Changing Tech, Changing Coverage: Preparing for New Vehicle Technologies

One of the technology drivers in the auto markets is the new CAFE standards set by the National Highway and Traffic Safety Administration (NHTSA) to boost the fleet average MPG of vehicles sold in the United States. The CAFE standards were first enacted by Congress in 1975 in response to the oil embargo against the US by OPEC, with the goal of decreasing the energy consumption of consumers by increasing the fuel efficiency of vehicles.

Recently, the NHTSA set new standards to drastically increase the average MPG of new models sold in the next few years, with the goal of 54.5 MPG by 2025. The increase started for the 2012 model year, and each model year after will have the CAFE standard raised. Each automaker with be penalized if the average is below the set standard by 0.01 MPG, and they will gain credits if their average is above that same standard. These credits can be applied to a different model year to offset any penalities.

Calculating the CAFE standards for each automaker is complex; with the documentation on it well over 1000 pages. The formula to determine the vehicle MPG standard for each car is based off of the size of the car’s “footprint”, which is the track width multiplied by the length between the tires. The footprint size has an inverse relationship with the calculated MPG, which means that a vehicle with a larger footprint size will have a lower calculated MPG. The CAFE standard that must be met by the manufacturer is the sales weighted average of each MPG measurement from all the vehicles in the manufacturer’s fleet. For example, General Motors will have a lower CAFE requirement than Suziki, because GM’s fleet contains many pickup trucks and SUVs with large footprints compared to the Suzuki fleet which contains smaller cars and SUVs.

Actual fuel efficiency under the CAFE standards will not be as great as the calculated numbers imply. According to Micheline Maynard of Forbes Magazine, the CAFE standard calculates a higher MPG number than what you will find on the sticker of new models. This is because the calculation is an outdated process that hasn’t changed much since when the CAFE standards went into law back in 1975. This process involves calculating the MPG from driving on a highway and in the city. The MPG you find on the sticker of new cars uses a more rigorous testing to simulate the actual conditions that people drive the cars in, such as hot/cold weather, high speed driving and air condition usage while driving.

The new CAFE standards introduce initiatives for car companies to produce more hybrid and electric vehicles. In model year 2017, the sale of one electric vehicle counts as two. For example if you sell 5,000 electrics then for CAFE standards it is counted as selling 10,000. This factor is reduced from 2 to 1.5 by 2021. Similarly, hybrid factors are 1.6 in 2017 and this will be reduced to 1.3 in 2021. However, current sales of hybrids are under 5% of the market and sales of electrics are under 1%.

VSC on Hybrid and Electric Vehicles

Hybrid and electric vehicles bring new challenges in covering batteries, as batteries are becoming more of a part of these new vehicles being created. Typical battery pack warranty coverage for hybrids is 8 – 10 years, or 80k-100k miles (whichever comes first), even though most manufacturers expect the batteries to last the life time of the vehicles. For example, the 2012 Sonata has a life time battery warranty. A recent consumer reports review showed minimal degradation in a 10 year old hybrid battery. The battery pack replacement costs generally in the $2,000-$4,000 range, but those costs can be reduced when using batteries from salvaged wrecked hybrids (hybrids have been sold in the US since 1999). Therefore, since there is a low frequency of battery failure and replacement cost is not too high, then VSCs sold on hybrid vehicles can be priced like similar non-hybrid models.

Electric vehicles have only been mass produced in the US since 2011, and the warranties for batteries in these vehicles are 8 years and 100,000 miles. Battery packs in these vehicles generally lose the ability to hold a charge over time. Many factors are attributed to this loss such as hot climates and the cooling system built in the car (water cooling is the best, then air cooling, and no cooling is the worst). When and how you charge is another important factor to the decline of a battery’s ability to hold a charge. Some examples of charging habits that accelerate battery decline are DC quick charges, full charges (over 80%), and deep discharging. So the user has a strong influence on the battery life of the vehicle.

The replacement costs are also very high for these batteries; for example the battery pack for a Ford Focus EV is $12,000-$15,000 and the Nissan Leaf is $9,000-$18,000. However, some of the cells might be able to be replaced instead of replacing the full battery, thus reducing some of that cost. There is an unknown frequency of failure in these batteries, but there are early indications of battery degradation in some the recent models. There is no significant exposure for VSCs in the usual new vehicle terms due to long manufacturer warranties, and it will be a few years before these vehicles show up in quantity as used cars. Therefore, it is better to wait and see what manufacturers do with pricing their VSCs.

Expect to see several other changes in engines that might affect VSC pricing as manufacturers attempt to meet the new CAFE standards. The use of turbo charging to enhance gas mileage and power on small engines, instead of using large engines, will become more common with these CAFE standards. The widespread use of this feature reduces, and sometimes eliminates, the need to surcharge these vehicles because turbo charging cars with smaller engines often leads to lower VSC costs than cars of similar models with larger engines. Additional enhancements to improve fuel mileage include engine shut-off at stops (expected in 50% of vehicles in 2016 according to Johnson Controls (Reuters)) and electronically controlled grill shutters to enhance aerodynamics of the vehicle. These enhancements are not expected to have a significant impact on VSC cost. However, the performance of the enhancements will need to be monitored and vehicle classifications adjusted as experience emerges.

Infotainment and Sirus XM Radio

In vehicle Infotainment systems generally include the following features: rear-seat entertainment (movies, games, TV, etc.), navigation, radio/CD, location-based services, internal connectivity to mobile devices and external communications (as defined by Intel). By 2014, autos will be one of the three fastest growing markets for connected devices and Internet content (Source: Gartner Inc). Fifteen percent of the cars built today have interactive infotainment systems that integrate climate control, voice commands, GPS, connectivity with mobile devices and even applications similar to those found in smart devices into one touch screen dashboard unit. In five years, that percentage is expected to increase to 50 to 60 percent of new cars sold in the US. Many manufacturers are already producing their own versions of these infotainment systems. Some examples of these are MyFordTouch, Mylink (Chevrolet), Entune (Toyota), iDrive(BMW), HondaLink and Blue Link (Hyundai).

The majority of new vehicles now come with installed satellite radio. According to Automotive News, Sirus XM will be installed in 70% of new vehicles this year. They passed the 50 million installations mark this year for new vehicles, and expect to have 100 million in new vehicles by 2018.

Infotainment brings new challenges to VSCs. As penetration of the new touch screen infotainment systems and Sirus XM satellite radio increases, there will be a need to include coverage of these systems as a standard component of exclusionary coverage. Lack of expertise in servicing these systems may lead to a high level of replacements versus repairs. Also, proprietary systems that integrate vehicle functions could be very expensive to replace. There should be differentiation for the pricing for systems that can be replaced by non-OEM systems that are less expensive.

So the take-away from all of this is that changing technology will lead to changes in the VSC market, and we, as VSC administrators, need to keep up with the changes to keep our products competitive and profitable.