CEOs of the American auto industry have dutifully showed up every time Donald Trump has summoned them, and now they are getting exactly what they want: The Environmental Protection Agency is poised to review—read: rip up—the regulations mandating that American automobiles have an average fuel economy of of 54 miles per gallon by 2025, just as the industry asked it to do last month.
The reasons Detroit is cheering are obvious: They have higher profit margins on larger, fancier, less efficient cars. While GM, Ford, and Chrysler do make some sports cars—cha-ching—the main products that spur their profits are pickup trucks and SUVs, the cars with the lowest mileage. Right now, with gas prices being very cheap and the economy generally chugging along, it’s a great time to sell SUVs and pickups. And carmakers’ profit-maximizing strategy for the next several quarters is to sell more of them. Anything that distracts from that is a problem—and strict efficiency standards are at the top of the list.
There are two things wrong with seeking to undo the Obama-era mileage regulations. First, it evinces a stunning lack of gratitude. While the banks and mortgage lenders the feds bailed out following the financial crisis have all paid back their bailout money with interest, U.S. taxpayers ate $9.4 billion of the bailout costs of GM and Chrysler. Ford, for its part, took a $5.9 billion easy-money loan from the Department of Energy to fund work on batteries and low-emissions technology—and is still paying it back. Now they’re all pushing back against regulations that would make the air we all breathe cleaner, reduce the demand for gasoline, and make it cheaper to operate vehicles—even though taxpayer funds are responsible for the handsome profits they’re all presently enjoying.
But this isn’t just a case of bad manners. For Detroit, it’s a bad long-term strategy.
One of the reasons U.S. automakers got into so much trouble is because their business model in the 2000s revolved around selling high-margin gas-guzzling pickup trucks and SUVs at a time when gas prices were low. But when gas prices spiked to $4 per gallon and then the economy went into recession, that reliance on pickups and SUVs turned deadly. And the Big Three had no answer to changes in consumer demand.
Right now, nobody is saying gasoline will hit $5 a gallon or that the economy will enter a tailspin. But if those things do happen, Detroit’s reluctance to make more progress on gas-sipping cars will hurt them.
To make things worse, this stance is deeply parochial. The U.S. remains a very important auto market, with a record 17.5 million vehicles sold last year. But only 4 percent of the world’s population lives in the United States. Americans bought only about 20 percent of the 88 million cars sold globally last year; the 2017 proportion is likely to be smaller.
To survive as an auto company, you have to manufacture and sell products that can appeal to consumers everywhere—in Europe, in China, in India. And that doesn’t just mean making cars people in poorer countries can afford. It means making vehicles that are able to meet the rapidly evolving standards on emissions and mileage in large auto markets. In Europe, high gas taxes make large, low-mileage cars a poor economic proposition. China, which is trying to reduce air pollution, has significant incentives for electric vehicles. In Norway—a small market, admittedly—nearly 30 percent of the new cars sold are plug-ins. If the shape of big markets continues to evolve to favor low- or no-emission vehicles—either via regulation or the cost of fuel—and you don’t have a product to sell, you’re going to miss out.
We’ve seen this at home. As Detroit focused on pickups and SUVs, Toyota essentially had the hybrid market to itself. And because Detroit eschewed the development of high-end electric cars, it left the field clear for Tesla, whose market capitalization is now 80 percent that of Ford. Yes, GM is rolling out the all-electric Bolt. But Tesla has taken several hundred thousand reservations for its upcoming mass-market Model 3.
There are two big dynamics that will affect global car markets in the coming years. First, the U.S. will end up being a smaller part of the global market with every passing year—especially if advances in ride-sharing and autonomous driving reduce the need for every red-blooded American to own a vehicle. Second, an enormous amount of capital and energy will be devoted to rolling out vehicles that get better mileage and release fewer emissions. It’s an open question as to whether Tesla’s Model 3 will be an electric Model T—cheap, highly functional, widely adopted. It could be. But someone else could crack the code of battery-driven drive trains. We already have all-electric trucks and buses capable of carrying big loads. It’s not too far-fetched to imagine that someone might soon figure out how to produce all-electric pickups and SUVs.
It could be Ford, General Motors, or Chrysler. And of course the big automakers are investing some of the profits they’re reaping from the gas-guzzlers into gas-sippers like the Bolt or Chrysler’s Pacifica Hybrid minivan, which gets 32 miles per gallon. But they’ve only been doing so because of the combination of government incentives and high government standards. And the automakers have made significant strides and reaped the benefits. Today’s pickups and SUVs already get substantially better mileage than they did 10 years ago, which reduces the operating costs (and thus makes them compelling purchases).
Take away the high standards, and they’ll regress. That might boost profits for the next few quarters, but it may set the companies up for trouble down the road.