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Anton Wahlman: GM, Toyota And Fiat Chrysler Oppose Restrictions On Consumer Vehicle Choice



From Anton Wahlman
Auto/Mobility Investors


  • At the forefront of automaker economics is the battle of what, if any, U.S. federal fuel economy fleet-average standards should be.
  • Ford, General Motors and Toyota are lobbying in Washington to keep the annual increase in the MPG average to 1.5%, compared to 5.0%, which is the prevailing number.
  • The problem is that increasing MPG averages means more expensive cars. Estimates range from $2,000 per car to almost $4,000, depending on the objects of comparison.
  • If automakers see such forced price increases, we could see a reduction in U.S. sales volumes by 10% or more.  That would be catastrophic to them, consumers and suppliers.
  • Shareholders had better not get hit by the higher requirements, such as a 5% annual increase in fleet average. Industry valuations would be bound to go down.

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NOTE: A version of this article was first published on or about June 3, 2020, on my Seeking Alpha Marketplace site.

Seeking Alpha pointed to an update in the battle of U.S. federal laws pertaining to average fuel economy numbers for light vehicles: Auto group backs Trump in effort to weaken fuel efficiency rules.

Here's the background to what happened: In December 2016, after the November 2016 election but before the change in administration that was to take place in January 2017, the EPA decided to compel automakers to sell a mix of vehicles that would have to average 5% higher MPG (miles per gallon) every year until 2026: Here.

By forcing an MPG-average standard, the government puts the burden on the automakers to sell a certain mix of vehicles. If that prescribed average MPG for the overall fleet is different than what the consumers would have purchased in a free market, then automakers have a problem: They would have to lower the prices of the high-MPG vehicles, and pay for that lower (or nonexistent) profit on those high-MPG vehicles by raising the prices of the low-MPG vehicles. The net result would be a dead-weight loss, in Economics 101 terms: A loss for the seller, and a loss for the consumers as a whole.

Consumers are capable of deciding how to spend their money on a vehicle. As with all sorts of other capital investments, you have a choice of spending more up front (an investment) in exchange for lower operational expense. It's a familiar choice in your home as well: You can spend more for a more efficient furnace or wall/door/window isolation, and reap the benefits in the form of lower energy bills in the years that follow. You then calculate whether the investment is worth it, based on the annual savings and other factors.

Let’s take a person who drives a car at the nationwide average of 12,000 miles per year. Let’s further say that this person has a choice of buying a 20 MPG vehicle or a 30 MPG vehicle. Divide 12,000 miles by the MPG and here is what you get:

20 MPG: 600 gallons per year

30 MPG: 400 gallons per year

That’s a savings of 200 gallons per year for the 30 MPG vehicle over the 20 MPG vehicle. Today’s national average is $1.98 per gallon: State Gas Price Averages - AAA Gas Prices. Let’s call that a round $2.00 even, in order to make the division easier to visualize:

The annual difference is $400 per year: 200 gallons (600-400) x $2 per gallon.

Let’s further assume that the extra cost to get from 20 MPG to 30 MPG is $2,000 for an equivalent vehicle. I use $2,000 per vehicle because that's roughly what it takes to get there. For example, the almost-tied-for-best-selling vehicle in the U.S. today, the Chevrolet Silverado, costs $2,495 more when you go from a ~20 MPG 5.3 liter V8 to a ~30 MPG 3.0 liter 6-cylinder engine: Silverado 1500 for Sale: 2020 Silverado 1500 Pricing | Chevrolet.

Some vehicles will naturally vary this up-front price premium meaningfully. Some will be lower than $2,000, and others will be much higher.

In any case, that would mean that the “straight payback” is five years- $2,000 investment divided by $400 in annual energy savings.

