Ram’s Growth Good/Bad for FCA – EPA Credits, CAFE Fines, New Powertrains
Tim Esterdahl | Jul 07, 2014 | Comments 4
The sales growth of Ram Trucks is a good/bad news scenario for Chrysler. Why? The convoluted system of EPA credits, CAFE fuel economy targets and Chrysler’s failure to sell small, fuel-efficient cars. This system means long-term the FCA is in trouble. Here’s why.
The Ram EcoDiesel may be helping move product it is helping to create a long-term problem at FCA.
Each month, we have been detailing how much growth Ram Trucks has been seeing. Its hard to argue the job they have done with grabbing market share, launching their commercial division and moving a lot of products. This growth is great for profits, yet these trucks don’t meet future CAFE fuel requirements. What’s worse, these trucks will eventually count against them and could cause them to pay fines for each truck sold. Yet, short-term, FCA (Fiat Chrysler Automobiles), needs the profit. If this sounds a bit confusing, it is because it is. Let’s break down each aspect of it.
Short-Term Profit
The financial facts are that the new FCA is short on cash. Unlike their competitors, they are hurting.
Chrysler announced “its net income more than quadrupled to $1.62 billion in the fourth quarter, boosted by strong U.S. sales and a $962 million one-time tax gain. Without the tax benefit, the company still earned $659 million, a 74 percent increase over a year earlier.
Without earnings from Chrysler, struggling Fiat would have lost 235 million euros ($321 million), nearly double the loss from a year ago,” according to a Yahoo News Story.
Contrast the $659 million net income (without tax benefit) to Toyota’s net income of $2.89 billion for the same period. This was after Toyota paid a $1.2B settlement.
Why does this matter? Toyota can easily invest millions/billions into new technologies and products (see: Fuel Cell Vehicle). While, FCA wants to invest billions into its infrastructure, it is limited in its financial ability to do so. This further postpones any new technologies like electric vehicles or hybrid technology.
In summary, Toyota and others can move forward rapidly developing new technologies, while FCA can’t and is at a competitive disadvantage.
Cummins vs. Fiat Diesel Explained
Thinking about new technologies and better fuel economy, it is easy to see now why FCA went with the in-house diesel option Fiat had instead of a Cummins. The Cummins would have simply cost them too much money. The reality is every time, Ram sells a Cummins engine, they pay a share of the profit to Cummins. Simply put, this strategy isn’t good for long-term growth.
Also, consider the Fiat 500e that is sold in California. This vehicle is built for the explicit purpose of meeting the California Air Resource Board requirements. FCA CEO Sergio Marchionne has said it costs them $14k every time they sell a 500e. This number is likely inflated, but it does bring up a good point about selling vehicles full of third-party parts (the 500e’s technology is bought from Bosch).
The above scenario leads one to believe Chrysler is working on in-house technologies and Ram is paying for these technologies.
EPA Credit Buying
Also, there is EPA credits. Currently, companies can buy EPA credits from other companies to use. These credits come from company that have an abundance (see: Nissan and Toyota). Companies that need them like Chrysler can apply the credits they have bought against vehicles they sold that didn’t meet CAFE requirements (see: Challenger, Town and Country Van, Ram trucks).
Sound outlandish? This actually just happened with FCA buying credits from Nissan (see: Pickuptrucks.com story).
In short, FCA buys credits from other companies which reduces their profit – the profit they need to develop new fuel efficient technologies. Also, buying credits isn’t a good long-term solution because companies don’t have to sell them and the companies that do can sell them for whatever price they feel like (it is a business to business transaction).
FCA’s Long-Term Plan
Let’s put everything together and talk about how this all works out.
- Ram does everything it can to sell lots of trucks, reaping as much profit as possible
- FCA takes the profit and invests in better technology – likely a 3-5 year plan to develop in-house EV powertrains
- FCA then develops EV and hybrid vehicles – obtaining their own credits – to offset Ram sales
The ultimate goal here is for Chrysler to develop and sell better cars. Why? They need the cars to improve their CAFE numbers. This would allow them to continue selling trucks without penalty or buying credits to offset their sales.
