1. home
  2. news
  3. Why Are the Germans Plugging In?

Why Are the Germans Plugging In?

They're scared of Uncle Sam.

German automakers, as we report here, are investing billions in EVs and plug-in hybrids. But why? Tiny Tesla has no doubt provided inspiration, but there's another, slightly larger motivator: the federal government.

The stage was set in the summer of 2011 when President Obama announced aggressive fuel-economy and greenhouse gas standards. Among the auto executives who joined him in a show of industry-wide backing for the regulations, there were a few faces missing.

"We are not in agreement. That's a fact," says William Craven, senior manager of regulatory affairs for Daimler. Volkswagen Group also dissented.

This may seem odd, given Europe's embrace of environmental controls. But the U.S. standards pose particular challenges to Mercedes-Benz, VW, and BMW.

The most obvious issue is with what the Germans sell in the United States—mostly powerful luxury cars. That hurts because regulators calculate their fleet fuel economy according to sales. General Motors needn't worry about Cadillac's fuel economy because every CTS-V it sells is offset by thousands of Chevrolet Cruzes. Mercedes, BMW, and VW enjoy no such cushion. Even the Volkswagen brand sells far too few Jettas and Passats to offset Audi, Bentley, and Porsche, which currently make up more than 35 percent of VW Group's U.S. sales. This is one reason we're seeing premium-branded compact cars such as the Mercedes-Benz CLA-Class and Audi A3.

But selling lots of efficient small cars will only do so much thanks to another regulatory wrinkle: footprint curves. These require smaller vehicles to meet higher
efficiency targets. Every automaker, in turn, has a fleet footprint. The smaller its footprint, the higher its fuel economy standard. The stated goal, according to the EPA, is "to minimize the incentive for reducing vehicle size to meet stringency."

As you might expect, German (and Japanese) automakers don't like this. They argue the footprint curves are lenient toward large trucks at their expense (see below). True or not, there's little doubt the Germans would be in better shape with regulators if they offered a really large, reasonably efficient truck (like, say, the aluminum 2015 Ford F-150).

Beyond the tougher standards lie tougher consequences. The Germans have missed fuel-economy targets in the past and paid millions in fines. They were OK with that. "They used to just sell the cars and pay the fines," says analyst Phil Gott of IHS Automotive. But under the EPA's greenhouse gas rules, which complement the CAFE standards, less efficient automakers must buy carbon "credits" from greener competitors—that is, hand over cash to rivals. Mercedes, Volkswagen, and BMW all had to do that in 2012.

Amid all this, German automakers have watched Tesla with growing interest. EVs clearly help toward meeting regulations, but German execs long assumed no one
wanted them. In proving otherwise, Elon Musk has shown Mercedes, BMW, and Volkswagen a potential way to please Uncle Sam.