Struggling Auto Industry Swept Up in Tumultuous Times

A U.S. economic slowdown is anticipated and jittery world markets are bracing for a domino effect.

Barbara McClellan

August 23, 2007

3 Min Read
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There must be mornings when automotive captains of industry wonder if it’s worth getting out of bed.

Supplier bankruptcies and the encroachment of private-equity deals aside, Detroit’s Big Three saw their combined U.S. market share slip below 50% in July for an historic low as foreign-based auto makers tighten their grip on North America and the year’s annual sales forecast grows dimmer by the day.

No surprise that sales incentives are back in force, as vehicle demand thins and inventories fatten. Sluggish August sales will keep the seasonally adjusted annual rate in negative territory, at 15.2 million units, well short of last year’s 16.1 million, a Ward’s sales forecast shows.

Meanwhile, the housing industry has not just cooled but frozen, as subprime mortgage lenders fall off a cliff and harsher loan terms are expected by credit-card and other companies, accompanied by soaring home foreclosures and stock-market turmoil.

With tighter credit and less liquidity (we’re all in a cash crunch), a U.S. economic slowdown is anticipated and jittery world markets are bracing for a domino effect. Already the value of many overseas currencies is falling, lessoning the advantage of the weak dollar.

Threaded throughout the fabric of these troubling times is the U.S. Congressional debate over stricter fuel-economy requirements.

Auto workers, business leaders and elected officials recently held demonstrations in Chicago and St. Louis in support of a bill from Rep. Baron P. Hill (D-IN) and Rep. Lee Terry (R-NE) that calls for a corporate average fuel economy standard of 35 mpg (6.7 L/100 km) for passenger cars and at least 32 mpg (7.4 L/100 km) for light trucks by 2022.

Hill-Terry faces opposition from an energy bill passed earlier this summer by the Senate, which includes a CAFE proposal directing the National Highway Traffic Safety Admin. to set standards for each class of vehicles that, combined, would reach a 35-mpg average by 2020.

This represents an increase of 40% over current CAFE standards, albeit the bill allows NHTSA to declare the goal too costly, if “clear and convincing” evidence exists.

A United Auto Workers union group at the Chicago rally warns the Senate bill would radically reduce consumers’ vehicle choices and raise sticker prices by thousands of dollars.

Supporters of Hill-Terry also say the Senate bill does not go far enough in separating cars from light trucks. Citing a recent study by the Lehman Brothers investment firm, they say the energy legislation would cut the production of large pickups and SUVs 60%.

A recent study from the U.S. Department of Transportation says by not separating car and light-truck categories, the Senate bill would negatively affect the economy by $114 million. Some industry estimates peg the cost per vehicle at upwards of $7,000.

“The biggest problem is that many of the proposals being discussed have one single standard for cars and trucks,” says a spokesman for the Alliance of Automobile Manufacturers, a Washington lobby group representing U.S. auto makers that back Hill-Terry.

“There are very different attributes besides wheelbase and track width that are important to a vehicle’s characteristics,” he says. “And anything that makes vehicles more expensive or limits their capabilities could be devastating to not only manufacturers but also consumers who rely on those vehicles for their way of life.”

Such restrictions couldn’t come at a worse time, as the Detroit Three, still mightily dependent on light trucks and SUVs, struggle to turn around their loss-making U.S. operations.

Perhaps the only good reason for automotive chieftains to face another day is the knowledge that, ultimately, a lot more than Detroit’s future is at stake.

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