As a company leader and owner, efficiency advocate, and AESP Board Member, I spend many of my waking hours and maybe many of my unconscious hours analyzing and processing behavior. What motivates people, and why do they choose what they choose? When I read a headline like White House Poised to Relax Mileage Standards – Rebuffing Automakers, the caution lights start spinning in my mind. What is going on here? Why on earth would they want this? Read on.
The Trump administration seeks to reduce the federal average fuel mileage standard from the Obama-set 54 miles per gallon to 37 mpg, by 2025. In my opinion, 37 mpg is impossible to reach considering entrenched consumer preferences.
As I wrote recently in Prestige, Not Pain, consumers do not want small cars as car companies are dumping their tin cans left and right. You can see a list of discontinued vehicles in that post. They are being discontinued because there is lack of demand. Where there is lack of demand, there is lack of pricing power, and where pricing power is vacant, monetary losses ensue. So these 17 executives, who are begging Trump to keep the extra impossible 54 mpg standard, have a better idea – keep the standards so we can sell high-mileage cars that cost more to make so we can lose even more money delivering cars no one wants.
Let us observe the light vehicle buying preferences of the mysterious purchasing anthropoid – next chart please:
When I was a kid, the ratio of trucks to cars was 1:4. Now it is 2.5:1. Light trucks get poor mileage, to the tune of 23 mpg, which is actually better than I would have guessed. Consumers want them, regardless. The automakers have tremendous leverage and loyalty from truck buyers. They will shell out close to $50,000 for new ones, no questions asked. And that, by the way, is $8,000 more than a year ago.
An Algebraic Story Problem
Let’s look at a little algebraic experiment based on the above data. We have 71% of the population with a 23 mpg fuel economy. What would the fuel economy need to be for the remaining 29% to meet the fuel economy standards?
Is this 4th, 5th, or 6th-grade arithmetic? Remember story problems? Fun times.
First, what does the EPA fuel mileage cap include? Cars and light trucks. What is a light truck? A vehicle weighing up to 8,500 lbs. Ok. I think this clearly covers all pickup trucks and SUVs. For example, the following tank weighs a svelte 5,800 lbs (and at ~20 mpg, has even worse mileage than the light truck).
How will the remaining fleet possibly come close to even 71 mpg by 2025? It won’t.
Consider the 54 mpg pie-in-the-sky standard that the automakers want. The other vehicles would need to achieve 129.9 mpg. Some EVs don’t even clear this hurdle. So in five years, the entire car fleet will convert to EVs, and barely, barely scrape in at a CAFE of 54 mpg. Uh-huh.
Politicians Know How to Run Companies – Into Bankruptcy
As The Wall Street Journal described, When Politicians Direct Capital, companies, Pacific Gas and Electric, in that case, go bankrupt. That article chronicles waves of requirements on the utility, including purchase power agreements with behind-the-meter energy producers at market rates. Those contracts led to higher prices for everyone else, and per my understanding, as part of the restructuring, those PPAs were submitted to the shredder.
So what are these kooky CEOs thinking? The Wall Street Journal reports that after complaining forever about fuel economy standards, the executives have contracted Stockholm Syndrome – you know, where the captives become sympathizers with their captors.
The Wall Street Journal reports Trump’s rule would scrap all the credits banked for electric cars to date. Executive: “OMG, don’t take my credits!”, while if enacted, the 54 mpg rule would drive them into bankruptcy faster than a New York minute because they would need to give away EVs to meet the standard. Make no mistake; EV adoption will not be swift. Per Wharton, only 2% of vehicles worldwide are electric today. Additionally, penalties would be piled onto automaker’s lucrative “light” truck market, displacing profit dollars their customers are all too willing to pay.
Who Didn’t Sign
Dig this: who didn’t sign the kooky letter to the EPA? Fiat, which hasn’t invested in EVs, and Tesla! Imagine that! Tesla, which wouldn’t exist without government largess and intervention, doesn’t want imposed competition. Tesla’s home state of California is wagging the dog, besides. As far as I’m concerned, California can make the rules it wants and impose them on their people, but I remind them of the twice-bankrupted utilities in the state. California’s impositions must stop at their border. Don’t expect the rest of us to subsidize your market.
There is a lesson here that has been learned many times over; the customer is king and what they want rules. More often than not, bad things happen when CEOs, who should be paying attention to what their customers want, spend too much time in Washington twisting arms. It is they who don’t understand what the politician wants – power.