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Study: A Strategy Based on Fuel Economy Provides Best Outcome for Domestic Automakers

A study by the University of Michigan’s Transportation Research Institute (UMTRI) has concluded that the strategy with the best financial outcome for domestic automakers is to focus on improving fuel-economy across their lineups.

The study—Can Proactive Fuel Economy Strategies Help Automakers Mitigate Fuel-Price Risks?— refutes the industry’s assumption that customers value fuel economy only when fuel prices are high.

The paper incorporates data-driven estimates of the value of fuel economy into an automotive market simulation model that has three components: a consumer demand function that predicts consumers’ vehicle choices as functions of vehicle price, fuel price, and vehicle attributes (the new estimates of the value of fuel economy are used to set the parameters of the demand function); an engineering and economic evaluation of feasible fuel economy improvements by 2010; and a game theoretic analysis of manufacturers’ competitive interactions.

Even the Big Three now acknowledge that high gas prices and their overdependence on fuel-inefficient SUVs and pickup trucks have accelerated their financial freefall. The findings of our report prove in sharp detail Detroit automakers’ long-term vulnerability to volatile gas prices and show that improved fuel economy fleetwide—above and beyond current regulation—is the key not just to their survival but their success, even if the price of gas goes down.

—Walter McManus, head of UMTRI’s auto analysis division

Looking ahead to the 2010 model year, the study uses three gas-price scenarios: $3.10, $2.30 and $2 per gallon. If all automakers take a proactive strategy to increasing fuel economy, the report concludes that:

  • Ford has more opportunities to improve fuel economy fleetwide than do GM or DaimlerChrysler and can narrow its fuel-economy disadvantage against the Japanese automakers more than their U.S. rivals.

  • At $3.10 a gallon, domestic automakers could increase profits by $2 billion collectively, with an annual profit increase of $1.4 billion at Ford, $500 million at GM and $100 million at DaimlerChrysler.

  • At $3.10 a gallon, Japanese automakers could lose up to $600 million.

  • Even at $2 per gallon, the Big Three could increase profits by $1.3 billion, while the Japanese could lose $300 million.

On the other hand, if all automakers follow a business-as-usual approach, US automakers could lose as much as $3.6 billion in profits with gasoline at $3.10 a gallon.

What is surprising is that each automaker is financially safer if they follow a proactive fuel-economy strategy, regardless of what their competitors do. Sure, Ford might not capture sales if their competitors make a better car that has high fuel economy, but what is certain is that Ford cannot capture those sales without higher fuel economy.

—Walter McManus

The study also estimated the impact of strategic choices by automakers on US employment. At $3.10 a gallon, a marketwide proactive fuel-economy strategy could save nearly 35,000 jobs at GM, Ford and DaimlerChrysler, while costing foreign automakers with plants in North America more than 19,000 jobs. By contrast, a business-as-usual approach could result in Big Three job losses of nearly 43,000, compared to less than 1,900 job cuts at the foreign transplants.

Automakers must decide their fuel-economy strategies for 2010 today, knowing neither the future fuel prices nor the decisions their competitors have made. With only cash on hand for one cycle of product development, as gas prices dip—for the moment—will these struggling automakers be tempted to remain dependent on their once-profitable gas guzzlers? Our report provides stark evidence that the riskiest thing domestic automakers could do is continue business as usual.

Deploying new technologies takes time and money to accomplish, and time and money are in short supply in Detroit. While management is currently focused on cutting capacity through massive layoffs, they need to undertake a deep transformation to much more fuel-efficient fleets to avoid going under. The dilemma the Detroit automakers face is that while they may believe that they cannot afford to make fuel economy a high priority, in actuality, it turns out that they cannot afford not to.

—Walter McManus




Wouldn't you guys just love to know how they came to these conclusions? Are they assuming that Japanese automakers will allow thier current fuel economy to stagnate?

Don't get me wrong, I totally agree with them. By increasing fuel economy accross their line, domestic automakers could reclaim some of their customer base.

Personally, I would love to see Ford become the auto maker that focuses on fuel efficient (NADI Diesels please), safe (four point safety harness), and functional (hatchbacks, crossovers, etc.) vehicles.


GM is going to come out with a hybrid Tahoe. I see nothing like that from Ford.
Some on here may think that a hybrid Tahoe is not the way to go and maybe they are right, but I think people will still buy larger SUVs. They will want them to get better fuel economy then they do now.

fyi CO2

Yeah the Japanese automaker undisclosed assumptions must be bogus. What about a study on gas priced in 2010 above current levels, e.g. $4-$5/gallon which is more along the trendline than a short-term drop to $2 or $2.30/gallon?

