The US government has set the target for 17 billion gallons of ethanol use by 2017 and Corporate Average Fuel Economy (CAFE) standard at 35 MPG by 2020. This entails the blending proportion will gradually continue rising in the coming years with the 2017 target being 20%. The volume of ethanol is expected to cross 50% of total gasoline consumption in the future.
Auto manufacturers have been projecting $100 billion Investment in the production of new models to meet these demands. The current annual ethanol production targets have been set at 36 billion gallons by 2022. Brazil has set an annual ethanol production target of 11.62bn gallons by 2016 while China has set a target of 1 billion gallons for itself in the coming years. In the long run, Europe and Asia are all aiming at 5-20% blending.
The US Government states that ethanol has added $47.6 billion to the nation’s GDP and has resulted in savings of imports of 228mn barrels or $16 billion per day. Greenhouse gas emissions have reduced by 10 mn tons. The government has mandated 9 billion gallons in renewable energy in 2008, targeting 15bn gallons in 2012 and around and 36 billion gallons by 2022. The government estimates that the current moves will displace the use of 11.3 billion barrels of oil until 2022.
Impact on Automobile Manufacturers
To implement these moves, more hybrid cars or eco cars will have to come on the road. Automobile manufacturers are seeking government subsidies for their $100 billion investment in manufacturing these hybrid cars and to meet the CAFE standards in their vehicles. This also entails that the used car market for current models will decline rapidly.
The fuel standards may drastically affect the margins of manufacturers, affecting their financial performance. General Motors has stated that achieving Leadership status in the Energy Diversity segment will be a key business strategy for them. GM estimates that it would cost them between $5000-6000 USD per car to meet the CAFE standards. Toyota is targeting 50% of its production to be Flexi-Fuel designs in the long run.
Response to the CAFE standards Industry-wide:
CAFE standards have been changed now to make the fuel economy requirement size-based. Since these standards are also being supported by growing consumer awareness towards greenhouse impacts and their interest in reducing them, manufacturers have no alternative but to implement these standards.
Trucks are the major target for the manufacturers since they are the biggest emitters of pollutants.
But concerns remain. Current cars can get damaged by using blended fuel of more than 10% ethanol. Toyota is warning in its warranty manuals that their engines may be damaged by using such proportionate blend. The impact has been summarized for the following models:
A Citigroup 2007 report stated that the actual value added to consumers is less than the increase in retail price in every segment.
Progress in Bio-Fuel Vehicles
Ford Flexifuel vehicles are now available across Europe. Ford has sold more than 40,000 Flexi Fuel vehicles in Europe to date. Ford is planning to double its hybrid vehicle production in 2009 and four-cylinder engine production in North America by 2011. It will also introduce EcoBoost engine technology on V6 applications next year and I4 engines in 2010. It will offer fuel economy designs on 80% of the lineup by 2012. Land Rover is also introducing from 2009, fuel and pollution efficient technology to cut down emissions.
Ford wants to be the largest domestic producer of full hybrid vehicles in North America. It is expecting all of Ford’s North American engines to be upgraded or replaced by 2010. It is converting 3 truck assembly plants to small car production with initial changeover beginning this December. It is expecting all North American assembly plants to have flexible body shops.
GM has several initiatives lined up to match the CAFE standards. These initiatives include a global compact program for the Chevrolet brand, next generation Chevy Aveo and a high efficiency engine module for the USA market per its recent SEC Filing according to a press release from GM. GM is investing $7Bn over the next few years to manufacture compliant new models. GM is also trying to improve its efficiency in its traditional gasoline models.
Foreign Brands’ Market Share
Toyota has set a 2009 global sales target of 10.4 million vehicles for 2009, which reflects an 11.3% increase from 2007 targets. Toyota has been witnessing strong growth in its Camry sedans and especially registered strong growth in hybrid and fuel efficient vehicles. Camry hybrid reported October 2008 sales of 2,792 units. Corolla recorded best-ever October 2008 sales of 27,386 units, up 2.2 percent over the year-ago month. Yaris reported sales of 4,871 units for the month. The Prius mid-size gas-electric hybrid posted October sales of 11,804 units. Toyota Motor Sales (TMS) calendar-year-to-date hybrid sales totaled 216,760 units. TMS also posted October sales of 16,310 hybrid vehicles. The Lexus division reported October sales of 692 hybrids. In Brazil and Russia, Toyota will focus on bio-fuel run corolla and local production of Camry’s. Toyota is targeting one million Hybrid Electric Vehicle (HEV) sales by 2012 (10% of production).
PSA is targeting to sell 4 million vehicles by 2010 and has set an operating margin target of 5.5-6% for 2010. It is planning to launch roughly between 53 models from 2007-2010. By 2015, PSA wants to consolidate its market share in Europe and become market leader in each of its divisions. It wants Peugeot and Citroen to rank among the European Top 5. Peugeot is expecting 29 product launches in Europe between 2007-2010. Peugeot is targeting the fleet market sales into which, will account for its 300,000 additional units in 2010, apart from dealer network optimization and an aggressive marketing strategy. PSA is also planning a cost-cutting program and also targeting Non-European sales target of 400,000 vehicles by 2010. PSA plans to reduce average CO2 emissions in Europe. PSA plans to launch HDi hybrids in 2010 and target 1 million sales of Stop & Start units from 2011.
SAIC will be launching hybrid car, apart from focusing on fuel cell development to demonstrate the operational feasibility of fuel cell cars. SAIC’s hybrid car. SAIC already has developed a fuel cell car with speed of 150 km/h in association with suppliers including Shanghai Fuel Cell Vehicle Powertrain Company.
Sources: Automotive Fuel Economy Program, Annual Update, Calendar Year 2001; U.S. Department of Transportation. National Highway Traffic Safety Administration, Light Truck Average Fuel Economy Standard, Model Year 2004, Final Rule; and U.S. Department of Transportation, National Highway Traffic Safety Administration. Average Fuel Economy Standards for Light Trucks Model Years 2008-2011, Final Rule.