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US: Bicoastal Blues For G.M. and Ford

by Danny HakimThe New York Times
April 23rd, 2005

Setting aside its home base in the Upper Midwest, Detroit has a blue state problem -- and it is about to get worse.

Washington and Oregon plan to become the 9th and 10th states to adopt California's tough car emissions rules, forming an increasingly potent market for more fuel-efficient vehicles on the West Coast and in the Northeast.

The states that already follow California's stringent tailpipe emissions rules also happened to fall in the blue column of the 2004 presidential election: Connecticut, Maine, Massachusetts, New Jersey, New York, Rhode Island and Vermont.

The electoral power of those states may fall well short of a majority but their buying power is still formidable, which puts considerable pressure on automakers to develop more fuel-efficient vehicles. Together, the 10 coastal states account for 29 percent of the nation's auto market, according to R.L. Polk, which tracks car registration data.

Further pressure comes from Canada, which recently forced automakers to agree to substantial cuts in emissions of global warming gases; California has a similar plan that automakers are challenging in court.

General Motors and the Ford Motor Company are themselves based in a blue state, but in the blue bastions on the coasts the last two domestically owned automakers face their biggest challenges, with customers turning to competitors like Toyota faster than in the rest of the country. Together, Ford and G.M. controlled 49.1 percent of domestic sales last year, but according to Polk, their market share in the 10 states was 40.6 percent.

''The regional states tied to this emission policy represent hotbeds of import dominance,'' said Lonnie Miller, an analyst at Polk. Coupled with rising gas prices, the emission control plan, which is a relatively new development in most of the states, ''doesn't make life easier'' for G.M. and Ford, he said.

The two companies, whose stocks have been battered this year for a variety of reasons, have bet their businesses largely on sales of big sport utility vehicles and pickup trucks. Faced with slowing sales of medium and large S.U.V.'s, they are moving in divergent directions, partly because of strategy and partly because of their particular product cycles.

G.M. is diverting engineering resources from passenger cars to rush a new generation of its largest S.U.V.'s into production, betting that new models will stimulate the market for big sport utility vehicles. By contrast, at Ford -- whose overall fleet is actually less fuel efficient than G.M.'s -- executives say that they must diversify beyond big S.U.V.'s and that they will bring a crop of midsize sedans to the market later this year.

''The reality is that both companies are heavily invested in large S.U.V.'s and both companies have more risk than they have opportunity with their current sales mix,'' said John Casesa, an auto analyst at Merrill Lynch. ''There is a secular trend towards lower emissions and higher fuel economy, which can only be met with lots of technology investment and probably smaller vehicles. There's only so much you can do with a Suburban.''

This week, Washington's state legislature passed a bill adopting California's car rules; the governor, Christine Gregoire, a Democrat, is expected to sign it next month. And in an interview this week, Gov. Ted Kulongoski of Oregon, also a Democrat, said he was planning to use his authority to adopt California's regulations; he said he believed that he did not need legislative approval to do so.

''We're going to move forward with it,'' Mr. Kulongoski said. ''It's going to be this year, I would expect.''

Daniel Becker, director of the Sierra Club's global warming program, said that for environmentalists, who have few allies at the federal level in Washington these days, ''the states are where the action is to curb global warming.''

''With Oregon and Washington and Canada all signing up for clean cars, we're now approaching the tipping point,'' Mr. Becker said. His hope is that the industry will make broader changes to its North American product development operations as more states adopt California rules.

Because California's regulations predate the federal Clean Air Act, the state has the authority to set air quality rules, and other states have the option of picking California's more stringent rules over federal policies.

The most potent part of California's regulations is its plan to require a roughly 30 percent reduction in automotive emissions of greenhouse gases by the 2016 model year, a step that would require an even greater percentage improvement in fuel economy. Automakers contend the measure is pre-empted by federal fuel economy law.

At the same time, there is a vigorous debate in Detroit over how gas prices are playing on the minds of consumers.

''Everybody thinks high gas prices hurt sport utility sales,'' said Robert A. Lutz, the vice chairman of G.M., in an interview last month. ''In fact they don't.''

Mr. Lutz said most buyers of big S.U.V.'s were highly affluent. For ''the median income of, say, a Suburban or a GMC Denali buyer, probably the best demographics of any vehicle we have, or a Cadillac Escalade, you're looking at people with a household income of $150,000 to $200,000,'' he said. ''Do they care whether their gasoline bill goes from $20 a week to $40 a week? The answer is no.''

By contrast, Ford cited ''the prospect of higher and sustained gasoline prices'' as the crucial factor in the 38 percent drop in earnings the company reported this week. Ford executives in recent weeks have said rising gas prices are leading to a faster-than-expected exodus from medium and large-size sport utility vehicles as gas mileage has emerged as a top issue for consumers.

''The world is headed this way; it just surprised us a little bit that it shifted so quickly because of the spike in oil,'' said William Clay Ford, Jr., the chairman and chief executive of Ford, in a meeting with reporters Wednesday.

Mr. Ford, who has been outspoken in Detroit on issues like global warming, pushed his company to become the world's third automaker to sell a hybrid vehicle, a version of the company's Ford Escape S.U.V. introduced last year. G.M. has said it will not introduce a comparable vehicle until 2008, about a decade after Toyota and Honda brought the first hybrids to market.

Mr. Casesa, who compiles detailed studies of the industry's product development plans, said Ford had also been more aggressive in shifting to smaller, more fuel-efficient S.U.V.'s known as crossover vehicles.

''They're not planning to dump the big S.U.V.'s, but they seem to be planning for pretty serious attrition in that market,'' he said, adding, ''G.M. has not been as big a believer in crossovers.''

Marc Beckers, a spokesman for G.M., disputed that point. ''We're quite well positioned in general, from a fuel-economy perspective,'' he said, adding that his company has several crossovers available, including the Cadillac SRX and the Saturn VUE. Many more are in development, he said.

Mr. Ford, in his remarks Wednesday, said his company had to push harder to diversify beyond its large S.U.V.'s, and said a new wave of midsize sedans coming later in the year would help.

''We decided, and rightly so in retrospect, that we had to change our cost structure so that we didn't lose money on the smaller stuff,'' he said. ''We knew that the halcyon days would end at some point and we couldn't have everything riding on just a few products.'' 



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