Citi report finds meeting higher CAFE/GHG standards likely to bring higher profits for all automakers, nearly $2.5 billion in extra profits for Detroit Three
5 April 2012
|Projected US sales by powertrain type in 2020. Source: “Fuel Economy Focus: Perspectives on 2020 Industry Implications”. Click to enlarge.|
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, according to a new report produced by Citi Investment Research and Analysis in collaboration with Ceres and the Investor Network on Climate Risk; Oakland University’s School of Business Administration; Baum and Associates; and Meszler Engineering Services.
The 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. It concludes that GM, Ford and Chrysler will likely enjoy the biggest percentage increase in profits (6.3%), pulling in an extra $2.44 billion dollars in 2020 under the standards, with the industry as a whole likely to see a 5.3% increase in profits of $4.76 billion in 2020.
In November 2011, the US Environmental Protection Agency (EPA) and the US Department of Transportation’s (DOT) National Highway Traffic Safety Administration (NHTSA) proposed standards for the secondary phase of the National Program (CAFE/GHG vehicle standards for model years 2017-2025), with a standard of 49.6 mpg fuel economy and 163 grams of CO2 per mile by 2025 (equivalent to 54.5 mpg). The final rule is expected in mid-2012. (Earlier post.)
Our baseline simulation suggests that an opportunity exists for aggregate industry sales and profits to actually increase as fuel economy improves. This is based on assumptions that we deem reasonable, however, we also recognize and present scenarios where industry profits would suffer from tightening regulations. The report does not seek to endorse one set of assumptions over another or form a view on the merits of industry regulations, but rather provide investors with a framework for modeling this important and inevitable trend.
Under our baseline simulation, Detroit 3 profits gain vs. the industry due to: (1) Narrowing the historical gap between D-3 fuel economy and competitors; and (2) Light trucks and larger cars, in which the D-3 sport a greater share, have greater potential to add consumer value, and since full-size trucks tend to be used for commercial purposes, this is actually an advantage to the D-3.—“Fuel Economy Focus: Industry Perspectives on 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%, or around 600,000 vehicles. The Detroit 3—Ford, Chrysler, and GM—would also likely see an improvement over baseline vehicle sales by about 4% or 300,000 vehicles.
Other automakers would likely record a 3% 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, the report suggests.
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. The report also finds that the added technologies required to meet the proposed fuel economy improvements are cost-effective for consumers.
Suppliers of fuel economy technologies will also benefit, according to the report. Within Citi’s coverage universe, key beneficiaries with relevant technologies include BorgWarner, Delphi and Johnson Controls, the report noted. As examples, BorgWarner appears best positioned to benefit as the company derives most of its sales from fuel savings technologies such as turbochargers and dual-clutch transmissions; Delphi stands to gain from its position in powertrain technologies and electronic distribution systems (weight reduction); and JCI offers a leading position in the growing start-stop hybrid market.
Role of alternative fuel vehicles. Although many are focusing on hybrid and electric vehicles as the means to improve fuel economy, the report says, the internal combustion engine is expected to remain the primary powertrain for years to come. The report notes that while diesel engines are used primarily in large pickups, some increase is occurring in other vehicle segments.
Differences in emissions standards between the U.S. and other nations (particularly those in Western Europe) have slowed the deployment of diesel engines in the US, however, there appears to be some harmonization forthcoming, which may reduce the cost of emissions reduction (by spreading costs across higher volumes) and therefore reduce the cost and increase the utilization of these powertrains.
...It is important to note that “regular” hybrids are expected to continue to grow even as plug-ins and full electrics enter the market. Each of these alternative vehicle types serves a particular consumer purpose and their varying cost position (including various incentives offered over a period of time) will enable hybrids (including lower cost mild hybrids), plug-ins, and electrics (as well as diesels) to coexist.
...Over the next several years, a large number of new entries, the increasing price of gasoline, and overall growth in the vehicle market should lead to a significant increase in market share for hybrids. Furthermore, the launch of a significant number of plug-ins and full electrics in the near term should enable increased market share going forward.—“Fuel Economy Focus: Industry Perspectives on 2020”
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