One other point to remember is that Chrysler has been and continues to one of the companies paying EPA fines and/or buying credits to avoid fines. They are really on the fence between paying/buying credits each year.
Ram’s Car Problem
The reality for FCA is they need those people coming in the dealership to not buy a Ram, but instead by a Dodge Dart. This simply isn’t happening.
For the month of June, Ram and Jeep may have helped FCA post a positive gain, however, Chrysler branded vehicles were down 12 percent. Remember Jeep doesn’t help FCA with hitting CAFE requirements either.
While Ram will continue to say they are working hard to hit fuel economy targets, they really need to sell more EcoDiesel and Pentastar V-6 pickups to offset Hemi sales.
In the end, kudos to Ram for increasing their market share and offering new, exciting products. However, one does wonder, at what expense? Is the Ram EcoDiesel being sold cheaply to improve CAFE numbers and generate new profit? Will Chrysler eventually need another buyout because of their poor car sales?
Thoughts?
Filed Under: Auto News
Tim, this is a great article with a lot of details. If I responded the way I really really want to; it would be so political I would be banned from planet earth….so I will not do that.
The whole structure of credits, fees, fines is actually a way to move a lot of money between nations; with most of the money headed to the direction of the EU. Theoretically, FCA has become an EU problem and I believe the EU will be more artistic in finding ways to get the funding they want from the USA.
Anyway, back here on planet earth what does this mean to my consideration of a RAM truck on the next purchase? Well one sentence says it all (at least for me): “Ram does everything it can to sell lots of trucks, reaping as much profit as possible”. I have absolutely no problem with any company making a profit. If fact I much prefer they make tons of profit, all for the reasons of having a “real and legitimate going concern”. But when a company becomes so extremely aggressive at making that profit “at the expense of their customers” (like GM and Ford), then that is where I draw the line and that company is no longer on my short list. Ford and GM have established new lows by denying customers basic warranty claims for the sole purpose of “profit” at the expense of the customer.
Since FCA is a relatively new entity from a foreign land would they continue to follow policies of the old Chrysler past, like Ford and GM, or will they adopt more consumer friendly service like that of Toyota and Honda and actually stand behind their products? For me there is not yet enough history with FCA running and owning RAM to make an informed decision; therefore if you buy a RAM it is entirely pot luck since virtually all car dealers must tow the line of their manufacturers.
Randy,
Thanks for staying on the planet Earth. LOL!
Glad you liked the article. I think sometimes the “business” side of the equation gets lost within automotive writing. We tend to get carried away with all the latest/greatest innovations and products that we forget at the end of the day, it is a business. My questions at various media events are more along the lines of why now? For example, Ram representatives openly wonder why other makers haven’t gone to coil springs. I tend to question their motive for offering them. Understanding their need to attract new customers and reap more profit makes more sense to me than the typical “doing right by the customer” response. If it was so clearly the “right thing for the customer” everyone would have it. They don’t.
-Tim
Tim, great information.
Randy, you and Tim both are right on top of the real issues on this one. The core problem being created by our congress is not good news. Regulated free markets would do a better job. Government no longer knows it’s place.
It does makes sense for FCA to have used the in house diesel. While it’s not Cummins, it does have a good reputation.
So,,,,,,,,, they need me to buy a Dodge Dart. If I had the time to think about it I wonder if I would be willing to drive a Dart if they paid me to drive one. I doubt it. Besides, a Dart won’t get up my snow covered driveway and a Subaru will.
Yes, FCA, Fiat, Chrysler or whatever we call them still has a long term problem. Toyota has a clear road in sight. A Toyota car V a Dodge car, who needs to think about that one. Just watch, the next major rev of the Tundra could really close the gap.
Larry,
You nailed it on Dodge’s problems when competing with a Toyota car. Dodge’s big problem is that nobody goes to their dealer looking for a car. They want the Challenger, Ram Truck or Town and Country van instead. That won’t work long term.
Toyota indeed has the money and the EPA credits to do whatever they want with the Tundra. I’m still hearing the capacity issues is slowing their progress. That will be their big “gap” to close.
-Tim