By on December 10, 2009

The movement to nowhere?CSM Worldwide seems to think so, telling Automotive News [sub] that new compacts from Ford and Chevrolet are being pushed into the market to comply with increasing fuel-efficiency and CO2 emission standards. If gas prices stay steady, CSM’s VP for Forecasting, Michael Robinet says “extreme pressure to channel smaller vehicles in the market due to CAFE and emissions standards will raise incentives and lower profitability.” “It is very possible that U.S. automakers will not achieve their objectives of selling small cars at a profit,” adds CSM CEO Craig Cather. The crux of the argument is that CAFE ramp-ups to 35.5 MPG by 2016 create incentives for automakers to produce small cars without corresponding consumer demand. Luckily there’s a planned gas tax hike for that.

CSM admits that either an oil shock or a gas tax hike would increase demand for small cars, effectively nullifying their argument. And given the DOT’s rhetoric recently, that seems like a very plausible scenario… after all, even the most virulent anti-tax types would sign up for an indexed gas tax given that the alternative could be a pay-per-mile GPS tracking scheme.

But there’s more to CSM’s analysis than politics. AN [sub] explains:

Increasing competition in the subcompact and compact segments, which have long been dominated by Asian automakers, may also hamper Detroit automakers’ goal of making money on selling small cars, CSM said.

In short, CSM isn’t actually worried about a small car glut, it’s simply collecting excuses for the seemingly inevitable failure of Detroit’s compact offensive. After all, CAFE standards apply to the “Asian automakers” just as much as they apply to Ford and GM. The real problem is that the Detroit has a hard enough time getting consumers to consider its traditionally strong products like large cars and SUV/CUVs, and will be even harder pressed to drum up interest in its new compact offensive. The steady growth in the small-car segments that even CSM admits are occurring will simply go to the manufacturers who have maintained a stronger presence in those segments.

Will Detroit face an uphill battle selling the compact cars that are filling its future-product pipelines? You betcha. Is it CAFE’s fault? Of course not. CSM’s analysis is, at best an argument for a gas tax hike. Given the government’s 61 percent “exposure” to GM (and its heavy investment in small cars like Cruze, Volt, Spark, and Aveo), such a hike seems all the more likely.

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35 Comments on “Will CAFE Cause A Small Car Glut?...”


  • avatar
    jaje

    CAFE never worked – b/c consumers bought what they wanted and MFGRs built what the consumers wanted (large cars & trucks).  The only time consumers had shifts towards fuel efficient cars was when gas was expensive.  CAFE will never force this shift as it has nothing to do with demand only supply.   Now the upcoming Gas Tax is the only real way to shift demand by making large fuel inefficient vehicles less satisfying to consumers who will then demand greater fuel efficiency.  CAFE should just go away and the gas tax stay in it’s place.  Use the proceeds of gas tax to pay for infrastructure upgrades to roads (unfortunately – it’s a necessary evil to alter demand).

  • avatar
    carguy

    Probably not. CAFE has been ineffective for years and always had enough loopholes for manufacturers to sell whatever they wanted more or less (including a boom in recreational truck ownership). The current industry focus on small cars  probably has more to do with changing consumer tastes than government mandate.
    While not scientific benchmark, all the hip young folk in my neighborhood are driving small cars – nicely optioned ones at that – so maybe that is an indicator that automotive fashions have changed.

    I should add that if all car makers were trying to do is to satisfy CAFE regulation then you would expect them to churn out cheap econo-boxes (Aveo style) – but that is not the case. The focus seems to be on better quality products that people actually may want buy as opposed to being forced into by economic circumstance.

  • avatar
    nikita

    Just read that Mexico is hedging oil prices at $57USD for next year.  Anything can happen in the Middle East, of course. But barring a war, worldwide demand is just not going to pick up real soon.  I want a Fiesta because it is minimalist (by North American standards) and fun to drive, but the majority of consumers still want the biggest and plushest vehicle they can afford.  IF the gas tax goes to highway infrastructure and not boondoggles like the never-will-actually-get-built LA-SF dedicated passenger rail line, im all for it in exchange for ditching CAFE.

