Yesterday, America's two largest auto manufacturers announced an agreement to join forces in developing a new type of automobile transmission. Ford Motor (NYSE: F ) and General Motors (NYSE: GM ) will pour roughly $720 million into the effort to develop a new six-speed transmission.
To date, Detroit has specialized in five-speed manual transmissions and four-speed automatics. The five-speed or "stick-shift" transmission has traditionally been thought to give cars better fuel economy than the four-speed automatic. But its downside is that a driver has to have some basic motor skills in order to operate it. (Pun intended; poke at automatic drivers also intended.)
The new six-speed transmission, therefore, offers a couple of benefits. First, it allows drivers incapable of operating a stick shift to achieve stick-shift-like fuel economy. Second, it moves Detroit halfway towards meeting the National Highway Transportation Safety Administration's (NHTSA) 2007 fuel economy standards for light truck fleets announced last year. NHTSA is requiring that by 2007, light truck fleets sold in the U.S. average 22.2 miles per gallon (mpg). In the intermediate term, truck fleets must achieve 21 mpg for their 2005 fleets and 21.6 mpg for their 2006 fleets.
Assuming that the Big Three car makers are already averaging just the current minimum of 20.7 mpg for their truck fleets (and that is in doubt, since NHTSA has suggested that GM is not meeting the minimum), a 4% increase in that efficiency (to 21.5 mpg) would bring GM and Ford very close to achieving their 2006 targets without any additional improvements in fuel efficiency. And just in time, too, since the new transmission is planned to go into production in 2006. While the new transmission alone will not bring GM and Ford into compliance with the ultimate 2007 fuel requirements, it will at least bring them halfway towards the goal.
That is good news for investors in both companies. And as a kicker, keep in mind that any increase in fuel economy, especially in our brave new world of rising gas prices, should help the American car makers to compete better with their Japanese archrivals -- Nissan (Nasdaq: NSANY ) , Honda (NYSE: HMC ) , and Toyota (NYSE: TM ) -- all of which currently offer far better fuel efficiency than any of Detroit's Big Three.
He owns no shares in any company mentioned in this article.