Why Is Ford Happy About 54.5 Miles Per Gallon?

Fifty-four-point-five miles per gallon. On average. By 2025.

It almost sounds a little crazy, but that's what the man said. And the man in question being no less than President Obama himself, this was serious.

The president announced this "breakthrough" goal in a room filled with cars and trucks, and, almost unbelievably if you know the history here, happy-looking auto executives.

Yep, there they were -- Alan Mulally of Ford (NYSE: F  ) , Dan Akerson of General Motors (NYSE: GM  ) , Sergio Marchionne of Chrysler and Fiat (OTC BB: FIATY.PK), and others representing Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and nearly every other automaker doing business in the United States. Up on stage and looking pretty happy about it.

All of them had signed on to this plan, many with visible -- and genuine -- enthusiasm. That's a huge change from the kicking and screaming we saw when this issue last came up a few years back.

Why?

First, it's not really 54.5 miles per gallon
Like most results of Washington sausage-making, this one gets a bit … interesting on closer examination. The details of how this will all work are still being worked on, but some things are more or less clear:

  • The real numbers are different. Nope, you're probably not actually going to see a whole lot of cars with "54 miles per gallon" on the window stickers come 2025. As The New York Times pointed out last week, federal officials typically "discount" ratings by 20%, meaning that the true average is likely to be more like 43 mpg. And that's in 2025, after years of gradually scaling up the requirement.
  • Extra credit for advanced technology. Electric cars? Out-there technology like fuel cells? Automakers will get extra credit for things like these, part of the Obama Administration's effort to encourage innovative thinking around fuel economy -- and the development of an infrastructure to support alternatives to conventional gasoline engines.
  • A partial exemption for pickups. Ford's (and America's) best-selling vehicle for ages has been its big F-series pickup truck. GM's big pickups (and the SUVs built on the same platform) are huge contributors to the General's bottom line, as are Chrysler's. These trucks are very important to Detroit, and they're very important to millions of Americans who need them for work -- but their need for size, durability, and power makes improving mileage a tough challenge. Pickups will have to get better mileage eventually, but they're exempted from increases during the early stages of the new plan, from 2017 through 2019. Automakers will get extra credit for incorporating hybrid technology into them in the meantime.

Long story short, the big headline number doesn't tell the whole story. Yes, the automakers are being pushed to improve fuel economy across their fleets. But while they're being pushed in ways that will require them to make vehicles lighter (and maybe smaller) and more reliant on new technologies, they're ways that build on what the automakers are already doing.

Why the automakers like this
New federal rules or no, better fuel economy is going to be a requirement to compete on a global scale in coming years. That's a no-brainer. You want to do business in China or Brazil or Europe? You're going to need fuel-efficient vehicles. Ensuring that they'll be required in the U.S. as well means that automakers can now justify big investments in smaller cars. That means more top-notch small American cars like the impressive new Ford Focus, and fewer like the nasty tin cans we all remember from decades past.

But there's another, more nuanced reason why the industry supports long-term plans like this -- especially when they're based on technology that already exists (sorry, Tesla Motors (Nasdaq: TSLA  ) ). Unlike, say, cell phones, cars can't be developed from scratch in a few months. Even the best-run automakers average two to three years to get from a clean sheet to the first car off the line, and a development program for a major all-new model can cost $1 billion or more.

Figuring out what the market is going to want in a few years is a tough game, and guessing wrong can be catastrophic -- we all saw what happened when Detroit was caught with SUV-heavy lineups once gas prices rose sharply. A plan, even an aggressive plan, gives them predictability. Ford and GM and the others can now make investments in fuel-efficient new models with confidence, because they know there will be a market for those vehicles when they arrive at dealers three or four years from now.

That's a good thing. And that's why Akerson, Mulally, and the others were smiling.

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Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 10, 2011, at 11:22 AM, studbike wrote:

    This article is mostly spot-on, but I think the real cost saver here is globalizing powertrains. In 10 years Americans will still be buying big sedans, trucks, and SUVs, but now they will have more diesel and downsized/turbocharged offerings. All of these companies already make plenty of very successful econo-boxes overseas where people actually buy them. Also, that 55 (or 43) mpg figure is based on the fleet at the dealership, not on the roads. It doesn't mean the average of all fords will get 55mpg; the mean epa rating on a list of ford models will be 55mpg.

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