Why Ford's CEO Thinks America's Fuel-Economy Rules Might Need Changes

By Markets Fool.com

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Ford CEO Mark Fields with 2015 F-150 pickups at a Ford plant in Dearborn, Michigan. The new F-150s are more fuel-efficient than the trucks they replace, but Fields is concerned that customers won't pay for the advanced technology Ford needs to make sure its pickups comply with federal fuel-economy standards in coming years. Source: Ford Motor Company.

You've probably heard that the U.S. government has adopted tough fuel-economy standards for new cars.

You've probably also heard that the new standards require an average of 54.5 miles per gallon by 2025.

Those rules went into place back in 2011. But what you might not have heard is that in reality, those standards are still very much up in the air -- and Ford and other automakers are gearing up to push back on them.

Why the automakers support tough fuel-economy standards in principle
First of all, I should make this important point: Automakers such as Ford and its rivals like having rules like these tough Corporate Average Fuel Economy ("CAFE") standards, even if they're very strict -- because it allows them to plan their product lineups years in advance.

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Autos are a slow-moving business because of this reality: It can take three years or longer to develop an all-new car or truck from scratch and get it to market. That means automakers have to decide three or more years in advance what kinds of cars and trucks they want to sell -- without knowing critical variables, like how much gas will cost when the 2018 model comes to market.

Tough regulatory rules like the CAFE standards help the automakers plan their future products. Whether gas is $5 or $0.50 a gallon in 2017, automakers that want to sell vehicles in the U.S. know that at least some of those vehicles need to be fuel-sippers, "zero-emission" electric cars, or both. And all of them have to be more fuel efficient than they were a few years ago.

The CAFE rules adopted back in 2011 are tough -- but a little less tough than you might think. While they require an average of 54.5 miles per gallon, the "average" uses a complicated formula that tends to discount ratings a bit, meaning the true average will probably end up being closer to 43 miles per gallon. And that's after some special exemptions for pickup trucks, and "extra credit" for things like fuel cells and battery-electric cars.

But the big catch is that automakers might have a chance to change those rules -- and that chance is coming up.

A chance to make changes is approaching, and Ford is already preparing
The CAFE rules that are driving automakers toward a more fuel-efficient fleet by 2025 also provide for something called the "midterm review."It's a meeting between regulators and auto-industry representatives, set for 2017, that is intended as a kind of sanity check: Are the regulations feasible? Do they still make sense?

Ford CEO Mark Fields said on Thursday that he's already looking forward to the midterm review. As he put it during a conference call for analysts and reporters:

It's going to be very important for consumers to adopt the new [fuel-saving] technologies, the electrified vehicles, etc. That's an important part of meeting the country's goals. And what we're seeing right now is that they are not adopting at the levels anywhere near what we expected. So that's why we're looking forward to the midterm review with the government.

In other words, Ford is worried that consumers won't pay for the technology needed to meet the tough CAFE rules in coming years -- a worry that carries some weight given the recent dramatic drop in gas prices. And it's already planning to make that point -- and possibly to push for some changes to the government's fuel-efficiency plan.

Fuel-saving technology is expensive, and customers aren't yet willing to pay
Ford and its old Detroit rivals have more to lose than some other automakers under the CAFE rules. That's because Ford, like General Motorsand Fiat Chrysler, derives a lot of its income, and a lot of its profits, from pickup trucks and SUVs.

That's unlikely to change. Americans buy a lot of pickup trucks, and so far, they haven't shown a lot of interest in buying them from automakers other than the Detroit Three. Ford, GM, and FCA have all made moves to increase the fuel efficiency of their pickups, and all three have signaled that more gains are coming as the rules tighten over the next few years. But the changes in the future will increase the costs of building those pickups. If the automakers can't pass on those costs to customers, their profits will suffer. That makes this important for shareholders, too.

Improving fuel efficiency is an important goal for the country. But Ford is saying it has to be done in a way that is consistent with the reality of the market. With a gallon of gas costing less than $2 in many parts of the U.S., fuel efficiency has become a much harder sell.

The article Why Ford's CEO Thinks America's Fuel-Economy Rules Might Need Changes originally appeared on Fool.com.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.