U.S. Automakers to Win Profits under Higher Mileage Standards

Two reports from Citi and Ceres predict U.S. car manufacturers will see greater sales than their global competitors.

As the U.S ramps up vehicle fuel efficiency standards, two new reports from Citi Investment Research, Ceres, and long-time independent industry experts conclude that U.S. automakers will be more profitable at a fleetwide 42 mile per gallon (mpg) average in 2020 – the strictest standard now proposed for that year and one seen as eminently achievable – and that by 2015 more than one in 20 cars sold in the United States will be hybrid, plug-in, or full electric vehicles (EV).

The two new reports, available online at www.ceres.org/cafe_report_0311 and www.ceres.org/electric_vehicles_report, were produced by Citi and Ceres’ Investor Network on Climate Risk in conjunction with the University of Michigan Transportation Research Institute, Baum and Associates, and Meszler Engineering Services.

The fuel economy analysis evaluates the potential impact that changes to the U.S. Corporate Average Fuel Economy (CAFE) and greenhouse gas (GHG) emissions standards may have on the auto industry in 2020. Federal and California state agencies tasked with developing these standards are expected to send their recommendations to the White House as early as May.

The second Citi report is an overview of the current state of the dynamic electric vehicle industry, with a focus on individual company product plans, key technological issues, and the latest industry initiatives and government policies that may influence further development of electric vehicles.

Key findings of the two reports – explained in greater detail below - include:

  • Stronger mileage and GHG standards will boost variable profits and sales in 2020 for the auto industry worldwide, with the Detroit 3 seeing the biggest financial benefits. The Detroit 3’s variable profit gains would garner more than half of all increased profits.
  • U.S.-based suppliers of key fuel-saving technologies – from turbochargers to direct injection, dual-clutch transmissions and more - will benefit.
  • The U.S. electric vehicle industry is already robust and viable and will grow further under strong standards and other government policies that will boost demand for electric and plug-in-electric cars.

The 42 mpg standard by 2020 is consistent with a 6 percent annual mileage improvement, starting in 2017, that would boost fleet mileage to 62 mpg by 2025. In addition to increasing profits, these goals are eminently achievable technologically and cost-effective.

Walter McManus, an economist at the University of Michigan Transportation Research Institute (UMTRI) and director of the Automotive Analysis Group, said: “Our research indicates that increasing industry average fuel economy to 42 miles per gallon by 2020 could raise industry variable profit by $9.1 billion, or 8 percent. Most of the added profit, $5.1 billon, could go to the Detroit 3.“

Dan Meszler of Meszler Engineering Services provided estimates of vehicle technology costs and fuel economy impacts for the CAFE study. Meszler, who has analyzed transportation energy and air quality issues since 1982, said: “technology exists to address a number of continuing inefficiencies associated with internal combustion engines. Between now and 2020 much of this technology is expected to mature, so that a 2020 CAFE requirement of 42 miles per gallon should produce consumer savings starting at gas prices of $2 per gallon. Since current and expected future gasoline prices far exceed that price, these technology-driven fuel savings are extremely cost effective and indicate that a 42 mile per gallon CAFE program will not only reduce petroleum imports, but save consumers money."

Lily Donge, Manager for Environment and Climate Change at Calvert Asset Management Company, Inc., said: “Investors often view tighter environmental regulations as an impediment to growth but these reports offer a refreshing counterpoint. Stricter environmental standards actually have the potential to spark innovation and improve the competitive positioning of U.S. automakers. So reports like these are important for investors – they shed light on the long-term growth prospects of American industries that are an important slice of our portfolios.”

In May 2010, President Obama directed the Environmental Protection Agency and National Highway Transportation Safety Administration (NHTSA) to work with California to develop the next phase of the nationwide CAFE mileage standards and GHG emissions limits, for model years 2017-2025. The agencies are considering a range of standards representing an annual decrease in carbon dioxide (CO2) emissions of 3 to 6 percent, which translates to a range of 47 mpg to 62 mpg in 2025. The agencies’ recommendation appears headed for the White House in May.

Source: Ceres