By Jim Kerr
Many Canadians may think of a café as a place to get a bowl of soup and a sandwich, but in the auto industry, CAFE is the acronym for Corporate Average Fuel Economy, a standard set by the National Highway Traffic Safety Administration (NHTSA) in the United States. Manufacturers who don’t meet the average fuel economy standard for all the vehicles they produce must pay a fine of $5.50 for every 1/10 mile per gallon they are under the standard, for every passenger car and light duty truck they make.
In the past, cars and trucks had separate standards but in 2012 the average is combined. Currently the U.S. standards are 27.5 miles per (U.S.) gallon for passenger cars and 23.5 miles per gallon for trucks but these will be raised progressively from 2012 to 2016 till they reach 34.1 miles per gallon. Future projections are for the standards to be set between 47 and 62 miles per gallon by 2025!
So what does this mean for us in Canada? We also have standards. The Company Average Fuel Consumption (CAFC) standard is similar to the U.S. CAFE standards except that they are voluntary in Canada. Starting with the 2011 model year, Canada is looking at regulations that will be a “made in Canada” standard but will, at a minimum, meet the U.S. goal. Basically it means that vehicles sold in Canada will likely be the same as the U.S. when it comes to fuel economy standards.
While the auto manufacturers support the long term planning and goals as an aid to product development, it also means there will be some big changes in the marketplace. Jerry Chenkin, Executive Vice President, Honda Canada says that for the first time in automotive history, the government will be mandating what people buy rather than letting consumer demand determine what is available in the marketplace. It’s mainly because of CAFE. Let’s look at a scenario for the future.
First, let’s look at the givens. Small, light vehicles get better fuel economy. Big ones use more fuel. Manufacturers make less profit on small cars and more on larger units and luxury vehicles. For the first time in history, trucks (includes SUV’s and Crossovers) have outsold passenger cars this year. Fuel economy standards are going to rise sharply and the manufacturers don’t want to pay fines for excess consumption. If fines are paid, the costs will be passed on to the consumer. Finally, the technology to increase fuel economy is going to add to the price of a vehicle.
From these givens, in order to meet the 2016 standards and the even tougher ones beyond, the majority of the vehicles produced and sold are going to have to be small (very small) cars. For the manufacturers to make any profit, the price of small cars is going to have to rise significantly.
Larger vehicle prices are going to rise too. There will still be some public demand for larger vehicles but the supply will be limited because the manufacturers must limit the number made to meet the CAFE standards.
Big or small, vehicles are going to cost more. Some of the cost in technology and added equipment will be offset by the better fuel economy, but not all the costs.
You will also see more hybrid, electric and alternate fuel vehicles on the road. Already you may notice many E85 compatible vehicles on our streets, even though E85 fuel is not readily available in Canada. Under the CAFE standards, building alternate fuel/hybrid vehicles can offset CAFÉ penalties. Look to see many more of these vehicles in the future, not because they may be the best technology but because they will reduce financial penalties.
According to Chenkin, we only need to look to Europe to see what our vehicle future holds for us. Very small cars, small delivery vehicles, and diesel engines almost exclusively. Canada is very different than Europe, with our less dense population, less public transportation and broad expanse to ship goods and move people, but if we want to drive in the future, the standards that are set will have to be met or we simply won’t have access to vehicles at an affordable price.
I’m wondering, should I invest in small cars now while the price is still low or should I invest in gold? Which will gain the most value by 2016?