Autos: A Bailout Could Have a Green Twist

Environmentalists want Uncle Sam to seize this chance to press Detroit to build more fuel-efficient cars

By Stacy Trombino From Standard & Poor's Equity Research

As Washington weighs a potential bailout of the U.S. automobile industry, environmental groups urge that such a rescue should come with eco-friendly strings attached.

Automakers have already started to move in that direction. After years of devoting themselves to building bigger, more luxurious vehicles, car manufacturers are shifting their focus to more fuel-efficient vehicles in the hopes of driving up profits. "The global automobile market has shifted toward the fuel efficiency of hybrids, and domestic brands are following this trend," says Efraim Levy, senior automobile equity analyst at Standard & Poor's.

In an environment where consumers are cautious and seeking value in every purchase, more are choosing a fuel-efficient vehicle.

The combination of high gas prices, rising raw material costs, tighter credit markets, and a shift in consumer behavior has made for a more challenging U.S. auto environment, forcing Detroit to ask for a bailout akin to the banks and insurance companies. Things could get worse for auto sales in 2009, especially if the unemployment rate moves up, as S&P Economics expects. Levy projects 2008 U.S. light-vehicle sales volumes will be about 13.5 million, down from 16.1 million sold in 2007. In 2009, he expects 12.8 million.

Leave Off Truckin'

What kind of car will consumers buy? Smaller, fuel-efficient ones, says Levy. In April 2008, for the first time in many years, more cars than trucks were sold in the U.S., an eye-opening event that led many automakers to shift to producing smaller, more fuel-efficient cars. Levy views this as an area of strength in 2009.

The next generation of vehicles is all about miles per gallon (mpg), not SUVs. General Motors (GM), for example, recently unveiled the Chevrolet Volt, a battery-powered car. GM is expecting to have the Volt on the market by late 2010. "GM has a lot riding on the success of the planned Volt," say Levy. However, even if the company can reach its technical objectives for the Volt, he is not confident that it will be achieved on time and at a cost that will allow the company to make a profit. "Even if GM's timetable is achieved, we do not expect a material positive contribution to GM's bottom line in 2010."

Chrysler, now a privately held company, recently introduced three advanced electric-drive vehicle prototypes, one for each of its brands: Chrysler EV, Jeep EV, and Dodge EV. The company said it will select one of these electric-driven models to be produced in 2010 for consumers in North America, and in Europe after 2010. In addition, the company expects 100 electric vehicles will be on the road in government, business, utility, and Chrysler development fleets in 2009.

Obama Is Adamant

The Toyota (TM) Prius, a midsize hybrid electric car, was first sold in Japan in 1997. It's now sold all around the world and is considered one of the most fuel-efficient cars on the market. Despite falling sales volumes in August, the Prius continues to gain market share as it expands rapidly outside the U.S. and Japan. In response to changes in consumer demand, and to improve the production efficiency and stability in its North American operations, Toyota is adjusting product mix at three U.S. plants. The change includes the addition of the Prius hybrid to its North American lineup.

While President-elect Barack Obama has recently made public statements suggesting he would support federal assistance to automakers, his previous public statements suggest he would also back environmentalists' concerns.

A year ago, Obama criticized the U.S. auto industry for failing to deliver more fuel-efficient cars sooner. At that time, Obama said: "The need to drastically change our energy policy is no longer a debatable proposition. It's not a question of whether, but how; not a question of if, but when. For the sake of our security, our economy, our jobs and our planet, the age of oil must end in our time."

The Civil Society Institute is an environmental group urging eco-friendly conditions to any federal loans or bailout. "Just because Detroit is pleading once again for another bailout is no reason for Washington to give these companies a 'free ride'," says Pam Solo, the institute's founder and president. "If taxpayers are going to be put at risk by guaranteeing new loans, then any such new help should be conditioned on the U.S. car companies ending their campaign to frustrate state-level efforts to clean up car and light-truck emissions that cause global warming."

"Further, Congress should insist that every penny of the $25 billion in new loan guarantees that Detroit is seeking be targeted to building the cars of tomorrow, not the gas-guzzling dinosaurs of yesterday," Solo says. "Business as usual for Detroit is a bad investment without the incentives for Detroit to do what it seems it cannot do for itself."

Trombino is a reporter for S&P Global Editorial Operations .