Who's Afraid Of CAFE? Not Detroit

Edward Niedermeyer
by Edward Niedermeyer
who s afraid of cafe not detroit

Hard on the heels of yesterday’s story on Hyundai’s preparation for CAFE standard ramp-ups comes this counterpoint, courtesy of the Detroit Free Press. Walter McManus, director of automotive analysis at the University of Michigan’s Transportation Research Institute, did his own study on a possible 43 MPG 2020 standard and his findings, as presented at a Citi Investment Research conference call, seem quite positive for American-based automakers. McManus’s research took several basic assumptions for granted in order to reach his conclusions, namely that

• Gas prices will average $4 a gallon between now and 2020.

• Industry sales will be 16.3 million vehicles in 2020.

• Every manufacturer complies with 2016 CAFÉ standard.

• Plug-in hybrids and electric vehicles will be less profitable than gas-engine vehicles.

Now, right off the bat it’s possible to take exception to some of those assumptions. If gas doesn’t crack four dollars per gallon before 2020, for example, this blogger will be one confused student of history. Also, predicting over 16m units of new car sales is by no means a sure thing. Though a comfortable industry assumption based on the “old normal,” there aren’t many indications that 16m+ annual new car sales was a sustainable level for the US economy. Still, Mr McManus has been doing this for a while, so we’ll give him the benefit of the doubt. So, given his assumptions, what does he foresee for Detroit as it moves to meet a 43 MPG standard by 2020? In two words: great success.

Now, because Mr McManus’s study isn’t publicly available either through the UM or through Citi, it’s tough to explain exactly how Ford, GM and Chrysler will achieve the CAFE-inspired advantages envisioned in his study. What we do have is a write-up from the Freep summarizing the study’s highlights, namely

Because consumers will have more technologies from which to choose, McManus forecasts that Americans will buy 1 million, or 6%, more vehicles than they would without the higher CAFÉ requirements. McManus predicts the Detroit Three will sell 60% of that increase, which is significantly more than their combined U.S. market share of 45% in 2010.

The news is even better, McManus estimated, for profitability. While the industry will see $9.1 billion in additional profit because the increased sales volume will more than offset the cost of the technology, about $5.1 billion will go to GM, Ford and Chrysler.

By meeting the standards, McManus said, the domestic automakers will eliminate the existing fuel economy gap.

One imagines that McManus came to this conclusion by assuming a radical increase in per-unit pricing, a price that the industry has long held up as a cost of CAFE compliance. Otherwise, it’s hard to explain how Detroit would become more profitable post-CAFE ramp-ups. Ford, GM and Chrysler all have the lowest fleet fuel economy in the US market because of their continued dependence on trucks for much of their profitability. As Hyundai proved, providing basic transportation (a C-Segment Sedan) at 50 MPG CAFE isn’t hard… but what Detroit’s bellyaching has recently confirmed is that the hard part of CAFE compliance will be pickup trucks. The magnesium frames and high-tech powertrains that Detroit envisions for its CAFE-compliant pickups of tomorrow could add as much as $15k (according to rough National Research Council data) to the cost of each vehicle, destroying either the consistent profitability or, if prices are passed on to consumers, the immense popularity of pickup trucks.

Without its base of truck-based profits, Detroit is going to be uniquely challenged by tough future CAFE standards. Whatever stimulative effects McManus believes the proliferation of new technologies will have on the market, they must be weighed against the inevitable declines in private pickup truck purchases. Moreover, it’s impossible to see how McManus can conclude that the Detroit Three will be able to capture 60 percent of that new market, based on their current market share of 45% (which is hardly growing consistently enough to support a 60% by 2020 prediction). If McManus’s profit projections are based solely on volume increases, than they too are suspect. Finally, the point that meeting federal standards will eliminate the long-standing “fuel economy gap” is tough to take seriously in light of Hyundai’s vow to “overcomply” with CAFE.

Hopefully McManus will have the opportunity to flesh out his argument in greater detail than the Freep’s write-up allowed, because his perspective is definitely unique among the Detroit crowd [actually, it seems we’ve been waiting for McManus to expand on this theme f or some time now]. Typically, the Detroit perspective portrays the industry as the victim, struggling beneath the yoke of oppressive government regulation. If, as McManus suggests, Detroit will not only not suffer from CAFE, but will actually be able to leverage the regulations to steal the march on their competition (which, at least on the surface, seems better prepared for the ramp-up), I for one would like to know more about how that is possible. Without more details, however, it’s hard not to treat the claim that Detroit will benefit from CAFE with the skepticism of someone who has been exposed to more than enough Detroit cheerleading.

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2 of 12 comments
  • PeriSoft PeriSoft on Jan 25, 2011

    Hey! How'd you guys find a picture of me leaving for work?

  • FleetofWheel FleetofWheel on Jan 26, 2011

    Whenever major changes occur in a product segment, there is a greater than usual opportunity for market penetration by outliers. If pickup trucks start to morph radically with all sorts of new tech to meet new efficiency requirements, then the Japanese brands are likely to take a greater percentage as they leverage their strengths. Remember what happened in the minivan segment. Minivans are largish vehicles that one would expect to be dominated by the domestic brands with their truck/full-size van building expertise.

  • FreedMike Love the engine, zero interest in a SUV. Thankfully, the engine is available in a CT5 Blackwing for about fifty grand less. Now all I need is about a hundred K for the CT5 Blackwing...
  • Dukeisduke Sorry, lady - in the state of Ohio, your son first needs to smash your skull with a cast iron skillet, then stab you in the neck 30+ with a steak knife, then maybe they'll arrest him: Sydney Powell found guilty of murdering mother in Akron | wkyc.com
  • Theflyersfan The news story says the teen is 17. Can be tried in court as an adult. Parents are still responsible for their minor children so she might need to lawyer up. But to go on the local news pleading for the police to lock up her son...wow. No send him somewhere for help. No military school. No discipline to try to shape him up. Just get the Franklin County Sheriff's Department to find him and pick him up. That's one broken family right there.
  • Analoggrotto lol
  • Dukeisduke Sorry, lady - in the state of Ohio, first, he has to smash your skull with a cast iron skillet, then stab you numerous times with a steak knife, then we'll think about arresting him. Sydney Powell found guilty of murdering mother in Akron | wkyc.com