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green@work : Magazine : Back Issues : Nov/Dec 2003 : Special Section : ECD Ovonics: On the Road to a Hydrogen Future

Special Section

ECD Ovonics: On the Road to a Hydrogen Future

Americans have long had a love affair with their cars. We care how they look, how they perform, how they handle and how comfortable and reliable the ride is. We consider all these factors and more when agonizing over which car we want to spend our money on—a major purchase that, in dollars, only a generation ago could have bought a two-story, four-bedroom home in a pleasant suburb outside a growing metropolitan area.

For a long time, we thought bigger was better. Then came the energy crisis of the ’80s and suddenly small was in. Today we have come full circle: not only is bigger better, huge is best.

But is it really? Suddenly our cars are not only causing sticker shock, but a fair share of surprise and dismay at the gas pump as well. Between rising gas prices, urban sprawl and the size of the vehicles we drive, it is not all that uncommon for an active family to spend upwards of $200 a month just on gas.

As a result, consumers are starting to take notice of how their automobiles are impacting their wallets on a regular basis. Combined with an increased awareness of environmental issues and transportation’s role in contributing to global climate change, a recent J.D. Power and Associates study found that 60 percent of American new-car buyers would seriously consider buying fuel efficient gas-electric hybrid cars, and they’re willing to pay $1,000 more for them—a premium that’s likely to rise with the next oil price shock. This reinforces the findings of another J.D. Power and Associates report, the 2003 Escaped Shopper StudySM, where gas mileage is now fifth on the list of reasons that new vehicle buyers reject one model over another—a sharp jump up from 13th place in 2002.

Automakers, too, are paying close watch. Hence the increasing introduction of hybrid cars and trucks, vehicles that are powered by a rechargeable battery combined with gasoline in order to deliver the energy efficiency that more and more consumers are looking for.

In fact, hybrid sales are expected to reach 40,000 units in 2003 with only three hybrid electric models currently on the market, reports the 2003 Hybrid Electric Vehicle OutlookSM report for third quarter 2003, released in October by J.D. Powers. However, manufacturers are preparing to introduce a dozen new hybrid electric models over the next two years, and hybrid sales are expected to exceed 177,000 by 2005. A total of 28 models—18 truck and 10 car models—are expected to offer hybrid powertrain options in 2008.

That translates into U.S. consumer purchases of approximately 350,000 hybrid vehicles annually by 2008, a forecast that has been revised down from previous expectations of 500,000 due to the fact that some automakers have revised plans to produce hybrid electric vehicles, with many delaying the release of some hybrid vehicle models or dropping models from their hybrid program altogether. In addition, the price premium charged to consumers for a hybrid powertrain option is expected to be higher over the next several years than previously expected.

“The hybrid-electric vehicle market has undergone some significant changes over the past several years, and those changes have caused many of the manufacturers to adopt a wait-and-see approach,” said Walter McManus, executive director of global forecasting at J.D. Power, whose outlook was based on its North American Automotive Forecasting data and the firm’s consumer research data.

“Hybrid electric vehicles are still a growing portion of the market, but their share is rising at a slower rate than we previously expected,” he continued. “Higher-than-expected initial retail prices will slow sales growth, and slower sales growth will keep prices high. Sales should increase dramatically as more hybrid vehicles, especially in segments other than compact cars, become available.”

The first hybrid electric model in the U.S. market was the Honda Insight in 1999. The Toyota Prius debuted the following year, and the Honda Civic Hybrid went on sale in 2002. The first full-size pickup hybrids—Chevrolet Silverado and Dodge Ram—hit commercial fleets this year and will reach retail dealers in early 2004. The first SUV hybrid, the Ford Escape, will also reach dealerships in 2004.

“Trucks should account for about 35 percent of hybrid sales by 2005 and 64 percent of hybrid sales by 2008,” McManus said. “We know, based on J.D. Power and Associates studies, that consumers express interest in a hybrid powertrain option in the same segments as their current vehicles. Trucks generally are more popular than cars, and they will be more popular in the hybrid market as well.”

