What a $25B auto loan might buy

Money will be used to build more fuel-efficient cars, but there won't be changes in product plans.

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By Peter Valdes-Dapena, CNNMoney.com senior writer

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The small Chevrolet Cruze, which will replace the Cobalt, is the type of vehicle that might benefit from the federal loan program.

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NEW YORK (CNNMoney.com) -- President Bush may be set to sign into law $25 billion in low-interest loans to help automakers and auto parts suppliers make fuel-efficient vehicles, but don't expect a rush of new hi-tech ultra-clean cars.

Lower-tech solutions - smaller cars with more fuel-efficient engines - will be a more immediate priority, industry analysts predict. And the money will likely be used for immediate manufacturing needs rather than for deep research.

According to the legislation, which is part of a massive spending bill that passed Congress last week, the funds must be used in the development or manufacturer of vehicles that are at least 25% more fuel efficient than an average vehicle of the same type already on the market.

Loans will have to be repaid within 25 years or within the life-span of the project, whichever comes first.

The money will mostly go to manufacturing rather than development, said David Cole who heads the Center for Automotive Research in Michigan. Creating new technology is the most cost-intensive part of the process, and "a lot of the basic research is in place by now," he said.

General Motors, for example, has already said it intends to produce the Chevrolet Volt, an electric car with lithium-ion batteries, in 2010. The research for that car is largely complete, but retooling a factory to actually produce it will be a major expense.

Even in the case of a production vehicle like the Volt, don't expect to see huge numbers coming out for some time, said Cole. Manufacturers will proceed cautiously at first so they can watch out for needed improvements that can be added to later versions.

"Nobody is going to invest in 2 million units of capacity right out of the chute," he said.

Industry consulting firm AutomotiveCompass expects that GM will produce only about 25,000 Volts in the first year of production with numbers ramping up to about 60,000 per year after that.

Low-tech solutions

A 25% bump in fuel economy won't necessarily require hi-tech solutions anyway, Cole said. For instance, GM's upcoming Chevrolet Cruze small car, due to hit the market in 2010, should get 25% better fuel economy than the Chevrolet Cobalt it replaces by using a six-speed transmission and a small, turbocharged engine, he said.

Ford is also getting ready to bring out a line of small turbocharged engines that will replace larger engines in some larger vehicles.

"The vast majority of funds is going to go into something with a faster turnaround," agreed Kim Korth, president of the automotive consulting firm IRN, Inc.

Advanced research will still benefit from the loan, though, said Korth, Some of the funds freed from immediate production needs, thanks the federal loan program, will likely go into research for future products.

The money will also spill over into projects that will improve the fuel economy of other vehicles in manufactures' line-ups, but perhaps not by a full 25%, she said.

Although the bill doesn't mention any specific companies, Detroit carmakers lobbied hard for the loan program and are clearly pleased with its passage.

"We are pleased that the Congress has appropriated full funding for The Advanced Technology Vehicles Manufacturing Incentive Program," GM spokesman Greg Martin said in a written statement. "Congress clearly recognizes the need to move forward at this critical time to make available this source of capital for automakers and suppliers."

Roots of the problem

Although the loan was initially proposed to help automakers deal with new Corporate Average Fuel Economy rules, high gas prices which have resulted in a sudden consumer shift away from large trucks and SUVs and toward smaller cars, have made the loans critical for American car manufacturers, said GM's Martin.

"It's unfortunate that that's happening while there's this turmoil in the credit markets," he said.

Borrowing money is extremely expensive now, especially for companies like Detroit automakers that have weak credit ratings, Martin noted.

Ford also applauded passage of the loan package. "This is an important first step to providing access to capital for important investments in the future at a time when the capital markets are distressed," the company said in a written statement.

It's less clear if other carmakers will benefit. The rules of the loan program favor the money being spent on older production facilities rather than new ones, something that would favor U.S.-based manufacturers.

Japan-based Toyota is indifferent to the loan program, said spokeswoman Martha Voss. It is uncertain whether Toyota would qualify for loans or would feel the need to apply for them if it did. "We're sort of on the sidelines watching," she said. To top of page

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