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Bugatti Automobili, S.p.A.; Grant of Petition for Temporary Exemption From Standard No. 208

American Government Special Collections Reference Desk

American Government Topics:  National Highway Traffic Safety Administration, Bugatti EB110

Bugatti Automobili, S.p.A.; Grant of Petition for Temporary Exemption From Standard No. 208

Christopher A. Hart
Federal Register
March 11, 1994

[Federal Register: March 11, 1994]


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DEPARTMENT OF TRANSPORTATION
[Docket No. 93-77; Notice 2]

 
Bugatti Automobili, S.p.A.; Grant of Petition for Temporary 
Exemption From Standard No. 208

    Bugatti Automobili, S.p.A., of Modena, Italy, petitioned for a 
temporary exemption until November 1, 1995, from the automatic 
protection requirements of Federal Motor Vehicle Safety Standard No. 
208, Occupant Crash Protection. The basis of the petition was that 
compliance would cause substantial economic hardship.
    Notice of receipt of the petition was published on December 10, 
1993, and an opportunity afforded for comment (58 FR 65008). This 
notice grants Bugatti's petition.

Petitioner's Hardship Arguments

    Under 15 U.S.C. 1410(a)(1)(A), section 123(a)(1)(A) of the National 
Traffic and Motor Vehicle Safety Act (the Act), the Administrator may 
provide a temporary exemption upon a finding that ``compliance would 
cause substantial economic hardship and that the manufacturer has, in 
good faith, attempted to comply * * *.''
    The following is a summary of Bugatti's petition. Bugatti was 
formed as an Italian corporation in 1987 for the purpose of 
manufacturing automobiles. It is 80.66% owned by Bugatti International 
Holding, S.A., a Luxembourg corporation, which between 1987 and 1994 
will have invested in excess of $115,000,000 in facilities, personnel, 
research and development. Four years after its founding in 1991, 
Bugatti presented a prototype vehicle to the public. The factory was 
completed in 1992. Production of its first model, the EB 110, began in 
April 1993. As of the date of Bugatti's petition, ``fewer than 50 cars 
have been produced.'' As the company only began realizing income with 
the commencement of sales in 1993, its cumulative net losses from 1987 
through the latest fiscal year preceding the filing of its petition 
exceed $30,000,000.
    In its early years, the company's focus was to establish itself and 
to commence sales in markets other than the United States. The 
company's permanent management team was not in place until 1991, and 
its permanent engineering team was finalized only in 1993. Initially, 
it ``seriously considered not even coming to the US at all'' because of 
``product liability exposure and insurance, homologation costs, and the 
often volatile nature of the high performance/exotic car market in the 
United States.'' In the spring of 1993, however, it made the decision 
to enter the U.S. market and intends to do so in mid-1994. Because of 
the requirement in the Intermodal Surface Transportation Act of 1991 
mandating the phase-in of airbags beginning in September 1996, the 
company decided not to develop an automatic belt system but, instead, 
to provide an air bag system from the beginning as a means of complying 
with Standard No. 208.
    Lacking the in-house engineering staff capable of developing an air 
bag system, and concurrently with its decision to enter the U.S. 
market, Bugatti began a search to locate an ``engineering design and 
development firm to manage Bugatti's air bag project.'' Fourteen 
companies were approached. In September 1993, the proposal by Lotus 
Engineering was accepted. The cost set forth in the proposal is ``in 
excess of $1.2 million (not including the cost of the vehicles to be 
crashed).'' The company anticipates that it will be able to commence 
production of air bag equipped vehicles in April 1995, well before the 
end of the 2-year exemption it has requested.
    Late in August 1993, Bugatti International Holding, signed a 
contract to purchase Group Lotus plc, including Lotus Engineering. 
Lotus is also a manufacturer of motor vehicles, whose production in 
1992 was 688 units. According to the petitioner, Lotus ``lost over $35 
million in 1992 on revenues of approximately $92 million.'' The 
purchase of Lotus would be financed by capital investments into Bugatti 
International Holding earmarked for that specific purpose.
    In the absence of an exemption, the company projects continuing net 
losses through 1994.

