NADA Should Be Smiling: Auto Dealer Profits Are Up as Fuel-Efficient Models Grow
Posted May 1, 2012
Consumers shopping for a new car have more fuel-efficient options and auto dealers are seeing a “renaissance” at their stores. The model year 2012 cars in showrooms today are the first to meet fuel efficiency and carbon pollution standards first announced in 2009. Since then, the number of fuel-efficient models has more than doubled.
Auto dealers are among the winners of the focus on efficiency. AutoNation, the largest dealer group in the U.S., posted a 5 percent jump in first quarter profit compared to last year. Mike Jackson, the CEO of AutoNation, recently told the Washington Post, “The renaissance in auto retail is well under way.” Jackson continued, “The American consumer has more choices than ever with improved fuel efficiency, better technology, and accelerated product offerings.” Jackson was also quoted in Automotive News, saying "The industry has gone all-in on efficiency on all vehicles, and people are walking in and see they don't have to give up on size or performance to get 20 percent [better] fuel efficiency."
Strangely, the Washington lobbying association that represents auto dealers, the National Automotive Dealers Association (NADA), has complained that increased standards are bad for business. NADA claims that the technology to improve efficiency will make new cars too expensive for low-income buyers. The truth is, however, that lower income households benefit from a fleet of vehicles that go farther on each gallon of gas.
Federal agencies have proposed standards to ramp up automobile standards to reach the equivalent of 54.5 mpg in 2025. Setting an efficiency pathway for the next 13 years gives the auto manufacturing industry the certainty it needs to make forward-looking technology investments and gradually deploy efficiency improvements across their offerings.
New vehicles in 2025 will be a good deal for consumers. According to analysis by the U.S. Department of Transportation and U.S. EPA, drivers of a 2025 vehicle will realize net savings of $4,400 over the life of their vehicle. The agency calculation accounts for both the incremental fuel-saving technology cost of about $2,000 and the more than $6,400 in gasoline savings compared to a vehicle that meets the finalized model year 2016 35-mpg standards. The average new car in 2025 will consume roughly half as much gasoline each year as autos on the road today.[i]
NADA has suggested that nearly 7 million low-income buyers won’t be able to purchase new vehicles in 2025 because of the incremental cost. Their claim is misleading and ignores some facts about the car market.
First, 7 million buyers is not the annual figure. The 7 million buyer figure is derived from an estimate that roughly 3 percent of 245 million households is low income and that 2 members of those households would purchase new cars. Currently, 14 million autos are sold each year, which would account for about 6 percent of households (one purchaser per household). If low-income buyers were seeking new (vs. used) cars they would represent 0.2 percent of purchasers in a given year.
Second, some banks offer “green car” auto loans at discount rates because they recognize that the fuel savings make the loans easier to pay off. So although incremental costs for a more efficient vehicle are higher, a lower loan rate can make the purchase affordable.
Third, low-income buyers are predominately in the used car market—not the new car market—and they will likely realize bigger benefits from fuel efficiency in the used car market. The used car market includes close to 40 million sales per year, far bigger than the new car market, and it makes sense that it is where low-income buyers would shop.
As standards drive more fuel-efficient vehicles into the marketplace, the efficiency of the used car market will improve providing fuel savings to the low-income households in the market. On top of that, the fuel savings come at lower technology cost. Because new vehicles depreciate so quickly, the full incremental cost of fuel-efficient technologies will not get passed along to the used car market. Therefore, low-income buyers actually get a double-benefit from the efficiency standards.
For all buyers that finance a 2025 vehicle, fuel savings will offset the increase in monthly payments due to efficiency technology starting in the first month. Low-income buyers of used vehicles would get the monthly net benefit but their total technology payback will also be quicker than new car buyers. According to analysis by the California Air Resources Board, a buyer of a 10-year-old 2025 vehicle will have fuel savings that offset the incremental cost in less than one year, while buyers of 2025 vehicles when they are new will see payback in just under four years.
Fourth, for low-income buyers that are buying new vehicles, automakers have an incentive to keep a stable of low-price vehicles. Think of a young person fresh out of school looking for a car to get to their first job. Automakers would naturally want to entice that first-time buyer into their brand to build loyalty for future, higher profit sales. To do so, the automaker might chose to keep entry-market car prices low, subsidizing them with profits from other segments.
Throughout the process of setting the 2017-2025 standards, NADA has been trying to throw up road-blocks. At every turn, they have exaggerated compliance costs and downplayed the benefits to consumers, the environment and our energy security. Even the industry publication Automotive News implored NADA to “be reasonable” about the proposed standards. The standards offer a bright future for auto dealers because higher efficiency is what consumers want and stronger efficiency standards are helping to drive traffic to showrooms. NADA should take a cue from the dealers that recognize that an auto industry rebirth is underway and put its support behind the 54.5 mpg standards.
[i] Net savings of a 2025 vehicle compared today’s is over $5,000. The combined per-vehicle incremental cost for both the 2012-2016 final standards and the 2017-2025 proposal is $2,894. The fuel savings of a 2025 vehicle compared to today’s vehicle is over $8,000 over the life of the vehicle.
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