The Commanding Heights

by William Yeatman on July 8, 2008

“The auto industry is the nation's largest manufacturing sector, accounting for almost 4% of U.S. gross domestic product. It employs about 2.5 million people directly or indirectly, and spends tens of billions of dollars a year in research and development.” (WSJ)

And yet regulators think they know what’s best for consumers, the auto industry, and the economy.  In April, the National Highway Traffic Safety Administration (NHTSA) proposed a 25 percent mandatory increase to fleet-wide fuel economy standards (CAFÉ) by 2015. Auto Alliance spokesman Charles Territo said about this proposed rule-making, "The price of gas has certainly created a market for more fuel-efficient vehicles, but it hasn't lessened the amount of time or the financial investment necessary to bring them to market.”  

The oft-heard argument that the US auto industry brought these troubles on itself by being short-sighted making large cars and trucks doesn’t take into account the extra costs per car that US companies have. As GM’s Vice Chairman Bob Lutz says, “US auto manufacturers were pretty much stuck selling gas-guzzling SUVs.”  

A University of Michigan study in January 2006 compared the labor costs per vehicle for Hyundai production in Alabama versus the composite average for the traditional Big 3 in North American production. Hyundai had costs of only $551 per vehicle whereas the Big 3 had $2,903. These extra costs included labor, health care, jobs bank and retirement plan costs. 

“Auto makers made upwards of almost three times the profit on SUVs compared with small cars,” according to Jeff Bennett in the WSJ.  This is how the US auto industry survived.

But now with the cost of gas, demand for these larger vehicles has decreased, causing the industry and the many related industries to suffer their worst year in over a decade.

On top of this, a district court in California has now decided that if the EPA grants California a waiver so they can impose even higher CAFÉ standards, the auto industry has to begin selling this higher mpg mix of cars in only 45 days. Since this is impossible and because twenty-one percent of new cars are sold in California, this means that the auto makers need to spend billions of dollars now to comply in case EPA grants the waiver.

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