How Detroit Can Still Wring Higher Profits From Better Fuel Efficiency

There's a major debate brewing about higher U.S. fuel-economy standards. They're already going up for the first time since the 1990s, but if President Obama gets his way, they could rise to a fleet average 60-plus mpg by 2025. Motown is trembling and has dispatched the heroic Ford (F) CEO Alan Mulally to beat back this affront. But if Detroit knows what's good for it, it will accept progress -- and make money in the process.

Big is the new small
You might think that higher MPGs necessarily means lots of smaller cars. To a degree that's true. But the profit margins on small cars have always been thin, and adding more technology to improve their mileage and reduce emissions isn't going to make the profitability thing any easier.

The move to small cars has generated massive change among the domestic automakers, who had pretty much left that market to the Japanese and the Koreans. Gas prices that lookas they're going to remain higher -- i.e., above $2-3 per gallon -- for the foreseeable future have been a clear motivating factor. But the push for higher MPGs doesn't mean the Big Three have to give up on their traditional bread and butter: trucks and SUVs.

In fact, that's where the hidden profits lie.

Let's go to the research
Allow me to quote some very salient language from a report on this subject, produced collaboratively back in March, under the aegis of Ceres, a green investment group:

Tougher fuel economy standards will have positive implications for sales units and variable profits for the auto industry in general, especially US automakers. The report assumes an industry-wide standard in 2020 of 42 mpg (a 6 percent improvement per year). Under this scenario the Detroit 3 gain relative to the global industry, with variable profits jumping 8% in 2020 globally but Detroit's rising by 12%. This is due to a number of factors, including: (1) narrowing the historical gap between Detroit 3 fuel economy and competitors; and (2) light trucks and larger cars, in which the Detroit 3 sport a greater share, have greater potential to add consumer value through improved fuel economy than competitors' smaller cars and trucks. [my emphasis]

Surrender to MPGs
If Detroit wants to embrace this future, it does need to make two critical moves now. First, it has to stop being such a pain in the butt regarding fuel-economy standards. The consumer has spoken: he wants higher MPGs. Second, Detroit needs to invest in raising the MPG profiles of its most profitable vehicles.

There's an added benefit to this second step, which is that the additional costs that the carmakers will incur by improving MPGs can be passed in to consumers who desire larger vehicles. More profits!

It's a total no-brainer. So if Detroit persists in being anti-MPG in Washington, you'll know it's not acting in its best interest -- or the interest of the American people.

Related:

• The Pickup Truck Is Dead! Long Live the Pickup Truck!
• Mr. Mulally Goes to Washington: Ford CEO Stakes Out Tricky Political Territory
• SUV Forever: Automakers Still Want Them, but They Really Need a Diet Plan