Friday, 22 May 2009

Macro-Level Trends - US Emissions Regulation - One Size Fits All.

As an echo of the the 1973-5 Oil Crisis, the "milestone" announcement that has been years in the making arrived. After years of debate and multi-various federal and state standards set, the coming of a single nationwide plan for US emission and mileage standards seems to have arrived.

Although not yet ratified by an Act of Congress, Obama's vision that the US should improve its energy security and advance its role regards emitted pollutants has been made clear. A country-wide CAFE (Corp Avg Fuel Efficiency) standard has now been aired for passenger cars and light trucks to be attained by 2016 - 4 years earlier than previous proposals.

Passenger cars must deliver 39mpg up from 27.5 today, and light trucks must reach 30mpg from 23mpg; giving a fleet average of 35,5mpg [NB these are of course average figures, and do not relate to specific models, simply the cross-fleet median, so as to allow for 'performance' and 'frugal' models and variants that sit above and below the benchmark].

The announced outcome of these measures is to save the equivalent of importing 1.8bn barrels of oil per annum (approximate the import capacity from Saudi Arabia) and saves 900m metric tonnes of greenhouse gases being emitted into the atmosphere which is paralleled to 177m cars being taken off the road. By current Washington estimates car-makers will need to average a betterment of 5% each year between 2012-2016 given todays capabilities.

For Detroit this of course sets provides a single template by which to engineer CO2 & NOx emissions for the country. It was previously claimed that the different regional standards made the Big 3's job hard, even though their foreign peer set such as the Japanese and Germans were able to engineer to an in-house standard by 'simply' bettering the most demanding state's requirements. But at least for Detroit it banishes the regulation chasm between 'progressive' California and the other states, even if the new standards are more aggressive than Californian demands.

All constituents from Congress to Detroit appear supportive of the plan, though given Detroit's current woes the "per vehicle on-cost" generated by additional R&D/Engineering spend, powertrain systems spend and dealer service/maintenance spend will be a much discussed item of the corporate agenda behind closed doors. Reports of that additional cost wildly differ from $600 by Automotive News and $1,300 by the WSJ.

But of course it will be a case of different technological solutions suiting differing applications (ie vehicle duty cycles); whether that be smaller capacity turbo-charged & lean-burn engines for lower cost compact & mid-size cars, hybrids and clean diesels for mid-size and large cars and clean diesels for SUVs and tradition diesels with tail-pipe tech for trucks. And of course the continued 'slow-burn' possibilities regards what are in reality specialist-case EVs. A case of "horses for courses" relative to consumer expectations and R&D/project budgets. But we suspect that given the markedly reduced 'contract' and 'spot' price of steel Detroit will only utilise aluminium and composit structures and sub-structures where the additional cost can either be absorbed in high sticker price luxury/niche cars or can be amortised by high volume cross-car standard part production.)

investment-auto-motives agrees with other commentary (eg Wachovia) that for the short and medium term this plan could in the short-term put Detroit and its traditional 'slow-progress' supplier-base at a distinct disadvantage given that its general product line and systems technology is "behind the curve" and so will require possibly billions of dollars of funding. However, there is of course Congress' Green Tech Fund that was announced by Bush prior to the later GM & Chrysler aid packages, which offered $25bn as a credit line as part of the 2008 Energy Bill.

Suppliers and external engineering consultancies have been eager to play their respective parts in forming the intelligence behind and conclusions to this debate; jossling as beneficiaries of the outcome.

One typical example is Ricardo Engineering has wisely endeavoured to best position itself - given its diesel combustion knowledge and competence build-up in electronic control systems for various hybrid system types and full EVs. As a savvy player it has endeavoured to mould the general dialogue as both a NHTSA contributor (helping to form government appreciation) and worked with the investment bank sector to mould technical and business case understanding.
From the supplier angle, it has been aired that the likes of American Axle, Lear, Magna could suffer due to their previous dependency on truck parts production, whilst the likes of BorgWarner could gain a metaphorical boost from its Turbo division.

Amongst Detroit it has been Ford that historically has tended to be the early advocate of efficiency-seeking design and engineering, today leading in the form of the Eco-Boost range of engines available as IL-4 & V-6, so GM's Ecotec and Chrysler will be seeking to chase Blue Oval's lead in advancing conventional ICE powertrain. This required impetus this raises the GM-Opel divestment issue, since GMNA will be keeping a strategic stake in the company and be seeking a synergistic relationship from GME's new owners given that Russelsheim has been the development home of small (B) compact(C) and medium(C/D) platforms - Gamma, Delta, Epsilon respectively.

However, beyond the reported cash-sale demand (vs FIAT's non cash offer) it must be assumed that GM's HQ will be seeking a technical advantage/routemap from the likes of Magna or RHJI International that can provide technical-transfer to GMNA for the renewed competitive positioning of both products and the 'new' North American company.

Prescient also that on the day of the Presidential announcement that Daimler should announce that it has taken nearly 10% of Tesla for an undisclosed sum "of a double digit millions sum". This cements the business relationship born from the battery supply arrangement for the Smart EV and provokes conjecture that Daimler will supply the C-E class architecture to enable a ready made production solution for the Model S. Yet much still remains unclear about the specifics of synergies Tesla offers Daimler, and about the eventual battery-tech functionality and business case given Daimler's own 49.1% interest in a JV named Deutsche Accumotive. In the end, it could simply be a blocking maneuver by Daimler to stop any of its competitors 'marrying' Tesla.

Interesting indeed given the recent increase in Daimler stakeholding from certain GCC investment companies. Much of their funding obviously originates from the region's pumped petro-dollars, and although the GCC is investing in clean-tech, it raises the possible prospect of Daimler at best setting forth internally competitive technology streams, and at worst conflicting big-picture ideologies.

On which note, now that oil has reached $55pb and its extraction & refining overhead has finally come down thanks to deflationary pressures, margins for oil-producers are set to grow and if sustainable for long enough attract further oil industry investment. So whilst there has been justified criticism regards Obama's apparent avoidance of a gas-tax - to reduce auto-use and assist the Treasury coffers - that could be ratched-up beyond the nominal 18c per gallon as Exxon et al improve their earnings and the economy slowly recovers over the next 4 years.

Whilst the US seeks global alignment in economic reform and the banking sector, so it should do so in due course for the auto-industry to generate harmonisation and improved value-creation. Achieved via both FDI alliances such as FIAT and a possible latter-day 'new GME' relationship, and also by re-aligning consumer desires. VW did it with Beetle & Golf in the 60s & 70s, Toyota did it with Corolla in the 70s & 80s, BMW did it with 3-series in the 80s & 90s and Toyota did it with Prius in the 2000s. VMs have been seeking the panacea of truly global vehicles for eons, today the US government can continue its 'time for change' efforts and assist that goal and in turn regain the heavily depressed investor sentiment in the sector.

However, as oil rounds out at $55pb, could it be an omen for the return of the 1970s style nation-wide 55mph limit? As an intermediate CO2 reduction-step which simultaneously maintains national oil inventory, might Obama use it as part of a new speed-limit delineation policy for various road systems?

The announcement may be the first step of a very different US autos roadmap – philosophically and literally.