U-M study: Fuel efficiency will increase auto industry profits

The University of Michigan Transportation Research Institute put out a new study on Monday morning that concluded that the government’s push to make the Big Three automakers build more fuel-efficient cars will increase the profits of the American automotive industry and put the current crisis to rest. The report concludes:

The Automotive Industry Crisis of 2009 is the worst the industry has ever experienced. This paper helps resolve the debate on how much and fast it should change and how it should it respond to demands for increased fuel efficiency. Looking at the actions of successful corporate turnarounds, the lessons are very clear: implement broad, deep, fast change, replace the management team, and transform the culture. We modeled the impacts of different fuel economy standards on profitability and sales, using the most accepted estimates of all the key parameters, and conducted an extensive sensitivity analysis on the key
parameters. The impact of higher fuel economy standards on industry profits is very clear: increasing fuel economy 30% to 50% (35 MPG to 40.5 MPG) would increase the Detroit 3’s gross profits by roughly $3 billion per year, and increase sales by the equivalent of two large assembly plants. The sensitivity analysis showed our findings are very robust. The overall risk and reward profile is very
positive, with only a small chance of losing and a very large probability of gain.

Citing the fact that Ford, GM and Chrysler had in the past continually lost market share to foreign automakers with more fuel-efficient vehicles, the study concludes that the Big Three American car companies “systematically underestimate the value of fuel economy to consumers.” By moving to more fuel-efficient vehicles, the report says, the Big Three will regain market share from companies like Honda and Toyota.

Looking at sales and profit projections based on three scenarios of increased fuel-efficiency in their fleets by 30%, 40% and 50% respectively, the report concludes:

The results show that higher fuel economy standards are favorable to the Detroit 3 automakers. Gross profits of the Detroit 3 automakers increase relative to the baseline by roughly $3 billion (8%) in all three scenarios. Unit sales of the Detroit 3 automakers increase relative to base by 446,000 to 527,000 (about two assembly plants at 80% utilization).

The results are not as favorable for the Japan 3 automakers. Gross profits of the Japan 3 automakers increase relative to the base case in all scenarios, but the size of the increase appears to fall as fuel economy standards increase from 35 MPG to 40.4 MPG. Part of the explanation for the less favorable outcomes for the Japan 3 automakers can be traced to changes in unit sales. The Japan 3 automakers’ unit sales increase if industrywide fuel economy improves 30% (to 35 MPG), but decrease by 27,000 units if industrywide fuel economy improves 40% (to 37.7 MPG), and then by 171,000 units if industrywide fuel economy improves 50%.

If the conclusions of this study are valid, that would be very good news for the auto industry, the environment and the entire country.