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Could Fuel Efficiency be Bad for Car Sales?

by Roger Lanctot | Aug 18, 2014

In the eyes of the car industry the only thing worse than telling car makers what kind of cars to build is telling dealers what kind of cars to sell. Both propositions smack of restraint of trade or even, dare I say it, socialism.

So it was no surprise when a National Automobile Dealers Association economist spoke at the Traverse City Management Briefing Seminar two weeks ago about how the Federal targets for higher fuel efficiency will curb the industry’s ability to sell more cars “after the end of this decade,” according to the report in Automotive News (http://tinyurl.com/olkt6pd - “Fuel regs will stymie industry after 2018, NADA economist says”)

The NADA has long opposed the Federal Corporate Average Fuel Efficiency (CAFÉ) fuel efficiency target of 54.5 miles per gallon by 2025. Automotive News quotes Steven Szakaly, chief economist for NADA as saying: “Unless gasoline prices rise significantly, or we see consumers becoming irrational and everyone buying an electric car, it’s tough to think of consumers willing to pay $3,000 to $7,000 more for the exact same car, just because someone in Washington, D.C., or California says they need to buy it.”

There are a few things wrong with Szakaly’s statement.

1) Who’s to say the cost differential will be in the range he claims by 2025?

2) What will the price of gas be at that time?

3) What will the range of fueling alternatives look like at that time?

4) How will cars themselves differ by that time?

5) Is 54.5 MPG really so much to ask?

But the biggest question of all? Who, better than a car dealer, knows how to sell a payment? As the prices of cars have risen the length of financing terms have grown to 60 months and longer along with a rise in leasing. And, by the way, it’s no secret that cars are lasting longer, upwards of 11 years.

But let’s unpack the ecologically unfriendly viewpoint of the NADA and take a closer look at reality and the changing regulatory landscape. Not only are higher fuel efficiency standards coming, they are arriving as a zero-emissions vehicle requirement is taking hold in 10 states.

The 54.5 MPG target for conventional internal combustion engines derives from the Federal government’s effort to harmonize fuel efficiency standards across the country. While politicians may debate the reality of global warming, regulators have accepted that greenhouse gas emissions are causing climate change and must be reduced – particularly CO2 emissions from cars.

The shift to CAFÉ was an assertion that only the Federal government could set fuel efficiency standards. The California Air Resources Board’s greenhouse gas emission reduction standards were introduced and challenged in 2004 for being a backdoor means of setting fuel efficiency standards.

California proceeded thereafter to introduce its Zero Emission Vehicles requirements, which were adopted by 10 states including Vermont, Maine, Massachusetts, Connecticut, Rhode Island, New York New Jersey, Oregon and Maryland. Eight of those states (ie. excluding Maine and New Jersey) signed a memorandum of understanding in 2013 for an Action Plan released in May of 2014 (http://tinyurl.com/n9c5qo7 - Maryland’s MultiState ZEV Action Plan brochure). The eight Action Plan states will meet next month to determine next steps.

The combined total of vehicle sales in the Action Plan states represents approximately 30% of total vehicle sales in the U.S. California’s influence, alone, has historically been persuasive enough to influence global vehicle emissions policy, but with the support of nine additional states, the ZEV program is emerging as a model for other countries (and U.S. states) wrestling with the desire to bring more zero emission vehicles into use.

The objective of the ZEV program is to “enhance energy security, diversity and reliability by reducing our dependence on petroleum products for transportation fuel,” in the words of the Action Plan. The member states seek to have 3.3M ZEVs on the road by 2025.

Selling cars in the U.S. will mean current market participants and new players will have to contend with the ZEV requirement. This explains why there are 28 car models currently on the road that fulfill the EV or plug-in hybrid (PHEV) requirements, plus two fuel cell vehicles, the 2014 Honda FCX Clarity and 2015 Hyundai Tucson Fuel Cell.

The Action Plan brochure notes the existence of 17,945 publicly accessible charging stations distributed across 9,330 sites nationally.

NADA’s skeptical stance toward alternative fuels ignores multiple market realities including the rising cost of fuel, a shift in vehicle ownership behavior, the growing longevity of vehicles, an increased emphasis on total cost of ownership, and the importance of ecological responsibility. One of the action plan items is dealer outreach to prepare and educate dealers to take on the selling and marketing of ZEVs.

But NADA has yet to come to grips with selling ZEVs, the organization is more concerned about the 54.5 MPG Federal target for 2025. While 54.5 MPG sounds stiff, the reality is that the 54.5 target translates, in real-world use, to something more in the 36-38 MPG range. The 54.5 figure is the sticker target before adjusting for air conditioning and real use.

The goal of CAFE is a fleet-wide, national standard for fuel efficiency with corresponding emission reductions. The bigger issue for the Federal government is how to fund highway repairs and improvements in the face of declining gas tax revenues – a gap that will only grow with improvements in fuel efficiency. States such as Oregon and California are either pondering or testing odometer-style per-mile road use taxation.

It seems clear that the time has arrived for dealers to embrace the sales and marketing of fuel efficient cars. Szakaly’s quibble that more fuel efficient cars will cost $3,000-$7,000 more 2-3 years from now is not borne out by the facts. The EPA estimates that the added cost for greater fuel efficiency will be $3,000 at the high end.

There are bigger changes impacting the auto industry than just fuel efficiency improvements – pushed by government regulation. The rapid adoption of collision avoidance technologies and inter-vehicle communication will ultimately alter vehicle design, though perhaps not appreciably by 2025. But, longer term, in a world where cars don’t collide weight can be greatly reduced and fuel efficiency greatly enhanced.

I find it hard to believe that car dealers are going to have a tough time selling a product that lasts longer and longer and costs less and less to own and operate. Might these vehicles have higher sticker prices? Sure. But if anyone knows how to sell a payment it’s a dealer. This is no time to be complaining about progress.

Qualifying ZEV Vehicles Currently on U.S. Roads:

2014 Smart fortwo EV Convertible and Coupe

2014 Fiat 500e

2013 Scion iQ EV

2014 Chevy Spark EV

2014 Ford Focus EV

2014 Mitsubishi i-MiEV

2014 Nissan Leaf EV

2014 Tesla Model S EV

2014 Honda Fit EV

2014 Toyota RAV4 EV

2013/14 Toyota Prius Plug-in Hybrid

2014 Honda Accord Plug-in Hybrid

2014 BMW i3 REX

2013/14 Ford C-Max Energi Plug-in Hybrid

2013/14/15 Ford Fusion Energi Plug-in Hybrid

2011/12/13/14 Chevy Volt EREV

2014/15 Cadillac ELR EREV

2014/15 Porsche Panamera S E-Hybrid

2015 Porsch 918 Spyder Plug-in Hybrid

2012 Fisker Karma

2014 Honda FCX Clarity

2015 Hyundai Tucson Fuel Cell

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