As Congress begins to debate whether to give part of last month's Wall Street bailout to U.S. automakers, all eyes are on the Big Three and whether they will survive growing financial turmoil. Can Congress pass a bailout during the lame-duck session? Will the automakers be forced to meet stricter environmental standards if they are given financial assistance? During today's OnPoint, Dave McCurdy, president and CEO of the Alliance of Automobile Manufacturers, discusses the financial viability of the Big Three automakers. He explains whether or not a bailout would compel automakers to drop lawsuits in states that have passed legislation requiring more efficient vehicles. McCurdy also addresses how a floor on gas prices could affect the sale of cleaner vehicles.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is Dave McCurdy, president and CEO the Alliance of Automobile Manufacturers. Nice to see you. Nice to have you on the show.
Dave McCurdy: Thank you Monica, pleasure to be here.
Monica Trauzzi: U.S. automakers are hurting hard these days as a result of slumping sales, the financial crisis, competition from Japanese automakers on fuel efficiency of vehicles. And your industry is asking for financial assistance from the government and there are a couple of different proposals out there as to how to assist this industry. Democrats in Congress would like to use part of the money from the $700 billion financial bailout and the administration has signaled that they would support using sort of low interest loans for your industry. What specifically does your industry need and which proposal do you think is a better way to help you guys get to a point where you're back on your feet?
Dave McCurdy: Well, since the alliance is composed of 11 manufacturers representing nearly 80 percent of the market, we have not only the Detroit-based companies; we also have European and Japanese. And it's a highly competitive industry. I think the concern today is, and you're exactly right, it's a credit crisis, it's a financial crisis and it's one that was started, kicked off by the mortgage collapse. That financial crisis has caught some of our members in this transition. And the transition is from a market that was dominated basically by trucks and SUVs and less fuel-efficient vehicles to one that is far more fuel-efficient and which is part of the future, which is what everyone is committed to. And a year ago we supported the CAFE standards, a 40 percent increase in CAFE. The industry supported that in recognition that it was going to, there would be a huge cost associated with that, government estimates of nearly $115 billion. With that bill they also enacted a provision for loan guarantees for up to $25 billion. Now, that's tied to investment retooling for advanced technologies. All of our members are committed to advancing technology. So I think that kind of provision obviously has broad support to have those funds freed up and be used. As far as bridge loans and other vehicles, I think that's what Congress is going to have to really assess. I know they're having hearings Wednesday before the lame-duck session and, at that point, they will, I think, identify what vehicles might be best for the Detroit-based companies. As the industry, we don't believe that bankruptcy or failure of just a company can be isolated. It affects suppliers. It affects retailers. It affects dealers and communities. Four percent of the U.S. GDP is connected to the auto sector, one out of 10 jobs, 13 million American jobs. So this is a critical sector. It's the largest manufacturing sector.
Monica Trauzzi: So, if Congress is able to pass something during the lame-duck session do you believe that the president's hand will sort of be forced and that he will sign onto it as well?
Dave McCurdy: Well, I know that President Bush had a meeting with incoming President-elect Obama. President Obama made it very clear during the campaign he thought this was a vital industry. There was no doubt that the Obama administration would like to find a way to help transition this vital sector into his vision of a more efficient, green economy, green jobs. Our industry's at the cutting edge of those green jobs. When you look at the investments in research and development, there's no question who's leading there. The timing of it, I think, is one that's not being controlled by either a Bush administration or an Obama incoming administration. I think the crisis is now and automakers have made it clear, the Detroit three said that they may not be able to make it through in time for an Obama transition to actually occur.
Monica Trauzzi: Just how financially viable or the big three and is there a clock ticking down on when one or more of these companies may fold?
