Impacts  of  Tighter  CAFE  and  GHG  Regula<ons  on  Automo<ve  Profits  

Walter  McManus  Economist  

Automo2ve  Analysis  Group  

1  

Regulatory  Context  

2  

Energy  Policy  and  Conserva2on  Act  

(1975)  

Energy  Independence  and  Security  Act  

(2007)  

Clean  Air  Act  (1963,  1970,  1977,  1990)  

NHTSA   EPA  

CARB  

U.S.  Supreme  Court,  Mass.  Vs.  

EPA  2007  Waiver  of  pre-­‐

emp2on  under  CAA  (2009)  

Corporate  Average  Fuel  Economy  (CAFE)  

Pollu<on,  including  GHG    

3  Wenzel  &  Ross  2008  

Before  CAFE  cars  over  4000  lbs.  were  40%  of  light-­‐duty  market;  Light-­‐duty  trucks  over  4000  lbs.  a  recent  phenomenon  

S<ff  frame  rails  of  pickups  &  SUVs  

4  Wenzel  &  Ross  2008  

Trucks  and  SUVs  make  everyone  less  safe  

5  Wenzel  &  Ross  2008  

•  Ceres •  Citigroup Equity Research •  Meszler Engineering Services •  Baum and Associates •  Automotive Analysis Group, UMTRI •  Natural Resources Defense Council

6

“Fuel Economy Focus: Perspectives on 2020 Industry Implications”

•  Limit on plausibility of detailed forecasts

•  Developed baseline forecast of sales units –  Vehicle by configuration to 2015 –  Manufacturer by segment to 2020 –  2020 sales: 16.3 million units –  2020 mpg: 31 mpg

•  Used technology package assumptions (and variable costs) to boost overall fuel economy to 42 mpg

Walter McManus University of Michigan Transportation Research Institute 7

2020 ANALYSIS OF PROFITS

•  Basic  cost  es2mates  reflect  variable  costs  to  the  vehicle  manufacturer.  

•  The  es2mates  reflect  future  costs  (2016-­‐2020  2meframe)  and  thus  assume  varying  levels  of  cost  reduc2on  due  to  learning  and  volume  produc2on.  

•  Thus,  the  costs  are,  in  some  cases,  substan2ally  lower  than  the  costs  that  would  be  incurred  if  such  technologies  were  implemented  today.  

Meszler Engineering Services 8

COSTS FOR 2020 ANALYSIS

•  2020  target  (42  mpg)  requires  roughly  55%  gain  over  current  CAFE  •  2020  workhorse  conven<onal  package  

–  ~55-­‐60%  fuel  economy  boost  –  Turbocharged/downsized/GDI  +  valve  control  +  AMT8  +  EPS  +  10%  mass  reduc2on  

+  5%  drag  reduc2on  +  low  fric2on  lube  +  engine  fric2on  reduc2on  +  aggressive  shia  logic  +  low  rolling  resistance  2res  

–  Cooled/boosted  EGR  allows  for  even  larger  gains  (at  higher  cost)  

•  2020  HEV  (onboard  recharge)  package  –  ~90-­‐110%  fuel  economy  boost  –  P2  HEV  (2  Mode  for  towing  apps)  on  the  back  of  conven2onal  workhorse  package  

•  2020  PHEV/EV  packages  –  FE  boosts  of  250-­‐1200%  due  to  credits  for  EV-­‐only  opera2on,  but  much  higher  

costs  –  NOT  needed  to  achieve  2020  target  

GDI = gasoline direct injection, AMT8 = 8 speed automated manual transmission (non-towing = dry, towing = wet), EPS = electric power steering, EGR = exhaust gas recirculation, HEV = hybrid electric vehicle, PHEV = plug-in HEV, EV = electric-only drivetrain, FE = fuel economy.

