Specifically, it has dismissed the Modena based firm's pleas that fitting an advanced airbag system to its new Huayra would cause Pagani financial hardship with a claimed cost of the system being projected at around US$4 million. In its summing up the NHTSA says: "The agency has determined that Pagani has failed to demonstrate that compliance would cause substantial economic hardship. Furthermore, the agency is unable to find that an exemption would be consistent with the public interest or the objectives of the Safety Act."

Pagani had planned to offer the new Huayra in the U.S. from 2012, the first of its supercars pitching to be road legal in this market as the Zonda C9 was never homologated stateside. The NHTSA dismissed Pagani's application on hardship grounds on the basis that the company is profitable and the only hardship to be suffered would involve a decrease in projected future profits coming from not being able to enter the U.S. market. In its detailed summary of the ruling the NHTSA notes: "Examining Pagani’s petition and supplemental submissions, it appears that the hardship from denying the petition consists of decreased anticipated profits and the inability to enter the U.S. market until it fields a fully compliant vehicle. With an exemption, Pagani projects earning €8,613,000 in net income from 2011 to 2014. Without an exemption, Pagani projects earning €5,398,000 in net income during the same period."

A detailed statement from the NHTSA to accompany the verdict offers interesting insight into Pagani and its U.S. market plans including historic production volumes, future worldwide and stateside sales targets, plans for a new factory, the US$20 million that it has so far spent to develop the Huayra and the company's revenues. The NHTSA is also quite dismissive of the standard of Pagani's submitted evidence in its statement, pointing to chopping and changing, inconsistencies and poor accounting.

National Highway Traffic Safety Administration (NHTSA) - Denial of Application for Temporary Exemption from Advanced Air Bag Requirements

Petitions against advanced airbag system requirements

The new requirements were phased-in, beginning with the 2004 model year. Small volume manufacturers were not subject to the advanced air bag requirements until the end of the phase-in period, i.e., September 1, 2006. In recent years, NHTSA has addressed a number of petitions for exemption from the advanced air bag requirements. The majority of these requests have come from small manufacturers, each of which has petitioned on the basis that compliance would cause it substantial economic hardship and that it has tried in good faith to comply with the standard. In recognition of the more limited resources and capabilities of small motor vehicle manufacturers, authority to grant exemptions based on substantial economic hardship and good faith efforts was added to the Vehicle Safety Act in 1972 to enable the agency to give those manufacturers additional time to comply with the Federal safety standards.

NHTSA has granted a number of these petitions, usually in situations in which the manufacturer is supplying standard air bags in lieu of advanced air bags. In addressing these petitions, NHTSA recognized that small manufacturers faced particular difficulties in acquiring or developing advanced air bag systems. Specifically, the agency noted that major air bag suppliers initially concentrated their efforts on working with large volume manufacturers and small volume manufacturers had limited access to advanced air bag technology.

Notwithstanding those previous grants of exemption, NHTSA has considered two key issues-- (1) whether it is in the public interest to continue to grant such petitions, particularly in the same manner as in the past, given the number of years these requirements have now been in effect and the benefits of advanced air bags, and (2) to the extent such petitions are granted, what plans and countermeasures to protect child and infant occupants, short of compliance with the advanced air bag requirements, should be expected.

While the exemption authority was created to address the problems of small manufacturers and the agency wishes to be appropriately attentive to those problems, it was not anticipated by the agency that use of this authority would result in small manufacturers being given much more than relatively short term exemptions from recently implemented safety standards, especially those addressing particularly significant safety problems. Over time, the number of petitions for exemption from the advanced air bag requirements has decreased, and several small manufacturers that previously received exemptions now produce vehicles that comply with the advanced air bag requirements. The majority of current petitions before the agency are petitions for limited extension of previously granted exemptions.

Given the passage of time since the advanced air bag requirements were established and implemented, and in light of the benefits of advanced air bags, NHTSA has determined that it is not in the public interest to continue to grant exemptions from these requirements in the same circumstances and under the same terms as in the past. The costs of compliance with the advanced air bag requirements are costs that all entrants to the U.S. automobile marketplace should expect to bear. Furthermore, NHTSA understands that, in contrast to the initial years after the advanced air bag requirements went into effect, low volume manufacturers now have access to advanced air bag technology.9 Accordingly, NHTSA concludes that the expense of advanced air bag technology is not now sufficient, in and of itself, to justify the grant of a petition for a hardship exemption from the advanced air bag requirements.

