New government requirements are putting car maker ingenuity to the test. According to the Wall Street Journal, "by 2025, the U.S. government wants large pickup trucks like the Chevrolet Silverado to get about 44% better mileage than today." The prospect "could be a daunting challenge, particularly if General Motors (NYSE:GM) doesn't want to cut the towing capability, payload or power of its best-selling and highly profitable big pickup," especially since GM has already "improved the Silverado's fuel efficiency by 20% since 2002." In the end, GM will have to up its game even further or stop making one of its most popular models.
But, there is a loophole. "Administration officials [have] highlighted the goal of boosting the average fuel efficiency of new cars and light trucks to 54.5 miles on a gallon of gasoline by 2025," writes theWall Street Journal. "In the real world, however, an auto maker could still sell significant numbers of vehicles that don't meet that target. If the Silverado falls short of the requirement that it get about 26 miles per gallon in 2025 - the official target as adjusted to reflect real-world driving results - GM could make up the difference by selling a smaller truck or car that gets better mileage than required for its class."
While hybrid technology is not a requirement to accomplish these standards, the easiest way to do this is by using electric car technologies.
The Obama administration estimates the cost of converting a vehicle to that level of efficiency at $1,800 a vehicle by 2025, and "consumers who buy 2025 cars can expect to save more than $8,000 over the life of a car compared to 2011 models, more than offsetting higher purchase costs. The calculations are based on a gas price of $3.87 a gallon, according to the Environmental Protection Agency."
The Wall Street Journal explains: "The key requirement of the new mileage standards is that vehicles in a given size class-midsize cars, large pickups, subcompact cars-meet the targets for that class. The bigger the vehicle, the lower the mileage target. A subcompact Honda (NYSE:HMC) Fit, which is rated at 30 mpg today, would have to get roughly 49 mpg to comply with the 2025 standards, according to the new rules."
There are also incentives for offering alternative energy cars. The new federal rules actually allows a company that sells electric vehicles to count that miles-per-gallon efficiency twice. This could be a major point of competition for an electric car maker like Tesla Motors (NASDAQ:TSLA). Makers of plug-in hybrids, such as Toyota and its Plug-in Prius, Ford and its Fusion, or GM's Chevy and its Volt, will get a less generous credit.
In the pickup industry, Ford (NYSE:F) has been making a switch to turbocharged six-cylinder engines as a substitute for the large, V-8 motors that traditionally led the market and been largely successful in that venture but reaching that 2025 benchmark is still no easy feat. Toyota (NYSE:TM) and Honda have long been known for fuel-efficiency. Toyota has been aggressive in introducing its Prius models and other hybrid technologies and enjoyed some success with that as well, jumping 300% year over year.
The problem is that consumers are not necessarily buying, or at least not by that much over all. The situation is bad enough that GM is actually shuttering the Detroit factory that makes the Chevy Volt for a month to forestall an oversupply of the electric cars. Honda's CR-2 and Insight vehicles were also disappointments. Solely electric vehicles have done the worst. According to the LA Times, "Sales of what are considered "pure" electric cars - they run off just a battery - have risen to slightly over 4,100 during the first six months of this year, up just 6% from the same period a year earlier."
In other words, compliance or not, fuel-savings or not, consumers are not swayed.
For investors, this means that simply following the technology is not going to cut it. The technology is only one part of the puzzle and while it has to take hold eventually - government requirements will push fuel efficiency to the foreground by 2025 - until then, investors need to either invest with an eye toward a longer term position (i.e. over 10 years) or follow consumer sentiment.
I recommend looking to the companies with strong plug-in hybrid technologies, like the Volt and the Prius. These companies should be able to play on that know-how to develop fully electric cars that consumers will love as sentiments shift and government incentives kick in. But, remember that these companies are going to need some room for those plays to develop. Right now, for as quickly as sales of those vehicles are increasing, they still remain a relatively small part of each company's respective production. Being a forerunner provides a certain advantage but be aware that it could take 2 to 5 years for investments in such companies to pay off.
Again, I would advise investors to stay away from investing in a car maker each time a new, more fuel-efficient model is introduced. But, there are companies developing the actual technology that car makers will use to produce technology driven and more energy-efficient vehicles. Google (NASDAQ:GOOG), for example, is seeking partnership in its efforts to produce self-driving cars. Last year, Google partnered with Ford to test out its Google Prediction API, to maximize vehicle efficiency, especially in hybrid and electric vehicles. Any one of the above mentioned car makers can partner with such a company often for much less than researching and developing the technology would cost - a trend seen often in the world of pharmaceuticals but no less valid here. As the need for this type of technology, fueled by government requirements, intensifies, investors are going to see more auto makers engaged in mergers, acquisitions and strategic deals - providing a good opportunity for investment, be it in the company buying or selling.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.