Meszler Engineering Services 9

EXAMPLE TECHNOLOGY PACKAGES

ECONOMETRIC MODEL

•  Elasticity matrix for automaker by segment derived from historical analysis by General Motors

•  Prices projected based on historical J.D. Power and Associates and other information

•  Variable profit rises with vehicle price, at a decreasing rate

•  Variable profit assumed to be lower for electrified than for conventional vehicles

Walter McManus University of Michigan Transportation Research Institute 10

ASSUMPTIONS: VARIABLE PROFITS

Walter McManus University of Michigan Transportation Research Institute 11

Important  but  Uncertain  Factors  

Minimum Baseline MaximumConsumer discount rate 17.2% 12.2% 5.2%

Life of vehicle (years) 3 7 15Annual miles driven 10,000 15,000 20,000Price of fuel ($/gal) $2.00 $4.00 $10.00

Consumer risk preference 30% 75% 140%

Scenario Alternatives

Walter McManus University of Michigan Transportation Research Institute 12

Overall Results

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Impacts on sales and profits

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Walter McManus University of Michigan Transportation Research Institute 13

WHY THE BIG 3 GAIN RELATIVE TO THE JAPAN 3

•  Big 3 (Detroit 3): General Motors, Ford, Chrysler •  The gap in fuel economy between Big 3 & Japan 3

is narrowed by the regulation •  Trucks and larger cars, in which Big 3 are more

invested, have greater potential for added consumer value through improving fuel economy

•  Costs of improving fuel economy are relatively lower for trucks and larger cars

•  Prices and variable profits are higher for trucks and larger cars

Walter McManus University of Michigan Transportation Research Institute 14

Sensi<vity  of  outcomes  

•  MPG  42  to  44  •  Sales  -­‐1.0m  to  +2.5m  •  Profit  -­‐$2b  to  +$18b  •  Big  3  -­‐$0.3b  to  +$9b  

•  MPG  41  to  45  •  Sales  -­‐1.5m  to  +4.5m  •  Profit  -­‐$5b  to  +$30b  •  Big  3  -­‐$2b  to  +$14b  

One  Factor   Two  Factors  

Industry  Profits;  1  factor  Industry profit; 1 factor

$2.00

30%

3

10,000

17.2%

$10.00

140%

15

20,000

0.0%

($6.0) ($4.0) ($2.0) $0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0 $16.0 $18.0 $20.0 $22.0

p_fuel

factorm

life

vmt

rate

industry profit

Industry  Profits;  2  factors  Industry profit; 2 factors

$2.00 & 30%

3 & $2.00

17.2% & $2.00

10,000 & $2.00

3 & 30%

17.2% & 3

17.2% & 30%

10,000 & 30%

3 & 10,000

17.2% & 10,000

$10.00 & 140%

15 & $10.00

0.0% & $10.00

20,000 & $10.00

15 & 140%

0.0% & 15

0.0% & 140%

20,000 & 140%

15 & 20,000

0.0% & 20,000

($15.0) ($10.0) ($5.0) $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0

p_fuel & factorm

life & p_fuel

rate & p_fuel

vmt & p_fuel

life & factorm

rate & life

rate & factorm

vmt & factorm

life & vmt

rate & vmt

industry profit

Big  3  Profits;  1  factor  Big 3 profits; 1 factor

$2.00

30%

3

10,000

17.2%

$10.00

140%

15

20,000

0.0%

($2.0) ($1.0) $0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0

p_fuel

factorm

life

vmt

rate

big 3 profit

Big  3  Profits;  2  factors   Big 3 profits; 2 factors

$2.00 & 30%

3 & $2.00

17.2% & $2.00

10,000 & $2.00

3 & 30%

17.2% & 3

17.2% & 30%

10,000 & 30%

3 & 10,000

17.2% & 10,000

$10.00 & 140%

15 & $10.00

0.0% & $10.00

20,000 & $10.00

15 & 140%

0.0% & 15

0.0% & 140%

20,000 & 140%

15 & 20,000

0.0% & 20,000

($6.0) ($4.0) ($2.0) $0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0 $16.0 $18.0

p_fuel & factorm

life & p_fuel

rate & p_fuel

vmt & p_fuel

life & factorm

rate & life

rate & factorm

vmt & factorm

life & vmt

rate & vmt

big 3 profit

Thank you Walter McManus University of Michigan Transportation Research Institute watsmcm@umich.edu (248) 821-0493 (cell) @waltermcmanus

