By on January 25, 2011

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 for 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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12 Comments on “Who’s Afraid Of CAFE? Not Detroit...”

  • avatar

    Ed – did you major in snarky?

     If gas doesn’t crack four dollars per gallon before 2020, for example, this blogger will be one confused student of history.  It can crack $4 – but still average over the next 9 years at $4 – for example it is $3 an change now so that would average out a period of the high $4’s.

    Plenty of legitimate points to make, so stop the incessent snark and anti Domestic bias.

    • 0 avatar

      Where is the bias? The article is about an article in the Detroit Free Press, not about domestic or import cars. The article is somewhat shaky at the best, full of best-case scenarios, wishful thinking and shaky assumptions. There is no criticism of any of the manufacturers.

    • 0 avatar

      I don’t see any bias, either.
      But I could certainly imagine gasoline climbing to $5, $6, or $7 over the next 9 years, and even higher wouldn’t surprise me. I’m inclined to think an average price of $4 for gasoline over the next 9 years is optimistically low.

  • avatar

    Mike978 is right about gas prices – an average of $4/gal between now and 2020 is reasonable, and would require gas to hit that price well before 2020.  But the rest of the editorial is sound.  It’s not that the Big 3 can’t make money on fuel efficient cars, it’s that their starting position is more difficult than that of most other companies.  A lot of the Big 3’s competition would have to trip up really badly for this scenario to come true.

  • avatar

    gas is at $4, maybe even $5 this year. by 2020 it will be crowding $8 – $9. it’s not scarcity nor demand moving the price, it’s unrestrained and irresponsible monetary policy. better be prepared ’cause hyper inflation is becoming a reality and will set in more rapidly as the dollar loses it’s place as the world’s reserve currency. China and Russia are beginning to trade without dollars and the Arabs are starting to utilize a basket of currencies. don’t suppose the USA is not subject to the laws of basic economics.

  • avatar

    I know this is not an economics blog, but I think Buickman is right! The Global Free Market is another failed model and is on it’s way down. Countries are starting to have their own trade policies with each other and the dollar will be the loser. The big wakeup will be the dissolution of the Euro.  Also, the Detroit brands have long been fuel economy leaders in their segments. If they ever start building small cars, they probably will be a fuel economy leader there as well.

    • 0 avatar

      You have it wrong, the lack of a free market is the problem now. Crony capitalism, government bailouts, industrial policy and the like have gotten us to this point. You might try reading some econ blogs for a change. This crisis started with the Too Big to Fail banks being bailed out from the consequences of their own mistakes and was made worse by the government rescuing failed auto companies instead of letting them die just to save their union supporters.

  • avatar

    I’m not convinced that there is any logical replacement for the dollar as the world’s reserve currency. No one will trust the Renmimbi as the reserve, period. First of all, the value of the Renmimbi is actually a derivative of the dollar as a result of all the US paper held by the Chinese government. So long as the US does not default (which is pretty damned unlikely despite the doomsday scenarios), it will continue to be the reserve currency. Progress will be made on the deficit (by making adjustments to SocSec, defense spending and other areas), tax revenues will rise and the dollar will strengthen. The US (through the debt) is a strong counterbalance to China’s alarming combination of totalitarian government and rapacious expansion. Eventually, China will recognize that it must adopt the practices of the US and Europe before their currency will be as trusted as the Dollar. And then there’s demographics to consider. Europe and China face the prospect of shrinking and aging workforces while that of the US will continue to get younger. All of this bodes well for the long term.
    Finally, doesn’t anyone remember what happened in the 1970s? I fail to understand how rising gas prices will do anything except drive up average fuel economy, which is what happened then. The difference is that the coming oil price crashes will be shallower and shorter-lived as a result of increased global demand.
    As for the main point, it is well-taken. However, there are signs of real progress. Should gas rise to $5 and, more importantly, stay there for more than a few months, Americans will adjust their buying habits.

    • 0 avatar

      it doesn’t have to be replaced in specific. watch what the oil ministers do…a basket of currrencies preads risk, you’ll see more and more direct trades between countries using precious metals. major problems are bound to arise given a Pentagon that can’t expailn disappearing Trillions and a Treasury hell bent on spending worse than drunken sailors. the worst is yet to come and it will make the last two years seem like  prosperity. Americans are dumb, they allow the government to deceive them (won’t get into 911) and worse sit idly by while the military/industrial complex goes from one unjust war to another. get ready folks, it ain’t gonna be pretty. remember I called the GM BK before anyone heard of Death Watch.

    • 0 avatar

      It’s not on subject really, but you are most likely right about the dollar, the only real alternative would be the Euro and it is hanging by a thread now and will continue to do so due to the weakest nations in Europe.

  • avatar

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

  • avatar

    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.

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