  • avatar
    lilpoindexter

    Here’s a better idea…Reduce taxes on Diesel fuel, pass some incentives on the purchase of new diesel powered vehicles (like with hybrids), and BAM watch average fuel economy shoot past 40mpg

    • 0 avatar
      rnc

      The EU/US have developed a very effective diesel/gas relationship (there’s only so much of each you get from a barrel of oil), our excess diesel goes to europe and vice versa and it helps keep down the price of both, without any new capacity being added.  Mass adoption of diesel isn’t happening in the US unless it’s “encouraged” like EU did and that would mess up the current arrangement, that’s not happening.

    • 0 avatar
      Ernie

      RNC – if we had rep or mod points here, I’d give you a +1.

      —–
      I’ll see everyone’s price-tinkering and raise you a “how about we only drive what we need?”

      With this year’s trade “up” of my family’s vehicles, I went from an SUV to a midsize sedan and the wife went from (the worst gas guzzling) minivan down to a midsize SUV.

      Everyone doesn’t have to go out and buy Prius . . . but why do so many people tool around in an escallade by themselves?

    • 0 avatar
      colin42

      rnc

      My understanding is that the split between gas & diesel per barrel can be changed to a certain degree. The US generate a large % of gas than Europe, however I understood that the US uses all the diesel it produces (and include heating fuel in that as they are the same part of the barrel).

      The majority fuel burnt in the US is still diesel (think of all those semi’s getting 5mpg and running 100K miles /year) just a very small amount of it is used in cars.

      Europe exports it’s excess gas to the US

  • avatar
    Steven02

    Most auto manufactures are easily going to make the mark for CAFE on MPG.  Remember, CAFE is not using anything close to the EPA standards of 2008.   New CO2 standards are a different story and will require smaller vehicles.  The Detroit 3 have been lacking in the compact and subcompact markets for awhile.  Now, all 3 are coming out with new/redesigned vehicles for this market.  If the models are slightly successful, it will likely have to take aware shares from Toyota and Honda, which has been hard for the Detroit 3 to do.  There will also have to be an increase in the demand in the segment, which a gas tax will help.
     
    But, to the author, why would CSM be collecting excuses for “the seemingly inevitable failure of Detroit’s compact offensive.”  They are a marketing and forecasting firm.  This just seems like a forecast.  4 new entries into a market that not very big in the US market is going to be interesting.

  • avatar
    dwford

    I would like to see the gas tax go up 50 cents over the next 2 years, up 10 cents per year until it hits $1.00.

    Compact cars are not where the fuel economy action is going to be anyway. In order to keep prices low, the auto manufacturers can’t put the best fuel saving technology into them. The midsize market is where the big gains will be. Prices are high enough and demand is high enough to cover the increased cost of turbos, direct injection, advanced transmissions, etc.. Look at the new Sonata. It is going to get 35mpg highway, beating the smaller Elantra!

    • 0 avatar
      George B

      I would like to see the federal excise taxes on gasoline and diesel go to zero and federal highway spending also go to zero.  Get congress out of the highway pork business and delegate highway construction/maintenance and fuel taxes to the states.  Possible to get a state constitution requirement that fuel taxes can only be spent on highway infrastructure, but damn near impossible to keep our national congresscritters on that short of a leash.  At the federal level, maybe we could look at a tax on oil imported from outside of the US, Canada, and Mexico to pay for Middle East military expenses.
       
       
      Regarding a possible glut of compact cars, Cash for Clunkers already increased the number of compact cars on the road.  New compacts have to compete with a good number of uses compacts in addition to the new choices.  Tough sell.

