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Automotive Policy Goes to the Polls

Automotive Engineering, October 2008

It was 100 years ago that Henry Ford launched the revolutionary Model T, a car whose technology was a marked departure from what had been used in the incipient autos in the industry’s gestation stage. The Model T’s steering wheel was on the left and the entire engine and transmission were enclosed; the four cylinders were cast in a solid block; the suspension used two semi-elliptic springs.

Now, too, Ford, General Motors and Chrysler are attempting to design and produce revolutionary autos and light trucks, those that run on alternative fuels such as E85 and those that run on batteries and even fuel cells. But while Henry Ford did not ask for help from the U.S. government to launch the Model T, Detroit, in more ways than one, is on its knees. Without the tax credits, research and development funding, reasonable auto energy mileage goals and foreign market opening assistance only the President and Congress can provide, Detroit could sink deeper into the financial morass from which only advanced technology vehicles can tow it out.

Before and during their respective primaries, neither Sen. Barack Obama (D-Ill.) nor Sen. John McCain (R-Ariz.) showed much sympathy for imperiled U.S. auto companies. Obama famously told the Detroit Economic Club in May 2007 that car makers deserved their just rewards for resisting the production of fuel efficient cars. He then campaigned across the country bragging about how he gored the lion in its own den. While Obama’s tone was sharper, McCain’s fangs had been growing for a much longer time. As early as 2002, he introduced legislation which would have upped the corporate average fuel economy (CAFE) standard to 36 miles per gallon by 2016, and explained on the Senate floor, when he introduced that bill on February 2, 2002, that his Fuel Economy & Security Act focused on “one of the major industrial greenhouse gas emitters, the automotive industry.”

Singing a new song; but will music stop after election?

Now fast forward to fall 2008. As the election draws within one month of votes being cast, both Obama and McCain are wearing cheerleading uniforms with big “Ds” on the front, “D” for Detroit. They have been in and out of Michigan of late on campaign swings journeying to GM, Ford and Chrysler plants in places like Warren, Flint and Sterling Heights. In July at the Warren, Michigan plant where the Chevy Volt will be produced, McCain praised GM and said he wants “to help in every way” to insure the success of that all-electric sedan. In Pittsburgh in June, Obama, sitting next to GM CEO Rick Wagoner during a panel discussion on the future of the auto industry, solicitously asked Wagoner: “The question is, assuming I’m president, what would be the one or two things that the federal government can do most constructive to make certain that in the race against time for the U.S. automakers that you are able to make this pivot as quickly as possible?”

What a difference a presidential party nomination makes! Greg Martin, GM’s spokesman in Washington, says, “The Detroit bashing has stopped and both candidates are being very supportive of the industry’s efforts.” That is because, he explains, both Obama and McCain have woken up to the importance of Michigan’s and Ohio’s status as “key states,” ones whose electoral votes could determine who wins the presidency on November 4, 2008.

The question is, of course, whether this change in tone is one of substance or convenience. It is an important question because this may be the most important presidential election for the auto industry in 100 years, a view shared by David Cole chairman of the Center for Automotive Research. Cole will vote for McCain. “They are both intensely focused on energy conservation and alternative energy,” says Cole, whose CAR sponsored a major industry confab in Traverse City, Michigan in August, where the candidates’ positions were dissected in the corridors. “But McCain has a more pragmatic view, supporting a more balanced approach to energy exploration, conservation and alterative energy. Obama tends to be overly optimistic and operates more in the theoretical space.”

But one official at another industry research group, who declines to be identified, prefers Obama because of his support for federal aid to auto manufacturers and their suppliers. Both candidates back some new federal assistance. GM’s Martin points out that visits like McCain’s to GM’s Warren technical center helps raise the profile of the need for federal help for battery technology development. McCain has proposed funding a $300 million award payable to the first company who develops an electric battery. After he made the comment, his campaign quickly jumped in and said the proposal would not be fleshed out until the Arizona senator became president. So there are no details. Obama derided the proposal as a ‘’bounty’’ for some ‘’rocket scientist’’ to win. The U.S. Department of Energy is already giving three consortiums involving GM, Ford and Chrysler $10 million each over three years for battery development, that money coming out of the $41 million a year the DOE has for its entire “energy storage program,” which funds R&D for passenger vehicles.

Mark Fields, executive vice president, Ford Motor Co., told a Washington, D.C. audience on June 11, 2008 that much more money was needed, and not just for battery chemistry, but for development of a manufacturing infrastructure, too. “Just as the Department of Energy recently placed nearly $400 million with various ethanol producers to hasten commercial applications, bold and dramatic incentives are needed to accelerate the commercial development of high-energy power batteries in the U.S.,” he said.

Mark Wagner, vice president, government relations, for Johnson Controls/Saft, says the U.S. is in danger of losing the lithium ion battery manufacturing base to the Asians. In fact, his company is supplying lithium ion batteries for the 2009 Mercedes S Class sedan, and manufacturing those batteries in France.

Obama pushes for revitalization of auto manufacturing base; McCain hesitant on aid

While Obama has not focused specifically on lithium ion development, either in the lab or on the manufacturing floor, he has said quite a bit about the need to convert auto company and supplier manufacturing facilities into launching pads for advanced vehicles. He was an original co-sponsor of Sen. Orrin Hatch’s (R-Utah) FREEDOM Act, a 2006 bill which offered first-year expensing for auto and component companies setting up production capacity in the United States for plug-in electric drive vehicles. Those provisions morphed into a different form in the Energy Independence and Security Act (EISA) which Congress approved in December 2007. That bill included provisions for low-interest loans to auto companies and their suppliers for retooling factories for “advanced technology” vehicles and a separate grant program for “refurbishment and retooling” of auto and component manufacturing facilities for manufacture of efficient hybrid, plug-in electric hybrid, plug-in electric drive, and advanced diesel vehicles. The low-interest loans would be made through a new Advanced Technology Vehicles Manufacturing Incentive Program (ATVMIP). Obama supports “immediate” funding of the ATVMIP. McCain at first refused to endorse federal money. But on August 22 he began to shift his position, saying he believed Congress should fund the ATVMIP.