Background – Pagani, an Italian corporation, was formed in 1991 and has been producing a small number of luxury sports cars since 1999. Pagani currently produces one vehicle, the C9 Zonda, which is not sold in the United States, but the company has been developing a new vehicle, the Huayra, a two-seat sports car, which it plans on selling in the United States and for which it seeks an exemption. The Huayra Pagani submitted its original petition in 2007 and a notice of receipt was published on November 25, 2008. Pagani subsequently requested that the agency delay a decision on its petition because of changes in the company’s production plans. In 2008, 2010, and 2011, the company submitted supplementary information regarding its financial situation and its compliance efforts. This information is included in the summary below and the submissions have been posted to the docket.

Requested Exemption – Pagani originally requested a three-year exemption from "Occupant Crash Protection" which establishes the advanced air bag requirements. In supplemental submissions, the company stated that it plans on beginning the production of the Huayra at the end of 2011 and clarified its plans stating that it will certify its vehicles to comply with the 30 mph belted 50th percentile male barrier impact test. Pagani has also since stated that it plans to certify to the unbelted 50th percentile male barrier impact test in force prior to September 1, 2006 (with the unbelted sled test in S13 being an acceptable option for that requirement). Finally, Pagani indicated that it has accelerated its compliance testing and would only need a two-year exemption.

Eligibility – Pagani asserted that it produces, on average, no more than 25 vehicles per year. The company estimated that if the requested exemption were granted, it would sell 35 to 45 vehicles per year, 6 to 12 vehicles of which would be sold in the United States. The original petition stated that Pagani contracts out some aspects of vehicle development, but asserted that these are arms-length transactions.

Economic Hardship – The agency notes that the material submitted by Pagani consists of its original 2007 petition, as well as updated financial information the company provided in 2008, 2010, and 2011. In determining the existence of substantial economic hardship, we rely primarily on the most recent financial information. The original petition was based on estimated compliance costs at the time and financial projections for 2009 through 2011. Given the passage of time and the updated financial information, these projections are no longer relevant. The most recent financial records provide updated estimated compliance costs for the advanced air bag program as well as financial projections for 2011 through 2014, one set in the event an exemption is granted and one set in the event the exemption is denied. The most recent records, as well as Pagani’s accompanying descriptions, reflect the company’s current financial condition and the company’s estimates of the projected effect of a grant or denial of the exemption petition. These records, and the relevant factual information from past submissions, are summarized below.

Pagani submitted financial records from 2004 to 2010 showing net incomes ranging from €13,327 to €832,000, with a total net income of approximately €1,947,846. The company also submitted projections estimating that if the petition for exemption is denied and no vehicles are sold in the United States, the company would make an estimated €5,398,000 in net income during the period of 2011 through 2014, compared to €8,613,000 in net income during the same period if an exemption were granted. The company asserted that the difference in gross revenue between granting and denying the exemption is approximately €34,000,000, and the financial records indicate a difference in projected net income of approximately €3,215,000.

Although Pagani has realized profits in recent years, the company asserted that immediate compliance with the advanced air bag requirements will cause substantial economic hardship. Specifically, Pagani stated that the company only operates on the cash on hand without lines of credit or debt financing, and its small profit margin is necessary to guard it from market fluctuations. Pagani stated that without an exemption, it will not be able to fund the advanced air bag program, which is estimated as costing €4,000,000, from its non-U.S. sales and will not be able to enter the U.S. market until at least 2015. Finally, Pagani stated that its production capacity is currently limited to approximately 25 units per year worldwide. The company indicated that its plan is to expand its production capacity to 50 to 60 units per year worldwide by building a new factory. However, the company stated that the new factory represents a significant investment for the company and could not be justified without the revenue from U.S. sales. Accordingly, construction of this new facility cannot begin unless an exemption is granted.