  • avatar
    jpcavanaugh

    If there is a small car glut, it will certainly be CAFE’s fault.  The only way there will be a glut is if manufacturers pump out more small cars than consumers want to buy.  When gas prices are high, this does not happen.  But when gas prices are relatively low and stable (as they are at present) and when CAFE is on the verge of its first major ratcheting up in 15 or 20 years, carmakers must keep volume up to increase its fleet average, but customers are not buying because more of them will value room and power over economy.
    The only time CAFE actually works is when gas prices are high as well.  Then we don’t need CAFE.  When gas prices go down, consumers want one thing, but carmakers are ordered to build something else.  The popular product goes WAY up in price, and the glut of small cars leads to selling at a loss just to keep them moving out the door.  This is why there has not been a decent US small car in years.   The only way we got through this the last time was the truck loophole, which was the only way to build a decent family vehicle. 
    The only thing I can figure is that there are too many CAFE fans who never had to drive the crap we had to drive in the early 80s when anything with any size for a family was designed to pass epa mileage tests, and not to drive.  That was a miserable era for the automobile, and now we are preparing to do this to ourselves again, just when the industry had made it through the learning curve and is building attractive, powerful and roomy cars that get decent mileage.

    • 0 avatar
      dolorean23

      I strongly disagree that the “only way to build a decent family vehicle” is to utilize the truck loophole. The average US family has two kids, coupled with Mom and Dad and the necessary luggage, the Fiesta five door works pretty well. Now, you won’t have two DVDs going at the same time and you may have to you know, talk to each other, I think we’ll make it through.

      You did get the problem right though. The Detroit three deliberately thumbed their nose at Congress and utilized the truck loophole to do whatever they wanted and the American public be damned. Trucks didn’t have to meet the safety standards of cars, didn’t have to meet 20 mpg gas mileage standards, and sure as hell didn’t have to worry ’bout pumping pollutants into the atmosphere ’cause it was a larger vehicle AND it pisses off Al Gore. Yee-ha!

      So now I daily see one person driving alone in their Suburban or Escalade or Excursion or Sequoia tooling along, happily burning another gallon of unleaded every 9-12 miles. I’m all for taxing the s*** out of these people. Unfortunately a large gas tax would definitely hurt the working poor who have to get their jobs cleaning these people’s houses or pumping their gas.

    • 0 avatar
      davey49

      the ” luggage” that 2 modern day children require barely fits in the back of a CR-V. A Fiesta? no chance

    • 0 avatar
      dmrdano

      Unfortunately, my two average-height teenage kids have legs.  They like to put them in front of their seats in the back seat.  When we drive our Nissan, my son has to sit in the front and my wife in back.  Since the kid’s knees hit the back of the Caravan seats in front of them, a self-propelled roller skate just doesn’t work.  We finally broke down a sold my wife Tiburon when the kids could not fit regardless of how cool they thought the car was.  Have you ever sat in the back seat of a Suburu wagon?  I suppose I could have their legs removed.  (At least some of the smaller cars have taller seats, and this helps a bit.)

    • 0 avatar
      educatordan

      It all comes down to effective space utilization.  My 1982 Chevy Celebrity 4dr had more back seat leg room than my 1987 Oldsmobile Cutlass Supreme 4dr.  Both vehicles belonged to my father before they belonged to me and I spent much time in the back seats of both.  Even with my 5’11″ father in the front seat, I could sit behind him in the Celebrity at 5’11″ myself, in the Oldsmobile?  No dice. 

    • 0 avatar
      dmrdano

      Educatordan, you are right about space utilization.  I had a Celebrity wagon (loved it) and it was very comfortable.  Was the Olds RWD?  Did that make a difference?  By the way, my V6 Celebrity got high-20′s to low-30′s.  (I drive like a grampa, though.)

      Sitting high really helps.  I had a Colt Vista wagon and it was very comfortable with higher seats.

