Rob Cleveland

When I talk to out-of-state relatives, they begin the conversation with the same pity-laden inquiry: “So how’s it going out there?” By “out there” they mean the state with the worst unemployment figures, rampant foreclosures, corrupt former mayors, headline-grabbing corporate meltdowns and enough clinical depression to put a squeeze on the country’s Zoloft supply.

Michigan’s slide into unwanted notoriety has been led by the collapse of the domestic automobile industry – once an engine for the economy, and now a drag both here at home and across the nation.

But unlike last winter (and spring, and summer), the news is looking a little brighter lately. Mind you, I’m not declaring “Mission Accomplished,” but the collective headlines that came out just this week could mean the auto industry, and by association the state of Michigan, could be on the mend.

Some Positive Signs at Ford, GM

The brightest news this week: Ford Motor Co., the only domestic manufacturer that opted not to take loans from the federal government, posted a near-$1 billion profit for the third quarter, built in part from a profit of $357 million from its North American operations. That is the first profit Ford has seen from its domestic unit since 2005.

Ford’s turnaround is tenuous, though. It still is sitting on a mountain of debt: more than $23 billion. That’s the equivalent of getting a job after a year of unemployment, and only now being able to face up to the maxed-out credit cards and home equity loans. And while Ford has some decent product out now, it is going to find it difficult to sustain a pipeline competing with other companies who shed their liabilities through bankruptcy, and now can devote more dollars to new cars and trucks.

It beats getting poked in the eye, though, and CEO Alan Mulally is predicting a return to annual profitability in 2011. Just one more year…

Meanwhile, east of Dearborn at the RenCen, the surviving General Motors crew is crawling to shore after the ship went down this summer. The public ire over billions of dollars in federal loans has apparently abated and they are buying GM cars again, up 4% versus October 2008 and up 13% over September 2009.

Perhaps more telling than sales, though, was GM’s decision to keep its European car unit, Opel, after a protracted effort to sell it to Magna – a giant Canadian parts supplier – and a consortium of Russian investors. The decision to keep Opel can only be based on optimism from the executive suites and a bullish forecast for the coming year.

In calling off the deal, GM managed to outrage both the German and Russian governments who had their own agendas and expectations built into the buyout. At least the taxpayers are getting some entertainment out of the federal loans, if nothing else just now.

What’s Up with Chrysler?

And then there is the plucky Chrysler that just won’t say die. In an all-out corporate marathon, Fiat/Chrysler-boss Sergio Marchionne took six long hours to outline the next, long five years that will pave the way to a Chrysler revival, largely on the backs of Fiat production platforms.

If the plan holds true, Fiat will do more for Chrysler in just two years, in terms of product sharing, than Daimler did for Chrysler during its entire ownership tenure. And Americans may, once again, be able to buy Fiats and Alfa Romeos at local Chrysler dealerships.

There are plenty of industry analysts and home-schooled amateurs who are writing Chrysler and Fiat off. Marchionne reminded the audience that the same dire predictions were made about Fiat before he took the helm there, and the company wound up turning a record profit in 2008.

Mind you, 2009 isn’t looking nearly as hot for Fiat but no one is lighting cigars with hundred dollar bills these days. If someone is going to try and revive the clinically dead Chrysler, it might as well be someone who has been through it all before.

The Road Ahead for Michigan

The slow and painful return of these three companies could mean better times ahead for Michigan. But that shouldn’t mean Michigan should give up its efforts to bring diversity to its business base. Foregoing efforts to bring other high-tech companies and industries into Michigan would mean that we’re back here a decade from now when the automobile industry takes another bad turn. And anyone who thinks the Big Three will ever have the same headcount it did five years ago is delusional.

Conservative groups are calling for elimination of tax breaks and subsidies to attract businesses here to Michigan. They claim it is a waste of time, and that those expenditures haven’t lived up to the forecasts for new jobs. That’s precisely the same short-term thinking that has put Michigan at the head of the pack when it comes to economic blight. Spending tax dollars to attract new businesses like high-tech software firms and new industries like the film business is a long-term investment: it won’t bring in jobs overnight but it beats the heck out of doing nothing and then whining about it when there are no results.

We can all hope and believe that the auto industry will come back. But Michigan needs to plan with the expectation that it might not. In the best-case scenario, more car jobs return to Michigan on top of jobs from other industries. Maybe then, the pity permeating over the telephone lines when out-of-state friends and family call may begin to dissipate.

About the author: Rob Cleveland is CEO of ICON Creative Technologies Group and a co-owner of Grange Kitchen and Bar in Ann Arbor.

