Regulation of the Motor Vehicle Industry
This chapter focuses on government regulation of the motor vehicle industry. Government regulation of motorists and motor vehicles, as opposed to the motor vehicle industry, began in the first decade of the 20th century. Significant regulation of the motor vehicle industry dates from the 1960s. Governments have also played a more direct role in regulating the motor vehicle industry through ownership of carmakers.
Mandates
Safety and environmental concerns brought the imposition of mandates on carmakers. Since the 1960s, vehicles have been required to be equipped with devices that control noxious emissions, especially nitrogen oxide, particulates, and carbon monoxide. Since the 1970s, in response to periodic petroleum shortages and price rises, vehicles have been required to meet minimum fuel efficiency standards.
Safety Mandates
The United Nations World Forum for Harmonization of Vehicle Regulations has created uniform regulations on vehicle design. Although primarily aimed at promoting international trade in vehicles, the U.N. regulations promote uniform standards for several areas of vehicle safety, including lighting, crashworthiness, and instrumentation. The World Forum evolved from an agreement in 1958 by the Economic Commission for Europe, a U.N. agency that was established to promote trade across Europe by standardizing regulations. Non-European countries were allowed to join the forum in 1995. As of 2013, the agreement had been signed by 58 countries, including Japan, those in the European Union (EU), most of those once part of the Soviet Union, and most others in Europe. The most notable non signers are China, India, and the countries of North America, including the United States.
The watershed event in spurring U.S. government safety mandates was the publication in 1965 of Unsafe at Any Speed, written by Ralph Nader. Nader argued that carmakers, especially GM, were more concerned with making higher profits than with making their vehicles safer. The book interspersed lofty public statements by auto company executives about designing safe cars with descriptions of gruesome accidents that might have been prevented with the addition of inexpensive safety features.1
Nader cited examples from all three of the major U.S. carmakers, but his harshest criticism was directed at GM’s Chevrolet Corvair. Nader charged that the Corvair had a tendency to roll over because of its design. The Corvair’s engine was in the rear, so a relatively small percentage of the car’s weight was in the front. As a result, the car tended to jackknife in sharp high-speed turns or crosswinds, inducing the driver to compensate by oversteering, resulting in loss of control. The first GM driver to test a Corvair prototype rolled it over. The first Ford driver to test a Corvair in 1960—companies routinely obtain early versions of competitors’ models—also rolled it over, but Ford kept quiet about it for fear of retaliation by powerful GM against some of its own less-than-perfect vehicles. A stabilizing bar between the front wheels would have substantially reduced the risk of a rollover, but GM eliminated it in order to save $15 per vehicle. Equipping the Corvair with undersized tires saved another $1.
Stung by Nader’s attack, GM officials fought back by trying to smear him. GM hired detectives to investigate Nader’s background, credentials, and qualifications, not unusual in legal proceedings. When nothing damaging was found, a second more intensive investigation was ordered that exceeded the bounds of proper legal inquiry. Detectives tailed Nader and checked into his private affairs. They uncovered an ascetic—a man with a Harvard Law Degree living in near-pauper conditions in a rooming house in Washington—but instead GM spread stories that Nader was homosexual and anti-Semitic. Nader sued GM, settling out of court for $425,000, which he used to set up a consumer advocacy program that became a potent force in the consumer safety movement.
Placing profits ahead of safety was nothing new for GM. In 1929, GM president Sloan had been urged to introduce safety glass by officials from DuPont, which manufactured the plastic inner lining for the glass, but Sloan refused. He believed that the corporation had no responsibility for looking after the general welfare of the population. Corporations were ill advised to stray from their central mission of providing their shareholders with an acceptable rate of return on investment. The introduction of safety glass, Sloan argued, would significantly reduce the company’s profits.2
In 1956, Ford decided to emphasize in its advertising the availability of a safety package called “Lifeguard Design.” Seatbelts were a $16 option, $25 if bought in a package along with padded instrument panel and sun visors.3 Ford along with Chrysler had made seatbelts an option in 1955, and sold 400,000 in the first 18 months of availability. With research showing that many accidents resulted in drivers being impaled on steering columns, Ford designed the steering wheel in a deep-dish shape to cushion drivers thrown forward in accidents. With research indicating that in one-fourth of accidents, motorists were thrown out of the car, Ford designed latches that kept doors closed during most accidents. Ford’s safety campaign failed, as GM extended its sales lead over Ford in 1956 by featuring more powerful engines. Ford salvaged its 1956 sales by dropping the “Lifeguard Design” advertising campaign. The lesson for Ford and its competitors: safety doesn’t sell. Motorists didn’t want to be reminded that vehicles were dangerous or pay extra for safety features. Seatbelt usage would remain extremely low for another generation.
