The New Margin Booster for the Auto Industry?

With CAFE standards looming, automakers may look to tech-based upsells.

Jan 18, 2014 at 8:00PM

Get a glimpse of what's on the tech horizon with Foolish reports from the field at the 2014 International Consumer Electronics Show. Companies ranging from start-ups to Fortune 100 firms launch and showcase thousands of products at the event, which attracts visitors from around the world.

As fuel economy standards tighten, high-tech options such as wireless connectivity and alternative fueling systems may be more attractive than larger engines as a high-margin upsell.

There were countless trends emerging from CES 2014 this year, but the real question for investors is how to capitalize on these revolutionary opportunities. Fortunately for you, David Gardner has an idea or two on how to invest in these new emerging technologies -- and how you can profit. Get in on the ground floor now by clicking here.

A full transcript follows the video.

Eric Bleeker: Hey, Fools. I'm Eric Bleeker with Austin Smith, from the floor of CES. One of the amazing things about CES -- it is essentially a car show. This is one of the coolest car concepts I've ever seen in my life. We're at Toyota's (NYSE:TM) booth right now, and you are seeing technology as a differentiator.

When we're looking at the broader automobile space, we see Tesla (NASDAQ:TSLA) with such enviable margins. Can some of these advanced technologies -- that are relatively cheap to manufacture, relative to cost and upselling -- can this be a differentiator to increase margins across the industry?

Austin Smith: I think so, absolutely. You look at Tesla -- enviable near-25% gross margin, something Ford (NYSE:F), Toyota, General Motors (NYSE:GM) would be absolutely salivating over. And Tesla, in many ways, is a very high-tech vehicle.

I'm starting to see a lot of these technologies and think that these could be very legitimate upsells for customers at the point of purchase. Normally it's going from maybe that small engine to the big engine, where you're getting that high-margin upsell. But when you have CAFE standards that are really going to be crippling a lot of these automakers in the next five to 10 years on what sort of engines and features they can upsell you on, these tech products -- which, as you pointed out, are very, very affordable to manufacture at scale -- could actually replace a lot of those engines as the big upsells for a lot of these vehicles: 4G connectivity, something Audi, General Motors, and a lot of companies here have talked about. We're standing right by a Ford C-MAX concept that has solar panels on the roof to charge this hybrid vehicle ...

So I can very easily see the car -- the upsell, the more premium vehicle that's going to get you those wider gross margins -- actually being much more tech-themed over the next few years, as opposed to performance-themed, which lines up very well with the CAFE restrictions these automakers are going to be placed under, and maybe even get them closer to those enviable Tesla 20%-plus gross margins.

Eric: Awesome. There you have it; something far more exciting than curved TVs -- automobiles! Who would have believed that, a decade ago? That's it for this look at auto news. For all your news on CES, head back to Fool.com. Fool on!

Austin Smith owns shares of Ford and General Motors. Eric Bleeker, CFA, has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors and owns shares of Ford and Tesla 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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