  • avatar
    mtymsi

    IMO despite relatively low gas prices and stability since the last spike demand for small cars has permanently shifted in the U.S. As small cars with all of the features of larger cars continue to come to market more will be sold. I think a lot of future small car buyers did not buy them previously because they were not competitive in features and trim levels. The Fiesta will be the first car to test this theory and I think Ford will do very well with it. In fact in its first year I think they will sell as many as they are capable of producing. Automakers up until now have equated small cars with econoboxes and that is no longer the case. Several years from now when there are numerous well equipped small car offerings I think they will be the dominant volume segment.

    • 0 avatar
      davey49

      Cross your fingers on that because that’s what the car makers are hoping for as well.
      I don’t think these small cars will ever be the dominant market segment. B segment cars are not even the dominant segment in Europe. The C segment is the best seller.

  • avatar
    segfault

    I don’t see what the big deal is.  Let the people who want to buy large, expensive SUVs subsidize the small cars.

  • avatar
    dancote

    Why a small car glut? The Ford Fusion Hybrid already gets 41 City/36 Hwy per the EPA and my son and his wife average 38+ combined. Spread this technology around and small cars may not be only solution.

  • avatar
    educatordan

    What did one of the scions (or did the old fart himself say it) of the Ford Family famously say?  “Small cars, small profits.”  The Japanese basically proved that wasn’t true.  What will happen as energy prices rise and CAFE standards increase is people with only one or two children will buy… (wait for it)… (shock of shockers)… Mid size and smaller sedans, hatchbacks, and wagons!  People who chose to have 4 or more children (debate the responsibility of  that all you want, treehuggers and NASCAR Dads) will buy bigger vehicles but those vehicles are going to be vastly different than a Chevy Suburban or a Ford Expedition. 

    A GMC Acadia will seat 6, 7, or 8 (I think, tried to build my own GMC and got an error) but gets 24mpg highway in FWD form, while a 2WD Yukon XL gets 20mpg on the highway.  Now to me the Acadia is just a glorified minivan but I’m currently with a woman whom I love DEEPLY (that I intend to marry) who thinks minivans are a sign of the end times but LOVES SUVs and CUVs.  She also wants to have 6 children (we’ll see how that goes after she has one or two, hey I’m open to it but she’s the one who has to do the hard work of bring them into the world)  Once she starts to fill up our lives with children, she’s going to drive the smallest thing that will hold the entire family, while not being a minivan.  I’m trying to “educate” her on the folly of her biases and sadly I could get her to drive a full size station wagon if anybody actually made one in the new car market.

  • avatar
    PeteMoran

    If there is recovery during 2010 and continued growth in 2011 from China/India, oil will be over $100/barrel. The fact some debt driven projects in the Middle East are in trouble tells us that $70/barrel oil isn’t enough for them to pay their debts. I’d suggest that along with increasing production costs, their debt repayment requirement provides a floor for the future oil price.
     
    Buy your hybrid (or diesel) small car now.

  • avatar
    davey49

    I’d guess that CAFE will disappear the moment the next President gets into office so its effects will last only so long.

    • 0 avatar
      John Horner

      The CAFE scheme has been in place in the US since the 1978 model year and has survived many a President. GW Bush signed the most recent tightening of CAFE rules. Your guess has a very slim chance of coming to pass.

  • avatar
    baldheadeddork

    Ed – without seeing the AN piece, I think you have a nice take on it.
     
    I’d like to know what the CSM report says about the exchange rate and the effect of that on the ability of the domestics to make a profit on small cars. Also, how do they square their view of the US industry being unable to make small cars that people want to buy, with what’s selling forFord and GM in the last year. Take away the full size pickups (which don’t have to get 35mpg) and look at the best selling cars for Ford and GM – you’ve got the Focus, Fusion, Escape, Impala and Malibu. There isn’t a gas guzzler on the list, and that’s when gas is back in the $2.50-$2.75 range. If there was going to be a comeback of the big SUV’s or daily-driver large pickups there’s no reason we wouldn’t be seeing it now.

    One of the biggest mistakes insiders and critics of Detroit consistently make is to predict the future on conventional wisdom that is dead and gone. I think that’s what’s happening with the CSM piece. From your description it ignores so many of the big fundamental changes in the market that have happened in the last year that it’s hard to take it seriously.

