New Gas Mileage Standards Creating Winners & Losers (JCI, XIDE, MXWL, BWA, HON, TSLA, GM, F, TM)

Last week’s announcement on new corporate average fuel economy rules, known as CAFE, got a lot of coverage for its headline number of average fleet mileage of 54.5 miles/gallon by 2025. The auto industry likes the fact that it has 14 years to get to the new standard because there are incremental improvements that can be made over that period that while small in absolute terms will add up quickly.

And presidential boosterism aside, electric vehicles don’t figure much into the picture. The companies that are likely to see some real gains from the new CAFE standards are electronics suppliers, battery makers, and engine companies. These include Johnson Controls Inc. (NYSE: JCI), Exide Technologies (NASDAQ: XIDE), Maxwell Technologies Inc. (NYSE: MXWL), BorgWarner Inc. (NYSE: BWA), and Honeywell International Inc. (NYSE: HON). Electric vehicle maker Tesla Motors, Inc. (NASDAQ: TSLA) shouldn’t expect much of a boost, and big automakers like General Motors Co. (NYSE: GM), Ford Motor Co. (NYSE: F), and Toyota Motor Co. (NYSE: TM) are far more likely to put their engineering efforts into internal combustion engines than into electric cars.

The reasons are simple. First, electric cars are not expected to have a significant impact on sales for a very long time.  A report issued last month by the Boston Consulting Group notes that battery pack costs will drop by nearly two-thirds in 2020 to around $400/kilowatt-hour for a typical 24-kWh battery system, but that still adds $9,600 to the cost of an electric vehicle. Internal combustion engines cost about a third of that.

Second, internal combustion engines have the ability to meet the new CAFE standards using available (or nearly so) technology. The first innovation will be start-stop technology, from which battery makers Johnson Controls and Exide should see significant growth. Another start-stop component will be the ultra-capacitors from Maxwell Technologies, and that company should see a boost as well.

Third, electric vehicles enjoy a substantial lead over internal combustion engines in emissions regulated at the tailpipe. However, if regulators switch to what is called a “wells-to-wheels” measurement, the electric cars see their advantage fall from a range 40%-60% to a range of 30%-50%. That remains a significant difference but the cost difference is too high to expect massive movement away from better internal combustion engines that are, essentially, clean enough.

Other innovations are smaller engines with turbochargers, transmissions with more gears, better cooling systems, and other technical changes that need only to be set up for mass production. This is an industry that could see enormous growth. BorgWarner produces turbochargers, drivetrain components, and emissions systems for auto makers. So does Honeywell. Both should see long-term benefits from the new standards.

While there is not necessarily a loser for every winner, electric vehicles and all of the effort to support an infrastructure for them could slowly bleed to death. There will always be a market for these cars, but the vehicles themselves will not be able to compete with the more fuel-efficient and cheaper internal combustion models.

Paul Ausick