In the wake of the GM-Nader scandal, the U.S. Congress in 1966 enacted the National Traffic and Motor Vehicle Safety Act, which created the Department of Transportation and empowered the National Highway Safety Bureau (renamed the National Highway Traffic Safety Administration [NHTSA] in 1970) to set standards for automotive safety and order recalls of vehicles with safety-related defects. Vehicles were required to be built with safety features such as head rests, energy-absorbing steering wheels, shatter-resistant windshields, and safety belts. NHTSA also imposed safer standards on road design such as better lighting, guardrails, barriers separating oncoming traffic lanes, clearer delineation of curves through stripes and reflectors, and signs and utility poles that break away.
The 1972 Motor Vehicle Information and Cost Saving Act required NHTSA to set bumper standards. Bumpers had become standard equipment during the 1920s. They were originally thin metal strips designed to reduce damage to the vehicle from bumping into parked cars and pedestrians. By the 1950s, bumpers had become elaborate decorative features that caused as many injuries as they prevented. Beginning in 1972, NHTSA required bumpers to protect the fuel tank, headlamps, and other body and safety features during low-speed front-end impacts of 5 mph and rear-end impacts of 2.5 mph. The front-end standard was reduced to 2.5 mph in 1983.
Mandating safer roads and safer vehicles brought highway fatality rates down sharply in the United States. The number of fatalities declined from a peak of 55,000 in 1970 to 40,000 in 2000. The number of fatalities per 100 million miles driven in the United States, which had declined from 18 in 1920 to 5 in 1960 and 3 in 1980, declined further to 1 in 2000.4 Rates of seatbelt usage increased from 11% in 1981 to 68% in 1997. In 1996, child restraints were used for 85% of children less than 1 year old and 60% of children aged 1–4 years.
Emissions Mandates
Carmakers are required to control the discharge of pollutants from the tailpipe. The three most significant emissions are hydrocarbons, nitrogen oxides, and carbon monoxide.
Photochemical smog is a haze that forms over urban areas, reducing resistance to respiratory infection and producing stinging in the eyes. It forms when hydrocarbons and nitrogen oxides from motor vehicles mix with sunlight. For each 1 kilogram of fuel burned in a vehicle, 0.2 kilograms of nitrogen oxides, and 0.1 kilograms of hydrocarbons would be discharged in the absence of emissions controls. Smog became more prevalent after World War II, in part because of the greatly increased concentration of vehicles in urban areas. Adding to the problem, cars built after World War II generated much more nitrogen oxides than prewar models because they had more powerful higher compression engines that ran hotter. The hotter oxygen and nitrogen in the cylinder air reacted to form nitrogen oxides, which were emitted through the exhaust pipe into the air. Exposure to carbon monoxide reduces the oxygen level in the blood, impairs vision and alertness, threatens those with pre-existing breathing problems, and can be fatal. In the absence of controls, 1 kilogram of burned fuel would generate 0.5 kilograms of carbon monoxide.
In the United States, the leading governmental entity in setting increasingly rigorous emissions standards has been the California Air Resources Board (CARB), which was established in 1967 through the merger of two other entities, the California Motor Vehicle State Bureau of Air Sanitation and the California Motor Vehicle Pollution Control Board. In 1961, the Bureau of Air Sanitation mandated that all vehicles sold in California from 1963 had to be equipped with technology known as positive crankcase ventilation that removed gases from the crankcase. In 1966, the Motor Vehicle Pollution Control Board adopted tailpipe emissions standards for hydrocarbon and carbon monoxide.
At the national level, the Federal Air Quality Act of 1967 established a framework for defining air quality control regions based on meteorological and topographical factors of air pollution. Most importantly, the act gave the State of California a waiver to set and enforce its own emissions standards for new vehicles based on California’s claim that it had a unique need for more stringent controls. Other states may not enact their own emissions standards, but they do have the option of following California’s more stringent standards rather than Federal standards. Thirteen states have chosen to follow the California standards: Arizona, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.
The most important federal initiative to control pollution from vehicle emissions was the 1970 Clean Air Act, which called for the U.S. Environmental Protection Agency (EPA) to issue national air quality standards and specify required emission reductions. The EPA in 1971 called for 90% cuts in emissions of carbon monoxide and hydrocarbons by 1975 and nitrogen oxides by 1976. Compliance with the mandates was later pushed back to 1981. Rather than design entirely new engines, the carmakers met the standards through installation of catalytic converters. More recent initiatives have focused on reducing emissions through improving fuel efficiency, as discussed below.
