Why The Auto Industry Is Failing – Part 2.

In this part of the series, we discuss a favorite liberal technique for destroying industries: regulations.  And I’m specifically discussing: emissions regulations.

If you mention to a liberal or an environmentalist that perhaps we should loosen vehicle emissions regulations, you’ll probably see their head explode.  If that doesn’t happen, you’ll undoubtedly be attacked with the standard liberal environmentalist fare: global warming is caused by man-made pollution, some of which comes from those nasty, polluting vehicles.  Among whack-job environmentalists, the prescription for saving the world includes burying your car and riding a bike to work.  If you think I’m kidding, you might want to check out a number of environmentalist websites and see for yourself.

The fact is that for the last ten years, the mean global temperature has been steadily declining.  However, that fact alone won’t stand in the face of full-blown environmentalist hysteria.  You’ll hear all sorts of history about how emissions regulations came about because of the dense smog that congested the air of urban areas, causing fish to die, acid rain, deforestation, etc.

After all, who wants to breathe polluted air, right?

First, while regulating emissions to an extent can be good for everyone, it comes at a price.

The cars of today produce levels of emissions that were thought to be unattainable over a decade ago.  The elimination of lead from gasoline, the addition of catalytic converters, and a number of innovations make today’s automobiles seem squeaky-clean when compared to the cars of yesteryear.  And yes, emissions standards are partially responsible for these innovations.  That’s because there was no desire by the market – meaning, “average Americans” – to buy cars that were environmentally friendly.  The reason for this is fairly simple to ascertain: cost.  Cars deemed “environmentally friendly” cost more than those that pollute.  Much more, in fact.  And therein lies the problem with stringent emissions standards.

I worked briefly at a company that was a supplier to one of the major American automakers.  They were developing an real-time monitor for testing new engines over a range of conditions – before the engine was even in the vehicle.  It was a complex system that recorded a staggering number of variables from an engine testbed.  You want to know one of the main reasons why such a system needed to be built?

If you guessed “emissions testing”, you’d be right on the money.

And this thing wasn’t just a computer hooked up to some gizmo – this thing was a virtual technological octopus, involving numerous pieces of specialized hardware, extensive databasing, and the integration of several software applications.  In the end, it sold for over ten million dollars a pop.

That’s ten million dollars to analyze a couple of engines.  The reason for the extravagance?  Because not a lot of companies out there make that kind of system, so the market is small.  It isn’t like you can go out to Best Buy and pick these up on sale, they often have to be tailored to specific customer needs.  There’s usually extensive training involved.  All of this costs mucho donero.

But that’s not the whole of it.  Then there are all of the people involved in the design of the engine, the people who test the engine, all of the reporting mechanisms used to report the analysis of the testing back to the engineers.  There are people who have to calibrate the engines to meet emissions standards, road testing, and so on, and so on.

So when that engine finally shows up in the first automobile produced, it already has tens of millions of dollars invested in its design and production.  The amount of money that goes into vehicle development – and specifically engine development – is staggering.  Which is the reason why most automakers aren’t so hyped about investing ungodly amounts of money into newer “green” initiatives, because they have to recoup the costs on the stuff they’re just putting out on the market.  And a good chunk of that price-tag if wrapped up in emissions.

And each and every year, the government tightens up emissions standards for cars, with an eye on creating a vehicle with zero emissions.  They do this because nutty environmentalists – who have never built a car, and whose only alternative to an automobile is a Schwinn bicycle – have the Democrats in their back pockets.

If you’ll remember, it was during the Clinton administration that the attempt to produce a zero-emissions car (a.k.a. an all-electric car) was initiated with much fanfare and hopeful expectations.  The movement died with a strangled scream.  The end result was a two-seater vehicle with a limited range of 40 miles, and a recharge cycle that took nearly 24 hours to complete.  Over a decade, and millions upon millions of dollars later very little progress has been made.  And yet, they continue to tighten vehicle emissions regulations at the federal level.

The end result is more expensive cars.

The end result of more expensive cars is decreased sales.

The end result of decreased sales is loss of revenue of the auto companies.

Now, you might be asking yourself: well, the same regulations apply to both foreign and domestic automakers, right?  After all, vehicles made by companies like Toyota also have to meet the same emissions standards, correct?