Compliance Efforts – Pagani asserted that small volume manufacturers have delayed access to “off-the-shelf” systems and must wait for technology to “trickle down” from larger manufacturers and suppliers. The company further noted that because small volume manufacturers build so few vehicles, the costs of developing custom advanced air bag systems, as compared to potential profits, discourages some air bag suppliers from working with these manufacturers. In a supplemental submission, the company stated that 65 percent of its costs have been focused on developing a U.S. version of the Huayra. Pagani indicated that it has partnered with Applus+ IDIADA, a Spanish engineering services company that has previously provided advanced air bag development solutions and testing for small volume manufacturers, and Bosch Engineering GmbH to develop its advanced air bag systems. Pagani estimated that the cost of developing an advanced air bag system is €4,000,000. The project began in 2009 and was initially scheduled to be completed at the beginning of 2014, at which time Pagani would begin production of fully-compliant Huayra vehicles. As discussed above, Pagani indicated that it has accelerated its testing schedule and is requesting a two year, rather than, three year, exemption from the advanced air bag requirements. According to Pagani, the vehicles produced during the exemption period will be equipped with a standard air bag system for both the driver and passenger seating positions. Additionally, Pagani stated that it will certify its vehicles to comply with the belted 50th percentile male barrier impact test and to the unbelted 50th percentile male barrier impact test in force prior to September 1, 2006 (with the unbelted sled test in S13 being an acceptable option for that requirement).

Public Interest – Pagani stated that the Huayra comes equipped with numerous features that enhance safety, and that the granting of this exemption would be consistent with the public interest and the objectives of the Safety Act . The petitioner asserted that the vehicles incorporate design features that have significant safety benefits. These include the use of carbon-fiber technology, which provides great strength at a low weight. The fuel tank is incorporated into the carbon chassis for maximum protection, and the chassis also incorporates the monocoque protective “cell” design. Enhanced by a metal roll cage and alloy front and rear chassis subframes, the vehicle provides a significant safety benefit in the event of a crash or rollover. The monocoque design can stay rigid during repeated impacts, providing an additional source of protection in the event of a potentially penetrating impact. Pagani indicated that these features serve, in part, to increase the crashworthiness of the vehicle. Additionally, the company indicated that all exempted cars will have standard air bags. Pagani stated that the risk to the public will be minimal given that only 6 to 12 vehicles will be sold per year in the United States, each vehicle is only expected to be driven approximately 2,500 miles annually, and children will rarely ride in the vehicle. Finally, Pagani argued that if an exemption is not granted, U.S. consumer choice would be adversely affected.

In this section, we provide our analysis and decision regarding Pagani’s temporary exemption request concerning advanced air bag requirements. As discussed below, we are denying Pagani’s petition because Pagani has failed to demonstrate that compliance would cause substantial economic hardship and because we are unable to conclude that an exemption would be in the public interest and consistent with the objectives of the Safety Act.

Eligibility – As discussed above, a manufacturer is eligible to apply for an economic hardship exemption if its total motor vehicle production in its most recent year of production did not exceed 10,000 vehicles, as determined by the NHTSA Administrator. Pagani asserted that it produces, on average, no more than 25 vehicles per year. The company estimated that if the requested exemption were granted, it would sell 35 to 45 vehicles per year, 6 to 12 vehicles of which would be sold in the United States. The original petition stated that Pagani contracts out some aspects of vehicle development, but asserted that these are arms length transactions. Accordingly, we have determined that Pagani is eligible to apply for an economic hardship exemption.

Substantial Economic Hardship – Pagani asserted that the difference between granting and denying the exemption is an approximately €34,000,000 reduction in gross revenue from 2011 to 2014. Additionally, the financial records show a reduction in projected net income of approximately €3,215,000 from 2011 to 2014. Pagani stated that without an exemption, it will not be able to fund the advanced air bag program, which is estimated as costing approximately €4,000,000, from its non-U.S. sales. The company further stated that, in the event of a denial, the company will not be able to enter the U.S. market until at least 2015. Additionally, denial would postpone construction of a new factory needed to increase the company’s production capacity.

In its original petition, Pagani also asserted that, without an exemption, it would be unable to fund the €13,000,000 in investment costs it would have to make in the Huayra from 2009 to 2011. In a July 9, 2010 email to the agency, Pagani briefly noted that investment in the Huayra had risen to €20,000,000 and that this would be funded by its net income from 2008 through 2010 as well as U.S. sales from 2011 to 2013 under an exemption. However, no further discussion of these investment costs was made in the company’s most recent financial records or its February 22, 2011, description of its financial situation and the effect of a denial of the exemption on the company. In any event, the company did not explain in its original petition, or in any of its subsequent submissions, why all of the investment costs for the Huayra have to be recouped immediately during the exemption period, particularly in light of the long model life of the vehicle.

