Posted by: bridget | 26 January 2007

US Automakers Continue to Haemorrhage Money

Ford has posted a $12.7 billion dollar loss in 2006.  It is cutting jobs, negotiating with the UAW Union, closing plants, and attempting to be profitable by 2009.  The Washington Post also reported that President Bush wants to allow NHSTA to set fuel standards for passenger cars as well as sport utility vehicles and trucks.  The executive branch and Congress are fighting over how to best raise fuel standards; Bush wants cars to get an average of 34 mpg by 2017, while Congress is aiming for 40 mpg.  US automakers fear that these changes will reduce their profits.  Yet, the Ford article states that foreign automakers are dominating the market because they make more fuel-efficient vehicles.

Ultimately, any government-mandated standard infringes on the free market.  Here, such standards are anti-competitive, but benefit US automakers more than foreign automakers.  US automakers will need to re-engineer their vehicles in order to meet the new standards, while foreign automakers (especially Toyota and Honda, both of which make fuel-efficient cars and have hybrids on the market) will need only minor modifications.  This translates into higher initial costs for Detroit; however, if Toyota and Honda want to retain their competitive advantage, they too will need to overhaul their line.

For years, these companies have made their cars as fuel-efficient as possible; hybrids have allowed a quantum leap forward, but more improvements in fuel economy will be difficult.  There are physical limits to fuel economy, such as inefficiencies in a Carnot cycle (2d law of thermodynamics), air resistance, and the momentum issues involved in moving several thousand pounds of weight down the highway.  Foreign manufacturers will either have to expend a tremendous amount of money in R&D to improve their cars, thereby retaining their competitive advantage, or allow American automakers to compete with them in fuel economy.

The first situation does not change the status quo, as all manufacturers will incur increased costs.  The second situation allows Detroit to eliminate fuel economy as a possible method of distinguishing competitors, which can do nothing but benefit American automakers, who are haemorrhaging money in the days of $3/gallon gasoline and concerns about global warming.  Either way, Congress is acting in an anti-competitive manner, albeit one that benefits Americans.

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