Obama Phase II CAFE Proposal and the Aftermarket

Aftermarket Business World...December 2011

     You'd have to be a college math professor to understand the formulas and factors the EPA and NHTSA propose to use in determining whether autos and trucks meet Corporate Average Fuel Economy (CAFE) standards during 2017-2025. The Obama administration released its proposed rule covering those years in mid-November, and three hearings are scheduled around the country for the month of January. Major auto manufacturers, labor unions and environmental groups already signaled their support back in July for the general concepts back in July; so the proposed rule is likely to become final with only some changes made around the edges.

      But even a fifth-grader can understand how the aftermarket will change as a result of these standards, once they go into effect. It goes without saying that CAFE standards affect vehicle manufacturers first and foremost. The only mention of the "aftermarket" in the mammoth, eye-splitting, 700-plus page proposed rule issued in November is with regard to aftermarket conversion companies, some of whom will apply for and be granted what are called small entity and/or small business exemptions. But the aftermarket will be affected indirectly and undoubtedly heavily by the development of technologies by manufacturer suppliers, who will distribute those technologies, be they low-friction lubricants, low-resistance rolling tires, air conditioning refrigerants with a lower global warming potential (GWP), to aftermarket retailers soon after they deliver them to the OEMs.

     Of course, there are, for example, low-resistance rolling tires already available in the aftermarket. But this Phase II CAFE proposal (Phase I will cover 2012-2016, and its rule is already final) will birth, for example, a second generation of low-resistance rolling tires with a 20 percent improvement in fuel economy and GHG emission reduction over those expected to be sold in Phase I.

     Another aftermarket product line likely to see innovation is high-efficiency exterior auto lighting. It will be in the spotlight because OEMs will use new lighting technology to reduce vehicle electric loads, which will earn them GHG "credits" which lower the CAFE number they would otherwise have to meet. The EPA would extend credits for lighting that reduces the total electrical demand of the exterior lighting system by a minimum of 60 watts when compared to conventional lighting systems. To be eligible for this credit the high efficiency lighting must be installed in the following components: parking/position, front and rear turn signals, front and rear side markers, stop/brake lights (including the center-mounted location), taillights, backup/reverse lights, and license plate lighting.

      The Obama administration proposal envisions a CAFE average per fleet in 2025 of 54.5 miles per gallon, an increase from the 35.5 mpg average expected in 2016, the last year of the Obama administration's Phase 1 plan. The Obama administration's 2017-2025 proposal is based on assumptions that plug-in electric and electric vehicles will become staples of the roads over the next decade and a half. Setting aside for a moment the high cost of electric batteries and the potential consumer resistance to the technology because of its cost, EVs also suffer from recent reports of battery blow-ups and fires in the weeks following collisions.

     Despite support from a number of groups, not everyone thinks the Obama proposal is hunky dory. Jeff Breneman, Executive Director of the U.S. Coalition for Advanced Diesel Cars, says the proposal favors hybrid technology in some instances over advanced diesel internal combustion technology, whose mpg/GHG performance is about equal. Moreover, he points out, advanced diesel engines can go 300,000 miles easy, meaning the autos in which they are installed can be kept longer, sending their owners more frequently to aftermarket retailers.        

SEC Examining Financial Statement Measurements

Strategic Finance Magazine...December 2011

     Are financial statement requirements up for review? It is not clear based on the a public roundtable discussion the Securities and Exchange Commission (SEC) held on November 8. The roundtable focused on financial statement measurements and associated disclosures that incorporate judgments about future events. It was the first in a series of an indeterminate number of roundtables which will be part of the Financial Reporting Series, instituted by SEC staff to assist in the proactive identification of risks related to, and areas of potential improvements in, the reliability and usefulness of financial information provided to investors. It is not clear what precipitated this initiative. It was not the Dodd-Frank law. It contains nothing on financial reporting "reforms," either in the financial services sector or anywhere else. In fact the SEC has done very little on financial reporting issues generally during Mary Schapiro's tenure as chairman. Jeff Mahoney, General Counsel, Council of Institutional Investors, says he suspects the SEC's action is related to the issue of fair value for financial instruments.