Dave McCurdy: Well, we can't assume that they would fold. We have to take them at their word that they are in a crisis mode from the liquidity concept and process. They are viable companies. They make great product, as does the entire industry. So the real question is what is the timing? Ford, I know, has had loans in the past. Most of the CEOs, and these are people that we work closely with, have made it clear that they expect 2009 to be a challenging year because economic recovery may not be as rapid as we would hope in the country. So, the question becomes can they get to 2010? 2010 is a time in which a lot of the restructuring efforts by the Detroit companies take effect. It's also when there's the deployment of a whole range of exciting new technologies. Next year alone there will be 25 different models of hybrids, eight different models of ultra-clean diesel.
Monica Trauzzi: Does the money exist to continue innovating and getting these vehicles on the road?
Dave McCurdy: That's a great question. Even with this incredibly difficult economic time, last year the auto sector spent more on R&D than any other industry, over $70 billion in research and development.
Monica Trauzzi: But what about the big three as compared to the Japanese?
Dave McCurdy: Actually Toyota was one and GM was two and they were both in excess of $8 billion in investments. So, again, you see the short-term crisis. The real investments in the future have been made and it's been a pipeline that's, it takes a long time. It takes 7 to 10 years to develop a new powertrain. It takes in excess of $1 billion to develop a new powertrain. And part of the challenge too is, quite frankly, some of the vehicles that were available in Europe, clean diesels that are 30 percent more fuel-efficient than gasoline versions, could not comply with the California standards, the clean-air standard, the emissions standard. So once the combination of the infrastructure, clean diesel was made available, then with some changes in technology they are able to deploy those vehicles. That's a big step in the right direction, but it's a combination of kind of energy policy that maybe our government was complicit in that actually fostered cheap gas, that encouraged consumers to look more to heavy vehicles and SUVs as opposed to smaller or more fuel-efficient vehicles. But that transition is occurring now and I think we're pretty optimistic that getting through this 2009 down sales, that consumers will come back to the showrooms and they're going to be excited by what they see.
Monica Trauzzi: You mentioned California standards and some have suggested that as part of this bailout the big three should be willing to drop lawsuits in states that have passed legislation requiring more efficient vehicles. Is that something that you see happening?
Dave McCurdy: Well, I think the opportunity with an incoming Obama administration is to move beyond this traditional kind of historic binary argument of either for California being able to regulate tailpipes versus a national standard. What we support is a national standard. We now have historic increases. Part of the rationale and we certainly understand that and appreciate in California and other states, is to push this because the past eight years in the Bush administration and even during some of the Clinton administration, there wasn't as much movement on climate and on environment and on fuel economy standards that was believed to be necessary. And so with a new administration, with a heavy focus on not only fuel efficiency, but conservation, but also moving to a green economy, focused on CO2, then I think you have a unique opportunity to unite this industry, manufacturing, labor, states, environmentalists, to really have a new approach. And I think that's the opportunity that Obama has and, hopefully, we can get out of this challenges of standards versus lawsuits. There's nothing more we'd like to do than get out of that confrontational environment and really see how we can work together in a partnership to address these problems.
Monica Trauzzi: So, does this is sort of, the Obama election and also some of the battles we're seeing in Congress for chairmanships of key committees, does that sort of signal the end to what some may call a very favorable look towards the U.S. automakers? Is this the end of the SUV? Is there going to be less leniency for Detroit?
Dave McCurdy: Well, you have multiple questions in there.
Monica Trauzzi: OK, take them one by one.
Dave McCurdy: The first question, is it the end of the SUV? Actually, the end of the SUV occurred a couple of years ago when it was clear that the market was moving away from that. It also occurred when we saw four dollar gas. Four dollar gas was spiked with in a six month period, which no one predicted it was going to go that fast. It really did shift the market and companies, whether they're in Detroit or global, realized that they had to deal with a different price signal and had to deal with that going forward. So they were moving toward, they were downsizing and moving towards crossovers, which are a fast-growing segment, which provides some attributes consumers want, safety, power, towing ability, size, or more fuel efficient. That transition was occurring, so politics is usually, actually, believe it or not, having been there, it's a little bit of a trailing indicator. I think the market made that signal quickly and rather dramatically. Unfortunately, it was such a steep spike that it didn't allow for a smoother transition.