Arguments Why An Exemption Would Be in the Public Interest and 
Consistent With Traffic Safety Objectives

    In order to grant an exemption, the Administrator must also find 
that the exemption is in the public interest and consistent with the 
objectives of the Act. In support of its petition, Bugatti informed 
NHTSA that it ``will make every effort possible to design its air bag 
system so that it can retrofit with air bags all vehicles sold under 
the exemption.'' It also argued that it does not expect to sell more 
than 100 cars under the exemption. Each car, equipped with a three-
point belt system, would be labeled with a seat belt use reminder. 
Further, all vehicles will meet all other Federal motor vehicle safety 
standards including amended Standard No. 214 Side Impact Protection in 
advance of the requirement to do so.
    No comments were received on the petition.
    The primary finding that must be made by the agency with regard to 
Bugatti in order to grant its petition is that ``compliance would cause 
substantial economic hardship'' (15 U.S.C. 1410(a)(1)(A)). The phrase 
``substantial economic hardship'' is undefined, and there is scant 
legislative history to provide an interpretation of these words. The 
purpose that was cited on the House floor while the legislation was 
pending was the need to protect the ability of a small U.S. 
manufacturer to ``continue production of its automobiles while it 
tooled to adapt the new safety equipment, which it purchases from big 
automobile manufacturers, to its own automobiles.'' (Remarks of Rep. 
Springer, Congressional Record, October 13, 1973, 38047 and 38048). 
Thus, to require immediate compliance of the manufacturer in question 
would have resulted in a cessation of production until compliance was 
achieved. The obvious result of cessation of production is an eventual 
cessation of sales and generation of revenue. In other words, the 
hardship example cited by Rep. Springer is directly related to the 
effect of a denial upon a small manufacturer's present income.
    In implementing the statutory provision, NHTSA requires a 
petitioner to file corporate balance sheets and financial statements 
for the past three fiscal years (49 CFR 555.6(a)(1)(iv)), and a 
projected balance sheet and financial statement for the year following 
any denial of a petition (49 CFR 555.6(a)(1)(v)). A petitioner is also 
offered an opportunity to discuss ``any other hardships (e.g., loss of 
market) that the petitioner desires the agency to consider.'' (49 CFR 
555.6(a)(1)(vi)).
    The touchstone that NHTSA has used in determining the existence of 
substantial economic hardship is an applicant's financial health as 
indicated by its income statements. NHTSA has tended to consider a 
continuing and cumulative net loss position as evidence per se of 
hardship. See, e.g., Ferrari, Docket No. EX89-5 (55 FR at 3786); 
Maserati, Docket No. EX88-2 (53 FR at 34630). The theory behind NHTSA's 
rationale is that, if a company with a continuing net loss is required 
to divert its limited resources to resolve a compliance problem on an 
immediate basis, it may be unable to use those resources to solve other 
problems that may affect its viability. The agency has considered this 
especially important in its treatment of corporate petitioners during 
their infancy.
    NHTSA has considered all these foregoing factors in the finding 
that it has reached with respect to Bugatti. The petitioner's income 
statements indicate the company's cumulative net losses to date of 
$30,000,000. Under ordinary circumstances, that fact ought to enable 
the Administrator to conclude that the company has made a persuasive 
hardship argument. Yet there are other factors here which must be 
weighed in reaching a decision that is consistent with the hardship 
legislation as NHTSA interprets it. The most important of these factors 
is the effect of a denial upon the company. A denial will not force the 
company to terminate production until compliance with Standard No. 208 
is achieved, because the United States is only one of a number of 
markets that the company is pursuing. A denial will not result in the 
withdrawal of funds by investors as completion of a total of 
$115,000,000 investment is scheduled for the current year. A denial 
will not result in loss of market in the United States or create 
hardship for its dealers here because the company has not yet imported 
vehicles for sale through a franchised dealer network. The primary 
