When Congress first enacted Corporate Average Fuel Economy, or CAFE, standards, the initial purpose was to reduce energy consumption by increasing the fuel economy of our nation's vehicles. While the policy has been in place since 1975, the standards are set to rapidly increase over the next decade. Its purpose is now twofold: to improve national security, and to save Americans money from the seemingly ever-increasing price of gasoline. And you can't overlook the environmental benefits from the reduced emissions.
However, the rapid increase in standards that's now looming over the auto industry is putting pressure on them like never before. In 2025 the fuel economy of passenger cars and light-duty trucks built in that model year is set for an average of 54.5 MPG, which is nearly double what the comparable standards are today. Automakers are being forced to get ahead of the curve and invest in reducing fuel consumption now. And that's proving to be tougher than some automakers had anticipated.
In fact, Ford (NYSE:F) is now being forced to lower the gas mileage estimates for its C-Max hybrid crossover after it was found to not live up to previous estimates. The 2013 C-Max was touted as delivering 47 MPG of performance on both the highway and in the city. However, real-world performance hasn't lived up to those lofty estimates. Instead, after additional testing, the C-Max delivered 45 MPG in the city and just 40 MPG on the highway, for a combined rating of 43 MPG.
Those 4 miles per gallon are now going to cost Ford some money, too, as it will reimburse buyers with a one-time payment of $550, while lessees will receive $325. To date, Ford has sold about 32,000 of the vehicles, meaning that at most it's on the hook for $17.6 million. Given that Ford recently reported net income of $1.2 billion, that payment isn't likely to hurt the automaker.
What might hurt it are the additional investments it will need to make to boost the fuel economy of its vehicles in the future. The company has already said it's working on making improvements to boost the gas mileage of the model year 2014 C-Max hybrids. However, Ford might be required to redouble its efforts to improve fuel economy across its platform to meet the aggressive changes coming up in the CAFE standards.
This is clearly a setback for Ford, and it could harm the company's quest to catch up with top hybrid seller Toyota (NYSE:TM). Its Prius has really resonated with consumers, making it a top-selling hybrid. Ford currently claims the No. 2 spot in the segment thanks to the rising popularity of its C-Max and Fusion hybrids. However, with the C-Max not achieving the fuel economy once thought, Ford could feel a big impact on future sales.
Admitting its mistake and reimbursing customers is a good start for the company as it looks to maintain its brand integrity. The next step, however, will be to simply deliver, which is easier said than done.
Matt DiLallo has long January 2014 $10 calls on Ford and short January 2014 $10 puts on Ford. The Motley Fool recommends and owns shares of Ford. 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.