Saturday, November 19, 2016

How the EPA Chased Small Car Production to Mexico

Donald Trump says he will bring small car production back from Mexico.  If he does, it will not be by tariffs, but through changes in environmental laws.

CAFE is not a place to buy coffee.  It stands for Corporate Average Fuel Economy - a standard set by Federal Law.   CAFE standards were established to increase fuel efficiency in a country where fuel prices are often very, very low compared to world standards.   In Europe and Japan where gas prices are well over $5 a gallon, you don't need to prod people to buy smaller cars - they have an economic incentive to do so.

Here in America, well, I bought gas today for $1.92 a gallon in Georgia.  There is no incentive to buy a car that gets 35 mpg on the highway (as mine does) or to drive more slowly (as I do) to save gas.   And we want to save gas not only to "save the environment" but to make us less dependent on foreign oil - it is a matter of national security.

Like most Federal Regulations, it is one born out of the highest and loftiest of intentions.  However, every regulation or law, no matter how wonderful in theory, has unintended consequences in action.

And CAFE is no exception.  With fuel-efficiency standards going higher and higher, car makers have to offer smaller and smaller cars.   In order to sell a 20 mpg car, you need to sell a few 50 mpg cars to offset the mileage of the "gas hog" car.   Since the public wants larger cars - and worse yet, SUVs - you have to basically give away smaller, more fuel efficient cars, in order to be able to sell the larger cars.

And Americans love their large cars, pickup trucks, and SUVs.   They love them.   Even people who can't afford them want them.  Why is beyond me, but there you have it.  We also love horrible food that kills you.  People are freaking idiots.

And as CAFE requirements ramp up higher and higher, it becomes tougher to meet these standards.   Under President Obama, the CAFE requirements were slated to go over 50 mpg by 2025.   This is astounding mileage for any car to get, much less a fleet average for a whole company.   For every Corvette you sell, you'd have to sell 100 Chevy Sonics to offset the difference.   

And to sell those small cars, you have to make them cheaply so you can sell them cheaply so people will be motivated to buy them.   And that means not making them in the United States with Union labor.   Nearly every car company in the world has a factory in their home country, China, and the United States.   But few actually make small cars here in the US.  Most make high-margin SUVs and trucks and larger-sized cars.   Small cars are still imported from the home country - overseas.

Other companies simply gave up on small cars.  Fiat-Chrysler just stopped making them altogether, dumping production of the 200 and Dart entirely.  And why they dumped them illustrates the problem.  Since they have a higher cost of production than, say, Korea, (due mostly to Union labor) they had to cut costs - so they cut content.  As a result, no one wanted the cars as they were cheap looking and feeling compared to foreign makes.  It is the same scenario that bankrupted Chrysler and GM in 2009.   How Chrysler plans on  making 50 mpg CAFE without any small car production is beyond me.   But they saw they were losing money on each car sold so they decided to just stop making them.

Ford decided to move production to Mexico and use the US plants to make profitable SUVs including the sexy new retro Bronco.   It was a sound business decision, given the regulatory environment they are in.  No one "lost their job" because of this, as the factories were re-tooled to make more popular cars.  In fact, production should increase and additional shifts (and jobs) added.  As it was, they were laying off people and cutting production in the small-car plants.

Trump, of course, gets this all wrong, claiming Ford is moving production to Mexico for "profits" which is only correct if you assume profits means "no longer hemorrhaging money on the sale of each car."

Of course, with Republicans controlling the White House (in theory at least) and both houses of Congress, one would expect that CAFE requirements would be eased, much as they were during the Bush administration.   So the need to give away small cars in order to sell big ones starts to wane.   The automakers can sell fewer small cars or no small cars at all (as Fiat-Chrysler has done, with the exception of its slow-selling Fiat line) and still make CAFE requirements.

But of course, Trump will claim he "brought jobs back to America" even if in reality, there are not actually more people employed at Ford, GM, or Fiat-Chrysler.   Ford won't bring back small car production, they will simply make more larger cars

Should CAFE requirements be eased?   That is a good question and one for you to decide.   The main thing is, to understand why Ford moved small-car production to Mexico in the first place, or why Fiat-Chrysler just stopped making them or why Chevy is laying off workers in Lordstown making the Cruz and expanding production in Mexico.  It has more to do with fuel economy than with labor costs - although the two work together in tandem to make it difficult to build small cars here.

People want SUVs and Trucks.  The most popular selling vehicle in America is a pickup truck.   With CAFE requirements, you have to induce people to buy smaller cars to offset sales of larger ones, and the only way to do that is by lowering your prices.   If you lower your prices far enough, you are losing money on each sale.  The only way to alleviate this effect is to lower the cost of production - somthing the Unions are loathe to do.

But in any event, I doubt Trump will "bring back" small car production to the USA or create jobs in auto factories, except perhaps by accident.   Sadly, it seems we may be headed for recession in the auto industry anyway.  In addition to layoffs in the small-car field, even truck sales are slowing.  Ford actually shut down its F-150 line due to excess inventory.  Trump may have inherited the perfect economic shit-storm, and whether or not he is culpable, he may end up getting blamed for it.

P.S. - Since Americans hate cars and love SUVs and Trucks, you can get really good deals on cars right now, particularly used ones, and particularly smaller, more fuel-efficient cars.   Look for an SUV on a used-car lot and they are hard to find.  In the meantime, they will give away a used Camry for next to nothing.  If the economy does go into the shitter, well, it will be like 2009, when you couldn't give away SUVs and small cars were flying off the lots!

UPDATE:  A reader notes that "foreign" car manufacturers make "small cars" here in America, citing the Nissan Altima, Toyota Corolla, and Honda Civic as examples.   The problem with this argument is twofold.  First, these are fairly LARGE cars, not sub-sub compacts.   Second, they are made at NON-UNION Plants where wages are far lower, benefits far less, and work-rules more lax.   As a result, these plants CAN compete with overseas or Mexican factories.

But of course, companies like Nissan do build cars in Mexico for export, and in fact are making the next-generation Frontier there, while we Americans are stuck with the previous-generation model made in Mississippi.  And maybe one reason the rest of the world has the "next Gen" Nissan Navarra/Frontier is that in order to keep costs down, Nissan is flogging the old platform of this compact truck for a few more years.

You can't build small cars - or even small SUVs - at union plants in America using Union labor.  That is why the "Big-3" are importing these vehicles from Mexico or overseas.   And if the blue-collar union man thinks Republicans are going to turn pro-union..... well that would be a first!