In the next decade, automakers will see federally mandated corporate average fuel economy (CAFE) standards rise dramatically. These new targets will be easy for some to reach, like Toyota and Honda. These automakers sell a lot of small cars, hybrids and electric vehicles, which give them lots of credits. Other automakers like Chrysler (newly renamed Fiat Chrysler Automobiles) — best known for muscle cars, minivans and pickup trucks — don't get the same amount of credit.
The EPA released a report in April that said most automakers are on track to meet upcoming fuel-economy targets. And those that may struggle — like FCA — are buying credits in preparation for offsetting fines. Buying credits is a short-term solution for FCA; long-term it is fraught with issues for the company and Ram Truck buyers.
Without selling a large number of cars to offset these requirements means the sales success of Ram may actually hurt FCA in the long run. Without a strong-selling fuel-efficient vehicle to help offset those sales, it is feasible that FCA could lose substantial amounts of Ram profits to either buying credits or paying a hefty fine per vehicle each year.
What Are EPA Credits?
Before we go any further, it is important to understand what an EPA credit is and how it benefits automakers. EPA credits, or emission credits, are given to manufactures that produce vehicles that are more fuel efficient than the minimum requirements state. Also, if an automaker sells electric vehicles, it gets added credits as well.
This is important to many automakers that take these credits and apply them to less fuel-efficient vehicle sales. For example, Nissan and Toyota control 60 percent of all credits available when calculated from the previous report — a whopping 136.7 million when combined (click here to download full report). Not coincidentely, both these companies sell an abundance of small cars and EVs. This allows them to simply apply a credit from these cars toward every truck sold that doesn't meet the requirements. To be fair, Nissan and Toyota sell a relatively small number of pickup trucks, and this also works in their favor.
Another report gives the reasoning behind buying the credits. An April 2013 National Highway Traffic Safety Administration (download summary report here)shows Chrysler's 2013 model-year light truck CAFE number was 24.5 mpg. The target for light trucks is 25.3 mpg for that year.
While Ford and GM are also struggling to hit their targets, Fiat Chrysler doesn't sell nearly the car volume the others do. Also, GM sells the electric Chevrolet Volt in good numbers, which will provide credits to offset its truck sales.
As you can see, CAFE rules affect each automaker differently; however, one point is clear: Automakers who build larger, less fuel-efficient vehicles are going to be penalized more.
Chrysler's Car Problem
The biggest problem facing Fiat Chrysler is its poor car sales. While Ram is putting all sorts of new technology into its trucks to improve fuel economy, it would be more helpful if FCA had a top-selling fuel-efficient car.
John Voelcker of Green Car Reportssaid FCA is really behind in developing a fuel-efficient solution to meet pressing CAFE needs. He said FCA hasn't sold a modern hybrid, and the Fiat 500e is really just a compliance vehicle for California emissions standards. The Fiat 500e, he pointed out, costs FCA nearly $10,000 for each vehicle it sells. But FCA has to offer it to meet standards.
Why doesn't FCA just develop an electric vehicle? Voelcker said it is expensive and time consuming to develop EV technology. Fiat bought the technology for the Fiat 500e from Bosch (this is why the vehicle costs the company so much). In order for FCA to develop its own EV, it is looking at three years (minimum) of development time and a mountain of investment cash.
FCA's big problem, according to Voelcker, is "nobody goes to [FCA] dealers for cars. They are so known for their trucks."
All of this begs the question: Why is FCA pushing so hard to sell pickups when it really needs to focus on cars like the new Chrysler 200? Voelcker said FCA needs the money.
"Ram trucks are extremely profitable, which is good because Chrysler needs the money to develop more fuel-efficient cars," he said. "The cars you sell today will pay for the vehicles you sell tomorrow."
Emissions Credit Market
FCA really has three options when it comes to improving its fuel economy numbers. It can:
• Increase fuel economy across the lineup (see Ram innovations and the new Chrysler 200 sedan).
• Pay fines to the EPA when it misses targets.
• Buy credits from other automakers.
Officially, the April EPA report states that FCA bought 500,000 credits from 2011 model-year sales from Nissan. Also, the EPA says that Chrysler paid CAFE fines in 2006 and 2008. Fiat isn't any better and paid fines in 2008 and 2010. These fines are, in part, the main reason for Ram's recent push to be more fuel efficient.
The problem with buying credits is that other automakers aren't under any obligation to sell them. For example, Toyota will probably let some of its credits expire rather than sell them. Some have suggested Toyota doesn't need them, nor does it need the money.
Paying fines doesn't make a lot of sense either. While critics have argued that the fines are too low to have a significant impact, Chrysler did pay a little more than $30 million in 2006 (when it was DaimlerChrysler). This may not seem like a lot in the grand scheme of things, but continually paying fines like this each year is not good business.
Ram Fuel Economy
For the past few years, Ram has been introducing all sorts of technologies to improve fuel economy. Nick Cappa, Ram spokesman, said it is also customer demand that is driving better fuel economy.
"Our research tells us that fuel economy is the No. 1 unmet customer need in half-ton trucks, and we own the top two spots [25 mpg highway with the Pentastar V-6 and 28 mpg highway with the EcoDiesel V-6]," Cappa said. "The numbers tell the story. Our strategy works. Ram's powertrain offerings set the standard. In the fuel economy race, we are clearly ahead of our competitors."
While what Cappa says is true, it is also true that Ram, like all automakers, is focusing on meeting CAFE regulations.
What does this mean for current and future truck fans? It's likely you will continue to see bigger incentives from Ram (especially for fuel-efficient models like the EcoDiesel and V-6 variants) as well as continued innovation for even greater fuel efficiency. FCA needs the continued profits from these full-size truck sales, and it needs to sell more fuel-efficient models of its best-selling models.
Also, it's important to note that with FCA research and development money being poured into new, more fuel-efficient cars, it is unlikely that Ram (or Jeep for that matter) has the funding to develop an all-new midsize pickup competitor.
In the end, FCA is dependent on Ram Truck (and probably Ram Commercial, too) to sell a lot of vehicles to help subsidize and fund future vehicle research and development. And that dependence could translate into more options, technologies and new types of pickups for Ram buyers.