Citigroup Report Says Automakers Can Profit from CAFE Standards

Citigroup Report Says Automakers Can Profit from CAFE Standards

Anticipating legislation that will boost required gas mileage for cars in the United States, Citigroup has released a report showing that the auto industry can improve mileage and improve profits at the same time.

The report comes as the U.S. Congress is considering bills to raise the standards for the Corporate Average Fuel Economy (CAFE) standards, which dictate the miles per gallon achieved by an automaker's vehicle line. In June, the Senate passed a bill that would raise the average to 35 mpg by 2020, a 40 percent increase over the average 24.1 mpg currently achieved by the six major U.S. car companies.

"When you have the world's number one bank, which has financial ties to many major automakers, saying fuel economy standards are a good economic play, it drives a stake through the heart of the auto industry's scare tactics," said Representative Edward J. Markey of the House's Select Committee on Energy Independence and Global Warming.

The report, "CAFE and the U.S. Auto Industry; A Growing Auto Investor Issue, 2012-2020," was created by Citigroup, working together with Ceres and the Investor Network on Climate Risk. The report examines predicted changes to the CAFE standards, and finds that improved mileage requirements will be good for manufacturers as well as for the environment.

"Our analysis reveals that the 2020 target is tough but attainable, requiring aggregate improvements of 2.5 percent per year," the report's authors write, "and -- surprisingly -- generating some growth in variable profits for most automakers."

The report looks at the estimated impacts by 2012 for all six major automakers -- Chrysler, Ford, GM, Honda, Nissan and Toyota -- that have major sales in the U.S. Across the board, the estimates suggest that higher mileage requirements will result in a move toward more cars and significantly fewer pickups and SUVs, which will necessarily impact truck-heavy automakers like GM more than Honda, which relies heavily on small, fuel-efficient vehicles already.

Financially, the impacts for the first phase of improvements, which Citigroup's researchers say will be in place by 2012, will have almost no impact for most of the automakers. The forecasts predict that GM could see a significant boost in its operating profits compared to the other companies -- a growth of $220 million by 2012, making it the biggest winner of the group. The automakers most likely to be negatively affected by the changes are Chrysler and Toyota, both truck-heavy manufacturers, with losses in profits of $92 million and $72 million, respectively.

The full report from Citigroup is available from