Will CAFE Cause A Small Car Glut?

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.