20

21

Meszler Engineering Services

•  2008  (for  model  years  2011-­‐2015),  2009  and  2010  (for  model  years  2012-­‐2016),  and  2010  (for  model  years  2017-­‐2025)  U.S.  Environmental  Protec2on  Agency  (EPA)  and  Na2onal  Highway  Traffic  Safety  Administra2on  CAFE  and  greenhouse  gas  standard  rulemaking  documents.  

•  U.S.  EPA,  EPA  420-­‐R-­‐09-­‐020,  “Light  Duty  Technology  Cost  Analysis,  Pilot  Study,”  Prepared  by  FEV,  Inc.  under  EPA  Contract  Number  EP-­‐C-­‐07-­‐069,  December  2009.  

•  Northeast  States  Center  for  a  Clean  Air  Future,  “Reducing  Greenhouse  Gas  Emissions  from  Light-­‐Duty  Motor  Vehicles,”  September  2004.  

•  U.S.  Department  of  Energy,  Energy  Informa2on  Administra2on,  DOE/EIA  0554(2010),  “Assump2ons  to  the  Annual  Energy  Outlook  2010,  With  Projec2ons  to  2035,”  Transporta2on  Demand  Module  Chapter,  April  2010.  (2008  and  2009  versions  also  consulted)  

•  Na2onal  Academy  of  Sciences,  Na2onal  Research  Council,  “Effec2veness  and  Impact  of  Corporate  Average  Fuel  Economy  (CAFE)  Standards,”  Na2onal  Academy  Press,  Washington,  D.C.,  2002.  

•  Na2onal  Academy  of  Sciences,  Na2onal  Research  Council,  “Assessment  of  Fuel  Economy  Technologies  for  Light  Duty  Vehicles,”  Na2onal  Academy  Press,  Washington,  D.C.,  2010.  

•  Ongoing  (currently  unpublished)  simula2on  modeling  results.  

•  Various  automo2ve  trade  publica2ons.  

