Auto Companies: You've Got Work to Do

The race to become less reliant on nonrenewable energy sources has been on for quite some time. Auto manufacturers have spent the past few years forwarding their resources to hybrids, electrics, and other alternative-fuel vehicles. There has been progress, but we are a long way from our goals. The Obama administration recently issued its latest miles-per-gallon requisite for major auto manufacturers, and it's a lot higher than the numbers we are seeing now. Can auto companies meet the grade by 2025?

Tomorrow's goals
With the support of major auto manufacturers, the Obama administration has proposed and passed a rule to nearly double the average fuel efficiency of autos by the year 2025. The new number is 54.5 mpg. If you're like me, a non-Prius owner, that seems like a long way away from the sometimes sub-20 mpg I see from my SUV.

Take a look at the following chart, provided by auto information analytics company TrueCar, outlining the average car and truck MPG for various major auto manufacturers, including Ford (NYS: F) , GM (NYS: GM) and Toyota (NYS: TM) . There are a few things to note here:

  1. By 2025, 13 years from now, some of these automakers have to more than double their average fuel economy. Considering that we've seen numbers like the ones in the table for several years, this seems like a tall order from Washington.

  2. Ford led not only the American automakers, but the Japanese and South Korean ones as well, with a year-over-year improvement of almost 5% -- though Hyundai still leads overall, with an average of 28 MPG.

  3. With the industry average at around 23 MPG, it looks as though the Obama administration is counting on a greater percentage of vehicle offerings to be electrics, hybrids, and natural gas vehicles. The average gasoline-powered V8 simply won't make those kinds of improvements in efficiency in the 13-year window.

Source: TrueCar.

Is the new rule feasible, given the current economic climate and the state of the fuel economy as is? Well, it may not matter.

A false standard
According to the Center for Biological Diversity, an environmentally oriented non-profit, the 54.5 MPG rule has loopholes and allows for further leniencies for some types of autos. The research group found that the new rules present only modest improvements and still allow for an overall increase in greenhouse-gas emissions over the long term. With automaker credits and "flexibilities" on certain vehicles, the 54.5 MPG actually drops to under 47 MPG. The CBD argues this number does not give the automakers incentive to develop new technologies and focus on alternative-fuel innovation, given that some of the smaller vehicles offered already meet this requirement.

When put in this perspective, it looks as though the pressure on these companies isn't quite as hard as it looks on the surface.

Poised to profit
Some of the more progressive manufacturers have an opportunity given the new rules. A company such as Tesla (NAS: TSLA) already far surpasses the requirement and can focus on marketing its vehicles instead of racing to catch up, as Chrysler will likely have to do. Tesla's sedan gets an incredible 89 mpg. The company will be eligible to receive certain credits that it can sell to other automakers that are lagging.

Before you rush to invest, though, keep in mind Tesla is a cash-burning company with a long road to go before it achieves the economies of scale and profits off its fellow auto-brethren.

Pedal to the metal
The CBD raises valid points, and companies like Daimler contend that the new rules favor American auto companies and light trucks -- which is why they didn't sign the new agreement.

But for companies like Ford, Toyota, GM, and the other majors, it's still a long road ahead to 47 MPG, much less the 54.5. Keep an eye on increased R&D spending, and some realignment of strategies across the board for your auto stocks.

As I mentioned, Ford was the year-over-year leader in fuel-efficiency improvement. But that's not the whole story for the company. Take a look at this premium report prepared by our analysts to help you learn everything you need to know before making an investment in the legacy auto company.

The article Auto Companies: You've Got Work to Do originally appeared on

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