On Monday congressional Democrats sent a bailout proposal to the White House that would provide $15 billion in bridge, or short-term, loans to the Big Three. The White House responded positively to the plan Wednesday. Small car companies are concerned because the money comes from a fund that was supposed to benefit the entire auto industry, not just Ford, General Motors and DaimlerChrysler.
Section 136 of the Energy Independence and Security Act, signed into law last December, originally was intended to serve as a loan program to help auto and parts manufacturers create more efficient cars. Now start-up companies are concerned those loans will no longer be available if the auto bailout drains the fund dry.
This will stymie innovation, stunting the industry's ability to produce fuel-efficient cars, said Reuben Munger, chairman and co-founder of Bright Automotive, a small, Indiana-based auto company.
"Tremendous innovation resides within small companies in both vehicle development and specific components, such as batteries (for hybrid and electric vehicles)," Munger told representatives Tuesday at a hearing in the House Select Committee on Energy Independence and Global Warming. "Taxpayer-supported incentives meant to achieve a specific intent must be open to all U.S. companies and should be allocated to programs and companies that provide the greatest return relative to funds invested."
Bright Automotive has developed a price-competitive, 100-mile-per-gallon, plug-in hybrid electric vehicle, Munger said, and the company is on target to produce 50,000 per year beginning in 2012.
In the current economic climate, the availability of loans is crucial for getting vehicles like this to the market, he said. Bright Automotive wants Congress to set aside at least 20 percent of the loan authority in Section 136 for smaller firms.
Precluding small companies from loans to save the big auto companies rewards the wrong people and will prevent real advancements toward fuel efficiency, said Rachel Konrad, spokeswoman for Tesla Motors, maker of the Tesla Roadster, a fully electric vehicle.
"Now Congress is turning over a large portion of that fund, which was earmarked for fuel-efficient vehicles ... and giving it to the companies that have resisted building fuel-efficient vehicles," Konrad told United Press International. "It's supremely ironic."
Konrad emphasized that while Tesla applied for two loans through Section 136 totaling $400 million, the money would go to clean technology projects, not to everyday operations.
"We don't need a bailout," she said.
However, companies like Tesla don't necessarily want the Big Three to go out of business because they're potential buyers of the parts they produce, such as the components for electric cars Tesla builds. Saving the big companies is also necessary to getting fuel-efficient cars on the road, said Richard Curless, chief technical officer at MAG Industrial Automation Systems, a leading parts manufacturer.
"We need the Big Three to handle volume," Curless said at Tuesday's hearing.
The cost of hybrid and electric vehicles won't fall unless industry starts to produce them in large enough quantities, Curless said, pointing to the change in price for computers as industry produced more and more of them. While it's good that small companies are planning on rolling out innovative, fuel-efficient vehicles -- such as Bright Automotive's plan to produce 50,000 annually -- the quantities they can turn out just aren't going to cut it, Curless said.
"We're talking about millions of vehicles," he said.
But there's no way to guarantee that the Big Three will actually use the cash they're lent to produce efficient cars unless the law requires them to do so, said Joan Claybrook, president of Public Citizen, a non-profit consumer advocacy organization.
"Again and again these companies make promises to do things and then don't," Claybrook said. "Anything we want these manufacturers to do has to be in the law, because then if it doesn't happen, organizations like Public Citizen can sue to make it happen."
One of the conditions Claybrook thinks should accompany loans to the Big Three is a mandate to increase fuel efficiency above and beyond the requirement passed by Congress in 2007, which mandates 35 mpg by 2020.
"If they're going to get these loans, they've got to go beyond that by at least 20 percent," she said.
Select Committee Chairman Edward Markey, D-Mass., agreed conditions for fuel efficiency must be included.
"With an allowance you need to attach rules," he said.
However, increasing efficiency standards for the Big Three while foreign companies continue unfettered by such rules could be deadly for Detroit, said Peter Morici, professor of international business at the University of Maryland.
"If we impose fuel-efficiency standards on these companies that the Japanese don't have, and gasoline falls to $1.50 a gallon and stays there, (the Big Three) are at an economic disadvantage," Morici told representatives Tuesday.
Morici, who favors a managed bankruptcy over a bailout for the Big Three, said going down the path of increased regulations for Detroit will lead to continual government oversight of the industry and perpetual dependence on Washington for money.
"If you give this money, they'll be back year after year," he said.
Even if the carmakers start producing efficient vehicles, it doesn't necessarily mean they'll increase their profits, said Adele Morris, deputy director of climate and energy economics at the Brookings Institution, a Washington think tank.
"It's fine for Congress to exhort automakers to build more fuel-efficient cars and advanced hybrids and electric vehicles, but over the long run it's no favor to them unless the demand for those cars builds along with automakers' production of them," Morris told UPI. "To control greenhouse gases efficiently and to gradually turn over the vehicle stock -- and transportation generally -- towards more climate-friendly technologies, the most efficient approach is a credible and growing price on carbon."
Congress could do that by attaching a cost to carbon emissions, either through a tax or a carbon-trading scheme.