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Volkswagen Versus the U.S. Government

By Jacob Brown | December 27, 2011
When President Barack Obama announced a proposal to mandate an increase in the Corporate Average Fuel Economy (CAFE) standard automakers must adhere to, the companies rushed to endorse it. Well, all of them but Volkswagen.
[caption id="attachment_71883" align="alignleft" width="300" caption="The Volkswagen Passat is built in the U.S."][/caption]
Volkswagen is a company that espouses the benefits of its clean-diesel technology and boasts about its new Passat sedan being able to reach 43 mpg on the highway—all without having to use expensive hybrid technology. It makes one wonder why the German automaker is protesting a law that will mandate an increase from 35.5 mpg in 2016 to 54.5 mpg by 2025 across the industry; after all, it's already halfway there on some of its cars. “It’s not about VW’s ability to make cars that can do it,” company spokesperson Tony Cervone told “It’s about the laws themselves. “VW is in favor of national standards, reducing consumption, and reducing greenhouse gases,” Cervone continued. “But it puts a huge disproportionate burden on us to meet the requirements.” How CAFE Works The CAFE laws work by splitting cars and trucks into two separate categories for each automaker. Then, it further dissects vehicles by their footprints, or space taken up on the road. Using the much more conservative standards in place for 2012, for example, Chevrolet’s compact Cruze, which measures greater than 41 square feet, is responsible for netting a minimum of 28 mpg for CAFE, which translates to an EPA window sticker of 21 mpg. By comparison, the company’s full-size Silverado pickup truck must achieve a 22 mpg figure, or an EPA rating of 17 mpg. That’s set to go up for the Cruze at a much faster rate than the Silverado. Furthermore, the CAFE proposal is also set to give truck makers a break until 2020 when trucks will have to show improvement of 3.5 percent per year. Cars will be mandated to a 5 percent annual increase from 2017 through 2025.
[caption id="attachment_71889" align="alignright" width="300" caption="Chevrolet Cruze Eco"][/caption]
Also, the proposed regulations will offset fuel economy credits when automakers use new technologies like hybrids, plug-ins, electricity, and hydrogen. Credits can also transfer from smaller vehicles to be used on larger, heavier vehicles like pickup trucks and SUVs. However, low-sulfur diesel engines are not expected to receive any breaks for efficient technology, and that's at the heart of Volkswagen's complaint. “There’s a benefit with trucks, transfer credits, and market share,” Cervone says. “It puts us at a competitive disadvantage.” General Motors’ head of government relations, Greg Martin, told that it’s not that simple, though. With large, inefficient cars in the 1970s, the auto industry nearly crippled itself under the weight of quickly fluctuating gas prices created by the Arab oil embargos of the 1970s. Only the Japanese and European automakers had the ability to quickly adjust, as they had been selling small, efficient cars for years in the U.S., imported from their home markets where such vehicles were already popular. The options for the U.S. market were either to create a price floor on gas to push up prices and people into smaller cars—i.e., a hefty gas tax—or the federal government could create CAFE to stabilize the market. Martin says that by pushing CAFE to 54.5 mpg, it “gives us that certainty to base products on” instead of having to adjust quickly to a rapid spike in prices. By having a clear objective and a fleet of high-achieving cars, it will help contain the sort of market volatility experienced in 2008 that all but destroyed brands like Hummer when consumers switched into more efficient vehicles. He added: “Let’s lock in on this right now, so we can establish product planning for the future.”
Market Conditions [caption id="attachment_71881" align="alignleft" width="300" caption="Chevrolet Silverado HD"][/caption]
It’s no secret General Motors, Chrysler, and Ford—the U.S. “Big Three”—have traditionally relied on larger vehicles and excelled in such markets. Despite switching many of their sport utilities from truck-based body-on-frame architecture to lighter car-based construction in recent years to minimize weight and maximize efficiency, they’re still in the business of making popular people-haulers. According to the EPA, a “light truck” is anything from a truck to a sport utility, minivan, crossover, or even some high-riding hatchbacks like the Chevrolet HHR. Across Buick, Cadillac, Chevrolet, and GMC, General Motors has sold 1,387,514 light trucks in the U.S. through November. That’s 61.1 percent of the company's total U.S. vehicle sales. “At the end of the day, automakers are still being driven by what the customer wants,” says GM’s Martin, giving little impression that will change significantly with the inception of the proposed regulations. In Volkswagen’s 2012 lineup, it has just the Routan minivan (built by Chrysler), the Tiguan, and the Touareg. For Audi, it’s the Q5 and Q7 crossovers. By comparison, its light trucks account for 18.3 percent of VW and Audi’s sales through Nov. 2011.
