The key to future Big 3 profits?
Fuel economy the key driver for US automaker profits?
CAFE requirements haven’t been the best way to drive US fuel economy averages higher. Thus, while aggressive new CAFE requirements might not push US fuel economy to the highest levels possible, they could still drive increased profits.
New research by Citi Investment Research, Ceres and a number of other researchers suggests that new CAFE standards, even 62 mpg by 2025, would actually be good and profitable for the US auto industry.
“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.”
Specifically, in terms of US automakers and suppliers “narrowing the historical gap between Detroit 3 fuel economy and competitors”; especially in “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.”
According to the research, technologies such as turbochargers, direct injection, and dual-clutch transmissions can increase fuel economy and profits even if gas prices dropped down to $2.00 per gallon.
Additionally, electrification technologies, led by hybrid cars, will continue to increase share, but improving the performance of conventional vehicles will be the key profit drivers according to the research.
Obviously a very interesting study, although other studies have both supported and contradicted these findings. I’m sure more studies will follow. Minimally, however, there does seem to be at least some potential that higher fuel economy standards could be good for consumers, automakers, the environment, and US energy security.