That would be correct.  However, Japanese automakers have had a LONG history of being subsidized in one form or another by the Japanese government.  There was the recent flap concerning a comment made by Jim Press concerning his knowledge of the Japanese government subsidizing the development of the Prius (which Toyota has denied).  What is known is that if the Japanese government wasn’t subsidizing the development of the Prius directly – as it was targeted for the Japanese auto market – they WERE subsidizing the people in Japan who purchased a Prius.

Japanese businesses are interrelated by shared corporate ownership.  Toyota, for example, owns stock in any number of companies headquartered in Japan.  These companies also own shares in other Japanese companies (and perhaps even in Toyota) thus forming an interconnected business web.  Thus, when Toyota needs a battery system for a Prius, it goes to one of its partner companies to develop that battery technology.  So, Toyota can have plausible deniability of government funding if the Japanese government subsidizes the company that developed the batteries used by the Prius. The subsidy wouldn’t be given to Toyota directly, and in fact Toyota may have also paid money up front to have the batteries made.  The net result is that, in such a scheme, Toyota would be getting the battery technology at a cut-rate when compared to US business practices.

Examples of Japanese protectionism (which is should be a part of this series of posts in and among itself) can also be found in a letter written by former Rep. Joe Knollenberg:

The following is a Letter To The Editor from the October 2nd edition of The Wall Street Journal. I thought it was something to be aware of in light of the sales figures that will be coming out in a few hours. – Perian GMI

Japan’s Auto Makers Get Subsidy Via Weak Yen

Your Sept. 25 editorial “Auto Epiphany” about the plight of the American auto industry disregarded the weak yen as a non-problem made up by protectionists in Congress. I have voted for every free trade agreement that has come before me during my 15 years in Congress, but the Japanese government’s policy of maintaining a weak yen is a real issue that deserves scrutiny.

Since 2001, the Japanese government has intervened repeatedly in currency markets to artificially devalue the yen by upward of 30%. As a result, Toyota and the other Japanese automakers receive a $4,000 to $14,000 subsidy on every vehicle they export to the U.S. Japan’s currency manipulation is fueling the market share gains of Toyota, Honda and Nissan in the U.S. and putting downward pressure on UAW wages and benefits.

As long-standing proponents of free and open financial markets, this is not something the Journal should celebrate in editorials, especially since the profit edge Toyota has over the Big Three is roughly $3,800 per vehicle, or about the same edge it derives from the yen-subsidized Toyota Prius.

The unfair yen subsidy is particularly egregious considering that Toyota will earn 75% of its profits this year in the U.S., while GM, Ford, and Chrysler will sell less than 20,000 vehicles in Japan.

Rep. Joe Knollenberg (R., Mich.)
Washington  

Now, American auto companies got grants, but not to the extent that Toyota may have gotten help from its own home government.  This also may explain why Toyota continues to push the Prius, even though the sales of the vehicle are a fractional percentage of the entire, worldwide auto market.  The Prius was initially made for the Japanese market.  The kicker to all of this is that it’s AMERICAN sales of the Prius that keep the vehicle alive (accounting for well over 50% of Prius sales in total).  The Prius hasn’t been as big of a seller as Toyota thought, so it does make one wonder why (or how) Toyota keeps the vehicle alive.

Unless they’re getting help from somewhere…

And the direct support Japanese automakers get from their home government is also supplemented by the indirect support they receive in things like healthcare.  Healthcare in Japan is paid for by the government.  American automakers have to shoulder that burden on their own.  That’s money that could otherwise be spent in research and development.

Now, foreign automakers being subsidized by their governments is something I’d like to expand on more in a different article, as it is a bit of a diversion from the main topic.  Suffice to say, it goes on, and it has a direct impact on how companies and funnel profits to Research and Development of vehicle technologies.

As it stands right now, companies like Ford and GM have vehicles in places like Europe that get 50 MPG (or more), but cannot produce those vehicles over here because Europe is far more lax with their emissions standards than the US.  Those cars will never drive on US roads given the amount of greenhouse gasses they produce – levels that exceed those of EPA regulations.  So, here we have another glaring instance of where higher efficiency vehicles are being produced by US-based automakers, but out-of-control emissions regulations impede their production in the US.

So, if companies like Ford want to make those vehicles here, they are required to spend more money in R&D to make them comply with government regulations.

The end result is more expensive cars.

The end result of more expensive cars is decreased sales.

Well…you can probably figure out the rest.

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2 Responses to Why The Auto Industry Is Failing – Part 2.

