Detroit's blue skies clouded by worries about fuel economy

By REUTERS | 14 January 2015

Auto industry executives see nothing but blue skies in the US market, especially compared with troubled Western European economies or slumping emerging markets.

There is just one, increasingly vexing problem: The vehicles American consumers will pay a premium to own are not the fuel-sipping small cars or electricity-powered models that they have been lavishing capital on to meet government emissions regulations.

Instead, what is selling as gas prices fall are big trucks, SUVs and high-performance luxury cars.

The disconnect between sales trends in the United States and regulatory demands is the hot topic among executives gathered for the annual Detroit auto show.

"It's the CO2 stuff that's wagging the dog more than anything else," said Fiat Chrysler Automobiles CEO Sergio Marchionne, who tends to say out loud what other industry executives say in private.

FCA loses money on electric cars it sells, he said. But FCA will not stop working on future electric cars because of cheap gas. Oil prices fluctuate, but the US government has not changed its requirement to build vehicle fleets that will average 54.5 miles per gallon (4.3l/100km) by 2025, he said.

"It is making our life a lot more complicated," Marchionne said.

Marchionne called on the US government to give automakers more time to comply with the 54.5-mpg standard.

Officials at other automakers hint that the US Environmental Protection Agency could flex its rules to give them mileage credit for installing autonomous driving features - which could save fuel - or advanced safety systems, without taking the politically awkward step of abandoning the headline fuel economy target.

The EPA is required to review during 2016-2018 whether the 54.5-mpg goal is achievable at reasonable cost by 2025. Work on that review is already under way.

"When we set the 2025 standards for light-duty vehicles, we expected automakers would comply primarily by improving conventional gasoline vehicles, and that has proven to be the case," the EPA said in a statement.

The EPA expects automakers will shift 2 percent of their fleets to electric vehicles and 5 percent to hybrids to comply.

"We believe hybrids and plug-in electric vehicles are important for the long term, as nearly all experts expect gasoline prices to rise again," the EPA said.

The tension between government greenhouse gas regulations and market demand is not unique to the United States. Fuel economy and greenhouse gas emissions mandates are roughly the same in the world's major auto markets.

But consumers in the two biggest markets - China and the United States - are gravitating towards larger, more luxurious vehicles.

With US$2 a gallon gas, says Morgan Stanley analyst Adam Jonas, it would take 14 years for the buyer of an electric car in the United States to be repaid in fuel savings for the higher cost of the battery electric systems.

Tesla Motors Inc CEO Elon Musk on Tuesday used an appearance at the Automotive News World Congress conference in Detroit to urge his established rivals to invest more in electric vehicles.“

"You won't regret making those decisions," he said.

Automakers insist they are trying hard to promote cleaner, electrified cars, in part by dropping prices and swallowing more of the extra costs of the batteries required to extend zero emission driving range. General Motors Co, for instance, debuted in Detroit a prototype of an electric car it said could run for 322km and sell for US$30,000, as well as a new generation of the plug-in hybrid Chevrolet Volt.

Daimler AG's Mercedes Benz brand said it plans 10 plug-in hybrid models over the next several years.

Steve Cannon, head of Mercedes' US sales arm, said pricing for the hybrid versions of core models such as the Mercedes S-class or E-class will not be substantially higher than for conventional gas-burning models.

"The trick is to sell these in volume" to drive down costs and achieve the 54.5-mpg federal mileage target, he said.

However, Cannon says selling plug-in hybrids "in the face of US$1.80 a gallon gas is scary for all of us."

Dave Zuchowski, head of Hyundai Motor Co's US arm said his company plans plug-ins and a battery-electric vehicle as part of a 12-model product blitz during the next three years.

But if Hyundai had the capacity, Zuchowski said he could sell up to 100,000 more SUVs in the United States.