The Government, the Auto Industry, the Environment, and the Economy

1. The Government, the Auto Industry, the Environment, and the Economy Walter McManus Automotive Analysis Division University of Michigan Transportation Research Institute

2. Physical infrastructure

4. America’s Road Network Ben Fry

6. 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

7. 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

8. Safety and emissions • NHTSA and EPA

9. Theories of regulation • Public interest theory • Capture theory

10. Public interest theory • Helping hand • Markets often fail due to externalities and monopoly • Governments are capable of correcting market failure through regulation

11. Public interest theory • Clean Air Act established clear, measurable targets based on science • EPCA and EISA was (intentionally) ambiguous

12. Capture theory • Invisible hand • Markets • Courts • Government regulators are incompetent, corrupt and captured

13. National Program • History • Calif. 1960 • Clean Air Act 1970 • Energy Policy and Conservation Act 1975 • 2007 • Energy Independence and Security Act

14. NHTSA

15. EPA

16. ARB

17. Can youname that vehicle?

24. Industry-Wide Improvements in Fuel Economy and Detroit 3 Profits:Sensitivity Analysis Walter McManus Automotive Analysis Division University of Michigan Transportation Research Institute

25. 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

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

27. 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

28. 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

29. 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.

30. 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.

31. 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.)

32. 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.

33. 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.

34. Tornado 30%

35. Tornado 40 %

36. Tornado 50%