  1. aka The Cat Herder says:

    “What is known is that if the Japanese government wasn’t subsidizing the development of the Prius directly – as it was targeted for the Japanese auto market – they WERE subsidizing the people in Japan who purchased a Prius.”

    How is this different from the IRS giving people a nice fat tax rebate if they purchase hybrid vehicles? Isn’t that also a subsidy?

    “As it stands right now, companies like Ford and GM have vehicles in places like Europe that get 50 MPG (or more), but cannot produce those vehicles over here because Europe is far more lax with their emissions standards than the US. ”

    A lot of those vehicles have diesel engines. In Europe, diesel is about the same cost as gasoline. Here, diesel is considerably more expensive. The mileage benefit (ignoring emissions for a minute) is largely wiped out in the US because of higher diesel cost. Basically, no-one is buying diesel (despite VW and Mercedes trying) because of the fuel cost.

    Besides, if you want to see what relaxed emissions smells like, go stand on a street corner in central London and inhale a good lungful of diesel bus and taxi fumes.

    Something else to consider. The first generation Ford Focus was largely the same vehicle in Europe and the US. The US version had some slightly different bodywork to take into account the need for amber running lights and different bumper requirements, but it was basically the same. Since then, the Euro Focus has undergone a complete redesign where the US version is a rebodied version of the first vehicle.

  2. unknownconservative says:

    —————————————————-
    “What is known is that if the Japanese government wasn’t subsidizing the development of the Prius directly – as it was targeted for the Japanese auto market – they WERE subsidizing the people in Japan who purchased a Prius.”
    How is this different from the IRS giving people a nice fat tax rebate if they purchase hybrid vehicles? Isn’t that also a subsidy?
    —————————————————-

    Good point. And I was waiting for someone to highlight this issue.

    Japanese automakers sell millions of cars in the US. The US, last year, sold less than 50,000 cars in Japan. That’s because Japan puts up trade barriers to a wide variety of US products, but specifically: automobiles.

    The odds are REALLY good that those subsidies went to the purchase of Japanese vehicles. There’s also a good chance that the tax breaks provided to people in the US went to Japanese automakers as well.

    Secondly, from what I can tell, the subsidy given to Japanese owners of the Prius was not a tax cut or write-off, but something like 250,000 Yen ($2,400.00) direct from the government. Now, you can argue that this is splitting hairs. Trade barriers to sales of US automobiles in Japan isn’t.

    —————————————————-
    “As it stands right now, companies like Ford and GM have vehicles in places like Europe that get 50 MPG (or more), but cannot produce those vehicles over here because Europe is far more lax with their emissions standards than the US. ”

    A lot of those vehicles have diesel engines. In Europe, diesel is about the same cost as gasoline. Here, diesel is considerably more expensive. The mileage benefit (ignoring emissions for a minute) is largely wiped out in the US because of higher diesel cost. Basically, no-one is buying diesel (despite VW and Mercedes trying) because of the fuel cost.

    Besides, if you want to see what relaxed emissions smells like, go stand on a street corner in central London and inhale a good lungful of diesel bus and taxi fumes.
    —————————————————-

    I hate to point this out to you, but bus fumes in the US are as bad as the fumes you’ve cited in London. The buses in the Metro Detroit area are – I believe – exempt from federal emissions standards (no big surprise there, as they are basically government vehicles). They belch out black smoke so thick, you could mix it with oil, and paint your house with the stuff.

    I’d also like to point out that I am neither a fan of regular gasoline or diesel. My point was that the auto companies are getting the crap kicked out of them because of government regulations essentially tie their hands. Then (as a subsequent post pointed out) you get some obnoxious journalist running around saying that the US automakers aren’t making fuel efficient vehicles, when in fact they do.

    As for the cost issue, the reason for the high price of diesel is because only a specific percentage of the oil refined for the US market gets allocated to diesel (and, less commonly known, because of higher taxes on diesel fuel). Since a VAST majority of cars run on regular petroleum, less diesel is refined, constricting supply, and thereby driving up cost.

    —————————————————-
    Something else to consider. The first generation Ford Focus was largely the same vehicle in Europe and the US. The US version had some slightly different bodywork to take into account the need for amber running lights and different bumper requirements, but it was basically the same. Since then, the Euro Focus has undergone a complete redesign where the US version is a rebodied version of the first vehicle.
    —————————————————-

    Ummmm…no.

    The new Ford Focus is not a “rebodied” vehicle. And I know this for a fact.

    That’s because I actually worked with one of the prototypes a year or two ago.

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