Attribute-Based CAFE Could Mean Big Bucks For Big Three

July 26, 2007

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Detroit automakers would gain market share and increase profits under proposed new fuel economy standards, according to a new study (PDF) by the University of Michigan’s Transportation Research Institute.

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 2017A?AA¢AA¢aAA¬AA¢a?A¬?at least $6 billion more than the competition.

The study, “The Impact of Attribute-Based Corporate Average Fuel Economy 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, says 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.

“The new, attribute-based CAFE is not one-size-fits-all,” McManus said. “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:

• 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.

• 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.

• 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 2017A?AA¢AA¢aAA¬AA¢a?A¬?more than twice as much than the weaker proposal under consideration (Hill-Terry).

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