However, that’s not a full economic calculation. The $2,000 extra spent is up front. We have to take into account the opportunity cost of the up-front investment. If you had not spent the $2,000 up front on a more expensive car, you could have invested the $2,000 instead. The average net stock market return over long periods of time is at least 5%, depending on the tax rate. That’s $100 per year in opportunity cost, on the incremental $2,000 invested in the more expensive vehicle.

As a result, you have to subtract $100 from the $400 annual fuel savings. That brings the payback to $2,000 / $300 = 6.7 years.

The consumer also will look at the higher MPG vehicle and assume that because it was more expensive to buy, it also will be more expensive to repair, over time. Clearly some expensive technologies, such as a battery, can have very low or even zero repair cost for its first eight or 10 years. But eventually, when the replacement cost does show up, perhaps after 10 years, then it will be an outsized expense. The first owner of the car may not experience this payment, but it will factor into the vehicle’s second-hand value.

That was a long way of saying that each consumer has to decide whether paying $2,000 extra up-front from going from 20 MPG to 30 MPG is worth the estimated annual $400 savings, minus opportunity cost of capital and future discrepancies in repair and replacement cost. In this example, it may be approximately seven years.

There's no fully objective and otherwise comprehensive objective answer to the question of whether that makes sense or not. Each consumer has to make that tradeoff for himself or herself. For example, the equation will be very different if a person drives half as many miles per year - 6,000 - or twice as many, 24,000.

One of the main points of the current automotive market is that the consumer is fully able to choose vehicles of varying sizes that yield around 50 MPG in most cases. Here are some examples in the U.S. market today:

US hybrids

city MPG

hwy MPG

avg MPG

starting MSRP



Toyota Prius







Toyota Camry







Toyota RAV4







Toyota Corolla







Toyota Highlander







Honda Insight







Honda Accord







Honda CR-V







Hyundai Sonata







Hyundai Ioniq







Kia Niro







Data sources: - The official U.S. government source for fuel economy information. and each brand’s web site

As you can see in the table above, the consumer has plenty of choices of various kinds of cars, crossovers and SUVs, including all-wheel drive, that will yield average fuel economy anywhere from 35 MPG to 58 MPG. If these are what the consumers want to buy, they can do so right now. There's no need for the government to mandate them.

From fuel economy to pollution: The paradox

Brand new cars sold in the U.S. today are very clean. That’s why you don’t smell anything from the tailpipe of a brand new 2020 model year car being driven out of a U.S. dealership today. The level of pollution has been reduced by so many decimal points since the peak of U.S. traffic pollution in 1973. What’s left is not zero, but it’s so little that it’s becoming imperceptible.

Even compared to a car that is only 10-20 years old, the difference between today’s brand new cars, and those from 2005 or thereabouts, is in the multiple decimal points when it comes to particulates such as NOx pollutants. An old car that's being replaced by a new one today is typically between 11 and 22 years old, with many being even older.

Leaving large trucks and other commercial vehicles aside, the only thing that really matters therefore when it comes to improving the air pollution caused by NOx and other particulates from light vehicles is to replace the oldest vehicles on the road - those aged 11-22 years, or more.

A vehicle that's 11-22 years old - or older - is typically not owned by its original buyer. It has traded to a second owner after 3-8 years, and then likely yet one more time. The owner of a 11-22 year-old car is typically someone who just can’t afford a brand new car. Maintenance may have been skipped, and that in turn results in even more tailpipe pollution.

Therefore, from the standpoint of pollution, the only policy that could move the needle is to replace the oldest vehicles on the road as soon as possible. The only way to do that economically is to ensure that the price of a brand-new car is as low as possible, so that it can get in the hands of a less affluent person sooner rather than later.

Even the least expensive brand new car in the U.S. market today is multiple decimal points cleaner than any 11-22 year old car on the road. Therefore, it’s vital for pollution numbers that the price of new cars be kept as low as possible.

Higher car prices mean more pollution

By requiring a higher fuel economy than consumers are willing to pay for voluntarily, an EPA standard that's higher than the free market equilibrium ensures that the cost of a brand new car will be higher than it otherwise would have been. That's what mandating additional equipment on a car does.

