How Obama set the course of the industry

by admin November 6, 2016 at 2:47 pm

WASHINGTON — Barack Obama may be remembered as the first auto industry executive to serve as president of the United States.

He happened to do both jobs at the same time.

And no matter who is chosen to succeed him on Tuesday, the eight years of the Obama administration will be recognized as one of the most pivotal periods in U.S. automotive history — not just in terms of the structural and technological changes that bolstered the industry during Obama’s tenure, but also in terms of the government’s profound role in determining its course, from investment priorities to competitive dynamics to the basic components of modern vehicles.

For evidence of that, look no further than the Ford F-150, America’s best-selling light vehicle. There’s a new one rolling off the assembly line every minute. And every one has a body made of aluminum.

If there was a guidepost for the administration’s approach to the auto industry, it’s a line attributed apocryphally to Winston Churchill, and co-opted by Obama chief-of-staff designate Rahm Emanuel.

“You never want a serious crisis to go to waste,” Emanuel told a gathering of corporate executives during the tumultuous weeks after the 2008 election. “It’s an opportunity to do things that you could not do before.”

At the time the country was facing many crises: a wealth-destroying housing crisis, spiraling health-care costs, a financial system in tatters, surging unemployment, bloody wars in two theaters.

In his first week, President Obama sought new fuel economy rules.

The auto industry had crises of its own — existential ones in the case of General Motors and the former Chrysler Group, plus big unknowns surrounding the impact of climate change, the nation’s dependence on imported oil and unrelenting competition from Toyota. 

True to Emanuel’s credo, Obama wasted no time. On Day 6 of his term, while General Motors and Chrysler clung to a lifeline extended by the Bush administration, the new president instructed the Department of Transportation to finalize new fuel-economy rules for the 2011 model year, and asked the EPA to review whether California and other states should be able to write their own greenhouse gas rules. 

“Our goal is not to further burden an already struggling industry,” Obama said then. “It is to help America’s automakers prepare for the future.” 

Automakers had fought hard against previous attempts to raise fuel economy standards, but the promise of a consistent national standard helped win their support. 

“GM and the auto industry benefit by having more consistency and certainty to guide our product plans,” GM’s then-CEO Fritz Henderson said in a statement at the time. 

By mid-May, Obama was with executives from 10 automakers in the White House Rose Garden, proposing rules that would boost average fleet mileage to 35.5 mpg by the 2016 model year. Two years later, the target rose again: more than 50 mpg by 2025. A midterm review will determine whether that target should stick, but beyond some nervousness about the timing and costs, both automakers and regulators have signaled that they’re committed to the course they’ve set.

Surge in investment

The new rules, along with toughening regulations elsewhere around the world, ignited a surge of r&d investment that has ushered in a new era of innovation in powertrains and lightweight materials, from the aluminum F-150 to the mixed-material construction of the Cadillac CT6.

Nearly half of the 2015 model year fleet used direct-injection engines, compared with 2 percent in 2008, according to the EPA. Six-speed transmissions jumped to 57 percent of the fleet from 19 percent, while gearboxes with seven or more speeds grew to 17 percent from 2 percent. In addition, automakers now offer 12 battery-electric vehicles and 13 plug-in hybrids, according to the EPA.

Of course, little of that investment would have been possible without the government-led rescues of GM and Chrysler, which not only revived the fortunes of the two automakers but sustained a supply chain that served the entire industry.

GM and Chrysler had scrambled for months to restructure on their own, but having deemed their work insufficient, the Obama administration’s auto task force took the wheel, ultimately pushing the two companies through government-orchestrated Chapter 11 reorganizations and onto more stable ground.

The bankruptcies were quick but far from painless. Workers were fired. Brands were killed. Plants were shuttered. More than 2,000 dealer franchises were terminated. Bondholders were stiffed.

To this day, many critics say the administration and the task force abused the bankruptcy law to benefit certain favored constituencies, and that the extent of their involvement in corporate affairs set a dangerous precedent, even if the industry is better off today.

But the administration claims credit for forcing the reckoning that the industry had long avoided.

“There was clear-eyed recognition that we couldn’t sustain business as usual,” Obama told the Detroit News in 2015. “That’s what made this successful. If it had just been about putting more money in without restructuring these companies, we would have seen perhaps some of the bleeding slowed, but we wouldn’t have cured the patient.”

As pivotal as this chapter was in their survival, the rescued automakers appear unwilling to revisit it. The very fact of the bailout soured many consumers on GM and Chrysler vehicles. And both companies felt stigmatized by having to endure the federal government as a shareholder well after they emerged from bankruptcy.

GM and FCA declined to comment for this article, as did the Alliance of Automobile Manufacturers, the Washington trade group that counts them among its 12 members.

