Why Ford Will Pay This $30 Billion Bill
It'll cost Ford (NYS: F) almost $30 billion, says the U.S. government. But Ford's not alone: General Motors (NYS: GM) will be on the hook for an even bigger $37.8 billion, and Toyota (NYS: TM) for $23.2 billion.
Those are huge numbers, even if they are pie-in-the-sky estimates. But all of those automakers -- and nearly all of the others who do business in the United States -- have said they'll be happy to pay.
What's this massive new obligation? It's the new fuel-efficiency rules proposed by the Obama administration, which is seeking to nearly double efficiency standards to a whopping 54.5 miles-per-gallon average by 2025. These sums are estimates of what the new rules will cost each automaker - though for some, the costs will be much more significant.
A big bill, but here's what it's buying
First of all, let's be clear -- this is a proposed rule, and although it's probably pretty close to what will eventually be adopted, it's not yet a done deal. But here's the gist of what's proposed: The government plans to raise the Corporate Average Fuel Economy number -- the miles-per-gallon target that automakers doing business here are required to hit -- in a series of steps from the current 27.5 mpg to 54.5 mpg in 2025.
Given that only a (very) few cars can hit 54.5 mpg now, that number sounds daunting -- even shocking -- on first glance. But a dip into the details reveals that it's really not quite as dramatic as it looks. First, the average relies on fuel-economy numbers generated by the National Highway Traffic Safety Administration, which are different from -- and usually quite a bit more optimistic than -- the EPA-generated numbers that appear on new-car window stickers.
Second, there are partial exemptions for the light trucks that generate so much of the Detroit automakers' profits. Although some improvements will need to be made, they're somewhat less aggressive and will be phased in later than those applicable to cars -- and the rule gives extra credit for certain technologies, like the hybrid pickups that Ford and Toyota are jointly developing.
In fact, there are a lot of extra credits available for advanced technologies, which is one factor spurring everything from the Ford-Toyota hybrid-truck project to Toyota's investment in Tesla Motors (NAS: TSLA) to Honda's (NYS: HMC) ongoing efforts to develop advanced fuel cells.
All over the world, a whole lot of resources are being plowed into developing vehicles that deliver the range, comfort, and performance consumers expect today -- but with fuel-consumption rates that meet these aggressive proposed regulations (and similar regulations being proposed or adopted in other countries). A lot of money is going into this, as the cost estimates suggest.
But who's ultimately going to pay those tabs?
Guess what: This one's on you
The government estimates that these proposals will raise the average cost of a new car by somewhere between $2,000 and $2,800. Of course, the government also claims that you'll more than make that up in savings on gas, though that assumes that gas prices "remain at essentially current levels."
The Obama administration "said it chose not to forecast" the impact of those costs on auto sales, according to TheDetroit News. The report does forecast total light vehicle sales of more than 17 million in 2025, a sizeable jump from current levels but a small one from the 16-million-plus annual totals seen for most of the past decade, but I wouldn't put too much weight on those numbers.
I think the costs aren't likely to dent auto sales significantly, on balance, though we may see more six- and seven-year auto loans, as well as a continuation of the recent tendency to keep cars for longer periods. But it will affect automakers' strategies and choices -- some more than others. Companies such as Toyota and Ford, which have already made big strides in fuel efficiency and hybrid technologies, should be able to meet the requirements in stride with merely evolutionary changes. Put another way, your 2025 Ford Mustang GT might be a hybrid, but it probably won't be too different in personality from today's offering.
Some automakers will have more trouble than others
Other companies will have to make bigger changes. Tata Motors (NYS: TTM) owns Jaguar and Land Rover, two thirsty lines of vehicles that won't make it to these averages without wholesale reinvention -- but Tata could work around the rules by introducing a line of small cars in the U.S. under a different nameplate. Although improvements would still have to be made, the gas-guzzling luxury offerings could continue, much as Ferrari's big V12 engines are expected to be sheltered by the more fuel-efficient offerings of corporate cousins Fiat and Chrysler.
Big cars, high-performance cars, SUVs, and pickups aren't going to go away. But they'll get less thirsty, and automakers are going to have to be careful about how they package them, and how they fit into their overall lineups and strategies. The companies that can develop (or acquire) the best green technologies will have the greatest leeway to offer more profitable products like these -- and the greatest competitive advantage in the ongoing battle for global market share and profits. Which companies will be the winners? Watch this space.
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At the time this article was published Fool contributorJohn Rosevearowns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by@jrosevear. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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