Tim Russell

I'm not suprised by those findings, after a couple of years of gas price spikes and an unstable world fuel economy is now cemented in the mind of the consumer. The effect of the last oil shocks in the 70's stayed with the industry for well over a decade until cheap oil in the 90's and marketing caused many to buy SUV's and forget about high gas prices being a problem. Even if things stablized clearly the next product cycle from the all the full line automakers will need to emphasize fuel economy over size and perfomance.

Sid Hoffman

As soon as the Democrats take back power in November everyone will figure that all the oil price spikes are over since they were caused by Republicans anyway. By mid-November SUV and truck sales will skyrocket as gas prices fall below $2/gal.


Since substantial investmet is being made in Ethanol and biodiesel fuels what are the prospects for ethanol products modified to meet equal efficiency of gasoline.
Since Honda Motors has announced it will be producing E100 automobiles that will run operate on pure ethanol or blend with gasoline when can we expect this from the "Big Three".

As I recall Henry Ford's model T was targeted to be adaptable for fuel use so that it would appeal to farmers.

Where are the auto executives heads anyway?

Rafael Seidl

In Europe, fleet average fuel economy has improved from 186 to 160 g CO2/km (the metric allows gasoline and diesel consumption to be combined into a single number) over the past decade, even though consumer demand for sportier, more comfortable cars has gone hand-in-hand with tighter regs on safety, noise and emissions.

This is not to sing the praises of the European auto industry - their voluntary target of 140 g CO2/km by MY 2008 exists only to deflect/postpone mandatory fuel economy regs by the EU. However, it does show that technologically, it IS possible to deliver relatively fuel-efficient vehicles that are still fun to drive and get customers to part with a boatload of hard-earned moolah. Note that cars cost a lot more in Europe, in part due to high VAT, than they do in the US even though average disposable household income is lower.

However, profits for most local carmakers are still anaemic for much the same reason the Big Three are in a financial funk: structural overcapacity in the industry and unions/politicians that make it incredibly hard to take long overdue corrective action.

Ergo: investing in the development new, attractive models featuring state-of-the-art technology is a good idea. Focussing on fuel economy specifically is a great idea, for many reasons. But neither will eliminate the problem of excessive payrolls and the idle plant associated with them.


"Where are the Auto Ex's Heads?"

You don't want to know.

If they pulled them out and cleaned all the stuff out of their eyes they might be able to see that a different world is here already.

It's certainly possible - right now - to design and produce a hybrid auto, powered by E100, that would be competative with anything else being produced in the world, including the Prius.

Using BioDiesel would be even more efficient.

Why won't it happen anytime soon?

They also can't hear where their head is at.


It is too late for GM and Ford. The perception that they just produce low quality gas guzzlers will take years to turn around. By that time, they will both be bankrupt or will have outsourced virtually their entire production overseas.


...and in other news the heads of OPEC (particularly Saudi Arabia) is putting out news releases stating doom and gloom for the advancement of mankind from all of the "harsh" regulations on emissions and fuel efficiency requirements. I guess they are feeling the fire but they are confident they will remain in control of the world's energy supplies for atleast another 30 years.


Looks like automotive experts more and more come to conclusion that major problem of Ford and GM is ever decreasing sales of big SUV and pick-ups due to high gasoline prices. This is very dangerous delusion. Japanese automakers already have high production capacity of SUV and trucks in North America, and capacity of Korean and European companies is increasing too. They offer way higher level of technical sophistication, reliability, and long-lasting value then domestic manufacturers. If sales of big vehicles increase, it will be Japanese, Korean, and European companies which will increase sales.

Second, looks like Big Three concluded that big SUV is part of American dream, and when more fuel efficient models will be offered, gasoline prices dropped, alternative fuels will kick-in, or simple Americans will become richer enough to oversee high fuel prices, everybody will own as big SUV as his budget will allow. This is big mistake. SUV is a pig to drive, and using it to everyday commute is like dancing in downhill skiing boots. Initial craze about big vehicles could fade, and SUV and pick-up truck will return to where they belong: vocational towing and cargo hauling.

I believe that the only way for Ford and GM to revitalize themselves is to improve automotive technology in all vehicle segments. Transition to 100% rear disk brakes, alloy wheels, and stainless steel exhaust would be nice and in fact only marginally more expensive for OEM, yet could very quickly boost sales. Better fuel efficiency will follow more technological sophistication automatically.