    There is a considerable amount of enthusiasm among statement preparers for the SEC effort here. "Determining the right level of disclosure requirements for measurement uncertainty will not be an easy task, but we are encouraged that the FASB has a Disclosure Framework project on their agenda and the prospect that guidance may be provided for disclosures on estimates that require assumptions, judgments, or other internal inputs that could reasonably have been materially different," says Bob Laux,  Senior Director, Financial Accounting and Reporting, Microsoft Corp.

      While the SEC hasn't said much about "why" it is undertaking these roundtables, it has been pretty specific about the kinds of topics it wants input on. These include: 1) where the extent of

uncertainty in an accounting measurement is less (or even more) useful to investors and why a more certain measurement would be preferable; 2) where uncertain measurements are useful to

investors, how should the uncertainties be incorporated into the measure; 3) What information do investors utilize to understand uncertainty?

Tightening of Chinese Mineral Exports Worry U.S. Manufacturers...and Congress

November 2011...The Fabricator magazine

     As if U.S. manufacturers don't have enough China-related manufacturing barriers, here is another: China's stranglehold on the production of rare earth minerals. That was the subject of a recent hearing in a House Foreign Affairs subcommittee. We are talking here about arcane minerals such as cerium, neodymium, and dysprosium which are critical to the manufacture of advanced manufactured goods, such as cell phones, fluorescent lights, hybrid engines, airplanes, wind turbines, and defense guidance systems. China controls 97 percent of the  manufacture of those minerals, and, according to testimony recently given at those House hearings, China is dramatically reducing its exports of rare earth minerals and expanding its supply of the same to its domestic manufacturers. 

     "Since July 2010 China has cut export quotas by 40% compared to 2009," says John Galyen, President, Danfoss, North America, a leading global manufacturer of compressors, controls and variable frequency drives for high efficiency air-conditioning, refrigeration, heating and motion systems. The company has 12 U.S factories. "Their reported purpose to do so was to protect the environment and licensors," Danfoss told the Foreign Affairs Asia and Pacific Subcommittee in September. "It is evident that in doing so they preserve the resource for their future internal use--to preserve it for the Chinese economy."

     Rep. Donald Manzullo (R-IL), chairman of the Subcommittee, says, “The U.S. Department of Energy is conducting cutting edge research into rare earth alternatives, but a more comprehensive effort is needed." He has co-sponsored a bill by Rep. Mike Coffman (R-CO) called the Rare Earths Supply Chain Technology and Resources Transformation Act of 2011(H.R. 1388). That bill was referred to three committees for action last April (Foreign Affairs was not one of them) and none of the three, including Natural Resources, on which Coffman serves, has held a hearing on the bill, much less passed it. Natural Resources did hold hearings last June on another bill, National Strategic and Critical Minerals Policy Act of 2011(H.R. 2011), which essentially requires the Department of the Interior to prepare a report on U.S. mineral production more broadly. A subcommittee passed the bill at the end of July and nothing has happened since then.

     Steve Duclos, Chief Scientist and Manager of Material Sustainability at General Electric Global Research told the Natural Resources Committee in June that the National Association of Manufacturers, on whose behalf he was testifying, said the NAM welcomed congressional actions that "not just draw attention" to shortfalls in mineral supplies " but attempt to resolve them as well." He seemed to be damning H.R. 2011 with faint praise. He asked for legislation by Congress that mandates a comprehensive solution that takes into account: (1) the domestic mining and processing of these minerals; (2) strengthening of the workforce; (3) government incentives for creating alternative manufacturing and materials technologies; and (4) recycling of these minerals that we can truly address this current problem with rare earth minerals.

U.S. Trade Policy Impact on Business

November 2011...Financial Executive magazine

     The U.S. Export-Import Bank is on fire. No, not its headquarters in downtown Washington, located on a north side corner of Lafayette Park, catty corner from the White House. It is the Bank's financing of U.S. exports that has helped turn up the flame under U.S. exports during the first half of 2011. In its latest triumph, Ex-Im guaranteed bank loans in September for Canadian firms building solar-energy plants in Ontario. The guarantees of the $226.1 million and $219 million loans will allow the Canadian developers to purchase engineering services and thin-film cadmium telluride solar-PV modules from First Solar of Perrysburg, OH and power inverters from Xantrex Technology USA. in Elhart, Indiana.   

