New reports predict US auto industry boosting profits with higher mileage standards

As the US ramps up vehicle fuel efficiency standards, two new reports from Citi Investment Research, Ceres and longtime independent industry experts conclude that US 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 US will be hybrid, plug-in or full electric vehicles (EV).

The two new reports, available online now at http://www.ceres.org/cafe_report_0311 and http://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 US 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.
  
• US-based suppliers of key fuel-saving technologies – from turbochargers to direct injection, dual-clutch transmissions and more - will benefit.
  
• The US 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% 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%. Most of the added profit, $5.1 billon, could go to the Detroit 3.”

Alan Baum of Baum and Associates, who has produced automotive sales and production forecasts since 1990 plus long-range industry analyses with a focus on fuel economy and electric vehicles, said: “Our study shows that the automakers are well positioned to meet the fuel economy requirements necessary in 2020 with a variety of approaches already in their product plans. Consumer interest in fuel economy, and their expectation that gas prices will remain high, suggests that consumers will purchase these products.”
 
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 $2.00 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."
 
In May 2010, President Obama directed the Environmental Protection Agency (EPA) 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%-6%, which translates to a range of 47 mpg to 62 mpg in 2025. The agencies’ recommendation appears headed for the White House in May.

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% 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 US 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.

Highlights of electric vehicle report:

• 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% of US 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 US 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.

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