They are too busy suing the California Air Resources Board to read this and learn from it.


Andrey, do you realy think the vast majority of car buyers know or care what their exhaust is made from?


OMG look what I just read...

"However, US-market versions of the latest-generation Focus and US-market Fiesta 'subcompact' - arguably the two cars Ford needs most - will not arrive until late 2009."

Ford is dead, unless of course they merge with GM, in which case they will drag on for many more years to come...


Merging with GM would be stupid. They both have the same problems.
Ford and GM both have a chance to become profitable, but they need to act fast.
Perhaps merging with someone who doesn't have a contract with the UAW would be a wise move.

Tim Russell

Andrey, just a question on this 100% rear disk brakes and alloy wheels. Why on lower end models, Honda uses drums and steel wheels on it's lower end models as do other "imports". All my vehicles, 2000 Ford Mustang, 2004 Accord Coupe and my wife's 2002 Taurus have stainless steel exhaust. Most cars have stainless exhaust for the federal emmissions warranty compliance, it would cost a lot more to have to repair the exhaust before the converter if it rusts through than to use stainless. I haven't had to replace a muffler on a car since the 80's due to rust out.

Why am I posting this info, to combat the perception that American cars are behind the others when it comes to tech. OHC engines, got em (GM lags behind the other here), 4 wheel disks and alloys on higher end models, got em. ABS, traction control... I could go on.


You are right. Import car manufacturers are playing same shameless game as Big Three. They retain outdated technology on entry and middle-class models to push customers to buy bigger, more technologically sophisticated, and way more profitable for manufacturers models. Honda at least offers the option of rear disk brakes – but for huge increase in price.

And yes, EPA standard pushed automotive manufacturers to make downpipe and cat from rust resistant materials. Cat back and muffler are still rusting out in 5-7 years, and any midclass car have to change it at least once in lifetime. Price for changing is roughly 5 times higher then price premium for original rust resistant connection pipe/muffler. And since most of exhaust job is done not on dealerships, I really do not understand what holds car manufacturers to eliminate this pain in the neck for car owners.


Lower end models from all manufacturers tend to have exhausts be of the aluminized steel variety with the cat having a stainless steel shell. Only "sporty" models and higher end cars bother with the entire exhuast being stainless.

How about the technological tour de force that is the Corolla's rear suspension? They have had a primitive and low-cost torsion bar rear suspension forever (thus why the Corolla is usually outclassed in handling competitions by all their competitors).

I kind of like the old cam in block V-8s for hp per pound. Kind of like a rotary engine; you get a lot of hp per lb of weight even if the motor is not as efficient (hp per liter) as an OHC motor. Besides, I do believe the OHC engine may pre-date the cam in block engine.

Ronald Graham

The Big Three leaders got greedy! They continued to push gas hogs,ie, Ford Explorer, Suburban, C10 pickups with big motors, etc. and now they're paying the price!

Ron Graham
Constitution Party
Jackson, Mich.

Tim Russell

Ronald your right on that, they really took the eye off the ball when it came to cars and their paying for it.


"Where are the Auto Ex's Heads?" Good question.
Apparently they're not the ones who spent $1Billion in tax payer money
in the PNGV program to delevlope an 80 mpg car.

Harvey D.

Why GM and Ford cannot make money making good smaller cars in USA and Canada while Toyota and Honda have been doing it for years now?

A Gm/Ford merger would just make matter worse. It would make better economical sense for Honda to buy Ford (cheap) and Toyota to buy GM (cheaper by the week.


There was some speculation that they are abandoning their US operations that are loaded with pension and medical liabilities. They are global companies and will make money in China and elsewhere. The total buyout offers at both companies may point in that direction.

hampden wireless

I actually think GM has the best chance to survive. They will be selling more hybrids in 2008 then Ford and do have a better mpg on the larger SUV's then most other competitors. GM has more choices of small car platforms to bring to the US then Ford and has more vehicles with displacement on demand. Ford has the hybrid Escape but does not make them in large enough numbers or apply it to the Fusion as they said they would.

While I dont like large SUV's and the market is shrinking there will be enough of a market for someone to control, and it will probobly be GM not Ford.


Harvey, Honda and Toyota don't have to pay out huge sums to retired workers due to badly worked out contracts with the UAW, that's why they can make a profit on smaller cars made in the USA.

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