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 (NYSE: F  ) , GM (NYSE: GM  ) and Toyota (NYSE: 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 (Nasdaq: 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.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter, @MikeyLewy. The Motley Fool owns shares of Ford and Tesla Motors. Motley Fool newsletter services have recommended buying shares of General Motors, Ford, and Tesla Motors and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2012, at 7:58 PM, chris293 wrote:

    We all could ride little scooers that get over 60 mpg, yet it is not those companies that Congress rewarded for failure, it will be the little company or individual who will make America a leader with new ways to meet impossible goals set by our leaders. Of course, our leaders might hope that by setting such goals, it will force people to attempt the impossible. Roughly 8 to 10 mpg was

    the standard when I was a kid.

    Why does Congress get involved with business at all, when they cann't balance their own books.

  • Report this Comment On August 29, 2012, at 10:35 PM, carsandplanes wrote:

    Article is full of errors, but here are two just to give you an idea of how badly you need to actually research your topic and not just Google key words for advocacy press releases.

    (1) "The average gasoline-powered V8 simply won't make those kinds of improvements in efficiency in the 13-year window." I'm sorry you choose to drive an SUV, but the fact is less than 10% of all new cars and light trucks/SUVs sold in 2011 had 8 cylinders. There is no longer and "average V8" in the avaerage American's vehicle.

    (2) "Tesla's sedan gets an incredible 89 mpg". Indeed this would be "incredible" if it burned fuel, which it does not. It's a BEV.

    This sort of thing makes one balk at what the available "remium report" by your analysts must look like.

  • Report this Comment On August 30, 2012, at 10:02 AM, XMFMadMardigan wrote:

    Hey carsandplanes,

    let me address your two points, without any google key word searches (how else does one use google, i wonder...)

    1.) When I said the average V8, I was referencing the average V8. No where did I say the average vehicle had a V8. And, just so you know buddy, my SUV has a V6.

    2.) As for the Tesla, you are truly a detective. It is, in fact, an electric vehicle. How you discovered that, I may never know. But, just a little info for you, the EPA still measures electric vehicles in their MPG equivalent. In fact, "The ratings are based on EPA's formula, in which 33.7 kilowatt hours of electricity is equivalent to one gallon of gasoline, and the energy consumption of each vehicle during EPA's five standard drive cycle tests simulating varying driving conditions."

    It all comes down to energy consumption, in whatever form.

    Next time you want to leave a critical comment, why dont you bring up some real errors :)

  • Report this Comment On August 30, 2012, at 10:29 AM, mattryan wrote:

    V8?

    V8 juice is good with vodka

  • Report this Comment On August 30, 2012, at 10:43 AM, XMFMadMardigan wrote:

    ^^^ The greatest comment I've ever seen on an article. This ones for you, hanktmoon.

  • Report this Comment On August 30, 2012, at 9:22 PM, menefer wrote:

    Someone who drives an SUV that gets less than 20 MPG may not be the right person to write about fuel economy.

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