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For Automakers, Higher MPG = Higher Profits

by Carol Lee RawnJuly 10, 2012
Fuel economy is driving sales of new cars. In an era of high fuel prices, consumers in increasing numbers are shopping mpg, and that’s good for automakers.

Automakers, and especially Detroit’s Big Three, will see greater sales and profits from stronger federal fuel economy standards.

That’s what a recent report by Citi Investment Research in collaboration with Ceres found. It looked at what Washington’s plans to boost fuel economy standards to 54.5 mpg by 2025 would mean for the industry in 2020.

The analysis found that in 2020, General Motors, Ford, and Chrysler could look forward to a 6 percent hike in profits – an extra $2.44 billion – under the proposed standards.

Foreign automakers would also benefit. They can expect a 5 percent rise in profits – an extra $2.31 billion in 2020.

As gas prices continue to rise, better mileage drives sales. Customers want cars that go farther on a gallon of gas. In fact, Kelley Blue Book's latest consumer survey found that 66 percent of people shopping for new cars are taking rising gas prices into account. Some shoppers are changing their minds about what vehicle to buy. Others say they’re considering more fuel-efficient cars they haven’t considered before.

These consumers can do the math. The Citi report finds that the added costs of technologies required to meet proposed fuel economy improvements in 2020 are extremely cost-effective. Even if gas prices sink as to low as $1.50 a gallon, drivers would still come out ahead. And higher gas prices would mean even greater savings.

All car companies selling in the U.S. will have to meet the standards, which means a level playing field. Buyers will be able to choose from a wide range of fuel-efficient vehicles.

American automakers will benefit the most. That’s because U.S. companies have historically relied on larger vehicles that guzzle more gas. The proposed standards will narrow that gap in fuel economy. Under the proposed standards, trucks and larger cars, in which the Detroit Three are more invested, will see relatively greater improvement in fuel economy, enhancing their consumer appeal. In addition, the prices, and therefore automakers’ variable profits, will be higher for trucks and larger cars than for smaller cars.

It’s important to note that U.S. carmakers can get most of the way to the new mileage standard simply by improving the internal combustion engines they already make – by using technologies already in play or almost market-ready.  Variable valve timing and lift, cylinder deactivation, turbocharging, gasoline direct injection and other technologies – along with some increase in hybrid, plug-in and electric vehicles – will get us to the new national mileage goal.

The proposed standards will trigger a wave of innovation that will help U.S. automakers’ long-term global competitiveness. The Citi report found that suppliers of key fuel economy technologies would benefit as well. And what’s good for Detroit is good for America: a healthy automotive sector leads to more jobs across the industry’s huge domestic supply chain.

The standards will also create jobs across the economy. Ceres’ More Jobs per Gallon report found that boosting gas mileage requirements will lead to 484,000 new jobs across the country, with net job gains in 49 states. That’s because the money consumers save on fuel will be diverted to the broader economy, flowing to a broad range of sectors.

So strengthening the national fuel economy standards will create a rising tide that lifts all boats. Car companies and their suppliers will see greater profits and sales. Consumers will save money at the pump. Employment will rise and boost the larger economy. And the U.S. will gain a greater share of the world’s rebounding automotive business.

It’s no wonder the major car manufacturers, investors, businesses, consumer groups, and auto workers’ unions are supporting the federal proposal to boost fuel efficiency. It will benefit the industry, its customers, and the economy.

Carol Lee Rawn directs the Transportation Program at Ceres, which mobilizes a network of investors, companies and public interest groups to tackle sustainability challenges. Ceres also directs the Investor Network on Climate Risk, which supports 100 institutional investors with assets totaling $10 trillion.