Transcript The Auto Industry, the Environment, and the Economy

The Government, the Auto
Industry, the Environment,
and the Economy
Walter McManus
Automotive Analysis Division
University of Michigan
Transportation Research Institute
Physical infrastructure
America’s Road Network
Ben Fry
US Suburban Population and Vehicles Grew Together,
1900 to 2000
60
900
Percent of Population in Suburbs
800
Census Years
700
Vehicles per 1,000 Persons
600
40
500
30
400
20
300
200
10
100
0
1900
1910
1920
1930
Sources: US Census Bureau and Ward's
1940
1950
1960
1970
1980
1990
2000
0
2010
Vehicles per 1,000 Persons
Percent of Population
50
Legal infrastructure
 Patents, trademarks, and IP
 Business laws (including franchise)
 Bail outs (1980 and 2009)
 Ownership (GM & Chrysler)
 Loans (Ford)
 Regulation (more later)
 National Innovation System
National Innovation System
 Education of workforce
 Basic research
 University of Michigan $1 billion in federal
research (out of total UM budget ~$6.5b)
 National energy labs
Safety and emissions
• NHTSA and EPA
Theories of regulation
• Public interest theory
• Capture theory
Public interest theory
• Helping hand
• Markets often fail due to externalities
and monopoly
• Governments are capable of correcting
market failure through regulation
Public interest theory
• Clean Air Act established clear,
measurable targets based on science
• EPCA and EISA was (intentionally)
ambiguous
Capture theory
•
•
•
•
Invisible hand
Markets
Courts
Government regulators are
incompetent, corrupt and captured
National Program
• History
– Calif. 1960
– Clean Air Act 1970
– Energy Policy and Conservation Act 1975
• 2007
– Energy Independence and Security Act
NHTSA
EPA
ARB
Can you
name that
vehicle?
Industry-Wide Improvements in Fuel
Economy and Detroit 3 Profits:
Sensitivity Analysis
Walter McManus
Automotive Analysis Division
University of Michigan
Transportation Research Institute
We used a future-market simulation to estimate the
impacts of higher industry-wide fuel economy
requirements. Both supply and demand are affected.
• Baseline “Middle” Market Scenario
• Fuel Economy Improvement Scenarios
• 30% (CAFE 2020 or Pavley 2016)
• 40%
• 50%
• Consumer Demand for Vehicles with
Higher Fuel Economy
• Cost of Supplying Vehicles with Higher Fuel
Economy
• Sensitivity Analysis
• Uncertain Factors
• Tornado Diagrams
We began our analysis with a scenario that represents
a mid-range outlook for the market in the near future.
Sales by Automaker & Segment, Future-Market Mid-Range Scenario
Thousands of Units
Segment
Chrysler
Ford
GM
Honda
Nissan
Toyota
Others
All
Luxury Car
44
85
237
65
65
199
239
934
Midsize Car
242
403
711
513
272
703
894
3,739
Small Car
131
340
467
487
327
742
606
3,100
Luxury CUV
0
72
44
55
23
76
0
269
Midsize CUV
83
158
178
90
129
137
259
1,035
Small CUV
92
344
400
200
83
307
137
1,563
Minivan
292
0
0
127
0
106
45
570
Large Pickup
411
612
654
0
0
114
0
1,791
Small Pickup
29
0
65
21
96
137
0
349
Large Luxury SUV
0
31
26
0
0
25
51
133
Large SUV
0
52
244
0
0
20
12
327
Midsize SUV
160
102
184
0
94
69
43
651
Midsize Luxury SUV
0
0
0
0
0
0
349
349
Small SUV
94
0
0
0
0
0
11
105
Large Van
15
140
135
0
0
0
0
289
All Segments
1,592
2,339
3,345
1,559
1,089
2,634
2,646
15,204
Source: The Planning Edge, April 2009
Consumer demand was modeled as a system of demand equations (one
equation for each automaker by segment market entry).
