Congress Wants Green Trucks. Do Buyers?
As Toyota Motor (TM) joins the Big Three Detroit automakers in trying to soften up fuel economy legislation winding through Congress that would require a Corporate Average Fuel Economy standard of 35 mpg by 2020, what gets lost in the controversy is that the carmakers actually could achieve the target. They just want a little more time—and money.
Key to the fuel economy target in the likely bill: building pickups and sport-utility vehicles that average 27.6 mpg by 2020. Despite complaints from automakers, that goal is certainly attainable. But it's going to take a well-funded information campaign aimed at consumers to prime the marketplace for what amounts to a re-engineering of the U.S. pickup market. This is what automakers, even Toyota, are afraid of. Nobody wants to upset "Bubba" pickup buyer.
The automakers have the technology to make the shift happen. But to build pickup trucks that get almost 10 miles more per gallon than they do now will require billions in new investment. This is a legitimate concern on the part of the auto companies, since the three domestics are struggling mightily to make any profit at all these days. Research and consulting firm Global Insight recently studied the issue and concluded that technology and manufacturing investments would be about $12 billion, including $8 billion on eight new diesel engine plants. And those investments would have to be made starting now, says Phil Gott, Global Insight's director of automotive consulting, in order to achieve the ramp-up with consumers.
Building Plug-In Efficiency
So far, the U.S. government hasn't talked up any plans to subsidize the shift. That seems odd. The government spends billions a year subsidizing farmers. And even Republican lawmakers believe there is a direct connection between foreign policy and U.S. dependence on oil. In the foreword of a new book, Freedom from Oil by David Sandalow, Senator Richard Lugar (R-Ind.) notes, "Oil is a magnet for conflict, a weapon for petro-states, and a stimulant for terrorism." Lugar adds, "We can build flex-fuel, plug-in highly efficient cars that get hundreds of miles per gallon of oil. It's time to get on the road to doing that." "Hundred of miles per gallon" refers to plug-in vehicles that can make a 40-mile trip without using gasoline.
The analysis by Global Insight goes like this: By 2020, nearly two-thirds of the U.S. vehicle fleet will have to be powered by a direct-injection engine (either gasoline or diesel), downsized from the current engine displacements on the market today, and be turbocharged. Diesel would have to comprise one-third of the market. Half of all vehicles would be one of the four forms of hybrid, and half of those hybrids would also be diesel-equipped. "To introduce such a stunning shift from port-injected gasoline engines (the vast majority of U.S. powertrains) to the new configurations would require a staggering amount of investment," says Gott.
Buyers Look at Upfront Costs
Toyota has made big investments in its new pickup truck plant in San Antonio as well as its Indiana plant where it builds SUVs. And even for Toyota, the move to much better truck/SUV fuel economy means not getting its planned return on investment in those plants, as well as its engine plants, if the energy bill goes through.
Toyota and its U.S. rivals support an alternative bill proposed in the House of Representatives that sets a goal of 32 to 35 mpg by 2022. It's not that much different from the stricter bill, but it reduces the size and speed of the investments that have to be made. "We believe this legislation sets a realistic and achievable deadline for all automakers to increase fuel economy standards," said Josephine Cooper, Toyota's U.S. head of government affairs.
From the consumer's standpoint, here is what would unfold for truck and SUV buyers. Some percentage, perhaps 25% to 30%, of those buying standard light-duty pickups will pay around 25% more for their trucks than they do today. That would put today's Chevrolet Silverado 1500 that costs around $26,000, fairly well equipped, at $34,000. But a person who owns that truck for, say, six years, will save about $1,000 or more per year on fuel. That math makes sense. But it is the kind of calculation that scares the heck out of auto companies. They know that in the real world their truck buyers look much more at upfront costs than ongoing costs.
Too Much Truck-Building Capacity
One of the other consequences is that some percentage of would-be truck buyers will examine closely whether they can get away with a smaller truck. General Motors (GM) and Ford Motor (F) have paid little attention to smaller trucks. The Ford Ranger and Chevy Colorado, which cost about $16,000 to $19,000 after rebates and options, could also get diesel engines to make them more fuel-efficient. Sales of these smaller trucks have fallen in recent years in large part because Detroit has been discounting the big ones so much that buyers have felt compelled to trade up to the bigger, thirstier models. Why all the discounting? Because Detroit has far more truck-building capacity than it needs for current and near-future demand.
Diesel engines, which are only offered on heavy-duty work trucks at present, would have to become a much bigger percentage of pickup sales, and automakers would have to make them available on light-duty trucks. Passenger car buyers have long been reluctant to adopt diesel vehicles because of the smell of the fuel, the fact that not all gas stations have a diesel pump, and the ones that do can be crowded with big trucks. An estimated one-third of pickup buyers use their trucks just like cars—out of personal preference rather than for work—and would likely be just as apprehensive as car buyers about buying diesel vehicles.
What's really possible? Indian vehicle maker Mahindra & Mahindra (MAHM.BO) plans to launch a midsize pickup in the U.S. in early 2009 powered by a turbocharged diesel engine that gets at least 30 mpg, perhaps more. The truck is untested in the U.S. marketplace. But it's significant that a major foreign company (Mahindra is the fourth-largest tractor brand in the U.S.) is building its business plan around fuel-efficient trucks and SUVs.
Specs Complicate Manufacturing
The fact remains that the U.S. pickup truck buyer is the most difficult consumer in the country. Consider that Toyota is on its third pickup design, and the current Tundra, while praised by auto journalists, isn't an unqualified success yet. That is, in part, because the company is not offering all the choices these customers want. Ford, for example, offers consumers five different "series" of trucks and some 26 configurations of its F-Series.
"By the time one of these buyers specifies the cab, the bed length, the style, the engine, the wheels, and the rest of it, you are into a huge investment on the part of the company in the complexity at the factory to meet those specific demands," says independent marketing consultant Dennis Keene.
Guzzlers Still Win
Despite the recent slowdown in pickup sales, due mostly to the softening of the U.S. housing market, Detroit's Big Three automakers have long lived and died on the profits of its pickup and SUV business. From a cost and manufacturing standpoint, trucks and SUVs offer much more profit per vehicle than passenger cars—sometimes as much as $10,000—depending on the age of the design.
The fear built into trying to reengineer this usually reliable market to go along with a national government policy makes automakers nervous. Toyota flopped with its first big pickup design, the T100, and its first Tundra design was an also-ran. It's only the new Tundra, which gets worse fuel economy than GM and Ford rivals, that gives the company any hope that it can finally crack the "Joe Pickup Truck" market.