While hybrid vehicles are stirring up interest among consumers, these vehicles will only represent about one percent of the market by 2005 and reach two percent market share by 2008, says J.D. Powers. Honda should see its share of the hybrid market soar to 58 percent this year based on strong Civic Hybrid sales. As other manufacturers enter the hybrid market, Toyota’s hybrid share is expected to drop from 39 percent in 2003 to 20 percent by 2008—about the same as Honda’s projected share for 2008. General Motors is expected to see growth from less than two percent market share in 2003 to nearly 33 percent by 2008. DaimlerChrysler’s share of the hybrid market should increase from slightly more than one percent in 2003 to nearly 15 percent by 2008, while Ford Motor Co.’s share should grow from zero percent in 2003 to six percent by 2008.

Market Sensitivity
But those predictions could change dramatically, suggests a study just out from the World Resources Institute (WRI) and Sustainable Asset Management (SAM), which analyzes how climate change policies can affect the financial performance and competitiveness of leading global auto companies. The report, Changing Drivers: The Impact of Climate Change on Competitiveness and Value Creation in the Automotive Industry, uses new indicators of a company’s performance. A product of WRI’s Sustainable Enterprise Program, it is intended to help investors make better-informed decisions regarding investments in automotive companies.

“The global auto market in which companies compete is increasingly being defined by concern over climate change,” said Jonathan Lash, president of WRI. “From Europe to Japan to California, new policies and commitments are challenging companies to make less carbon-intensive and more fuel-efficient vehicles.”

As a growing number of countries adopt measures to address climate change, auto company profits will become increasingly sensitive to pressures to reduce vehicle carbon dioxide (CO2) emissions and improve fuel economy. Investors and portfolio managers will need to start considering these influences and their impact on company finances when buying and selling stocks.

Though carbon constraints create both risks and opportunities for the industry as a whole, the risks and opportunities fall differentially on the 10 companies that the report assesses: BMW, DaimlerChrysler, Ford, General Motors, Honda, Nissan, PSA Peugeot Citroën Group, Renault, Toyota and Volkswagen.

According to the report, companies producing low-carbon vehicles and possessing superior carbon-reducing technologies should see market share increase and competitive advantage grow as these developments take hold. In contrast, companies that have more carbon-intensive vehicles and that are lagging behind in the race to develop lower-carbon technologies could suffer from lower sales, increased costs and reduced profits. Hence, carbon constraints could have a strong influence on competition within the industry.

WRI and SAM have developed new indicators to quantify the risks and opportunities that carbon constraints create. The two key measurements of the risk facing companies are “carbon intensity of profits” and “value exposure.”

The carbon intensity of profits captures the degree to which current profits are derived from high carbon-emitting vehicles. Comparing the carbon intensity of profits for different companies allows investors to assess the relative ease or difficulty that a manufacturer faces in responding to carbon constraints. Value exposure is an estimate of the costs manufacturers face in meeting new carbon constraints. The report finds that the costs incurred in meeting carbon constraints could vary by a factor of 25 across the industry.

Offsetting the risks are important new opportunities for car companies to capitalize on carbon constraints by developing new technologies. In a management quality assessment, the report analyzes which companies have the best opportunity to benefit from carbon constraints by developing and commercializing key lower-carbon technologies—clean diesel, hybrids and fuel cells—ahead of their competitors.

SAM and WRI found that Toyota has the strongest management quality score regarding lower-carbon technologies, with a strong position in all three technologies likely to confer competitive advantage. Investors and portfolio managers will need to monitor closely the management quality of companies regarding lower-carbon technologies, so that they can invest in those companies best positioned to capitalize on carbon constraints.

While carbon constraints appear to be a material issue for value creation in the automotive industry, institutional investors and financial analysts do not currently take these aspects into account when valuing companies. WRI and SAM also assess what impact the risks and opportunities will have for companies’ estimated earnings between now and 2015. While some companies’ earnings could increase by up to eight percent because of carbon constraints, others may decline by as much as 10 percent—indicating just how important this issue is for investors and portfolio managers.

“Carbon constraints could significantly affect earnings and competitiveness in the global auto industry,” said Alois Flatz, head of SAM Research “It is critical that portfolio managers understand the implications of carbon constraints and begin to differentiate car makers on the grounds of their relative carbon positioning.”

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