Monica Trauzzi: So, is Congress going to be less favorable to the U.S. automakers?
Dave McCurdy: Well, who would have predicted that they would be considering the kinds of loans and, you know, two years ago no one would have forecast the economic situation that we're in. This is a recession. If we're not careful it could be a depression. It's a depression in the auto sector, across the board. Sales were down in October by an average of 30 percent. No one was exempt from that and so, again, this is such an interconnected industry with the rest of the economy, you know, we have to see. We're working as fast as we can to get the new technologies out and that's our key.
Monica Trauzzi: You mentioned gas prices a couple of times and they were riding high earlier this year, but they've been lower in recent days and many people would speculate that that means people are taking SUVs back out, maybe they're less likely to purchase a hybrid if they're going out to buy cars. So, in order to incentivize a cleaner fleet, should there be a floor on gas prices?
Dave McCurdy: Well, there are, again, two parts to that. One is floors have been discussed. It's much easier to do a floor if you're at two dollars than it is at four dollars from the standpoint that consumers are concerned about price. I think they became accustomed to three and four. You can have some increases, gradual, but the alliance doesn't have a formal position on that. I think the really interesting point that you make though is about the incremental costs of technology. I have a hybrid. It's a great technology. However, it costs more to build that hybrid compared to the gas version. Plug-in electric is coming. Ultra-clean diesel is phenomenal, 30 percent more fuel efficient. However, there are incremental costs. Until they're mass produced on a broad front, there will be more costs. Whether the consumer is willing to make that difference is not only a question of math, but it's also whether there are incentives. One of the things that Congress will be looking at is providing incentives to consumers in order for them to buy the advance technology. That's something that I think we broadly support and I think it should be a top consideration. Not only aid to particular manufacturers or make it available to all manufacturers if they invest here, but also the incentives for consumers to actually get back in the show rooms.
Monica Trauzzi: Why aren't other automakers in the U.S., beyond the big three, facing similar financial issues? Does this go back to the union problems?
Dave McCurdy: Well, I work on the energy and environmental issues for the industry and so I'm not going to comment on the legacy costs. But clearly, some have more legacy costs.
Monica Trauzzi: Yeah.
Dave McCurdy: It's a very competitive industry. Any differential in structured costs make a difference on the ability to make profit. SUVs, as popular as they were when gas was cheap, are also the largest profit margin for companies. And that's why even international companies started manufacturing in that space. The introduction of smaller cars, there was always the fear of it being a repeat of the 80s when they, you know, after CAFE and during the Carter years, the energy crisis, that they would revert to small, less safe, not as efficient vehicles. And cheap and efficient were kind of synonymous back then. Today it's not the case. You know, you have really efficient vehicles, but they're much safer and have all the attributes that consumers want. And I think there is an ability to be successful in that lineup.
Monica Trauzzi: Final question, the Los Angeles auto show starts next week. What are you expecting from carmakers there? What's the tone going to be on the floor and are we going to be seeing the same number of concept cars that we usually see coming out of the auto show?
Dave McCurdy: It's going to be a good show and I'm going to be out there. And it's clear there's going to be much more, it's going to be a green focus. But that's the case, since I came to the industry less than two years ago I've been amazed at how much the emphasis has shifted to that. That will be a continuing focus, more than concepts. You will actually see those models on the floor. There are 137 models today that get more than 30 miles per gallon. Four years ago there were a couple of hybrids, today there are dozens. And it's going to double each year going forward, the same way with diesel and other hydrogen concepts. So yeah, there's always going to be neat looking concept cars, but I think what you're seeing is we're closer to the fact and the time in which we'll actually have marketable products that consumers want, that are affordable, that are both energy efficient, but also reduce our emissions of CO2.
Monica Trauzzi: OK, we're going to end it right there. Thanks for coming on the show.
Dave McCurdy: Monica, a pleasure.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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