The touchstone that NHTSA uses 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 a cumulative net loss position as strong evidence of hardship. 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. In this case, Pagani has made profits in recent years, and based on its projections, would continue to do so even if its petition is denied and the company is limited to selling vehicles outside of the United States.

As noted by Pagani in its petition, the existence of recent net income does not necessarily preclude a finding of substantial economic hardship. In situations where a petitioner’s financial records show recent net income, the agency balances the net income against the costs of compliance and the effect of a denial on the company. In past petitions, we have noted that even where a small enterprise manages a net profit, the agency may find that hardship exists.13 In this case, Pagani earned profits of approximately €1,947,846 from 2004 to 2010. This amount is less than the €4,000,000 it will cost to complete the advanced air bag program. Accordingly, immediate compliance would result in net losses. However, considering the effect of a denial on the company, we believe that the fact that immediate compliance would cause Pagani to suffer short-term losses is insufficient to demonstrate substantial economic hardship. Examining Pagani’s petition and supplemental submissions, it appears that the hardship from denying the petition consists of decreased anticipated profits and the inability to enter the U.S. market until it fields a fully compliant vehicle. With an exemption, Pagani projects earning €8,613,000 in net income from 2011 to 2014. Without an exemption, Pagani projects earning €5,398,000 in net income during the same period. Based on these projections, Pagani would continue to earn increasing net income each year without an exemption. Additionally, the amount of net income projected over the next several years if the petition is denied would appear to cover the costs of the €4,000,000 advanced air bag program.

In contrast to most of the manufacturers that have been granted exemptions, Pagani has historically made profits and projects increasing profits even in the event that an exemption is denied. Additionally, unlike several profitable manufacturers that have been granted exemptions in the past, Pagani currently only sells vehicles outside of the U.S., and the company expects to maintain and exceed its current sales levels in the event that an exemption is denied. Accordingly, the agency concludes that a measure of economic hardship may result from the denial, but it cannot be characterized as “substantial” given Pagani’s current financial condition, its financial projections, and the continuing demand for its vehicles outside of the

United States. Public Interest – We have also examined whether an exemption in this case would be consistent with the public interest and the objectives of the Safety Act and the implementing regulations. Pagani has requested an exemption from all of the advanced air bag requirements except for the 30 mph belted 50th percentile male barrier impact test, compliance with which the agency has conditioned previous advanced air bag exemptions. Pagani stated that 1) the Huayra has several features that increase the crashworthiness of the vehicle, 2) a limited number of vehicles will be sold in the U.S. and each vehicle is expected to be driven approximately 2,500 miles annually, 3) the vehicle is expected to rarely carry children, and 4) a denial of the exemption would adversely affect consumer choice. Although the agency supports additional crashworthiness features designed to increase the safety of occupants in the vehicle, we note that most of the requirements from which Pagani seeks exemption were implemented to minimize the risks posed by air bags to infants, children, and small-statured adults, especially in low-speed crashes. In the 2000 final rule, the agency estimated that these requirements had the potential to protect more than 95 percent of the at-risk population (out-of-position infants, children, and small-statured adults) from the risks presented by air bag deployment. The Huayra’s crashworthiness features do not mitigate these risks, and although Pagani asserted that children will rarely ride in the Huayra, the company has not proposed any measures or warnings to reduce the chance that a child or small-statured adult would ride in the vehicle nor has the company described any vehicle features designed to mitigate the safety risks of standard air bags to vehicle occupants. (In the original petition, the company indicated that the vehicle would be equipped with an on-off air bag switch. In a supplemental submission to the agency, the company indicated that no on-off switch would be installed.) Accordingly, the agency is unable to find that an exemption would be consistent with the public interest and the objectives of the Safety Act. Decision – Based on the foregoing, the agency is unable to make a finding of substantial economic hardship or that an exemption would be consistent with the public interest and the objectives of the Safety Act. Accordingly, Pagani’s petition for temporary exemption is denied.