42 MPG Spells Profits
It really sounds counter-intuitive, but increasing U.S. Corporate Average Fuel Economy for light cars and trucks to 42 miles per gallon (5.6L/100 km) by 2020 will not only save consumers a lot of fuel, reducing US oil imports, but will actually spur auto industry profits, especially for the "Detroit Three."
That's the findings of two studies sponsored by CITI Investment Research and Cere's Investor Network on Climate Risk. Traditionally, investment advisors have argued that increasing fuel economy standards will drive down industry profitability, a conclusion that the four key groups involved in this latest research refute. With Ceres Senior Manager of Transportation Programs Carol Lee Rawn taking the lead in the accompanying press conference, which is available in MP3 format both here on EV World (right-hand column) and on the Ceres.org web site, Walter McManus, Alan Baum, Dan Meszler and Lily Donge explain their respective roles in both studies, at which point, media representatives are invited to ask question. The entire conference is just under 60 minutes in length. Below are the key findings of each study.
KEY POINTS IN MPG REPORT
- Tougher fuel economy standards will have positive implications for sales units and variable profits for the auto industry in general, especially US automakers. The report assumes an industry-wide standard in 2020 of 42 mpg (a 6 percent improvement per year). Under this scenario the Detroit 3 gain relative to the global industry, with variable profits jumping 8% in 2020 globally but Detroit’s rising by 12%. This is due to a number of factors, including: (1) narrowing the historical gap between Detroit 3 fuel economy and competitors; and (2) light trucks and larger cars, in which the Detroit 3 sport a greater share, have greater potential to add consumer value through improved fuel economy than competitors’ smaller cars and trucks.
- Suppliers of key auto technologies will benefit. The U.S. auto industry is still in the early stages of adopting fuel saving technologies to meet rising regulatory standards. Key beneficiaries with relevant technologies include BorgWarner and Johnson Controls. BorgWarner appears best positioned to benefit, as the company derives most of its sales from fuel-saving technologies such as turbochargers and dual-clutch transmissions.
- The industry is viable: Traditional automakers, as well as a number of start-ups, continue to establish inroads into the EV market, which currently comprises about 3 percent of U.S. sales volume. General Motors headlines a new class of electric vehicles with the recent launch of the Chevy Volt. Toyota remains a key player as it develops a suite of EVs around the popular Prius name, and Nissan is staking its claim on full electrics with the mid-size Leaf. Of the nontraditional manufacturers, Fisker and Tesla's plans appear the most advanced, with significant technological and financial resources in place.
- Key government incentives and policies serve as important drivers for the industry’s growth; these include significant US federal and selected state governmental funding, and current and pending policies directed toward supporting EV development, sales, electricity regulation and pricing and infrastructure.
- By 2015, Baum & Associates forecasts over 100 models available in the U.S. market covering the four technology groups (including fuel cells), but many of these products will sell only in modest volumes. The forecast outlined in this report anticipates that sales will grow from approximately 2.5% of the total market this year to 6.3% by 2015, with total sales of over 900,000 units that year. Regular hybrids will remain most prevalent in both number of vehicle offerings and volume (approximately 55% of projected volume); with plug-ins and full electrics each representing about 20% of projected volume.
- Critical technological issues include the status and cost of battery technology and infrastructure support. Increasing volume, technological advancements, and creative business models (battery leasing) all promise to improve the value proposition of electric vehicles over time.
Profits AheadThe University of Michigan's Walter McManus and his group at the Transportation Research Institute calculated variable profits for the industry as a whole at $9.1 billion with the "Detroit 3" sharing 56% of that, or $5.1 billion, due largely, again counter-intuitively, to the sale of larger, more fuel efficient cars and light trucks compared to their foreign competition. Improving the fuel efficiency of a large car or pick-up, which happen to be more profitable to build, also results in greater overall fuel savings.
In conclusion, the group makes the case that the government needs to enact the 42 mpg standard being debated now by the EPA. It will not only result in reduced petroleum consumption, better environmental quality, but also improved profits to car makers at an estimated incremental cost per vehicle of just $945.