recognizable effect of a denial is that the company will be unable to 
introduce itself to the American market until if fields a fully 
complying car. According to the petition, it anticipates that 
compliance will be achieved during April 1995, approximately 9 months 
after it would have begun importation of an exempted vehicle. Given the 
nature of the EB110, it appears that sales which would otherwise have 
occurred during this period will only be deferred rather than lost.
    In search of a rationale for an affirmative finding of hardship, 
NHTSA returns to the criterion implicit in Rep. Springer's example, the 
effect of a denial upon present income. The effect of a denial, 
according to Bugatti, is that it will experience a net loss of 
$2,000,000 rather than the $10,000,000 profit projected with the 
exemption in place. Thus, a denial would have a potential $12,000,000 
impact upon the company, contributing to an increase, rather than a 
decrease, in the cumulative net loss figure of $30,000,000. Even though 
the profits might eventually be realized with the sale of conforming 
cars were the petition denied, the delayed profits will have the effect 
of deferring down the line the additional profits that would be 
realized, and will not affect the net losses attributable to a denial. 
This has an impact upon the company's cash flow situation. NHTSA has 
been given to understand that the petitioner has been able to sell only 
approximately 30 vehicles as of mid-January 1994 because of the 
economic situation in Europe, and that this is below the sales that had 
been projected for the EB 110. Thus, it is the effect that a denial 
would have upon current income that NHTSA believes would create 
substantial economic hardship. This situation is to be contrasted with 
the agency's denial of a similar petition by Ferrari where the effect 
of the agency action was to reduce anticipated profits from $20,000,000 
to $10,000,000, and no loss of cumulative loss position existed (55 FR 
3785).
    With respect to the company's good faith efforts to meet Standard 
No. 208, the company has argued that it did not commit itself to 
entering the American market until early 1993. While it might be 
assumed that a motor vehicle would not be designed today without the 
American market in mind, the United States is not invariably attractive 
to small manufacturers. The EB 110 appears to be one of a number of 
expensive, high performance vehicles that have been developed with no 
original intention of sale in the United States. Examples of such 
vehicles include Britain's Jaguar XJ220, McLaren, and Lister. Accepting 
the petitioner's statement that the decision to offer the vehicle for 
sale in the United States was not made until 1993, the agency is led by 
the solicitations and decisions reached in the period preceding the 
filing of the petition, and Bugatti's anticipated ability to comply by 
April 1995 to conclude that the petitioner has made a good faith effort 
to meet the automatic restraint requirements of Standard No. 208.
    The agency must also find that an exemption is in the public 
interest and consistent with the objectives of the Safety Act. In 
providing the authority to establish safety standards, Congress 
expressed its intent that the public continue to be afforded a wide 
choice of motor vehicles. The agency is cognizant that granting the 
petition would not appear to have a discernible impact upon safety. 
Bugatti now anticipates that, at the most, about 50 vehicles would not 
be provided with automatic restraints. Further, it is actively pursuing 
the possibility that these could be retrofitted to comply with driver 
airbags.
    For the reasons expressed above, it is hereby found that to require 
Bugatti to comply with Standard No. 208 would create substantial 
economic hardship, and that the petitioner has made a good faith effort 
to comply with the standard. It is further found that an exemption for 
Bugatti would be in the public interest and consistent with the 
objectives of the Act. Accordingly, Bugatti Automobili S.p.A. is hereby 
granted NHTSA Exemption No. 94-1 from paragraph S4.1.4 of 49 CFR 
571.208 Motor Vehicle Safety Standard No. 208 Occupant Crash 
Protection, expiring November 1, 1995.

    Authority: 15 U.S.C. 1410; delegation of authority at 49 CFR 
1.40.

    Issued on: March 8, 1994.

Christopher A. Hart,
Deputy Administrator.
[FR Doc. 94-5774 Filed 3-10-94; 8:45 am]
BILLING CODE 4917-59-M

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