U-M Study Says Big 3 Would Benefit Under New CAFE Standards

Jul 24: A new study by the University of Michigan's Transportation Research Institute (UMTRI)indicates that Detroit automakers would gain market share and increase profits under proposed new fuel economy standards. Under the highest proposed fuel economy standard of 35 miles per gallon, General Motors, Ford Motor Co. and Chrysler Corp. stand to make $14.4 billion by 2017 -- at least $6 billion more than the competition. The study, The Impact of Attribute-Based Corporate Average Fuel Economy (CAFE) Standards on the Automotive Industry, is the first rigorous analysis of the economic impacts of current legislative proposals to raise CAFE under the reformed "attribute-based" structure, according to Walter McManus, director of UMTRI's Automotive Analysis Division.

McManus' preliminary analysis evaluates three scenarios that represent alternatives under consideration in Congress. Whereas historic CAFE standards set one benchmark for every automaker, the reformed system fundamentally alters the impact of the standards on individual companies by setting standards based on a vehicle's attributes, such as size. McManus said, "The new, attribute-based CAFE is not one-size-fits-all. It takes into account the differences between vehicles and light trucks, which will have lower targets than cars. The new system doesn't penalize the Big Three for making large cars and trucks, but it does require that they improve the fuel economy of those vehicles. In so doing, they will gain market share and boost profits."

Among the study's findings: (1) An attribute-based CAFE would mean lower standards for Detroit's automakers. Under a size-based standard of 35 mpg, the Big Three could be required to meet a 33-mpg standard, while the rest of the industry would have to meet a 38-mpg standard. (2) An attribute-based CAFE yields greater gains in market share and profits for the Big Three than for the rest of the industry. Detroit automakers stand to receive more of the profit gains from higher CAFE because they will be making improvements that have higher market value and higher profit margins. (3) Higher CAFE standards yield higher profits. The strongest CAFE proposal currently under consideration in Congress (Markey-Platts) provides the greatest profit for Detroit automakers. GM, Ford and Chrysler have projected profits of $14.4 billion by 2017-- more than twice as much than the weaker proposal under consideration (Hill-Terry).

McManus said, "Many in Washington are discussing the old form of CAFE and are not directly dealing with the new reformed, attribute-based CAFE that legislative proposals would actually create. As the House of Representatives considers CAFE legislation, members should be aware of this important distinction and the impacts on costs and profits it will create."

Access a U-M release on the study (click here). Access the complete 20-page report (click here). Access various media reports on the study (click here). [*Energy]