Higher MPG standard could equal higher profits
Automakers will likely make billions more dollars in profits under proposed new national gas mileage and emissions standards that will be finalized later this summer. A new report – produced by Citi Investment Research and Analysis in collaboration with Ceres – shows that American automakers will likely enjoy the biggest percentage increase in profits (6.3 percent), pulling in an extra $2.44 billion dollars in 2020 under the standards. The industry as a whole will also likely see big profits, earning a 5.3 percent increase in profits of $4.76 billion in 2020.
“Automakers who invest in more efficient vehicles are investing wisely. Given the volatility of gas prices – and the likelihood that they’ll head through the roof again – it’s clear that customers want better fuel economy and delivering it means a better bottom line for the industry,” said Carol Lee Rawn, transportation director of Ceres, which leads a national coalition of investors and public interest groups working with companies to address global sustainability challenges.
The new report, “Fuel Economy Focus: Perspectives on 2020 Industry Implications,” evaluates the impact that meeting the proposed fuel economy/GHG standards would have on the car industry in the year 2020.
The report finds that meeting the proposed standards will likely boost total vehicle sales for the automotive industry as a whole by about 4 percent or around 600,000 vehicles. As a group, Ford, Chrysler and GM would also likely see an improvement over baseline vehicle sales by about 4 percent, or 300,000 vehicles. Foreign automakers would likely record a 3 percent uptick in sales representing around 300,000 vehicles. Sales would increase because with increased fuel economy the overall cost of operating a car will go down and consequently, consumers will have more spending power to buy more vehicles or more expensive vehicles.
“Although the automotive industry as a whole will benefit by meeting the new standards, the Detroit Three will enjoy the highest relative profits boost,” said Walter McManus, School of Business Administration at Oakland University, who conducted the sales and profits analysis. “The reason we see these increased benefits for American automakers is because compared to foreign automakers they are currently more heavily invested in lower mileage trucks and cars. Under these standards the Detroit Three would have a greater potential to add customer value to those vehicles with improved fuel economy.”
According to the report, the new standards could largely be met by using existing technologies that improve the performance of cars powered by traditional internal combustion engines.
“Automakers today are already working on the improvements to the internal combustion engine and overall vehicle design to get us to 54.5 mpg. Turbocharged direct injection, advanced transmissions, electric power steering, low-rolling-resistance tires, turbo charging, variable valve lift and timing are available now and they continue to improve,” said Alan Baum, founder of Baum and Associates, who conducted the sector analysis. “These technologies are not only cost-effective, but also make for better performing vehicles than those currently on the market.”
The report finds that the added technologies required to meet the proposed fuel economy improvements are cost-effective for consumers. “Even if gasoline prices dropped to as low as $1.50 per gallon in 2020, money saved during vehicle use would fully offset the cost of added fuel economy technology,” said Dan Meszler of Meszler Engineering Services, who conducted the cost analysis. “Since gasoline prices are over twice that right now, it’s likely that consumer savings on fuel purchases will far outweigh the additional money consumers will spend on a new car.”