You used to be able to buy a new basic budget car for well under $10,000. Now, the least expensive brand car on the U.S. market is more than $15,000. This is causing fewer newer cars to be sold, that would have ended up replacing the oldest cars in the fleet - either immediately, or indirectly as that brand new car makes it to the second-and-third hand owners quicker than otherwise, thanks to its lower price.

That's the paradox: By setting higher MPG standards, the EPA ends up causing fewer new cars sold, which in turn would replace fewer of the oldest and most polluting cars on the road.

GM, Toyota and FCA see impact to their sales

Fiat Chrysler (NYSE:FCAU), GM (NYSE:GM) and Toyota (NYSE:TM) understand the paradox that the higher EPA standards for MPG (miles per gallon) mean less clean air than a lower MPG standard would yield. However, there's also an additional impact: By raising car prices, a higher MPG standard also reduces the number of cars sold.

This is simple Economics 101, demand and supply: If you raise the price of a product, you sell fewer of them. The EPA standard for higher MPG fleet average requirements is effectively a giant price increase to the average car. It means fewer cars sold.

Impact to Toyota, FCA and General Motors stock prices

Imagine if these companies were homebuilders instead, and that the government came out with a new law that said “Because we want people to live really well, we will no longer permit inexpensive homes to be built. Every home must be luxurious and have a minimum of four bedrooms.” It might add over 10% to the cost of a new home, going from $350,000 to $400,000.

That would be harmful to the businesses of those homebuilders. Fewer people could afford to buy those homes, and more people would be stuck in their old homes instead.

The law would have been well meaning, sort of: Some people should live in higher-end houses! Wouldn’t it be great if all houses were higher end? The problem with this analysis is cost and the basic fact that resources are limited. Yes, I think you should buy organic in the store, but what if that item costs 10% more? The consumer does not have unlimited money. If prices go up, fewer items are sold.

For that exact reason, General Motors, Toyota and FCA are simply protecting their stock prices by not wanting to be forced to sell more expensive products. It’s no different than if they were homebuilder stocks fighting a mandate that they must only sell more expensive homes.

5% vs 1.5% vs zero

The December 2016 EPA mandate was for a 5% annual increase in fleet-wide MPG, from 2020 to 2026. The new U.S. federal administration that took charge in January 2017 first called for 0% annual increase during those years - 2020 to 2026.

It has since compromised to a 1.5% annual increase. Ford, GM and Toyota support that number, for that time period. Many of the other automakers don’t.

The financial impact to the automakers from a $3,000 or so price increase onto every car, by bringing the fuel economy average to over 40 MPG, would be devastating to these stocks. It would be close to a 10% increase in the price of the product. If that happens over this short period of time, and is independent of, and on top of, inflation, it could lead to a sales increase of 10% or worse. That’s the impact of price elasticity.

The risk to automaker stocks from this regulatory battle

If Ford, Toyota and GM are unsuccessful in their quest to keep the annual fuel economy increases to 1.5% through 2026, it would cost the automakers dearly. They would have to subsidize the higher-MPG vehicles by adding to the prices of the vehicles that people prefer to buy. Overall sales volume would decline.

In the U.S., such a 10% price increase on cars would at best lead to a 10% decline in sales. In a normalized world of 15-17 million vehicles sold in the U.S. per year, the decline in overall market volume would be at least 1.5 million fewer cars sold per year (10% of 15 million).

With a typical new car plant today producing between 150,000 and 250,000 cars, that would lead to as many as ten entire car plans being shut down. The impact would spread to suppliers and beyond.

GM, Ford and Toyota had better see their position prevail in Washington DC, and that it prevails for the duration of the regulation - until 2026. Otherwise, it will be a very costly affair for sales volumes, profits, and the environment.

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Disclosure: I am/we are short TSLA. 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.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.