Rob Cleveland

One thing is certain in the automobile business. When you start peeling back the onion on the performance claims and quality ratings made by and for all of the automobile manufacturers, you better have a bottle of ibuprofen at the ready. General Motors’ recent announcement that the Chevrolet Volt will get 230 miles per gallon (mpg) certainly is no exception.

First, some disclosure for your reference. I have been a big fan of GM’s efforts to create its hybrid electric vehicle and felt for some time that the car could be a positive step forward for transportation in general. I’ve been a strong supporter of GM’s many efforts in alternative transportation, from hydrogen to ethanol, as well. There are plenty of detractors around these programs – and some of the criticism is warranted. But for a company so maligned by the public as being out of date, I’ve always felt GM got a bad rap seeing how they are doing at least as much as any other car company to find solutions that take petroleum out of the transportation equation.

With that said, I found myself scratching my head trying to absorb this latest news out from GM. In principle at least, it seemed as if the Environmental Protection Agency (EPA) had just given the Volt a 230 mpg fuel economy rating, more than 10 times the average fuel economy of other cars on the road. Fantastic or fantastical?

One can be excused for having pitched one’s eyes in that too familiar arc with an element of pessimism upon hearing this. In the midst of a political, fiscal and public relations nightmare, GM manages to pull this arrow out of its R&D quiver, hitting a bulls-eye with the news media. Let the conspiracy theories begin: the EPA, the federal government agency charged with developing rules for fuel ratings, just created the rule that calculates the Volt fuel economy at 230 mpg – more than 10 times the average vehicle on the road today. And GM’s principle owner, at 60%, is … the federal government.

Or just maybe we’re witness to something genuinely revolutionary – an opportunity for those who have been railing about automobiles for years to climb off of their green dais built of cork and mud into – gulp – a Chevrolet. Perhaps after all of the chatter and hype, the American public is finally getting what it has been clamoring for, and GM is really capable of changing with the times after all.

Being in a university town, hopefully more than a few folks here will wonder what exactly is behind GM’s lofty number. Well, that is where it get’s fun. My breakdown is below but I’m hopeful that people with more alphabet soup after their last name will weigh in on the comment lines.

Get Out Your Calculators

Here is some background to provide the proper context for the subsequent calculations. The EPA is chartered with coming up with the formulas and testing procedures that dictate how car companies will calculate fuel ratings to their cars. This isn’t just an exercise. Automakers can incur heavy fines if they can’t demonstrate that their fleets meet the Corporate Average Fuel Economy (CAFE) benchmarks mandated by the government.

For the Volt, and other electric vehicles, the EPA calculates the rating, in part, based on how many kilowatt hours (kWh) are used to go 100 miles. GM says the Volt will use about 25 kWh.

So with that, let’s do some math. To do this I offer you no less than four calculations and ratings.

For the first number we have my math, which I would call the “simple” formula, seeing that it took me 10 minutes to come up with it.

If it costs about 11 cents on the average for a kilowatt-hour (the national average), to go 100 miles using 25 kWh would cost approximately $2.75. Compare that to a car getting 20 mpg – about the average for cars and light-duty trucks on the road right now. Using a national average of $2.60 per gallon of gasoline (visit GasBuddy.com to see your region), the same mileage costs $13 on our benchmark “pretend” gasoline vehicle. So the straight math tells us that the gasoline equivalent is about 4.7 times as much, putting our “simple” calculation for the Volt at about 95 miles per gallon. Not bad, but not anywhere close to 230 mpg. Yes, this calculation is imperfect, as it does not take into account whether or not the car ran all-electric or in both electric then gasoline modes. And of course as the price of gasoline fluctuates and the benchmark vehicle changes, so does the answer. But it is a simple start.

Of course, the EPA doesn’t like things to be that simple, otherwise I could just run the whole place myself with a laptop and a Twitter feed. Instead, they have conducted studies on the driving patterns of about 80,000 people and, based on those driving patterns, concluded that the average Joe (or plumber or six-pack drinker) is driving in a particular way. These “driving cycles” are used in coming up with the mileage.

The EPA takes these driving cycles – there are different ones for different scenarios like city and highway, by the way – and calculates the fuel efficiency of the Volt over a cycle, assuming one starts out with a full charge on the battery pack.

A Little More Complicated

Now we explore the second number, 230 mpg. The cycle is roughly 50 miles, and the fully charged Volt goes 40 miles on its initial battery charge, and then consumes a fifth of a gallon of gasoline to go the remaining 10 miles.

The very simple math – no more complicated than the scenario above – says that if the car made it 50 miles on one-fifth of a gallon … guess what? The car will go 250 miles per one gallon (250 mpg). The test cycle itself isn’t quite 50 miles, and there are some inefficiencies one needs to build into any powertrain system versus the theoretical world, so in the end, 230 mpg was probably a safe bet and one GM was willing to stand by, assuming everyone is inclined to take this approach at face value.

