Fiat Chrysler runs short on time to fix emissions problems in U.S.

WASHINGTON (Bloomberg) -- Fiat Chrysler Automobiles is running short on time to fix its emissions record in the U.S.

For the fourth consecutive year, the maker of Ram pickups and Jeep SUVs finished last in a 2014 Environmental Protection Agency ranking of carbon-dioxide emissions among big automakers. And the agency plans to accelerate its CO2 targets sharply beginning next year.

To comply, FCA must improve faster than bigger and richer rivals who also are straining to cut emissions. Failing that, it might be forced to stop building some of the light-duty trucks that Bloomberg Intelligence analyst Kevin Tynan says deliver 90 percent of its profit. Or, to keep making them, it could be forced into a merger.

"FCA doesn’t have the resources to fulfill the emissions requirements," said Maryann Keller, an independent auto-industry consultant in Stamford, Conn. "It's not a company that can survive in its present form."

To fight global warming, the EPA will cap tailpipe CO2 emissions at 163 grams per mile in 2025. FCA reported an average 428 grams per mile in 2014, compared with 302 for industry-leading Mazda.

FCA also faces tougher fuel-economy targets by 2025. The EPA requires automakers to boost average miles per gallon by 50 percent to 54.5 mpg. Meanwhile, California requires as much as 15 percent of sales come from zero-emission vehicles powered by fuel cells or batteries.

CEO Officer Sergio Marchionne describes these mandates as both expensive and an existential threat. He has been saying since fall 2014 that automakers should face the challenges and boost chronically low profits by merging. General Motors, which he has mainly focused on, said no.

“Nobody needs a merger with Chrysler,” Keller said.

Rely on Ram

FCA has struggled to meet fuel-efficiency requirements since the U.S. first set them in 1975, when Fiat and Chrysler were separate companies. Today it relies on Rams, Jeeps and minivans: With gasoline at about $2 a gallon, 78 percent of its U.S. sales volume comes from light-duty trucks, compared with 70 percent at GM and 69 percent at Ford Motor, according to Autodata Corp.

Its truck fuel economy was worse than GM’s in the 2014 model year, according to EPA data, with pickups averaging 17.3 mpg compared with 19.2 mpg. This excludes two-wheel-drive compact SUVs that help boost ratings, which accounted for 8.9 percent of FCA’s fleet and 13.4 percent of GM’s.

To offset the drag on fuel efficiency, FCA uses credits the EPA offers for green technologies; it also buys credits from competitors who meet the targets. It bought 8.2 million, six times more than the second-biggest buyers, in the five years ending 2014, according to an EPA comparison. In the 2013 and 2014 model years, it purchased 2.1 million from Tesla Motors Inc. Toyota Motor Corp., Honda Motor and Nissan Motor also sold credits during the five-year period, the report said.

Price of credits

Neither the agency nor FCA spokesman Eric Mayne would disclose the price, but people familiar with such transactions said it was about $250 million, based on going rates.

The EPA report reveals FCA’s strategy so far. In 2014, the company made no use of credits for selling plug-in or zero-emission models. Instead, it earned more than any other automaker by selling vehicles running on fuel containing as much as 85 percent ethanol and by making air conditioning and interior ventilation more efficient.

FCA had 13.8 million credits saved up by September 2014, the latest date for which data are available. But as regulators tighten CO2 limits, the credits are getting scarcer and more expensive, the people familiar with the market said.

Possible fines

The EPA doesn’t levy fines for excessive CO2, but its rules might cause FCA to rethink its dependence on light-duty trucks. And if the company continues lagging on fuel economy, it risks paying fines to the National Highway Traffic Safety Administration. These could total $55 per vehicle for every mile-per-gallon of non-compliance with the EPA target. Whatever happens, the company intends to comply with both mandates, Mayne said.

So far, the EPA has shown no interest in bending rules for FCA or anybody else, since total industry compliance was ahead of schedule for 2014. "The results have been nothing short of spectacular," Christopher Grundler, EPA’s director of the Office of Transportation and Air Quality, said during a Jan. 13 speech in Detroit.

FCA’s relations with federal regulators already are strained, just as it’s fighting accusations -- which it denies -- that it encouraged U.S. dealers to falsify sales. Last year, NHTSA fined the company a then-record $105 million for dragging its feet on safety recalls. The company’s quality reputation is suffering, too. It ranked last in the 2015 J.D. Power & Associates survey on quality after 90 days of ownership, partly because of complaints about nine-speed transmissions it installed to reduce CO2 emissions.

Central role

With new models such as the Renegade small SUV, Marchionne boosted Jeep sales in the U.S. by 25 percent during 2015. And he’s given Jeep a central role in his plan to triple net income to about 5 billion euros ($5.5 billion) by 2018.

Even so, FCA still can satisfy future government mandates by, among other things, cutting emissions from pickups, he said Jan. 11 at the Detroit auto show. He is planning a plug-in minivan and already sells the Fiat 500E battery-powered car in California and Oregon.

Marchionne’s rivals are moving faster. Ford, which is a third bigger, makes six electrics and hybrids now and said last month it will spend $4.5 billion to develop 13 more by 2020. And GM says its new 2017 Chevrolet Bolt electric car will go more than 200 miles (320 kilometers) on a charge, close to the range of Tesla’s Model S.