The Auto Channel logoEditor’s Note: Thom Cannell and Steve Purdy from the Detroit Bureau of provided this insight into the future of the auto industry. The story was titled “Can the US Produce Vehicles to Compete in the World Market and Satisfy Home Markets? and subtitled “The Dichotomy of Political Courage VS Personal Choice.”

This week the think tank and business intelligence company CSM brought its annual predictions to the Automotive Press Association in Detroit. There was nothing as earthshaking as last year’s prediction that Chrysler was doomed – unless you think that adding $31,900 to the cost of your favorite vehicle is news. That is the cost of non-compliance with EPA mandates in the future; and that cost forms the basis for a huge dichotomy.

Craig Cather, president and CEO of CSM, introduced his staff’s projections 5 to 15 years out. He insisted that after this past year of unprecedented carnage in the industry “we’ve hit bottom and positive signs are at hand.”

But he worries that the United States has no coherent energy policy. It does, however, have political energy focused in different directions that are perceived by some, but not all, as desirable. One of those is the push for smaller vehicles which could save the US car industry. However that means convincing Americans that buying small cars, vehicles smaller than the Ford Focus, Chevrolet Malibu, equal and smaller than Ford Fiesta and Chevrolet Cruze is what they must do for economic as well as patriotic reasons. Nifty, necessary, noteworthy and highly unlikely if fuel remains inexpensive. Would you rather have a Fiesta or a Flex, a Cruze or an Impala, a Dodge/Fiat 500 or a Chrysler 300? Given low fuel price that particular handwriting is in the sky, not on some back wall in Foggy Bottom. The EPA wants vehicles the size of A and B cars like Fiat 500, Cruze, Fiesta, and smaller to be the norm.

Our CSM experts also insist that for U.S. auto makers to compete internationally we’ll have to be making vehicles that fit into mandates and preferences in other world markets – which, they insist, we are not doing now. They contend that our mandates ought to be reflecting those of the other world markets.

CSM’s VP of global powertrain forecasts, Eric Fedewa, speculated about ways Detroit automakers may become profitable over the next 40 years. His projections attempt to anticipate trends all the way out to 2050, a monumental task to be sure.

Fedewa said we must acknowledge the role of global warming and world leaders’ ambitions of reducing CO2 levels by 80% by 2050. Transportation (including vehicles, mass transit, air travel, etc.) accounts for about 25% of CO2 production. That makes for a huge challenge for the industry. “But it’s not about icebergs,” he insists, “its about economics. And, pollution is a drag on economics”

Will governments substantially subsidize the radical changes that will come in our transportation inventory and infrastructure? And, will the US government subsidize the domestic industry to help them compete in other parts of the world where more strict requirements might be in place?

It will be tough, and perhaps impossible, to motivate the great mass of customers to vote with their increasingly hard-earned dollars for a politically mandated vehicle mix. People always want smaller cars and more fuel efficient cars, particularly in times of high fuel prices, until told that they are the ones who have to buy those small cars and pay for the technology. Then they purchase what makes the most sense for them.

What about electric cars?

Yes they are coming. CMS predicts that 45% of nameplates will have electric vehicles – in some form – by 2020. This includes milder hybrids and other technologies like the cost-effective Stop-Start which stops engines when standing and instantly restarts; Prius, Ford Fusion, Milan, and Escape already have this feature as does Honda Insight. Many other incremental advances will enhance electric cars, hybrids and conventional automobile powertrains.

What about other mandates?

Will government decide that you can only have the number of kids you can fit in your compact car? Will you have to have a business license to have a full-frame vehicle with reasonable towing capacity? Time will tell. What about pickups and large SUVs for families? As explained by CMS, those business-oriented vehicles will remain available but at a price that will, in our opinion, have small businessmen, those with recreational vehicles to tow, horsemen, farmers, and families with more than seven members literally breaking down doors to political will. Come on, an extra $31,900 for your necessary-for-business F-150/Ram/Silverado?

Government strategies will include continued demonization of CO2, continuing to allow the California Air Resources Board (CARB) to set emissions policy, substantial fines (perhaps as much that $30,000/vehicle) for noncompliance with mpg targets.

Some pols pontificate that Japan, Korea, the EU do not have open markets. Some of that is accurate. However, what really kills car sales is the size and thirst of our typical vehicle. While Rangers and Colorados are world-wide business vehicles there are no F-150s or Rams or Silverados anywhere else. Even our mid-sized and full-sized vehicles are luxury-class size in the rest of the world. More damning is carbon emissions and most of the world rates vehicles in grams of CO2 per kilometer. This is an accurate method of expressing both fuel economy and emissions. The current US fleet vehicle produces 105 g/km more than a comparable European vehicle making them unsellable overseas, according to CSM. In 2015 the company says, the gap will shrink to 42 g/km which is better but not enough. By 2030 the difference is expected to be 20 g/km or less, which is an acceptable difference.

All of this omits some harsh realities that CSM also disclosed. What happens when GM, Fiat/Chrysler, and Ford make small cars available and they don’t sell as planned? Expect those cars to have high levels of luxury-style content and probably large customer incentives — good for the customer and terrible for the companies.

In other bad news, the payback on your investment in new technology whether Direct Injection, Diesel, Hybrids, or pure Electric is very slow. The best ROI (return on investment) remains the spark-ignition engine with Direct Injection and turbocharging which adds about $1000 cost per car and a 4-8-year payback at current fuel price of $2.50 per gallon. Contrast that with an extended range or pure electric car and a payback that, at $2 per gallon for fuel, takes 10-27 years depending on how the technology is executed.

Even at $4 per gallon it would take 4-10 years to recoup the extra expense. Thus government will absolutely have to manipulate demand, absent a fuel shortage or huge taxes. Seen anyone in Washington seriously sponsoring a bill proposing additional gas tax? Are you holding your breath?

What is most needed, and also least likely, is a pure and defined governmental strategy for sustainability. Business needs defined and stable rules to plan and the auto industry with its 3-10 year cycles even more so. Car companies need stability in order to build and validate appropriate technology in volumes. Of course a sustained spike in fuel price caused by taxes or external factors could make political courage and action moot.

The G8 (and we’re not talking about the Australian Pontiac here), Cap and Trade scheme is expected to generate an ongoing 428 billion dollar per year price tag and 4.2 trillion in expenditures by 2020.

Fuel Cells, still at least 20 years away, may be a game-changer. Japan and others are using home-based fuel cells to produce home heating and electricity and will utilize these years of experience to implement automotive fuel cells. So many unpredictable factors will certainly effect our vehicular future.

During Q&A one of our particularly wise and astute colleagues asked about the risk of a “consumer revolt” as the government mandates result in the production of vehicles we may not want. Perhaps the U.S. auto scene will begin to look like Cuba with just old vehicles populating the highways because no one will want to buy the government mandated ones. As our friend and colleague, Gary Witzenburg, is fond of saying, government can mandate what kind of cars the manufacturers build, but they can’t force consumers to buy those vehicles. At least not yet.