President Obama unveiled tougher fuel-efficiency standards for vehicles Tuesday that he said would provide certainty to car companies as they design a new fleet for the 21st century.
Auto executives welcomed a national standard that encourages more environmentally friendly cars, but they worry whether enough consumers will actually want to buy them.
Auto officials say the new standard — which calls for an average of about 35 miles to the gallon — creates big challenges to their business plans. And whether they can succeed under these new rules hinges on the future price of gas.
"It's a very tricky situation," says Marc Cannon, a top executive at AutoNation, the country's biggest car retailer.
Cannon says consumers care about the environment, but they care even more about money. Unless the price of gas is consistently high, Cannon says there just isn't enough demand for the fuel-efficient cars Obama wants manufacturers to build.
"This summer gasoline was $4, and every single automaker was trying to put out fuel-efficient vehicles as fast as they could," Cannon says. "All of a sudden, come December, gasoline drops to $2 and nobody wants fuel-efficient vehicles."
Instead, dealers say, they began to return to trucks and SUVs, which earn manufacturers a lot more money. Cannon says that if gas prices keep bouncing around, companies will struggle to find a mix of vehicles that turn a profit.
"I think it's going to whipsaw everybody back and forth," he says.
A Tough Sell
Auto analysts say the new fuel standard could put pressure on manufacturers in other ways. The White House says car companies will have to employ new technology that will add a total of $1,300 to the cost of each vehicle.
But U.S. car companies have never done all that well selling small cars, says Sean McAlinden, chief economist at the Center for Automotive Research, an industry think tank in Ann Arbor, Mich.
McAlinden says a company like GM has never been able to sell enough small cars at a high enough price to make much money. "On average, they've lost about $1,000 a unit — fully accounted — for the last 25 years on every small car they've tried to sell in the U.S. market," he says.
Auto executives say the solution to this is a gas tax, but many analysts say the public won't go for it.
"Any discussion of higher taxes is politically not viable," says Eric Fedewa, an executive with CSM Worldwide, a global auto forecasting company.
When the new fuel standards go into full effect in 2016, the government expects gas to be selling for about $3.50 a gallon.
A New Relationship Between Detroit, Washington
Some auto executives aren't criticizing the new standards publicly because they want to stay on good terms with the White House.
Chrysler and General Motors are surviving on billions of dollars in taxpayer loans. In Tuesday's Detroit Free Press, columnist Tom Walsh put it bluntly: "General Motors Corp. and Chrysler LLC are under almost total federal control now and must do whatever Uncle Sam says."
At the end of Tuesday's announcement, Obama made a personal pitch for fuel-efficient cars that underscored the new relationship between Washington and Detroit.
"By the way, I just wanted to mention, I think I still have my Ford parked in Chicago," he said, returning to the podium in the White House Rose Garden in what appeared to be an afterthought. "Ford Hybrid. Runs great. You guys should take a look."
Despite their concerns, auto executives say they will abide by the new standards and that, over time, they expect gas prices will rise and they will be able to make some money.
One GM official said that after months of working with the car companies, the White House now has an intimate understanding of challenges automakers face. And having already sunk billions of dollars into Chrysler and GM, the government has a vested interest in their survival.