California was also in the forefront of attempting to reduce global warming by regulating the emissions of greenhouse gases, especially carbon dioxide. In 2004, CARB adopted emissions standards for vehicles. Each carmaker needed to meet a standard based on a production-weighted fleet average, that is, the emissions of each of its vehicles weighted by its share of the company’s total sales in a year. Increasingly stringent annual standards were set, measured in grams per mile. During the Administration of George W. Bush, the federal government opposed CARB’s initiatives, but favorable court rulings and support from the Obama Administration removed the legal challenges to California to move ahead. The Federal EPA began regulating greenhouse gas emissions from vehicles in 2011 following California’s pattern of increasingly stringent fleet-weighted averages. Fifteen other states opted to follow California’s standards for controlling greenhouse gas emissions.
California and nine other states require zero-emission vehicles to account for 15.4% of the state’s new car sales by the 2025 model year. In the absence of a nationwide standard, carmakers are coping primarily by selling only electric vehicles in the states with the mandate. “Compliance car” is the carmakers’ informal name for these vehicles that they need to produce in limited quantities and sell at a loss such as Chevy Spark EV.5
The EU sets emissions policies, regulations, standards, and increasingly ambitious targets for Europe. In 2009, the EU set a target of 130 g/km (5.6 l/100 km or 42 mpg) for the average emissions of all new vehicles to be phased in by 2015. Each carmaker gets an individual annual target based on the average mass of all its new vehicles registered in the EU in a given year. Each carmaker had to ensure that 65% of its new vehicles registered in the EU in 2012 had average emissions below its target. The percentage of vehicles below the target would rise to 75% in 2013, 80% in 2014, and 100% in 2015. The EU has also set a target of 95 g/km (4.1 l/100 km or 57.6 mpg) for the overall vehicle fleet to be phased in by 2020.
EU member states decide how to best implement the standards. The EU encourageds member countries to establish variable tax rates for registering vehicles, with more fuel efficient vehicles benefiting from lower taxes.
Europe’s standards for emissions have been adopted by China’s State Environmental Protection Administration and India’s Central Pollution Control Board under the Ministry of Environment & Forests. Japan has regulated emissions in urban areas, including nitrogen oxides since 1992 and particulates in 2001. Japan applies the standards to older vehicles, not just newly sold ones, requiring owners of older vehicles to either retrofit emissions controls or (more likely) replace them with newer models. Russia does not have an emissions mandate.
Fuel Efficiency Mandates
Minimum fuel efficiency standards are mandated by the governments of many countries. The initial impetus for these mandates in the United States was the oil price shocks of the 1970s. More recently, concerns for oil security have driven other developed countries to set higher fuel economy standards than those in the United States.
The United States produced more petroleum than it consumed during the first half of the 20th century. Beginning in the 1950s, the handful of large companies then in control of international petroleum distribution determined that extracting domestic petroleum was more expensive than importing it, primarily from the Middle East. U.S. petroleum imports increased from 14% of total consumption in 1954 to 58% in 2009. In 1960, several countries possessing substantial petroleum reserves created the Organization of Petroleum Exporting Countries (OPEC) in order to gain more control over the production and pricing of their resource. Countries possessing the reserves nationalized or more tightly controlled the fields, and prices were set by governments rather than by petroleum companies.
Angry at North American and European countries for supporting Israel during that country’s 1973 war with Egypt, Jordan, and Syria, most OPEC members imposed an oil embargo in October 1973. Soon, gasoline supplies dwindled in the United States and much of Europe. OPEC lifted the boycott in March 1974 but raised petroleum prices from $3 per barrel to more than $35 by 1981. The rapid escalation in petroleum prices during the 1970s caused severe economic problems in North America and Europe. Production of motor vehicles, as well as steel and other energy-dependent industries, plummeted in the wake of the 1973–1974 boycott and price rise. Manufacturers were forced out of business by soaring energy costs, and the survivors were forced to restructure their operations to regain international competitiveness. In the wake of the 1970s shocks, the United States reduced its dependency on OPEC oil from 40% in the 1970s to 10% in the 21st century.
The principal U.S. policy response was the passing of the 1975 Energy Policy and Conservation Act, which mandated Corporate Average Fuel Economy (CAFE) regulations, effective in 1978. The sales-weighted harmonic mean fuel economy of a manufacturer’s fleet of vehicles in a model year had to exceed a specified level, expressed in miles per U.S. gallon (mpg). Separate means were set for each carmaker’s fleet of passenger cars and for light trucks. The EPA measures each vehicle’s fuel efficiency, and the NHTSA enforces the standards. If the carmaker’s overall CAFE fell below the standard, it had to pay a penalty. As a result of CAFE regulations, the average vehicle driven in the United States increased from 14 mpg in 1975 to 22 mpg in 1985. A National Academy of Sciences committee in 2002 concluded that CAFE regulations had improved vehicle efficiency by 14%.
In 2011, CAFE was changed from an average for each carmaker to a standard for each vehicle. A larger vehicle has a lower CAFE requirement than a vehicle with a smaller footprint. The overall average for all vehicles sold in the United States is anticipated to increase to 54.5 mpg in 2025.
