The Game Changer: How the Car Industry Is Adapting to New Fuel Economy Rules

Last Updated Apr 7, 2010 4:05 PM EDT

Last week, the Environmental Protection Agency unveiled its 1,469-page final rules setting standards for greenhouse gases and fuel economy for model years 2012 to 2016.

And the new standards, which will require car fleets to achieve 35.5 mpg by 2016 (or 250 grams of carbon dioxide per mile), are already bearing fruit, in terms of dramatic product announcements (and contingency plans) from carmakers that also have to meet similarly stringent rules in Europe.

One possibility: Mercedes-Benz' might turn all of its flagship S-class into hybrids. "A variety of different scenarios are being laid out," said Mercedes spokeswoman Donna Boland. "Right now it looks to Germany that hybrids are the most promising way to go. But there will be discussions. Stuttgart does not make unilateral decisions."

Some U.S. Mercedes dealers reacted with alarm to the possibility. A New England sales manager, who asked for anonymity, told me, "Americans love high-performance cars and big V-8s. To me, the feasibility is very slim." Tommy Baker, chairman of the Mercedes-Benz dealer board, told Automotive News that, for S-Class buyers, the "goal is not gas mileage."

Mercedes' plans could include leaving the V-8s intact but letting the electric systems take up some of the slack with start-stop mechanisms and electric-only mileage. It's unlikely that S-Class cars would lose much horsepower.

On Wednesday morning, the Renault-Nissan Alliance and Daimler announced they they had agreed to "strategic cooperation" -- ie, not quite a merger -- aimed at bringing new small car platforms to the Mercedes brand while giving Alliance brands such as Infiniti some high-end glamor. The small-car collaboration is clearly aimed at complying with the fuel economy/greenhouse gas rules in Europe and the U.S.

The two parties exchanged 3.1 percent stakes in each other's companies, a deal each side valued at approximately $3.6 billion. One of the first fruits will be a common platform for the next-generation Smart (in two- and four-seater variants, plus a convertible) and the Renault Twingo city car. The cars will be built alongside each other in European plants, one owned by Daimler, the other Renault.

This could be just the beginning. "I think we'll see a wave of such partnering, though maybe not full-scale mergers," said David Cole, chairman of the Center for Automotive Research. "When you look at the coming fuel economy standards, that's another reason for them to come together."

The Alliance will build three- and four-cylinder engines for future scaled-down Mercedes-Benzes, and Daimler will reciprocate with engines for Nissan's luxury brand, Infiniti. Daimler has a lot invested in its high-end engine technology, and was reluctant to freely offer its power plants to Chrysler even when they were part of the same company. So it will be interesting to see what will happen this time. The Alliance's Carlos Ghosn is very canny, and will work hard to ensure that Stuttgart gives up the goods.

I think the Daimler-Alliance collaboration could help them both, and think they are probably right to keep it limited, too. The companies are vastly different, and a full-scale marriage could prove as disastrous as the Daimler-Chrysler merger.

Mercedes S-Class hybrids? I'm less sanguine that there will be enough customers for them, especially in the U.S. The best-selling hybrid here remains the much more modest Toyota Prius, and Mercedes' existing S400 hybrid is unlikely to be a high-volume vehicle.

I interviewed BMW's U.S. chief, Jim O'Donnell, in New York on Tuesday, and he said his Munich-based company is unlikely to follow Mercedes' lead with the comparable 7-Series. And he predicted that the forthcoming (in June) ActiveHybrid 7 would not be a huge seller in the U.S. "It won't be thousands," he said. "We're going to let the market decide what kind of volume it has."

Photo: Flickr/Malyousif