EffectiveConsumer
Consumer
Effective
Effective
Consumer
Price
forSegment
Segmenti i
Effective
Consumer
Effective
Consumer
Price
for
Price
for
Segment
i
from
Automaker
Price
for
Segment
Price
for Automaker
Entry
n i j j
from
fromAutomaker
Automaker j
from
(seg
i & oem j) j
Consumer Demand
for Entry m

Retail Price for
Entry n
(seg i & oem j)
Fuel Economy
(MPG) for Entry n
(seg i & oem j)
Expected Fuel Costs of
Operating for Entry n
(seg i & oem j)
Vehicle
Lifetime
First Year
Fuel Price
Consumer
Discount
Rate
Overall
Discount Rate
Expected Fuel
Price Growth
First Year
Miles Driven
Rate of Change in
Miles per Year
An industry-wide increase in vehicle fuel economy has impacts on
OEMs’ and dealerships’ product costs, on product prices, and on
consumers‘ willingness to pay for vehicles—leading to changes in
profits.
Profits
Revenues
Variable Costs
Vehicles
Indirect
Direct
Price
Vehicle
Fuel Economy
Fuel Cost
We used information from J.D. Power and Associates’ Power
Information Network (PIN) to define Retail Price, Gross Profit, and
Direct and Indirect Costs at the level of the combined enterprise of
an automaker and its dealerships.
•
•
•
•
•
•
•
•
•
•
•
•
Vehicle Price Less Customer Cash
Rebate
+ Customer Cash Rebate
+ Dealer-Installed Options Price
= Dealer’s Price
Factory-Configured Vehicle F.O.B.
+ Freight, Advertising, & Holdback
= Dealer Invoice
+ Cost of Dealer-Installed Options
= Dealer’s Variable Cost
Dealer’s Price
- Dealer’s Variable Cost
= Dealer’s Gross Profit
•
•
•
•
Factory-Configured Vehicle F.O.B.
- OEM’s Variable Vehicle Cost
- Customer Cash Rebate
= OEM’s Gross Profit
Evidence that automakers underestimate the value of fuel economy
to consumers leads us to reject the assumption that fuel economy
is optimized in the baseline scenario.
Fuel Economy Improvement:
Supply Price and Consumer Willingness to Pay
WTP0
True WTP
Supply
Price
$ per Vehicle
A
B
RP0
C
Assumed WTP
D
0%
20%
40%
60%
% Improvement in MPG
80%
100%
120%
The improvement in fuel economy raises both the vehicle marginal cost and the
vehicle marginal revenue curves, and vehicle unit sales could rise or fall,
depending on which marginal curve shifts more. (If we had assumed that in the
baseline fuel economy were optimized, then unit sales could only fall.)
Vehicle Marginal Cost & Marginal Revenue
MR1
$ / Vehicle
MR0
MC1
MC0
Q0
Q1
Vehicle Unit Sales
We estimated the detailed impacts on the industry of three levels of
inprovement in industry-wide fuel economy: 30%, 40%, and 50%.
Industry total gross profit increases relative to the base case in all
three scenarios; Detroit 3 gross profits increase roughly $3 billion
(8%) relative to the base case in all three scenarios.
Sales and Gross Profit Impacts
Mark e t MPG
Base
26.9
30%
35.0
40%
37.7
50%
40.4
Gross Profits (billions)
Scenario O/(U) Base
base
30%
40%
50%
Det roit 3
$39.5
$2.9
$3.2
$3.1
Japan 3
Ot hers
Mark e t Total
$27.1
$18.8
$85.3
$0.9
$0.9
$4.6
$0.7
$1.0
$4.9
$0.3
$1.2
$4.6
Vehicle Sales (000)
Scenario O/(U) Base
Det roit 3
Japan 3
Ot hers
Mark e t Total
Base
30%
40%
50%
7,276
527
521
446
5,282
2,646
15,204
72
145
408
(27)
147
641
(171)
133
408
In the auto industry model of fuel
economy, costs, demand, and gross
profits we identified 11 future-market
factors that cannot be predicted with
certainty. Analysts such have widely
different prior beliefs that most
empirical evidence is unpersuasive.
