Markets are constantly changing and companies are forced to adapt, or go out of business. Ford and Toyota are successful now and look to have strategies that will succeed in the future as well. Different strategies are adapting the automakers to the changing market. One is to invest in fully electric vehicles, such as General Motors Chevy Volt. A more popular option is hybrid vehicles, where Toyota (NYSE:TM) dominates with the Prius and Camry, while Ford (NYSE:F) is gaining ground with the C-MAX and Focus electric. While those options have had some success, I don't think full-electric is the answer for another decade. Let's look at why downsizing and more efficient internal combustion engines, or ICE, are the answer for a foreseeable future, and which automaker is prepared to take market share, both near and long term.
Looking at the graphic above, it puts into perspective the tiny fraction of alternate-power vehicles on the road today. When you take a look at the future CAFE standards for vehicle fleets, it's unrealistic to think that the amount of hybrids or electric vehicles will command enough of the market to meet the miles per gallon (mpg) requirements anytime soon. Look at two results from KPMG's recent survey (link opens a PDF):
- 92% of respondents said the No. 1 factor in purchases was fuel efficiency.
- 85% of auto executives said ICE downsizing and innovation represents the best chance to reach high fuel efficiency and low emissions.
The majority of executives now believe it will be at least six to 10 years before ICE is replaced as the best answer for clean, efficient engines. For now, it's vehicles with innovation, such as Ford's EcoBoost engine, which account for over half of the engines it sells. Although ICE innovation is expected to receive the most investment in research and development over the next five years, companies are still branching out into some alternate energy powertrains.
Ford has done extremely well with its EcoBoost engines, which account for half of the engines it now sells. The Fusion, Focus, and Escape are great examples of how ICE innovations can boost miles per gallon into the mid-30s on the highway, and sell extremely well. Ford's recent Atlas concept, which is rumored to go into production in 2014, is replacing up to 700 pounds of steel with aluminum, could be capable meeting CAFE standards out to 2025. Ford hasn't been the only automaker successful with fuel efficiency.
Toyota has produced efficient vehicles since it entered the U.S. market. It has had great recent success with its hybrids, and dominates the segment which could be the next big trend. People forget that the Prius debuted way ahead of its time in 1997. A time when people were more focused on not trampling other vehicles, like a monster truck, in their oversized Hummer. It also has cars that get great mpg rates through ICE with the Camry and Corolla both expected to finish in the top six of total vehicles sold this year.
GM is taking a slightly different approach, unveiling its diesel version of the Cruze this week at the Chicago Auto Show. In my opinion, it's not going to make much noise. It is reported to get 42 mpg highway and 30 mpg in the city. Those numbers aren't much better than the gasoline versions and it's going to cost the consumer about $4,000 extra. GM also differs from Ford's V-6 turbo-charged EcoBoost engine, as it opted to leave the engines with eight cylinders, which deactivates cylinders when not needed. GM's reasoning is that eight cylinders burn less fuel while towing than a turbocharged V-6, which only makes sense if truck owners tow a majority of time spent driving. Of the three automakers in this article, GM looks to be behind in the fuel-efficiency game.
We're in a situation today, where we must think both short and long term. Automakers must divide precious dollars for development into ICE innovations, alternate-power vehicles, or both. We're likely to see a change in the market demands in the next six to 10 years, and I believe Ford and Toyota are both positioned for success. Consumers are aiming to purchase vehicles for fuel efficiency, rather than to reduce their carbon footprint. The truth is that ICE will be the reason automakers meet the CAFE standards, or fail. We might reach a day where innovation will allow combustion engines, in vehicles like the Fusion and Corolla, to reach 50 mpg. Those vehicles will determine future market share gains.
At this point in time it's just difficult to predict which technology will be the winner to lead alternate energy to replace ICE. Toyota has always been ahead of the game for fuel efficiency, and rightfully earned its position as No. 1 automaker. Keep an eye on Toyota and Ford, as they seem best prepared for short-term and long-term trends. Finding companies like those two, with forward-looking strategies, is how to make your portfolio a long-term winner.
Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.