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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. Legal infrastructure. Patents, trademarks, and IP

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the government 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

legal infrastructure
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
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
theories of regulation
Theories of regulation
  • Public interest theory
  • Capture theory
public interest 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 theory1
Public interest theory
  • Clean Air Act established clear, measurable targets based on science
  • EPCA and EISA was (intentionally) ambiguous
capture theory
Capture theory
  • Invisible hand
  • Markets
  • Courts
  • Government regulators are incompetent, corrupt and captured
national program
National Program
  • History
    • Calif. 1960
    • Clean Air Act 1970
    • Energy Policy and Conservation Act 1975
  • 2007
    • Energy Independence and Security Act
industry wide improvements in fuel economy and detroit 3 profits sensitivity analysis
Industry-Wide Improvements in Fuel Economy and Detroit 3 Profits:Sensitivity Analysis

Walter McManus

Automotive Analysis Division

University of Michigan Transportation Research Institute

slide25

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
  • Findings
slide26
We began our analysis with a scenario that represents a mid-range outlook for the market in the near future.
slide27

Effective Consumer Price for Segment i from Automaker j

Effective Consumer Price for Segment i from Automaker j

Effective Consumer Price for Segment i from Automaker j

Effective Consumer Price for Segment i from Automaker j

Effective Consumer Price for Entry n

(seg i & oem j)

Consumer demand was modeled as a system of demand equations (one equation for each automaker by segment market entry).

Consumer Demand for Entry m

Retail Price for Entry n

(seg i & oem j)

Expected Fuel Costs of Operating for Entry n

(seg i & oem j)

First Year

Fuel Price

Overall Discount Rate

First Year Miles Driven

Fuel Economy (MPG) for Entry n

(seg i & oem j)

Vehicle Lifetime

Consumer Discount Rate

Expected Fuel Price Growth

Rate of Change in Miles per Year

slide28

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

Fuel Cost

Price

Vehicle

Fuel Economy

slide29
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

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.

slide30

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.

slide31

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.)

slide32

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.

slide33

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.