But hang on – what about all of the “fuel” that goes into that first charge of the battery pack? Surely we can’t ignore that. Seeing that electricity isn’t free at the moment, and has its own inherent energy capacity, what is the mileage relative to gasoline (if you’re not a fan of math or making life more complex than it needs to be, skip ahead six or seven paragraphs.)

And so we have the third number.

Gasoline has an energy density of 114,000 BTU/gallon. A kilowatt hour has 3,400 BTUs/kWh, so it takes 33.59 kWh to equal one gallon of gasoline (which, by the way, is why gasoline has been so popular).

This puts the conversion factor at 33,590 from watt hours to gasoline. Unfortunately, the EPA gets 33,705 so I will use their number instead, since I am using the calculator on my Mac.

Now take the fuel economy in terms of watt hours to go 1 mile (remember GM says 25 kWh to go 100 miles, so 250 watt hours to go 1 mile) and divide that into the conversion factor: 33,705/250(wh/mile) = 134.8 mpg. So in electric mode, the Volt is getting 135 mpg – much closer to my “simple” calculation result.

Of course, now this completely ignores the gas mileage that ensues after 40 miles when the onboard gasoline-driven recharger kicks in to top off the batteries. It does this when the battery is at 30% capacity and tries to keep things above that line until you can recharge.

Here GM provides us with our fourth and final number. When the engine is on, the Chevy Volt is getting 62 mpg – about 12 mpg better than a Prius, but nowhere close to the jaw-dropping 230 mpg previously stated.

What to Believe?

Deciding which answer to believe is complicated in itself. After all, it is the EPA’s own rating formula that provided the 230 mpg and GM is unlikely to make such a dramatic claim without some way to use the EPA as a backstop for the media’s fastball pitches. On the other hand, it doesn’t stand to reason that the car can get 135 mpg in electric mode, 62 mpg in gasoline/electric mode and somehow walk away with 230 mpg.

My only thought is that the EPA’s complete model for fuel economy calculations is so complex and so outdated that trying to assign a fuel economy rating in miles per gallon to an electric vehicle is like trying to publish a web page with a Heidelberg four-color offset press.

This is likely to get even more complicated as the EPA considers rules that will provide ratings for electric-only modes and composite modes (sort of the city/highway equivalent). And the EPA already is running for cover, having issued this statement the day after GM’s 230-mpg revelation: ”EPA has not tested a Chevy Volt and therefore cannot confirm the fuel economy values claimed by GM.”

To make matters worse, Nissan just unveiled its Leaf all-electric vehicle – no onboard recharger fueled with gasoline. The company says it can go 100 miles on a single charge (of course, when you run out, you better be close to a wall socket).

Taking the EPA’s formula using the LA4 driving cycle, Nissan calculated that the Leaf – a four-door sedan much like the Volt – gets 367 mpg, trumping the Volt by a wide margin (apparently Americans can’t even make fuel efficient cars fuel efficient.) Note that the 367 miles per gallon rating is for a car without a drop of gasoline, never mind a gallon, on board.

Luckily for GM, Nissan and the EPA, the public isn’t likely to dive too deeply into the calculus. NBC’s Today Show swallowed the fuel economy rating whole, with no mention of how GM or the EPA arrived at the number. CNN ran the 230 mpg number in their endless news cycle without any reflection on the calculation. As far as the news media seems to be concerned, if the government says it’s true, it must be true. Great.

What the public is more likely to listen to will be the sticker price on these new EVs. GM has floated that the Volt will come out around $40,000. Just by comparison, a 2010 Mercedes Benz C-Class, roughly the same size as the Volt, comes in just over $35,000 nicely loaded.

And therein lies the rub – whether it is flying cars, high-speed rails, or electric vehicles. Worse than not getting what we want can be getting what we want. And now the bill for what we all asked for incessantly – incredibly high fuel economy in a four-door sedan – appears to be coming due.

In truth, I hope the calculation proves to be true through some far more complex equation that takes into account the vagaries of regenerative braking and the leftover 30% battery capacity after the driving cycle is finished. I wish I could explain the number just so I could be more preachy and tell GM’s critics  to kiss Rick Wagoner’s posterior (some folks in the Senate get first pucker), as the Volt was conceived under his watch. Having a vehicle that provided 10 times the fuel economy of today’s average car would solve an extraordinary set of seemingly intractable problems, from Middle East oil imports to climate change and the environment.

But for the public to buy into the hype, the car companies had better be sure they all are speaking from the same playbook. In principle, that’s the EPA’s job, but in fact we don’t buy cars from the EPA (well, sort of, if you think about it). It’s up to GM, Nissan and the half dozen other manufacturers planning all-electric or hybrid electric vehicle production in the next few years to give car buyers something solid that really justifies the added cost of owning an EV.

