decimals apparently indicate seriousness. In reality, the rules are full of fudge factor to favor the electric cars Mr. Obama likes to talk about and Detroit’s pickup truck business. A more realistic claim would be about 47 mpg in 2025, though that’s still far more fuel economy than car buyers would likely find worth paying for at any gas price below $7.

Which brings us to the small cars that fared so badly in the front overlap tests, including the 2014 Ford Fiesta.

Ford was louder than most in predicting that Americans would become more like Europeans, willing to hand over top dollar for teensy cars with luxurious touches. But Europeans pay $9 and $10 for gas. Plus, even as they get fatter and older like Americans, Europeans spend fewer hours behind the wheel, which makes a lack of full-size comfort easier to accept.

In the U.S., gasoline is about $3.28. At this week’s Detroit auto show, Ford was talking up not its minicars but its full-size pickup and a forthcoming 155-mph Mustang.

But then fraudulence in all things is not the worst practical slogan for anybody practicing politics. We don’t exaggerate when saying all auto makers are focused on 2017. Hard to find is an executive who believes the rules will survive as written. Get ready for one of the great regulatory scrums. Not only will car makers send lobbyist hordes to shape the successor rules to their own advantage, but to the disadvantage of their rivals.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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