I foresee fleet procurement patterns changing due to impending federal-mandated corporate average fuel economy (CAFE) standards. In 2016, CAFE standards will increase to an average of 35.5 miles per gallon. It is estimated it will cost the OEMs $52 billion cumulatively to be in compliance and add an average of $1,000 to the cost of manufacturing a new vehicle.

However, CAFE standards will not remain static. They will increase again in 2025. Last May, the Obama administration proposed increasing CAFE standards to between 47 to 62 mpg by 2025. There is no guarantee this proposal will be mandated as there will be powerful forces advocating against it. However, it is a safe assumption that the next CAFE standard will be higher than 35.5 mpg. OEMs will continue to improve the fuel efficiency of gasoline-powered engines and enhance horsepower performance of smaller displacement engines. However, these improvements, although impressive, may not be sufficient to comply with future CAFE requirements with an OEM’s current product portfolio, especially if it is a major seller of full-size pickups and SUVs.

In the final analysis, complying with government mandates for fuel efficiency or emission reductions, no matter how beneficial, costs money. Someone has to pay these increased costs, and invariably it will be the end user, namely the fleet buyer. Witness what happened to the diesel truck market in 2007 and 2010. EPA regulations dramatically decreased tailpipe emissions, but they also increased diesel truck acquisition costs by $6,000 to $9,000, introduced all-new operating cost expenditures for diesel exhaust fluid (DEF) and diesel particulate filters (DPF), and forced users to buy more expensive ULSD and CJ-4 motor oil.

Ultimately, these escalating federally mandated fuel-efficiency standards will have far-reaching ramifications for both the OEMs and fleets. Future OEM product portfolios will be discernibly different than today’s mix of vehicles, which, in turn, will be reflected in the types of vehicles placed in fleet service. These vehicles will most likely be smaller, weigh less (built of more expensive light-weight composite materials), have increasingly complex engine electronics/software to optimize fuel efficiency, and will, in all likelihood, include an expanded number of models incorporating a hybrid powertrain to eliminate idling and enhance the performance of smaller displacement gasoline engines, which will be more prevalent. On a parallel track, OEMs will continue to pursue diversified strategies for alternative-fueled vehicles, along with vehicle electrification technologies, which will dovetail with future hybrid development.

I believe future CAFE mandates (and other market forces, such as pricing pressures due to escalating commodity prices) will converge to stimulate a long-term shift in new-vehicle procurement patterns. One change I foresee is a proliferation of hybrid models in fleet operations through the balance of this decade and next. I know this prediction will cause many readers to scoff, citing a multitude of reasons (many valid) as to why this will not happen, such as higher acquisition costs, lengthy ROI (which sometimes exceeds the anticipated service life of a hybrid), the inability of current hybrid models to fulfill many fleet applications, and a doubt about the “true” fuel/emission reductions, especially when analyzed from a “well-to-wheels” perspective. Examining the statistics in this year’s Fact Book, you will see that hybrids continue to represent a very small percentage of fleet vehicle acquisitions. Also, from a lifecycle cost perspective, many fleet managers continue to lament it is difficult to get hybrids to “pencil out.” Nevertheless, there are emerging market forces at play, which support my prognostication.

Forthcoming ‘Hybridization’ of Fleet

As hybrids proliferate in terms of vehicle sizes and classes, I foresee a growing “hybridization” of fleet. This doesn’t mean corporations will mandate all-hybrid fleets, although a few fleets have stated this is their ultimate goal. Rather, I foresee a larger percentage of a company’s fleet asset composition comprised of hybrids to fulfill corporate initiatives based on fuel spend reduction, attainment of sustainability metrics, portrayal of  positive corporate citizenship, or to take advantage of aggressive OEM incentive programs.

Today, interest in hybrids is directly proportional to the price of fuel. This bodes well for future hybrid acceptance. Most observers, but not all, agree with the long-term forecast that the price of fuel will continue to trend upward. For the skeptics among us, consider this: China currently consumes 10 percent of all the fuel in the world. There are 88 million barrels of oil consumed every day in the world, which means 8 million barrels are consumed daily by Chinese consumers. Currently, there are 85 million vehicles on the road in China. By 2021, China is forecast to have 200 million vehicles in operation, which will easily double its annual consumption of fuel. Based on today’s market dynamics, the supply and demand fundamentals for this finite resource suggest strong upward pricing pressure in the future.

Past history has repeatedly shown that higher fuel prices influence the types of vehicles fleets acquire. For the past four years, corporate fleets have been downsizing to four-cylinder engines. Many fleets have completely converted to four-cylinder engines. What next? Other fleets are migrating to smaller vehicle classes. However, there is a limit as to how far you can downsize before a vehicle is unable to accomplish its fleet mission.

As time will tell, government CAFE mandates for higher fuel economy, coupled with higher fuel prices, will change the vehicle portfolio mix offered by many OEMs, which in turn will ultimately change the asset composition of tomorrow’s fleets.
Let me know what you think.

mike.antich@bobit.com

Originally posted on Automotive Fleet

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Mike Antich
Mike Antich

Mike Antich

Mike Antich has covered fleet management and remarketing for more than 20 years and was inducted in the Fleet Hall of Fame in 2010.

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Mike Antich has covered fleet management and remarketing for more than 20 years and was inducted in the Fleet Hall of Fame in 2010.

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