Besides his battery “prize,” McCain has talked up his support for a $5,000 tax credit for consumers who purchase a plug-in electric vehicle such as the Chevy Volt GM hopes to have on its dealers’ lots for the 2010 model year. The FREEDOM Act, which Obama supports, and which the auto companies have consistently pressed for since Hatch introduced it, allows for a plug-in credit as high as $7500 depending on the kilowattage of the battery. Equally important, Obama backs eliminating the 60,000 unit per manufacturer limit on the number of vehicles which could qualify for the plug-in credit, a ceiling that applied to the hybrid tax credit in the 2005 energy bill, and which Toyota hit very quickly with Prius and Lexus sales.

Both favor federal incentives to consumers on electric plug-ins

Talking about tax credits, Obama has been a leading Senate proponent of tax credits to service station owners for the cost of building new E85 vehicle refueling facilities, introducing legislation to that effect in May 2005, two years before GM CEO Rick Wagoner, Jr. told the House Energy and Commerce Committee that the best opportunity for addressing the twin problems of high gas prices and CO2 emissions was “through increased use of bio-fuels.” McCain has been anti-ethanol, especially from a federal subsidy standpoint. He has warmed up to ethanol as a fuel—sans subsidy--of late.

“Senator Obama’s record regarding the use of domestic-renewable fuels such as ethanol is first-rate. Senator Obama has personally participated in E85 station Grand Opening events and offers a strong case as the Presidential candidate promoting change in our long dependence on the use of hydrocarbons,” says Phillip Lampert, executive director, National Ethanol Vehicle Coalition. “From my experience in working energy policy issues at the federal level, Senator McCain has only recently become aware that flexible fuel vehicles even exist. I don’t recall a single bill or proposal introduced or co-sponsored by Senator McCain that would have advanced the use of domestic-renewable transportation fuels.”

Obama and McCain green peas in pod on greenhouse gases

Of course, auto manufacturers see E85 vehicles not only as a way to reduce dependence on imported and expensive gasoline, but as a way to reduce greenhouse gas emissions. Both Obama and McCain are supporters of a national “cap-and-trade” greenhouse gas emissions program; one was incorporated into the Lieberman-Warner Climate Security Act of 2008 which came to the floor of the Senate for a vote on June 6, 2008 but failed to gain the necessary 60 votes to end debate. Obama and McCain supported the bill, although they have proposed slightly different carbon reduction targets, with Obama’s being a bit more aggressive. The auto industry doesn’t necessarily oppose a federal greenhouse gas mandate. Prior for the bill coming up for a vote, Ford said that it supports “a comprehensive, climate solution for reducing emissions through a economy-wide cap and trade federal framework with complementary state and local government roles.” Neither Ford nor GM or Chrysler took a position on the Lieberman-Warner bill itself, although Ford said, “This legislation is helping to progress the dialogue on climate legislation.”

The problem, from the auto companies’ standpoint, with that particular bill, is that an amendment was inserted on the Senate floor allowing California (and other states) to establish its own greenhouse gas limits on auto tailpipe emissions, which the EPA has so far prohibited the state from doing. Both McCain and Obama favor allowing states to adopt the California limits, or others of their own choosing, which would result in states imposing CAFE limits that are harder to meet than the 35 mpg by 2020 mandate in the EISA.

Positions on South Korea free trade agreement diverge; but industry ambivalent on issue

While Obama and McCain are pretty much twins on greenhouse gas regulation and CAFE standards, they diverge considerably on trade issues, which are increasingly important, particularly with regard to the Far East. McCain supports and Obama opposes the U.S.-South Korea free trade agreement President Bush negotiated in 2007, which includes a number of automotive proposals aimed at reducing the current automotive trade imbalance between the two countries. In 2006, according to the UAW, U.S. imports of Hyundai Motor Co. and Kia Motors products into the United States were valued at $12.4 billion, while U.S. exports of similar products to Korea amounted to just $751 million.

Obama has sided with the UAW, which opposes the agreement, even though it would result in elimination of Korea’s current eight percent tariff on imported U.S. vehicles (and, in return, the U.S. 2.5 percent tariff on Kias and Hyundis). The UAW has criticized the deal because it says it contains no hard-and-fast assurances that the Koreans would eliminate their non-tariff barriers. The pact poses a conundrum for the U.S. auto companies, who on the one hand want to be able to expand in Korea and Asia generally, but don’t want to impose conditions on South Korea which backfire, leading to restrictions on operations in that country, the latter factor weighing most heavily on GM. That balancing act explains why Martin, the GM spokesman, says, “We are agnostic on the U.S.-Korea agreement.” GM builds the Chevy Aveo in Korea. Ford and Chrysler, which have very limited operations in Korea, oppose the deal. Steve Biegun, Ford’s vice president, international governmental affairs, said in a statement after the Bush administration announced the agreement, “As a company that operates and competes in 200 markets globally, we see the real and tangible benefits of free trade. Unfortunately this agreement, as we understand it, will not open the Korean market to free trade in automobiles.”

Of course, in the end, U.S. auto manufacturers are most concerned about a freer flow of vehicles in America, where high gasoline prices have dammed up sales for the past year. Both Obama and McCain have shown their ears are now open to industry entreaties. “The next administration will be a lot more engaged with us than the current Bush administration,” says an official at a major auto industry research group.