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Will Trump’s reduced emissions rules kill auto industry innovation?

Joe Harpaz  Managing Director, Tax & Accounting Corporate Segment, Thomson Reuters

Joe Harpaz  Managing Director, Tax & Accounting Corporate Segment, Thomson Reuters

President Trump put smiles on the faces of auto industry executives this week when he announced plans to roll back government fuel economy standards.

The regulations in question are the controversial Corporate Average Fuel Economy (CAFÉ ) standards, the most recent of which was put in place by the Environmental Protection Agency (EPA) under President Barack Obama, and call for auto manufacturers to have an average fuel economy of 54.5 mpg across their fleets by the 2025 model year. The average fuel economy for all cars sold in 2012, when the laws were passed, was 23.2 mpg.

The looming threat of meeting the new standard has forced automakers to make some serious changes. The most obvious, of course, has been the growth of the electric vehicle (EV) segment. True EVs like the Tesla, Chevrolet Bolt, and Toyota Prius Prime saw their sales increase 59 percent in 2016 and new alternative power vehicles are popping up in showrooms from virtually every manufacturer in the world. Despite their rising popularity, though, electric vehicles still represent just 1 percent of total U.S. auto sales, making them very much a speculative bet on the future for the companies who make them.

Cresting the 54.5 mpg hurdle has also manifested itself in some less obvious ways that involve keeping gasoline-powered engines, but using technology to make them more efficient.  Examples include the widespread use of lower displacement engines, aided by turbochargers, and the use of ultra-light-weight building materials.  BMW, for example, now puts at least one turbocharger in every new car it sells in the U.S. – with the exception of its all-electric i3.  Ford, for its part, has begun building its best-selling F-series pick-up trucks out of aluminum and special military-grade alloys, which make the trucks lighter, and thus, they require less gas to move.

That last point is an important one. The Ford F-150 pick-up truck has been the best-selling vehicle of any kind in America for the last 35 years. Americans really like trucks.  In fact, through January of this year, nearly 60 percent of U.S. new vehicle sales were accounted for by light trucks and SUVs. That trend is supported by average U.S. gasoline prices that have stayed in the $2-$3 per gallon range for the last few years, but, even when gas prices shot above $4 per gallon in 2012, SUV and truck sales stayed strong. However, by using lighter weight materials, a turbocharged V6 motor and a 10-speed transmission, Ford has managed to crank the average fuel economy of the F-150 up to 17 mpg in the city and 21 mpg on the highway. They also managed to increase horsepower and torque along the way.

Porsche has gone even further. Its newly introduced, second generation Panamera sports sedan is a 4,400 pound, four-door that cruises to 60 mph in just 3.6 seconds, has a top speed of 190 mph and a computer system running over 100 million lines of code. To put that in perspective, the previous generation Panamera had 2 million lines of code, the Space Shuttle ran on about 400,000 lines of code, and Microsoft Office 2013 had about 45 million lines of code.  The new Porsche isn’t a car with a computer in it; it’s a computer with wheels! The Panamera uses all of this computer wizardry, of course, to catapult its gigantic body through space at break-neck speeds while also managing to get about 29 mpg on the highway.

That brings us to the issue of President Trump’s promise to reduce the environmental regulations that, in many ways, were a catalyst to this renaissance in auto manufacturing. The phenomenon underscores the double-edged sword nature of many regulations. While regulation clearly burdens industries with new costs and compliance demands, in this case, it also trigged the auto industry to take a hard look at the way it was engineering and designing cars.

Though it may have been done begrudgingly at first, auto manufacturers have addressed the CAFÉ standard mandate by innovating.  Instead of compromising driver experience to get into compliance as they did in the gas crisis of the 1970s, today’s automakers have managed to build the best cars and trucks ever made, while still increasing fuel economy.

Will eliminating CAFÉ standards now dis-incentivize automakers to keep investing in this new technology? Not if Teslas keep beating Ferraris in drag races.

Because manufacturers responded to the threat of new fuel efficiency requirements with a corresponding investment in innovation, the resultant consumer expectation has been set for constant improvement in both performance and economy. As a case in point, the newest Tesla Model S P100D electric sedan just became the world’s fastest production car, reaching 0-60 mph in just 2.28 seconds. The previous record holder was the USD$1.4 million gasoline-powered Ferrari LaFerrari.

Computer code, sophisticated engineering, lightweight materials, and good old-fashioned ingenuity are the new muscle in the auto business. The fact that the performance is arriving along with record levels of fuel efficiency is proof that some things are good enough to succeed with or without regulation.

The latest comments from the Trump administration suggest that the looming threat of the CAFÉ standard will not be the primary driver of auto innovation for long. But the consumer expectations that have been built-up by the auto industry over the last five years will likely prove to be an even more powerful motivation.

No doubt, regulations like the CAFÉ standards have triggered a wave of innovation across the auto industry. But with momentum now pushing fuel economy and improved performance as not just government mandates, but competitive mandates, the stage is set for significant disruption. The growth of electric vehicles, the advance of self-driving technologies, even the emergence of ride-sharing services like Uber are all going to have a profound effect on the auto industry as we’ve known it.  Ironically, though, now that the innovation train has left the station, deregulation may actually spur even more growth.

View the story as it appeared in Forbes.

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