Our approach is to do a sensitivity
analysis for these factors in each of
the three scenarios.
Profits
Revenues
Variable Costs
Vehicles
Indirect
Direct
Price
Fuel Cost
Vehicle
Fuel Economy
Sensitivity Analysis: Influence Factors Subject to Uncertainty
Factors
1.
2.
3.
Fuel economy cost curves multiplier
Indirect cost multiplier
Profit Margin on new technology
4.
5.
6.
7.
8.
9.
10.
Price of gasoline ($/gallon)
Real rate of change in gasoline price
Rate at which miles driven falls
Consumer real discount rate
1st year miles driven (miles)
Relative consumer response to operating v capital costs
Horizon for valuing expected operating cost (years)
11. Industry size (millions of units)
Range Used in Sensitivity Analysis
Unfavorable
Base
Favorable
2.00
2.20
0%
1.00
1.50
5%
0.50
1.00
10%
$1.50
-2.0%
8.0%
18.0%
10,000
0.33
10
$3.00
0.0%
5.2%
7.0%
15,000
1.00
15
$7.00
5.0%
2.0%
2.0%
18,000
3.00
20
14.2
15.2
16.3
Tornado 30%
SensIt 1.42
9.
Relative consumer response to operating v capital costs
4.
1.
3.00
Price of gasoline ($/gallon)
$1.50
Fuel economy cost curves multiplier
2.00
$7.00
0.50
8.
1st year miles driven (miles)
10,000
7.
Consumer real discount rate
18%
2.
5.
0.33
Indirect cost multiplier
1.00
-2%
Rate at which miles driven falls
5%
8.0%
10. Horizon for valuing expected operating cost (years)
3.
2%
2.20
Real rate of change in gasoline price
6.
24,000
10
Profit Margin on new technology
20
0%
11. Starting industry unit sales (millions)
($8.0000) ($6.0000) ($4.0000) ($2.0000) $0.0000
2.0%
10%
14.2
16.3
$2.0000
$4.0000
$6.0000
Change in Profits: Detroit 3
$8.0000 $10.0000 $12.0000 $14.0000 $16.0000
Tornado 40 %
SensIt 1.42
9.
Relative consumer response to operating v capital costs
4.
1.
Price of gasoline ($/gallon)
Fuel economy cost curves multiplier
3.00
$1.50
$7.00
2.00
0.50
8.
1st year miles driven (miles)
10,000
7.
Consumer real discount rate
18%
2.
5.
0.33
Indirect cost multiplier
2%
2.20
Real rate of change in gasoline price
6.
1.00
-2%
Rate at which miles driven falls
5%
8.0%
10. Horizon for valuing expected operating cost (years)
3.
24,000
10
Profit Margin on new technology
20
0%
11. Starting industry unit sales (millions)
14.2
($8.0000) ($6.0000) ($4.0000) ($2.0000) $0.0000
2.0%
$2.0000
10%
16.3
$4.0000
$6.0000
Change in Profits: Detroit 3
$8.0000 $10.0000 $12.0000 $14.0000 $16.0000
Tornado 50%
SensIt 1.42
9.
Relative consumer response to operating v capital costs
4.
1.
3.00
Price of gasoline ($/gallon)
Fuel economy cost curves multiplier
8.
1st year miles driven (miles)
7.
Consumer real discount rate
2.
5.
0.33
Indirect cost multiplier
$1.50
$7.00
2.00
0.50
10,000
24,000
18%
2%
2.20
1.00
Real rate of change in gasoline price
6.
-2%
Rate at which miles driven falls
8.0%
10. Horizon for valuing expected operating cost (years)
3.
5%
2.0%
10
Profit Margin on new technology
20
0%
11. Starting industry unit sales (millions)
14.2
($8.0000) ($6.0000) ($4.0000) ($2.0000) $0.0000
$2.0000
10%
16.3
$4.0000
$6.0000
Change in Profits: Detroit 3
$8.0000 $10.0000 $12.0000 $14.0000 $16.0000