Fitch Comments on Bush Administration Stance on New California Emission Standards

    CHICAGO--Oct. 10, 2002--With the submission of Justice Department legal brief in support of General Motors Corporation (GM) and DaimlerChrysler Corporation (DCX), the Bush Administration has weighed-in on the California emissions debate.
    Although this issues is not an immediate concern to the original equipment manufacturers (OEMs), these legal proceedings could have a potential impact on the future of vehicle design in the United States.
    Fitch believes that if the California standards are upheld, hybrid vehicle will become the short-term winner over fuel-cell powered vehicles.
    As a result, the domestic OEMs will be put at a relative disadvantage to the Japanese OEMs in the near-term. The European OEMs, with their focus on diesel engines and their relatively limited use of hybrid technology, would also be at a disadvantage to the Japanese OEMs.
    "Clearly there will be winners and there will be losers, Fitch believes that when it is all said and done that the California laws will be overturned and that this is a positive for future fuel cell development," said Chris Struve, Director, Fitch Ratings. "This result would have to be considered a relative positive for the domestic OEMs and GM in particular."
    As a reminder, California recently passed (and Governor Davis signed into law) California Assembly Bill 1058, which takes steps to regulate the emissions of carbon dioxide (CO2), a so-called greenhouse gas. Opposing California's efforts, several OEMs intend to argue in federal court that this is merely a veiled attempt to mandate higher fuel economy and that under federal law only Congress has that authority (under the existing Corporate Average Fuel Economy (CAFE) regulations). With the filing of its brief, the Justice Department has clearly indicated that the regulation of fuel economy is a right reserved by the federal government under the existing CAFE regulations.
    The domestic automakers, led by GM, have staked much of their advance vehicle research and development efforts on fuel-cell powered vehicles. Fuel-cell powered vehicles are considered the 'holy grail' by most people concerned about the environmental impact of automobiles, as fuel cells offer the potential to eventually reduce harmful emissions to negligible levels (water would be the principal product emitted) while also potentially reducing America's dependence on foreign oil. Only one problem exists, namely that most analysts do not anticipate that the domestic OEMs will have viable large-volume vehicles available by the time that the California regulations would take effect. As a result, should the California legislation stand, the domestic OEMs would have to shift gears to more fully adopt the hybrid technology.
    Led by Toyota Motor Company (Toyota) and Honda Motor Company (Honda), the transplants have been much more proactive in the area of hybrid vehicles. As a result, they have effective leadership in this area. Vehicles such as the Toyota Prius, the Honda Insight, and most recently the Honda Civic Hybrid, are clearly the industry leaders in the utilization of cleaner technologies to meet emissions standards while improving fuel economy.
    The long-term ramifications of this court case are potentially significant. Should California win in court, then automakers could potentially face 50 different emissions standards. This assumes, of course, that only the states and not other legal entities such as the District of Columbia or Puerto Rico decide to get into the game. Should California win in court, investors would also see the development of viable fuel-cell powered vehicles pushed out further into the future as the domestic OEMs would be forced to shift their efforts to hybrids over the near term to meet the revised California standards
    For greater detail on this issue, please find the Fitch report titled "California Dreaming -- An Emissions Nightmare," available on Fitch's Web site at 'www.fitchratings.com' in the special reports section corresponding with the corporates sector.