In early June, CNN Radio called and asked me about gas prices and autos. The first question was more like a statement. The radio host said that people were forsaking big cars and flocking to smaller models. And wasn’t that great? He added that the American consumer should be congratulated for being so willing to save on energy.
He couldn’t see me shaking my head in disagreement. I told him we haven’t turned into a nation of tree-huggers yet. And congratulations are a little early. Consumers are simply responding to price. When gas goes up, smaller cars look more attractive.
I told him it works in the other direction too. When gas goes down, bigger cars start looking better.
Since then, gas prices have fallen by more than half in most parts of the country. So what has happened?
People have begun buying pickups and SUVs again. You couldn’t give them away earlier in the year. See more of my thoughts on this in the IDE issue from December 9, “Can It Really Get Worse Than This?” .
The economics of buying a hybrid no longer makes sense. You’d have to keep your car for about 10 years to make up the extra money you spent on the car.
The ones buying these cars now are really tree-huggers.
So should auto companies spend tens of millions of dollars on R&D for cars that nobody is buying right now? Or should they keep making the bigger cars that Americans seem to love?
First off, it’s not a question of doing one or the other. It’s more a question of how fast U.S. auto makers should reduce their reliance on bigger vehicles.
A so-called “car-Tsar” would quicken the process.
Putting a “car-Tsar” in charge of the auto industry would put the government in the driver’s seat. The auto industry would be effectively nationalized. Say good-bye to the free market. It’s road kill.
But the triumph of the government didn’t happen overnight. The current auto crisis may have cemented the government’s victory. But the government has been telling the auto industry what to do for a long time.
Safety regulations date back decades. As do the Corporate Average Fuel Economy ( CAFE ) regulations.
CAFE regulations are already forcing auto makers to make more fuel-efficient cars. They call for auto companies to make vehicles that get at least 35 mpg by 2020. And every couple of years between now and then, U.S. auto makers will have to produce cars with better mileage.
So by 2018, for example, to reach 35 mpg will only require a small jump.
Will the American consumer want more fuel-efficient cars or not? It doesn’t matter. They don’t get to decide. The decision has already been made for them.
A nationalized auto industry may not be good for the economy. It may not be good for the auto industry. But it’s a gift from the government to you as an investor.
Markets are hard to predict. Government policy isn’t. Government policy is literally an open book. You want to know what the government is thinking? Go look it up.
As investors, what more can you ask for?
So this is what I can say about the future of the auto industry with complete confidence…
- Cars are on the fast track to going hybrid
- By 2020 nearly all cars will be hybrids
- The dominant hybrid technology will be lithium-ion batteries.
Why lithium-ion? They have two times the capacity of the currently used nickel-cadmium batteries. They have half the weight. And, unlike nickel-cadmium batteries, they perform superbly in very hot or cold weather.
The problem is nobody is making them. And companies that are planning to make them will need at least two years to achieve full-scale production.
But, actually, there is one company making them right now. They are already supplying a European car maker with these batteries under a $70 million contract.
The company I’m talking about is Ener1 (AMEX: HEV ). And while the S&P 500 lost almost 20 percent over the past year, Ener1 gained 40 percent.
It’s a small company. Its market cap is $750 million. Once finished, its facilities could generate revenue of over $300 million.
Ener1 is talking to about 30 car companies interested in their battery technology. The company has an awesome future. And it’s practically guaranteed by the U.S. government. That is why HEV is my top stock pick for 2009.
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