The fuel efficiency future

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The uncertainty of gas prices, combined with the government-mandated increase in Corporate Average Fuel Economy (CAFE), has most automakers preparing both small and fuel-efficient vehicles for their future lineups.” –James Bell, executive market analyst, Kelley Blue Book's kbb.com

It’s none-too-surprising to see “fuel efficiency” becoming the focus of not just owners and operators in the light vehicle world but of manufacturers as well for the near future. The question, however, is whether this focus is temporary or represents a more permanent shift in specification demand.

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High fuel prices have much to do with this, especially on the consumer side of the equation. AAA Chicago, for example, noted that the cost of regular unleaded gasoline jumped 16 cents in Illinois during January alone, driving pump prices up to a statewide average cost of $3.22 per gallon for the month; 38 cents higher per gallon than the same period in 2010. Nationwide, gasoline prices are hovering at about a $3.12 per gallon average, AAA noted.

“Oil prices are trading at nearly $90 per barrel, which is having an enormous effect on the price of gasoline at the pump,” said Beth Mosher, director of public affairs for AAA Chicago. “Unfortunately, at least in the near-term, consumers should get used to paying these high prices at the pump.”

Thing is, consumers seem to be resigned to high fuel prices – which may be driving them to rank fuel-efficiency higher on the “vehicle needs” list on a more permanent basis.

According to the most recent Kelley Blue Book kkb.com Market Intelligence survey concerning gas prices, the current economic situation coupled with concern over the potential rise in gas prices is leading new and used vehicle shoppers alike to change their consideration criteria.

[You can see how fuel economy is affecting vehicle design; look for example at how General Motors described its 2010 GMC Terrain, with high fuel efficiency meshed tightly together with vehicle styling and other characteristics.]

The firm surveyed 1,127 new- and used-car shoppers via its web site from January 8 to 11 this year and turned up some interesting results. For starters, nearly three-quarters (70%) of car shoppers say that gas prices have influenced vehicle considerations, or the type of vehicle they are considering, KBB said, with almost half (43%) of car shoppers delaying the purchase of a vehicle due to economic concerns and gas prices.

Moreover, 75% of kbb.com survey respondents said they expect gas prices to rise in the next 30 days, and data from the U.S. Energy Information Administration reveals that gas prices are projected to rise throughout 2011 and into 2012.

In addition, 61% of kbb.com survey respondents say that they have changed their driving habits as a result of rising gas prices, and many indicate they are considering making trade-offs on their next vehicle choice to save money on fuel.

Furthermore, nearly half of car shoppers (48%) said they would be willing to change engine size (i.e. choosing a four-cylinder versus a V6 or V8) according to KBB’s poll, with 36% saying they would change vehicle size (i.e. mid-size sedan versus large sedan), and 31% said they would change vehicle category (i.e. sedan versus SUV).

Even light vehicle manufacturers themselves recognize a much greater emphasis if being placed on fuel economy now and in the future – although in their case, government-mandated increases in corporate average fuel economy (CAFE) is forcing their hand.

According to the 12th annual global automotive survey conducted by KPMG LLP, fuel efficiency, safety innovation, and vehicle styling are going to be the three most important product issues influencing automotive consumer purchase decisions over the next five years.

[Here are some thoughts on this subject from Derrick Kuzak, group vice president-global product development for Ford Motor Co.]

When asked to rate the importance of product attributes to consumer purchase decisions over the next five years, "fuel efficiency" was most frequently cited by global automotive executives in the 2011 survey (91%), followed by safety innovation (82%), vehicle styling (77%), and environmental friendliness (75%).

KPMG interviewed 200 global executives, representing vehicle manufacturers and suppliers, from October through November last year for this survey.

When asked what vehicle categories will see global sales increases over the next five years, they said hybrid fuel vehicles (84%) topped the list, followed by electric vehicles (77%) – a new category option in the KPMG’s survey this year – other alternative fuel vehicles (63%), basic or introduction cars (60%), cross-overs (56%), SUVs (51%), small pick-up trucks (45%), minivans (41%), and large pick-up trucks (27%).

[Fuel economy is also a major design parameter for engines and transmissions as well, which is not surprise, of course. Last year, Chrysler’s Nick Cappa showed how the need for greater fuel efficiency is driving new design paths for these two components.]

However, it’s interesting to note that the responses for hybrid vehicles dropped in 2011 compared to the 2010 survey numbers, with basic/introduction cars falling more than 20 percentage points from last year.

Still, the key inflection point for consumers (and working fleets, too) remains the price of fuel – something Kelly Blue Book winkled out from its survey. Using the “Van Westendorf” pricing model as a research strategy, the firm said that the current “optimum price point” for gasoline is $3 per gallon (with the acceptable range of pricing from $2.75 - $3.25), meaning that if prices remain around $3 per gallon, car shoppers likely will not make major changes in vehicle consideration criteria.

However, at the $3.50 per gallon price point, more than half of consumers feel that gas is so expensive that it will affect their vehicle consideration, and at $4 per gallon, 80% of consumers say their vehicle consideration will indeed be affected. At a price point of $5 per gallon, almost all car shoppers (95%) reveal that gas prices will affect vehicle consideration.

The analysis also determined that consumers can become acclimated to semi-static price points over time, but the speed and amount by which gas prices increase also affects the changes in interest of alternative-fuel vehicles. Given that the current U.S. price per gallon of regular gasoline in the is $3.12 range, KBB believes that if prices were to reach $4 per gallon by this summer, interest in alternative-fuel vehicles would double.

“It is clear from the [our] data that gas prices have a definite impact on the vehicle choices made by new-car shoppers in the U.S.,” said James Bell, executive market analyst for Kelley Blue Book's kbb.com. “It also seems that the price of gas also will help determine the success or failure of many new alternative-fuel vehicles now set for production.”

Thus it looks like more “wait-and-see” is on the plate of vehicle manufacturers as to whether fuel prices rise or fall when this winter’s chill finally begins to thaw.

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