The EU does not set a fuel economy mandate independent of the emissions mandate. The targets of 130 g/km in 2015 and 95 g/km in 2020 for the average emissions of new vehicles are considered equivalent to fuel efficiency of 42 mpg and 57.6 mpg, respectively.
Vehicles in China are assigned to sixteen weight classes, ranging from vehicles weighing less than 750 kg to those weighing more than 2,500 kg. Each vehicle must meet the standard of its weight class, or it cannot be sold in that model year. China does not permit corporate averaging. China’s fuel efficiency standards are designed to secure an overall mean of 42.2 mpg in 2015.
Similarly, Japan allocates vehicles to fifteen weight classes. Fuel economy standards vary from 10.6 km per liter to 24.6 km per liter (24.9–57.9 mpg). However, as in the United States and Europe, Japan permits averaging fuel economy across all vehicles sold by a carmaker. The proposed overall average target for 2020 is 20.3 km per liter (47.8 mpg).6
Government Ownership
National and local governments own significant stakes of four of the ten largest carmakers through a variety of financial mechanisms. The two leading carmakers with direct government ownership are Renault and VW. Honda and Toyota have substantial indirect investment from the Japanese government. In no case, though, does a governmental entity exercise control over day-to-day management or strategic policy at the leading carmakers. Government ownership involvement in other carmakers, notably those in China, is more direct.
Renault was nationalized by the French government in 1945 at the end of World War II, in part because of Louis Renault’s alleged collaboration with the Nazi during their occupation of France 1940–1944. During the nationalization period, Renault’s finances were part of the national budget, and the national government absorbed the company’s operating losses. Even under direct national government ownership, though, Renault was managed by executives who had latitude to run the company without direct government oversight. The government reduced its stake in Renault to 53% in 1994 and 46% in 1996, when it became a minority shareholder. The government now holds 15% ownership of Renault.
VW began as an initiative by the Third Reich to create a “people’s car.” After World War II, the company was reorganized as a trust controlled by the government of the Federal Republic of Germany and the government of the State of Lower Saxony. Though the national government no longer holds a direct stake in VW, Lower Saxony still owns 20%. In addition, the government of Qatar owns 17% of VW. The investment from Qatar came originally through an investment in Porsche, which is now owned by VW.
The Japanese government holds a substantial indirect financial interest in the leading Japan-headquartered carmakers. The connection is through the Japan Trustee Services Bank, which is the largest shareholder of Honda and Toyota. The Japan Trustee Services Bank in turn is owned two-thirds by Sumitomo Mitsui Trust Holdings and one-third by Resona Bank. Sumitomo Mitsui Trust in turn is owned one-third by the Resolution and Collection Corporation, which is a wholly owned subsidiary of Deposit Insurance Corporation of Japan, a semi-governmental organization. The Resona Bank was rescued from insolvency in 2003 by the Japanese government, which as a result held two-thirds of the voting rights.
Three of the ten largest carmakers—Fiat, Suzuki, and GM—had substantial government ownership in the past. The government of Libya acquired 15% of Fiat in 1977. International outrage over Libya’s support for international terrorism induced the Agnelli family to reacquire the shares from Libya. However, Libya has since repurchased 2% of Fiat shares. The government of India owned 18% of Maruti Suzuki when it was established in 1981. The Japanese carmaker Suzuki Motors has acquired an increasing share of the company, and the government sold all of its shares to financial institutions in 2007.
Government ownership of GM dates from the company’s trip through bankruptcy in 2009. Sharp declines in sales and production during the severe recession of 2008–2009 left Chrysler and GM finances perilous. Unable to secure credit and running out of cash, the two carmakers turned to the U.S. government for assistance in late 2008. Rebuffed by Congress, the carmakers received emergency short-term loans authorized by President George W. Bush in his last month in office. Shortly after taking office in 2009, President Barack Obama appointed a Task Force to devise a strategy for dealing with the two carmakers near collapse. The two companies were restructured using a little-known and rarely used section of the U.S. bankruptcy code. Majority ownership of Chrysler was turned over to the United Auto Workers’ Voluntary Employee Beneficiary Association (VEBA) health care retirement trust. Fiat was given operating control of Chrysler and permitted to buy more shares of the company by meeting several benchmarks. The restructured GM was initially owned 61% by the U.S. Government, 8% by the Government of Canada, and 4% by the Government of Ontario. Through public offerings of shares, the U.S. Treasury eliminated its holdings in several increments between 2010 and 2013.
Three of the ten largest carmakers not discussed in this section—Ford, Hyundai, and PSA Peugeot Citroën—remain under the control of the founding families. In the case of Hyundai, leaders of the chaebol have been active in South Korea’s politics.
Several smaller and up-and-coming carmakers have substantial government ownership. Kuwait owns 8% of Daimler Benz. The leading Chinese carmakers are owned by the government of China.