[caption id="attachment_71877" align="alignright" width="300" caption="Volkswagen Amarok"][/caption]
In the future, Volkswagen will be adding a few more light trucks, as well as a plug-in hybrid version of its Jetta sedan and an all-electric Volkswagen Golf to help even out its CAFE numbers. Some have suggested that Volkswagen should sell its Amarok in the U.S., a pickup truck about the size of a Toyota Tacoma. But given the cost of setting up manufacturing it domestically or making it in South America and facing stiff tariffs for importing trucks to the U.S., Cervone contends that it’s too cost-prohibitive in a hotly-contested market of already well-established players. And that’s not even including the cost of certifying its crashworthiness and marketing it in the U.S. It’d likely be a good exercise in lighting money on fire and watching it to a smolder. In a recent report from the University of Michigan’s school of engineering, the college concluded that the proposed standards would push cars and trucks to their maximum footprints. Trucks would buffer the benefits of a 54.5 mpg standard by 1 to 4 mpg in 2025. “Will cars get bigger? Very possibly,” says associate professor Steven Skerlos in the department’s press release. “Will that lead to more pollution? Yes. And there wasn't an emphasis in the rulemaking process that this could happen.” Formulaic measures ensure that the number you see on the car’s sticker isn’t the number for which CAFE judges fuel economy. The government ratings used for the magic 54.5 mpg composite number are, in fact, already higher than the window listing. Hyundai, for instance, says it’s already hovering over 40 mpg for CAFE despite the fact that only four of its 13 vehicles carry an EPA rating of 40 mpg. Volkswagen’s technology spokesperson Mark Gillies says the EPA and CAFE tests are flawed in that cars are built to achieve a government-recommended number instead of a real-world greater benefit. He cites the EPA test cycle as a culprit, allowing automakers to factor a 55/45 percent city/highway split, which favors electric-powered cars’ higher city fuel economy numbers, according to Gillies. “If you look at the American driving experience, it leans more toward longer commutes,” he said. “It’s just how we drive.” Both he and Cervone say diesel technology isn’t getting the credit it deserves. “Our technology is as advanced as anything,” says Cervone. “The story of diesel technology advancement is much more dramatic than that of hybrids.” What’s Going to Happen? The next month will ultimately decide the next 13 years and reshape an entire industry. With that said, there’s a lot on the line for automakers, consumers, and a government driven to be the most environmentally conscious since Teddy Roosevelt’s. During the discussion period held by the committee dictating CAFE, each automaker will have a chance to speak. GM will be for the legislation, and Volkswagen will be against it. GM will argue for the need to push fuel economy standards forward while protecting the lifeblood of U.S. industry. It will use overall averages with technological innovation as its playing card. With the standards in place, it would likely push consumers who once bought trucks as fashion statements into more fuel-efficient vehicles and allow those who still need niche and commercial vehicles to keep purchasing heavy-grade haulers.
[caption id="attachment_71895" align="alignleft" width="300" caption="Chevrolet Corvette ZR1"][/caption]
“I can’t imagine an America without a Corvette,” says GM’s Martin. “Or for that matter, trucks that do real work.” On the other hand, VW will push for a higher fuel economy number on a per-vehicle basis. As an underdog in the debate, VW will be throwing its entire weight into the discussion, from citing the added cost per vehicle expected for electric powertrains to stating its case for diesels. It also plans to lobby hard with congressmen, as it just built $1 billion Chattanooga, Tenn. plant that has helped create 10,000 jobs overall and spur $12 billion in economic development. “There’s a chance they’ll listen,” says VW’s Cervone of the committee. “The plant shows that despite high unemployment and a recession, we’re committed to selling cars in the U.S. market.” And thus we have a standstill with two vastly different solutions to solving the same problem. As political as it is mechanical, both proponents and opponents of the CAFE proposals are gearing up for war. How it all turns out is still anyone’s guess.