# Automobile Industry Retail Price Equivalent and Indirect Cost Multipliers

# Automobile Industry Retail Price Equivalent and Indirect Cost Multipliers

Assessment and Standards Division Office of T ransportation and Air Quality U.S. Environmental Protection Agency Prepared for EP A by

RTI International and T ransportation Research Institute University of Michigan RTI Project Number 0211577.002.004

NO TICE T

his report has been peer -re vie w ed f ollo wing the guidelines recommended b y the EP A Science P olicy Council’ s P eer R e vie w Handbook, 3rd Edition, J une 20 06. T he peer re vie w report f or this report is a v ailable as a separate document, “P eer R e vie w f or the R TI R eport, P assenger V ehicle R et ail P rice Equiv alent F actors and Indirect Cost Multipliers” (EP A-420-R-09-0 04). T his tec hnical report does not necessarily represent final EP A decisions or posi

tions. It is intended to present tec hnical analy sis of issues using dat a that are cur rently a v ailable. T he purpose in the release of suc h reports is to f acilit ate the e x

c

hange of tec hnical inf ormation and to inf orm the public of tec hnical de v elopments.
EP A-420-R-09-003 February 2009

## February 2009 

# Automobile Industry Retail Price Equivalent and Indirect Cost Multipliers Report Prepared for Gloria Helfand U.S. Environmental Protection Agency Office of Transportation and Air Quality 2000 Traverwood Driv e Ann Arbor, MI 48105
Prepared by Alex Rogozhin Michael Gallaher RTI International 3040 Corn wallis Roa d Research Triangle Park, NC 27709 Walter McManus Transportation Rese arch Institute University of Michigan 2901 Baxter Road Ann Arbor, MI 48109

RTI Project Number 0211577.002.004_________________________________ 

### RTI Project Number 0211577.002.004 

# Automobile Industry Retail Price Equivalent and Indirect Cost Multipliers
Report February 2009 Prepared for Gloria Helfand U.S. Environmental Protection Agency Office of Transportation and Air Quality 2000 Traverwood Driv e Ann Arbor, MI 48105

Prepared by Alex Rogozhin Michael Gallaher RTI International 3040 Corn wallis Roa d Research Triangle Park, NC 27709 Walter McManus Transportation Rese arch Institute University of Michigan 2901 Baxter Road Ann Arbor, MI 48109

RT I Internation a l is a trade n a m e of Researc h T r iangle Insti t ute.

### CONTE N T S

Section Page

Executive S u mm ary .................................................................................................... ES-1

1 Introduction

................................................................................................................. .. 1-1

2 Comp aring RPE Multiplier and IC Multip lier A pproaches

.......................................... 2-1

3 RPE Multiplier Es tim ation

............................................................................................ 3-1 3.1 Components of Indi rect Costs

.............................................................................. 3-1 3.2 Comp any-Level IC Component s and RPE Multipliers

....................................... 3-3 3.2.1 Data Origin and Lim itations

.................................................................... 3-3 3.2.2 Data Assumptions and A d justm e nts

........................................................ 3-3 3.2.3 IC Components and RPE Multip lier Values

............................................ 3-5 3.3 Industry Average Indire ct Costs and RPEs

.......................................................... 3-8

4 IC Multip lier Estim ation

............................................................................................... 4-1 4.1 Technology Comp lexity and Innovation Scope

................................................... 4-2 4.2 Impacts of a New Technology on Autom o tive Manufacturers’ Operations

........ 4-4 4.3 Evaluating Indirect Co st Contributors

................................................................. 4-6 4.3.1 Low Complexity : Low Rolling Resistance T i res ..................................... 4-7 4.3.2 Medium Complexity: D u al Clutch T r ansm issions

.................................. 4-8 4.3.3 High Comp lexity: Hybrid Electric V e hicle

........................................... 4-11 4.4 Calculating IC Multip liers

................................................................................. 4-11 4.5 Summ ary ............................................................................................................ 4-12

5 Conclusion

................................................................................................................... . 5

- 1 5.1 Applicability of the RPE and IC Multip liers in Future Years

............................. 5-1

iii

### References

..................................................................................................................... .........R-1
Appendix A: Calculation of RPE Multipliers for In dividual Manufacturers

........................... A-1

iv

### LIST OF F I GURES

Number Page 2-1. RPE Multiplier vs. IC Multip lier Approach

.............................................................. 2-2
4-1. Impacts of Technology C o mp lexity on IC Multiplier

............................................... 4-3 4-2. Definition of Innovation Processes

............................................................................ 4-3

v

### LIST OF TABLES

Number Page ES-1. Industry Av erage and In dividual Company RPE Multip liers : 2007

.............................. 2 ES-2. IC Multip liers by Techn o logy Comp lexity and Tim e Fram e ........................................ 3
3-1. RPE Multiplier Contribu tors in Vyas et al. ’ s Meth odology