The industry’s crises didn’t end in 2009. In some quarters, they were just beginning, opening new avenues for government intervention. The subsequent string of safety problems at Toyota, General Motors and Takata led to a reinvigorated National Highway Traffic Safety Administration under chief Mark Rosekind, who came to power in December 2014 pledging to ensure that the industry and the agency arm themselves to avert safety crises instead of just reacting to them.

“NHTSA is truly successful not when we catch safety violations and hand down penalties, but when we work together with industry to prevent that kind of crisis from ever occurring in the first place,” Rosekind said in a speech this year.

NHTSA’s consent decree with GM following the 2014 ignition-switch crisis set a precedent for federal monitoring of an automaker’s internal safety operations. Under Rosekind, NHTSA would extend this oversight and continue to invoke rarely used powers, summoning Fiat Chrysler to a public hearing to explain its handling of recalls, and taking control of the complex Takata airbag case to schedule recalls and coordinate the distribution of replacement parts.

Obama’s DOT has assumed a similar posture in its approach to autonomous vehicles, reserving the right to assert new authorities, even as it stops short of issuing new regulations. The recently issued draft proposal calls for manufacturers to disclose significant detail about their self-driving cars and systems before they’re introduced to the market, a departure from the way auto safety has been regulated to date.

The visible hand

Automotive businesses that came under a consent decree or some form of government oversight, or that settled regulatory or criminal charges during the Obama administration:

BMW: Two-year consent order signed in 2015 required the automaker to retain an independent safety consultant and reform safety practices after it failed to recall 30,000 Mini Coopers in a timely manner.

Fiat Chrysler: Agreed in July 2015 to three years of oversight by an independent safety monitor after mishandling more than 20 recalls since 2009. Separately, FCA’s sales reporting practices were being investigated by the Justice Department and Securities and Exchange Commission.

General Motors: Agreed to make sweeping safety reforms and submit to close NHTSA scrutiny in a 2014 consent order stemming from ignition switch crisis. The oversight has been extended through mid-2017. In addition, GM installed an independent monitor under an agreement with the Justice Department.

Honda: Submitted in January 2015 to stricter oversight and agreed to complete several remedial actions after failing to report more than 1,700 deaths and injuries linked to potential defects in its vehicles over an 11-year period.

Hyundai-Kia: Agreed to spend $50 million to establish an independent fuel economy certification group as part of a 2014 settlement to resolve a two-year EPA probe into inflated mpg ratings.

Takata: Submitted to five years of additional NHTSA oversight and hired an independent monitor as part of a November 2015 consent order for failing to properly notify regulators that its airbag inflators were defective.

Toyota: Installed an independent monitor in 2014 as part of a deferred-prosecution agreement with the Justice Department to settle charges that Toyota misled regulators and consumers during its unintended-acceleration recall crisis.

Volkswagen: A VW engineer pleaded guilty to conspiracy and wire fraud charges tied to his role in VW’s emissions cheating scandal, a rare example of an individual being charged in connection with a corporate scandal.

EV vision

As for the vehicles of the future, the administration won’t see its vision fully pan out, at least not in time for move-out day on Jan. 20. Obama’s goal of putting 1 million plug-in vehicles on the road by 2015 (backed by billions of dollars in federal loan-guarantee programs for electric-vehicle projects and startups) has come up short by half. Compelling offerings from Nissan and Tesla Motors remain virtually off limits to people who have long commutes or short credit lines.

Obama’s plug-in vehicle goal came up short, but the Chevy Bolt is almost ready.

But the cost of electrification is coming down, and the potential for affordable, longer-range vehicles is growing. As the Obama administration cleans out its file cabinets, General Motors will be rolling out the Chevy Bolt, a 238-mile-range electric vehicle and technological descendant of the plug-in hybrid Volt, which despite its groundbreaking powertrain became an early symbol of the administration’s unrealized expectations. 

Meanwhile, an alternative version of the administration’s vision is playing out on America’s roads. 

The restructuring of the auto industry was geared toward spurring production and sales of high-quality small cars, the kind that Toyota and Honda were using to beat up the U.S. auto industry. And for a time, the recession and wobbly recovery helped wean consumers off costly gas guzzlers. 

Ford’s Michigan Assembly factory became the poster child of this movement when it retooled from the big Ford Expedition and Lincoln Navigator SUVs to build the Focus compact in 2010. 

Yet, thanks to the expansion of domestic oil drilling, which has kept gasoline prices low, the uptick in domestic small cars was eventually overtaken by surging sales of crossovers — family-size utility vehicles that could be built on the same platforms as smaller cars. 

In a way, it’s an unintended consequence of the administration’s fuel economy quest: Americans have always preferred bigger cars, and thanks to the current rules that require greater efficiency from all vehicles, consumers can now have both. 

“By and large, the majority of the domestic automakers have found a good balance in creating fuel-efficient products that people want,” said Ed Kim, an analyst with AutoPacific Inc. 

He added: “I absolutely do think that there was an important role that the government took in bringing these well-balanced products to the marketplace.”

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