New Mileage Standards: The Winners

by: Brett Korsgaard

New mileage standards for automakers were released on July 29th by the Obama Administration and to the surprise of many; automakers were in support (at least publicly). The new standards set to phase in starting in 2017, call for a 54.5 miles per gallon average to be reached by 2025. Of course those with a lineup of smaller cars applauded the loudest [Toyota (NYSE:TM), Honda (NYSE:HMC), and a revamped Ford (NYSE:F)]. The new standards will be a boon to automakers and suppliers who invested heavily in more efficient smaller cars, hybrid technology and next generation battery technology. Consider that it cost billions to create the Prius concept and you get an inkling of the costs associated with developing advanced fuel efficient models. An argument is being made that the new standards hurt the consumer who may pay more for vehicles and for automakers that may be forced to make fewer of the vans, trucks and SUV’s that many consumers (particularly U.S. consumers) want. Advancements in technology and increased scale in manufacture of batteries and high tech components may make such arguments moot. It shouldn’t be too hard for strapped consumers to get used to drastically lower gas bills either. Let’s take a closer look at winners likely to result from these new standards:

The Japanese “Big Three.” Toyota, Honda and Nissan (OTCPK:NSANY) have been churning out small, fuel efficient models for decades. They have made the manufacture and marketing of such vehicles a veritable art form and are well equipped to leverage new technologies in hybrid and battery technology to meet the challenges posed by new standards. Toyota has bet the company on its advanced hybrid technology that was launched over a decade ago in the best selling Toyota Prius (whose success has warranted it becoming a sub brand in its own right). Toyota has made refinements off this platform and hybrid technology is infused in most Toyota lineups. Honda too has made great strides in the manufacture of fuel efficient engines and power trains and is gearing up to feature more of its hybrid and battery technology in vehicles beyond its insight model. Finally, Nissan is attempting to steal the hearts and minds of green oriented consumers with the successful launch of the Nissan leaf. This all electric vehicle is a show stopper and sets the bar in the eyes of consumers (it uses zero gas of course). Nissan will probably reap tangible benefits in its entire line-up as it basks in the afterglow of this model which it is marketing aggressively.

Ford Motor Company. Ford has steadily outperformed its U.S. counterparts in the creation of high mileage cars that can go toe to toe with the best imports. Ford’s fuel efficient triumvirate - the Fusion, Focus and Fiesta - are efficient little bangers that rank among the top in class in what is an extremely competitive category. Even its best selling F 150 line-up benefits from best in class mileage standards. New eco-boost engines have a ways to go before meeting tough new standards, but they exhibit the will to invest and be a leader in fuel efficient larger vehicles. Ford CEO Alan Mulally, gave vocal support to the new standards, by stating that the agreement gives Ford the “regulatory certainty” it needs to design and build fuel-sipping cars and trucks over the next 14 years. “We are pleased to have worked together with all the stakeholders to be a part of a solution that benefits the environment while protecting jobs and providing customers with a full range of affordable vehicle choices,” he said.

General Motors. GM must be given credit for trying. They came out of bankruptcy with a line-up of 13 vehicles that achieve at least 30 mpg and the release of the Chevy Volt was a bold move and a nod to the future. Still, GM is king of multiple lines of hulking SUV’s and pick-ups that, even with hybrid technology, have a long way to go in the area of fuel efficiency. Perhaps GM can crack the code of creating truly fuel efficient large vehicles – something American consumers will continue to demand and probably pay a premium for. GM has much at stake with the advancement of new fuel standards and expect the new GM to make the proper investments to get there.

Korea’s dynamic duo: Hyundai (OTC:HYMTF) and Kia (OTC:KIMTF). Hyundai has aggressively captured market share with its efficient engines, high build quality, and aggressive styling. Its lower average costs have been a boon to this brand in a post Great Recession world that clamors for value. Kia too is capitalizing on these trends and the vast majority of its lineup is likely to gain momentum in future years. Both Korean auto-makers have made their name in fuel efficient smaller cars and they should continue to separate from the field through plans to aggressively infusing cars with advanced hybrid technology to meet these standards.

Volkswagen (OTCPK:VLKAY). Europe’s biggest car maker is chock full of efficient small vehicles and is poised to benefit from investments made in advanced diesel technology that put some of its vehicles within striking distance of these future standards today. Volkswagen’ lineup ensures that it is poised prosper from these new standards.

Tesla Motors (NASDAQ:TSLA) & Fisker Automotive. Both high-end automakers are at the creative front in the electrification of the automobile. The Tesla Roadster was first out of the gate and Tesla has the cache’ of a recent $100M investment from Toyota. Fisker Automotive has just launched the Fisker Karma- an astonishingly beautiful vehicle that is likely to win well-heeled eco conscious converts to EV vehicles in Europe, the US and China. Expect both companies to be trendsetters and to profit from first mover advantage in the high end EV segment. It is this high-end of the market where BMW, Porsche and to a lesser extent Mercedes Benz have been slower to focus on fuel efficiency. The premium makers have huge investments in legacy auto plants and a client base that expects luxury and performance and is less discriminating of higher gas prices. At least for now.

Electric Vehicle (EV) Battery Makers. A123 (AONE), Ener1 (NASDAQ:HEV), BYD (OTCPK:BYDDF), Johnson Controls (NYSE:JCI) and Panasonic EV (PC) are all poised to benefit from higher standards, government incentives and continued private investment. The U.S. Department of Energy has committed $5 billion, China’s government is set to invest $15 billion and South Korea is looking to invest $12 billion with the objective of becoming the global leader in advanced battery technology and manufacturing. While the market has punished battery makers as of late, it is early innings in the trend to convert more drivers to cars fitted with hybrid and EV technology. As the scale of manufacturing increases, prices will drop and technology aided with huge investment will only get better. At some point it will be an easy to decision for consumers to make- do I want to spend my hard earned money filling up my tank, or can I just drive by and smile because I don’t have to? Arguments that “drivers aren’t interested” in new technologies will likely prove unfounded. Every new paradigm shift is met with skeptics and the winners are often on the side of progress- especially when the world’s largest governments mandate it.

The Consumer Ultimately Wins

New mileage standards, huge investment and a ground swell of advanced technology will all be contributors to a new age where we can rely less on fossil fuels. The consumer ultimately wins in this scenario. This is a good thing and the list of beneficiaries is long indeed- cash strapped consumers, our environment and a job market that is thirsting for the creation of new “clean tech” jobs. Of course those companies that are investing in a “fuel sipping” future should also benefit. In a difficult economy, these trends are a true bright spot and it will be exciting to watch the application of new technologies to an automotive industry that appears eager to embrace the future. Finally.

Disclosure: I am long AONE. I am a venture investor in Fisker Automotive