     That financing and the exports it will support help maintain an estimated 550 jobs at First Solar's manufacturing facility in Perrysburg, Ohio. With job creation the number one U.S. political and economic imperative, the Ex-Im bank has been doing what it can to keep U.S. employment numbers from cooling further. But as the Obama Administration and the Federal Reserve exhaust their stimulative bag of tricks, more aggressive trade policies--including expanding Ex-Im authority--are needed to save the drama around saving American jobs from becoming a tragedy.   

     "We need an activist trade policy to create good American jobs," says Myron Brilliant, Senior Vice President, International, U.S. Chamber of Commerce. He explains President Obama has done some good things such as enforcing trade agreements and moving toward modernizing and updating an outdated export control regime. "But in some ways he has fallen way short," he adds. "The administration must be actively involved in advocating for American business including in promoting trade agreements and engaging in commercial diplomacy that will open up markets for our companies and create jobs in the US. Look at what the French President does; he gets into deals involving his companies."

     Brilliant alludes to the Indian Air Force's winnowing down of contenders to sell it 126 fighter jets to the Eurofighter Typhoon--essentially a NATO product produced by a consortium of three European companies-- and the French Dassault Rafale. The buy is worth $12 billion. Obama had made a visit to India in late 2010 and former Secretary of Commerce Gary Locke followed up with a trade mission in February 2011, a week after the U.S. lifted a 12-year-old export control ban on nine Indian space and defense-related companies. Boeing and Lockheed-Martin, eager bidders for the Indian jet contract--were on that trip with Locke. "That was a good opportunity for the administration to promote exports, but we lost the sale," Brilliant says. 

     Anyone looking for a list of testosterone injections that could be administered to export policy need reach no further than the syringes lined up by the President's Export Council, a group of business leaders chaired by W. James McNerney, Jr., Chairman, President and Chief Executive Officer, The Boeing Company. Top executives from Xerox, UPS, Walt Disney, Met Life, Dow and other large and small companies sit on the council. The PEC has issued three separate sets of recommendations since it was appointed by Obama in July 2010. That big bundle includes an  arm-load of items in the areas of export control, intellectual property protection, getting more small businesses involved in exporting, bringing the Ex-Im Bank up to the level of similar banks in other countries, establishing a single window for exporters at the U.S. Customs and Border Protection and developing export transportation infrastructure. The prime focus of the last March 2011 meeting was getting President Obama to submit Free Trade Agreements with South Korea, Colombia and Panama to Congress, and for Congress to approve them. The FTA with South Korea, for example, would spur $11 billion in U.S. exports, and support some 70,000 jobs in the process, former Commerce Secretary Gary Locke (now ambassador to China) said that day.

      But the three FTAs have still not arrived at the Capital for a vote, nor have Ex-Im Bank enhancements passed Congress. And many of the other PEC recommendations are still on the Obama administration's and Congress's "to do" list...maybe.

     President Obama did announced an National Export Initiative in January 2010. Its goal is to double U.S. exports over five years. Increases had been more than enough to put that goal within reach, at least they were until May and June of 2011, when exports declined in both months. Francisco J. Sánchez, Under Secretary for International Trade at the U.S. Department of Commerce, says exports were up 17 percent in 2010 and 16 percent year-to-date as of September.  "We need to grow at 14.8 percent a year in order to double exports by the end of 2014," he says in an interview. "We are ahead of the curve and I feel good about where we are and where we are heading."

     Eric Farnsworth, Vice President, Council of the Americas, is less sanguine. Asked about  Sánchez's analysis that the U.S. is ahead of the curve in terms of meeting Obama's goal, Farnsworth replies, "A lot of the growth in U.S. exports is related to the sinking value of the dollar. There are bigger macro things going on."

    Sánchez acknowledges that the U.S. does need to do more to back exports. "We need to get the FTAs passed, and get the TransPacific Partnership in place, which, after the FTAs, is the single most important trade policy we have going on." The U.S. is meeting with the eight other TPP nations--some of whom we already have individual FTAs with--in November. A multilateral TPP would further stimulate trade with those countries.

