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June 6, 2008
General Motors Shifts
Gears, and Concedes the CAFE Debate
In the end, it was General Motors who settled the debate
over fuel economy standards in the United States.
Responding to plummeting demand for the full-size trucks
and sport-utility vehicles that prompted Detroit’s resurgence during the
’90s, GM announced this week that it is going to change its business
model. It will no longer focus on trucks, and plans to close four plants
that builds them – focusing instead on cars that burn gasoline more
In doing so, the company was following the oldest rule in
capitalism – supply must follow demand. American consumers had finally
reached their breaking point when it comes to the cost of gasoline. It
turns out that people’s patience expires when it hits about $3.50 a
gallon, at least when it appears that it will stick around there for
The last couple of months have been incredibly savage for
automakers, already in tatters from increased foreign competition.
Perhaps nothing illustrated the Big Three’s woes more than when four
foreign-built car models topped Ford’s F-series truck as the nation’s
top selling model. It was a title Ford had held since 1991.
GM’s announced refocusing on smaller, more efficient cars
means that the argument that Detroit’s automakers can’t meet rigorous
Corporate Average Fuel Economy (CAFE) standards is now moot. Because
CAFE focuses on fleet-wide standards, the contention of automakers has
been that they can’t build the kinds of cars people are buying in ways
that meet a high standard. There was something to that. People were
buying as much car as they could afford, and fuel economy was not an
Fuel economy is now an issue, and people are no
longer buying big, inefficient vehicles. When GM shifts production away
from inefficient vehicles to more efficient ones, their fleet-wide
average – critical to meeting fuel economy standards – will rise without
the company’s engineers lifting a finger.
This should be backdropped against the fact that the auto
fleets in most European countries would meet the most rigorous economy
standards suggested anywhere in the United States. They do that because
the price of gasoline is so high in Europe.
It used to be, 10 years ago, that the automakers built
highly efficient cars so they could help the Big Three meet their fuel
efficiency standards. Because no one was buying them, they sat in the
lot. These days, people are buying those cars, and dealers can’t keep
them in stock.
The lots are filled with SUVs and full-sized trucks.
People still occasionally buy them, but these days it’s because they
need them. There’s good reason to think that what remains of demand will
come from rental fleets, where people will go when they need a truck’s
towing capabilities for individual jobs. For shorter trips and commuting
to work, they’ll use an efficient, smaller car.
The danger to this, however, is volatility in the price of
gasoline. There are predictions circulating that the price of oil
reflects both a weak dollar and activity by speculators purchasing up
Although the price of oil has been on a sustained upward
slope, which suggests that if there is speculation going on, there isn’t
much, it appears that at least the dollar is getting stronger. A
stronger dollar means that the cost per gallon of gasoline will probably
drop a little bit.
General Motors, at least, is banking on that the drop in
price won’t be enough to overcome the deep shock the cost of gasoline
has put Americans into. They are putting their money on efficiency,
which is probably the safest, smartest bet there is these days.
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