    • 0 avatar
      davey49

      Even back in the 90s and early 00s the best selling cars were midsizes, nothing really new there. The SUV “craze” has always been a bit exaggerated.
      Did the Explorer ever outsell the best selling sedan in a year?
      The GM Lambda vehicles will creep up on that best seller list in due time. People just don’t have the money to buy them now.

    • 0 avatar
      PeteMoran

      @ davey49
       
      You make a good point. The problem with the SUV “craze” (such as it was), is that the manufacturers were so very dependant on the margin they made on those vehicles. Addressing that problem caused the restructures we’ve seen so both Ford (and GM) should be better positioned to make smaller cars more profitable in the future.

    • 0 avatar
      baldheadeddork

      Davey – the Explorer did outsell the Taurus for at least a couple of years after the third generation Taurus was launched in ’96.  If you remove the fleet sales, there were several years where the Explorer outsold the Taurus by a wide margin.

      It was never contest against the Tempo and Contour, the Explorer beat both of them like a drum year-in and year-out.
       

  • avatar
    geozinger

    Hard to say what will happen with CAFE regs vis-a-vis compact car production. I tend to echo some other folks feelings, sh*tcan CAFE altogether and let the market decide what we are offered. With advances coming in from all over, the cars we buy now are more efficient than their older counterparts. Again, I agree with other posters here, that compact cars may not make as big a percentage of the fleet, due to the fact that other cars have increased their efficiency. We purchased a 2009 Pontiac G6 with 2.4 Ecotec and 6 speed manumatic, and routinely enjoy highway fuel mileage numbers in the low 30′s. If I drive in the 80MPH range, it goes down to about 28 MPG. Freakin’ fantastic if you ask me! For the first time ever, we currently do not own a car with a motor larger than four cylinders, and nothing larger than 2.5 liters. After the $4.25/gallon fuel prices in the summer of 2008, I made a promise to keep the cars and their consumption down to a lower level than I had at that time. 
    I would like to get a nice V8 car (GTO, Mustang, Challenger) again someday, but not as my daily driver. 

    • 0 avatar
      educatordan

      That’s basically my plan.  Smallest things that size wise will accommodate my family, and that doesn’t mean if you have lots of kids you need two SUVs.  One driver needs a larger vehicle that can hold everybody and the other needs an Elantra to get to work.  My third vehicle will be an occasional use truck that will be bought and paid for and only driven to do actual truck based errands, my dream is to get a big old gas hog car as a toy that is driven very seldom.

    • 0 avatar
      dmrdano

      The best reason to close the “CAFE” is that it pays no attention to market forces.  It is arbitrary at best.  The market is not perfect, but is better than any govenment regulation.  Also, higher gas taxes are regressive, really punishing the poor disproportionally who generally must drive older, less efficient cars.  For me, I have gotten mid-20′s MPG from all the Caravans I have owned.  If you think that is poor, the drive your little car.  This one fits my family and I can afford it.

  • avatar
    John Horner

    Increased fuel taxes are by far the smartest way to reduce oil consumption.

    • 0 avatar
      dmrdano

      So let me get this straight.  You want to artificially increase my cost of living and give the politicians more of my money to be irresponsible with so that I might use less gas and leave more oil to the Al Gores of the world to use in their private jets?  Ya, seems really smart.

    • 0 avatar
      don1967

      I always cringe when somebody proposes using taxation to enforce their vision of what is best for society.    Taxes are for providing essential public services and infrastructure, not for wielding ideological power.

  • avatar
    Mark MacInnis

    Will we have cars like Havana?  A series of large cars, trucks and SUVS that continuously gets rebuilt, recycled and modified because NO ONE will want to buy the new, small Pelosi-Reidmobiles the government wants us to own?

    CAFE is self-defeating.  The people who voted for it are twits.  Come to think of it, the people who VOTED for the people who voted for it are….well….you get the idea.


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