Ram’s Growth Good/Bad for FCA – EPA Credits, CAFE Fines, New Powertrains
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.
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.
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?
Filed Under: Auto News