SOURCES FOR TECH IMPACTS AND COSTS

SALES FORECAST 2020

Segment Chrysler Ford GM Honda Nissan Toyota Others All Auto makers

CARLUX 67,419 48,481 151,376 55,006 113,198 195,095 742,791 1,373,365

CARMID 294,440 509,158 656,156 443,423 369,598 648,883 887,338 3,808,995

CARSML 113,463 422,008 434,870 495,191 486,245 698,750 891,275 3,541,802

CUVLUX 66,548 48,312 66,871 24,295 162,623 38,270 406,919

CUVMID 88,489 279,937 276,418 174,487 74,068 161,206 376,683 1,431,288

CUVSML 126,808 483,270 262,867 224,789 174,248 246,743 309,800 1,828,524

MINIVAN 307,928 149,183 132,102 61,598 650,811

PULRG 244,224 670,216 649,061 41,293 128,494 1,733,287

PUSML 60,064 147,590 207,653

SUVLRG 45,083 227,878 27,591 300,551

SUVLUX 10,255 23,825 27,198 266,599 327,876

SUVMID 144,104 61,519 76,110 20,425 302,158

SUVSML 122,185 33,433 155,617

VANLRG 29,511 120,084 74,723 17,285 323 241,926

All Segments

1,538,569 2,655,039 2,805,484 1,608,949 1,449,403 2,624,794 3,628,533 16,310,771

Walter McManus University of Michigan Transportation Research Institute 22

BASELINE SCENARIO 2020

Segment Chrysler Ford GM Honda Nissan Toyota Others All Auto makers

CARLUX 84,661 48,276 151,384 66,897 141,756 234,345 683,721 1,411,040

CARMID 327,256 564,980 748,175 449,554 409,052 638,020 959,732 4,096,769

CARSML 133,935 428,852 130,688 444,114 241,067 492,136 1,211,349 3,082,142

CUVLUX 62,373 59,067 79,624 30,430 171,453 39,969 442,916

CUVMID 103,407 275,295 387,964 170,685 74,268 166,143 499,570 1,677,332

CUVSML 133,756 610,845 308,929 217,979 184,060 283,888 402,861 2,142,317

MINIVAN 348,853 154,269 148,516 96,193 747,832

PULRG 254,651 702,487 760,904 40,237 131,306 1,889,584

PUSML 75,006 144,502 219,508

SUVLRG 59,930 214,618 32,182 306,731

SUVLUX 12,585 26,868 32,725 288,516 360,694

SUVMID 184,192 61,813 77,207 26,123 349,335

SUVSML 133,198 49,525 182,723

VANLRG 28,780 205,246 124,872 27,860 478 387,235

All Segments

1,732,688 2,970,867 2,913,470 1,583,122 1,317,732 2,520,241 4,258,037 17,296,158

Consumer discount rate 12.2% Annual miles driven 15,000Life of vehicle (years) 7 Price of fuel ($/gal) $4.00

Consumer preference for fuel cost risk 75%

Walter McManus

University of Michigan Transportation Research Institute 23

MPG;  1  factor  MPG 2020; 1 factor

$2.00

30%

3

10,000

17.2%

$10.00

140%

15

20,000

0.0%

41.2 41.4 41.6 41.8 42.0 42.2 42.4 42.6 42.8 43.0 43.2 43.4 43.6 43.8 44.0 44.2

p_fuel

factorm

life

vmt

rate

MPG 2020

MPG;  2  factors  MPG 2020; 2 factors

$2.00 & 30%

3 & $2.00

17.2% & $2.00

10,000 & $2.00

3 & 30%

17.2% & 3

17.2% & 30%

10,000 & 30%

3 & 10,000

17.2% & 10,000

$10.00 & 140%

15 & $10.00

0.0% & $10.00

20,000 & $10.00

15 & 140%

0.0% & 15

0.0% & 140%

20,000 & 140%

15 & 20,000

0.0% & 20,000

40.0 40.5 41.0 41.5 42.0 42.5 43.0 43.5 44.0 44.5 45.0 45.5 46.0

p_fuel & factorm

life & p_fuel

rate & p_fuel

vmt & p_fuel

life & factorm

rate & life

rate & factorm

vmt & factorm

life & vmt

rate & vmt

MPG 2020

Industry  Sales;  1  factor  Incremental sales 2020; 1 factor

$2.00

30%

3

10,000

17.2%

$10.00

140%

15

20,000

0.0%

(2.0) (1.5) (1.0) (0.5) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

p_fuel

factorm

life

vmt

rate

Incremental Sales 2020 (millions)

Industry  Sales;  2  factors  Incremental sales 2020; 2 factors

$2.00 & 30%

3 & $2.00

17.2% & $2.00

10,000 & $2.00

3 & 30%

17.2% & 3

17.2% & 30%

10,000 & 30%

3 & 10,000

17.2% & 10,000

$10.00 & 140%

15 & $10.00

0.0% & $10.00

20,000 & $10.00

15 & 140%

0.0% & 15

0.0% & 140%

20,000 & 140%

15 & 20,000

0.0% & 20,000

(3.0) (2.5) (2.0) (1.5) (1.0) (0.5) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

p_fuel & factorm

life & p_fuel

rate & p_fuel

vmt & p_fuel

life & factorm

rate & life

rate & factorm

vmt & factorm

life & vmt

rate & vmt

Incremental Sales 2020 (millions)