Published July 25, 2004


One does not often hear financial analysts talk about climate change, but this month John A. Casesa, an analyst at Merrill Lynch, organized a teleconference to address a troubling question for Detroit's automakers: As regulators around the world move to curb global-warming emissions from cars and improve fuel efficiency, what happens if Wall Street adds up the costs?


The most likely answer will not make General Motors and Ford Motor very happy. Mr. Casesa's call included a presentation by the World Resources Institute, an environmental policy group in Washington, which recently issued a report on the subject with Sustainable Asset Management, an investment group based in Zurich.


The report forecasts that G.M. and Ford stand to lose the most, financially, of any automakers in complying with regulations that the groups expect the United States, Europe and Japan to adopt over the next decade - rules in addition to the pollution controls put in place over the last half-century.


Ford would have to spend $403 more on each vehicle to meet the expected new standards, the report estimates, and G.M. would have to spend $377 more. By contrast, the added cost to Honda would be just $24.


Car for car, BMW would have to spend even more than Ford or G.M., $649 on each vehicle, the report found, but because its prices are much higher, it would not be as difficult for it to absorb the cost.


Perhaps the most troubling finding for G.M. and Ford, the last two major automakers based in the United States, is that some foreign competitors, particularly Toyota, may actually be helped by tougher regulations because they have already invested much more in fuel-efficiency technologies, like hybrid gas-electric engine systems, that could generate profits.


Regulations related to fuel economy and global warming are "going to be one of the key drivers that determines competitiveness in the industry over the next decade and beyond,'' said Duncan Austin, who until recently was a senior economist at the World Resources Institute. He left to join a new investment firm that plans to use financial analysis to assess the effects of environmental rules and social trends.


One problem for analysts and investors who try to estimate these costs is predicting the outcome of the regulatory process, including the practical effects of voluntary agreements between governments and industry.


China, which has the world's fastest-growing auto market, is preparing to introduce fuel economy standards - a move that will add momentum to the worldwide push for more efficient vehicles.


The European Union and Japan are phasing in curbs on automotive emissions of global-warming gases, which rise and fall almost in lock step with fuel use. The Bush administration has moved away from an international agreement, known as the Kyoto Protocol, to cap global-warming emissions, but California has drafted its own plan and several Northeastern states may follow suit.


"As a U.S. auto analyst, I'm very concerned about the risk side of the equation,'' said Mr. Casesa of Merrill Lynch. "For the domestic auto companies, we've had an accommodating energy policy, but there are new issues like climate change, and there are new geopolitical issues, defense issues, that relate to our energy policy.


"There's the potential for a confluence of events to occur,'' he added. "Americans could be more concerned about climate change, while at the same time we try to reduce our dependence on the Middle East for oil, for national security or political reasons. If these two strands come together, that would put a lot of pressure on policy makers, which would invariably lead back to higher fuel-economy standards.''


That would be especially painful for Ford and G.M. because they rely heavily on sales of light-duty passenger vehicles that are the least fuel-efficient: large sport utility vehicles and pickup trucks. So far this year, large vehicles have remained as popular as ever in the United States, or even more so, though gasoline prices have been high and volatile. But what about the sales prospects for G.M. and Ford in countries that have different regulatory priorities?


"I just wonder whether it complicates matters for the U.S. companies, because fuel economy is not high on the agenda of the U.S. consumer,'' Mr. Austin said. "Are these companies going to have successful strategies to compete in countries like China, where fuel prices are higher, and incomes are certainly lower and road space is considerably more limited?''


Niki Rosinski, a financial analyst who collaborated on the report and worked at Sustainable Asset Management until leaving recently to join Mr. Austin at his new firm, pointed to what he called the "carbon intensity" of Ford's profits, meaning the company's reliance on vehicles that consume the most fuel and emit the most gases linked to climate change.


"Sixty percent of Ford's sales globally come from the North American market, and in the North American market, 60 percent of their sales come from light trucks, which are around 80 percent of profits of their North American operations," Mr. Rosinski said. "This is a huge risk if - on the grounds of energy security, not just climate change - the government decides that they will bring in stronger fuel-economy standards.''


The institute's report projects that because of new regulations, Ford's profits will be 10 percent lower than would otherwise be expected from now to 2015, and that G.M.'s profits will be 7 percent lower.


"The reason our carbon intensity is the highest is our vehicle mix, because we have leadership in large trucks and S.U.V.'s," said Carolyn Brown, a spokeswoman for Ford. "But we are trying to put out more environmentally friendly vehicles."


Ford is poised to start selling a hybrid version of its Escape S.U.V., thus joining Toyota and Honda in offering a hybrid that can get fuel savings on the order of 40 percent or more. Ford has even licensed a small number of Toyota patents. In the Toyota and Ford hybrids, an electric motor takes over from the gas engine at slow speeds and when the vehicle is stopped.


General Motors will not have a comparable hybrid on the road until 2007, though it is offering a milder version of hybrid technology in its Chevrolet Silverado and GMC Sierra pickup trucks.


G.M. and Ford have lagged behind Toyota and Honda in part because the American makers' research and development budgets have been crimped by high overhead costs, like health insurance premiums, which are a much smaller issue in countries like Japan.


Joanne Krell, a spokeswoman for G.M., said the company "takes some issue" with the findings of the report and had not been consulted by the groups that put it together; Ford, Ms. Brown said, has had continuing conversations with the groups.


Ms. Brown said in a statement that Ford did not dispute the importance of these issues to its future. "Starting early and regularly monitoring our progress on the issue of climate change," she said, "is critical to our long-term corporate viability and financial success."


http://www.nytimes.com/2004/07/25/business/yourmoney/25warm.html?ex=1091849157&ei=1&en=43a2ad4a9e5338e9