    While the TPP negotiations are of recent vintage, the FTAs with  South Korea, Colombia and Panama have been aging since they were corked by President George W. Bush. Passage of the three FTAs has been held up by partisan differences over the Trade Adjustment Assistance (TAA) program, which provides payments to U.S. workers who lose their jobs because of imports. The program was expanded as part of the 2009 stimulus bill, and now costs approximately $1 billion a year. The Obama administration and congressional Democrats had wanted to include extension of the TAA in the U.S.-South Korea FTA. Republicans balked, questioning the value of the program, especially at a time when the federal deficit had become a marquee issue.

      While there has been substantial bi-partisan bickering over the FTAs, Democrats and Republicans seem to be of one mind about changes to the statutes governing the Ex-Im Bank, which despite its successes still lacks the punching power of other countries' export financing agencies. "Notwithstanding the efforts of its leadership team and staff – Ex‐Im unfortunately remains among the world’s least competitive export credit agencies (ECAs)," Karan Bhatia, Vice President & Senior Counsel, International Law & Policy, General Electric, told the House Subcommittee on International Monetary Policy and Trade last March. "Ex‐Im dramatically trails other countries’ ECAs in total funds authorized. For example, Canada – a country less than a tenth the size of the United States – has more than triple the amount of export financing as the U.S.; Japan more than five times; and China an estimated eleven times. Moreover, Ex‐Im is forced to labor under restrictions and processes that lessen its attractiveness and discourage many U.S. companies from accessing it."

      In an interview, Fred Hochberg, Chairman and President of the Export-Import Bank, says Ex-Im only finances foreign exports which create jobs in the U.S. "The Canadian export credit agency furthers Canadian business interests, whether in Canada or overseas, and it doesn't matter where the jobs are created," he explains. "We are limited by a more rigorous domestic content policy."

    The House and Senate are currently considering very similar Ex-Im Bank reauthorization bills which, most notably, increase the bank's current $100 billion exposure limit to $140 billion in the House bill and $160 billion in the Senate bill. The PEC recommended $200 billion. The exposure limit is the total level of financing currently allotted by the bank. It has about $87 billion worth of active projects on its books. Neither bill appears to make major changes in current domestic content restrictions.    

    The Ex-Im Bank focuses on exports to nine emerging markets: Brazil, Colombia, India, Indonesia, Mexico, Nigeria, South Africa, Turkey and Vietnam. The U.S. number one and two export markets, Canada and Mexico, aren't on that list. They are already fully open for business due to the North American Free Trade Agreement. Neither is the number three country, China. The U.S. doesn't have a FTA with China. Numerous companies in numerous industries complain they can't get their foot in the door there, and if they do, the door gets slammed on their toes because of insufficient intellectual property protection and other discriminatory policies.

     "We should be exporting more in China and Asia," acknowledges Sánchez. "But there are challenges in that market." The U.S. China Joint Commission on Commerce and Trade, established in 1993, met in December 2010 and agreed to a number of policies that both countries would implement. "We have made progress, and we expect to make more progress by the time of the next meeting at the end of this year," states Sánchez, who co-chairs the commission on the U.S. side.

     Sánchez also highlights the importance of the Trans-Pacific Partnership, a trade grouping which includes the U.S. and Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam. Negotiations are now ongoing to create a Free Trade Agreement among the TPP partners. The next step on the TPP is a ministerial meeting in Honolulu in November.    

     The Chamber's Brilliant says the U.S. has made some progress negotiating acceptable language for the treaty but has also had some setbacks. "We are not there yet where we feel comfortable that the text is to the satisfaction of American business," he explains. "It is important that the intellectual property chapter be right, that regulatory coherence chapter be right and that state-owned enterprises are dealt with in these negotiations in appropriate ways since this agreement will set the bar for future agreements and must be of the highest international standards possible."

     Of course Congress' record on passing pro-export legislation leaves something to be desired, too. The Senate Banking Committee approved its version of a pallid Ex-Im Bank reauthorization bill on September 8, taking about 10 minutes during a 40-minute committee session devoted to a number of other issues. The only discussion over the Ex-Im bill had to do with an amendment denying Ex-Im guarantees to any foreign company doing business with Iran, a reference to a 2008 Ex-Im loan to an Indian refinery which supplied refined gasoline to Iran. The bank's role as a job creator came up for not a moment's discussion.