Mileage Standards Have Ford Battling Tesla And Toyota, GM Hanging Back

  • Increasing mileage standards are creating new investments in hybrids and electrics.
  • Tesla leads in electrics, Toyota in hybrids, but Ford has a place in both of these markets.
  • GM trails, and its best hope may be in having these standards lifted.

Ford Motor (NYSE:F) is being dragged kicking-and-screaming to the electric car revolution. The company said this week it will invest $4.5 billion over the next five years in electrics and hybrids, aiming to increase their share of its sales to 40% from the present 13%. 

That sounds like a huge bet, but it is being made over five years, by a company that last quarter earned about $2 billion on revenue of $38 billion. The total research budget over the next five years is expected to come in at $70 billion. In other words, this should not be a very big deal.

The problem is that today’s low gas prices have hammered the sales of these kinds of vehicles. Even sales of the Toyota Motor Corp (NYSE:TM) Prius are down 12%. Sales of Ford’s own hybrids, which come in the big sizes car buyers most want, are down 25% so far this year.

These investments won’t just be made by Ford. Auto makers see CAFÉ standards on average fleet gas mileage forcing them to move toward hybrids and all-electric vehicles in order to get the numbers up.

Which means they must battle Tesla (NASDAQ:TSLA). Tesla sales may be miniscule in terms of the total market, but in terms of electrics they remain a giant. Through November Tesla had sold 22,100 of its Model S luxury electrics, more than any other maker. Ford was running second, split among three cars – Fusion, C-Max, and Focus. But all three combined represent 17,190 sales.

Tesla, meanwhile, is preparing to ramp up production to 500,000 over the next five years, many of them at prices as low as $35,000. That’s no longer a luxury threat. That’s the heart of the market.

The other way forward is with hybrids, which combine gas engines with electricity for city driving. Tesla isn’t in that market, but Toyota is.  There, they are dominant, with 55% of the 2014 U.S. market, against just 12% for Ford. And right now, Ford is the only U.S. nameplate that is even making a serious run at these markets.

With the oil glut expected to last through next year, and prices expected to average $2/gallon through that time, it means pressure could grow in 2017 for the mileage standards to be lifted. This would mainly benefit General Motors (NYSE:GM). A Republican victory in the 2016 elections would make such a move a near certainty, but even Democrats can be inclined toward industry arguments, and it may be tough to hold the line if the glut continues.

GM does have some hybrid and electric investments. It teased a $245 million “new vehicle program” in June, after saying the previous year it would put nearly $500 million into the Chevy Volt electric.  But this is a drop in the bucket, compared with what Ford, Toyota or Tesla is doing. Call it mileage to the press release.

So long as the CAFÉ standards for 2025, mandating average fleet mileage of 54.5 miles per gallon remain in place, pressure to produce more hybrids will remain in place and GM stock will remain under pressure because it just does not have what this market wants.

GM’s best hope lies in the oil glut continuing until it can beat the mileage standards back.

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