Industry News
New report from Merrill Lynch and WRI advises investors on the ‘Clean Car Evolution’
13th November 2006
U.S. bank Merrill Lynch’s automotive research team, in collaboration with World Resources Institute’s Capital Markets Research team, has just released a report entitled ‘Energy Security and Climate Change: Alternatives for the Clean Car Evolution’, aiming to present a framework for understanding the regulatory and market dynamics driving the demand for more fuel efficient and less polluting vehicles, and to highlight investment ideas ‘levered’ to this theme.
This report is the second in an annual series produced by Merrill Lynch and WRI focusing on energy security and climate change in the automotive sector.
The report’s preamble notes that the automotive industry is increasingly facing constraints on oil consumption and emissions contributing to global climate change. The confluence of energy security concerns and growing awareness of climate change are fuelling more stringent and widespread regulations on CO2 emissions and energy efficiency. Moreover, the search for an antidote to the U.S. “oil addiction” is leading lawmakers to focus on promoting biofuels as a possible solution.
Regulatory issues for investors in the automotive sector include 1) Whether the Supreme Court classifies CO2 as a pollutant; 2) How governments integrate the auto sector in climate regulations, particularly the EU, over the next year and longer term in the U.S.; 3) Monitor the regulatory and legal actions in California, which has a long history of setting national trends on environmental legislation; and 4) Whether the U.S. CAFE standards will be adjusted to decrease the benefit given to manufacturers for producing flexible fuel vehicles (FFVs), given that 99% of the time, FFVs are driven with regular gasoline.
Although, there have been government regulations for decades aimed at fuel economy, consumer demand is a force that often trumps regulation in the U.S., note Merrill Lynch and WRI. The rise in gas prices has enforced some discipline, but it is American’s insatiable appetite for bigger, better, and faster that clouds the memory of the crises of OPEC I, OPEC II, and the Gulf War when gasoline was in short supply.
Although many global OEMs often highlight specific powertrain strategies, most are exploring a number of options, as the ultimate winner is extremely unclear. Most OEMs point to fuel cells as the holy grail of powertain technology, but considering the timing of introduction (10+ years), the possibility of another alternative emerging exists. In the interim, the alternatives being explored are increased diesel penetration, ethanol & biofuels, and hybrids.
In light of these trends, the report authors highlight three Tier 1 supplier investment targets to capitalize on the trends to the changing fuel efficiency landscape:
BorgWarner - Almost all of BorgWarner’s key products offer the benefits of higher fuel efficiency and/or lower emissions. We estimate that these products account for at least 70% of the company’s revenues.
Valeo - fuel economy-enhancing products account for at least 35% of the company’s 2006 revenues.
Magna International’s high-pressure hydroforming business is a critical technology for creating lighter, stronger vehicles and is expected to play a key role in the intensifying drive for higher fuel economy.
(www.capitalmarkets.wri.org)
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