About the author: Rob Cleveland is CEO of ICON Creative Technologies Group and a co-owner of Grange Kitchen and Bar in Ann Arbor.

Rob Cleveland

I held back submitting this monthly column until the end of March to see what latest theatrics would wash over the auto industry. I wasn’t disappointed. The Obama administration looked over the homework submitted by GM and Chrysler – homework designed to demonstrate how they were going to get out of their collective messes – and sent them back to detention to do it over again.

On top of it all, long-time CEO at GM Rick Wagoner was summarily dismissed, as if one lone auto executive had been responsible for creating an unworkable fiscal structure and a corporate culture developed over decades of booms and busts in the auto business. And just for good measure, the government is insisting that Chrysler and Fiat hook up – something they were bound to do anyway – making this requirement the equivalent of forcing children to eat dessert.

Those inside the industry recognized the Obama administration’s reply for what it is – political theatre. Only 16% of Americans polled believe the auto industry should get additional loans, making any decision to give GM and Chrysler more money…toxic. Obama had to scold the two companies, and chastise them for not being aggressive enough in their restructuring plan to show that the money he is bound to give them came after careful review and critique. And Wagoner? Bob Lutz, GM’s vice-chairman, called it throwing the virgin into the volcano to appease the gods a few months ago. I’m having trouble picturing Mr. Wagoner in a hula skirt, but the analogy fits.

Despite all of the pronouncements and lecture, something major is missing from the activity. It is an opportunity not just to save GM and Chrysler, but also to change the fundamental landscape of the auto industry and our energy consumption patterns across America. Sound too far-fetched, too grandiose? Well so does universal health care and rebuilding our education system, but I expect the Obama administration to handle these problems too.

Government’s job is not to try and decide how many employees GM should have, or whether or not a tie in with Fiat is a good idea. Government’s job should be to instigate fundamental change. As part of the loan package, the Obama administration could require GM and Chrysler to roll out their production-ready electric vehicles in 2010, offering the first real step towards a fundamental shift in how Americans get around and what they consume in order to do it.

Are these cars ready? GM and Chrysler both have pre-production models that have been driven by hundreds of people, including the hypercritical automotive press. The general consensus is that they are as good as any pre-production model can be. GM and Chrysler are not exactly bullish on how profitable the vehicles will be once they are in showrooms, but it seems pretty clear that they’re not making money on their gas-powered cars and trucks anyway, so why not at least lose money on something that shifts the environmental burden and the energy focus to the electricity industry.

If this kind of authoritarian mandate sounds too socialist, you’re close, because the Chinese are doing exactly this. The New York Times reports that Chinese leaders are planning to pour vast government resources into the development of electric vehicle technology and EV production. This comes from the very top down, meaning they have the means and the political will to actually pull off this grandiose plan.

Make no mistake; the Chinese aren’t doing it to save the planet from global warming or pollution (much of the new electricity demand in China will likely come from coal or nuclear power plants). Instead, they are eliminating a massive liability – their dependence on foreign oil. Most of China’s oil comes in from the Middle East, and must take a long sea route to show up in Chinese ports. The U.S. has a pretty big navy. Actually, it is considered the best and the biggest in the world. So the math isn’t hard. Either the Chinese government builds a massive navy that can go head to head with the U.S. to guarantee its energy security, or it reduces oil imports to negligible volumes by developing technology solutions that also could also be exported around the world, making the Chinese government even more money.

Meanwhile, back in Washington D.C. and Detroit, government is fretting over details about projected U.S. vehicle market volume (not even Nostradamus knows where that is going) and standalone viability casting a wafer-thin veneer over the obvious political subterfuge. I’m not advocating communism by any stretch, but if the executive branch is going to make a decision about the car companies unilaterally anyway, why not step up and make a decision to promote real and resounding change that will live on for generations.

Call it a silver lining, lemonade out of lemons, making the best of a bad situation. Whatever the label, the ideal confluence of events is upon us: needy car companies, a president who has made energy efficiency a keystone of his administration and a genuine shift in consumption patterns made by the American public that are more sensitive to the environment.

Change. Hopefully it won’t just be a tidy campaign slogan. If it is, you can bet the Republican Party – the authors of this miserable state of affairs – will be using exactly the same theme to rebuke the incumbent in 2012, blaming him for the failure of our manufacturing base, and the lack of progress in reducing our dependence on foreign oil. My hope is that President Obama realizes the opportunity in front of him and acts in a way that realizes those lofty goals he now is obliged to execute. 

About the author: Rob Cleveland is CEO of ICON Creative Technologies Group and a co-owner of Vinology Restaurant in Ann Arbor.