...................................... 3-2 3-2. RPE Multiplier Contribu tors in RTI’s Methodolo g y ................................................. 3-2 3-3. Individu al Manufacturer and Indus tr y Average RPE Multip liers: 2007

................... 3-7 3-4. Weighted RPE Multip lier: 2007

................................................................................ 3-8
4-1. Weighted Average IC Multip lier C ontribu tors to RPE: 2007

................................... 4-2 4-2. Impact on Operations

................................................................................................. 4-5 4-3. Short-Term Effects on Indire ct Cost Contributors

..................................................... 4-8 4-4. Long-Term Effects on Indirect Cost Contributors

................................................... 4-10 4-5. Short- and long-Term IC Multip lier Calculation s ................................................... 4-13
A-1. McKinsey’s Autom obile Industry Manuf acturers’ Cost Contributions to MSRP

........................................................................................................................ A-2 A-2. Autom obile Manufacturing Industry RPE Multiplier (b ased o n McKinsey ’s Data)

.......................................................................................................................... A-2 A-3. Dealer Gross Profit Margin on New-Vehicle Sales

.................................................. A-3 A-4. Average U.S. Dealership Net Profit and Selling Expenses on New Vehicle Sales as a S h are of New Vehicle Sales, 2003–2007

................................................. A-4 A-5. Dealer Net Profit and Selling Expenses on New Vehicle Sales as a Share of Manufacturers’ Cost of Sales

.................................................................................... A-6 A-6. General Mo tors RPE Multip lier Calculations: 20 07

................................................. A-8 A-7. General Motors Main Indirect Cost Contributors (as a Shar e of Cost of Sales)

....... A-9 A-8. Daim lerChrysler RPE Multip lier C a lculation s : 2006

............................................. A-10 A-9. Daim lerChrysler Main Indirect Cost Contri butors (as a Share of Cost of Sales)

... A-11 A-10. Ford Motor Comp any RPE Multip lier Calcu l ations: 2007

..................................... A-12 A-11. Ford Motor Comp any Main Ind i rec tCostContributors (as a Share of Cost of Sales)

....................................................................................................................... A- 14 A-12. Honda Motor Comp any RPE Multiplier Calculations: 2007

.................................. A-15 A-13. Honda Motor Comp any Main Indirect Co st Contributors (as a Share of Cost of Sales)

.................................................................................................................. A-16 A-14. Hyundai Motor Comp any RPE Multi plier Calculations: 2007

............................... A-17

vi

### A-15. Hyundai Motor Comp any Main Indirect Cost Contributors (as a Share of Cost of Sales)

.................................................................................................................. A-18 A-16. Nissan Motor Comp any RPE Multip lier Calculations: 2007

................................. A-19 A-17. Nissan Motor Comp any Main Ind i rect Co st Contributors (as a Share of Cost of Sales)

.................................................................................................................. A-20 A-18. Toyota Motor Comp any RPE Multip lier Calculations: 2007

................................. A-21 A-19. Toyota Motor Comp any Main Indirect Co st Contributors (as a Share of Cost of Sales)

.................................................................................................................. A-22 A-20. Volkswagen Group RPE Multip lier Calculations : 2007

......................................... A-23 A-21. Volkswagen Historical Main Ind i rect Co st Contributors (as a share of Cost of Sales)

....................................................................................................................... A- 24

vii

### EXE CUTI V E SUMM ARY When developing environm ental regulations , governm e nt agencies typically m u st estim ate and consider the cost of the regulati on to society. The cost of new regulations to producers, such as vehicle m a nuf acturers, typically shows up in two broad categories: direct
m a nufacturing costs and indirect co s t s. Direct manufacturing costs in cl ude m a nufacturing labor and direct material costs, which can b e estim a ted via reverse engineering or other approaches. Indirect costs include research and developm ent, corporat e operations, dealer support, and
m a rketing and are difficult to estim a te becau se m a ny indirect cos t s are difficult to a llocate to specific production activities or are not affected by levels of production.
Because of the difficulties of estim ating indire ct costs associated with n e w technolog ies, the autom o tive industry has often applied scaling factors to change s in estim ated direct costs to captur e chan ges in ind i re ct cos t s and, hence, pred ict the f u ll impact vehic l e m odif i cations will have on the final selling price. A commonly used scaling factor is the retail p r ice equ i valen t (RPE) m u ltiplier, which is historically based a nd comp ares direct m a nuf acturing costs with all other facto r s that influen ce the fi nal price of a vehicle. Regulatory agencies, including the U.S. Environm ental Pro t ec tio n Agency (EPA), have used RPE m u ltip lie rs to s cale the dire ct
m a nufacturing costs as s o ciated with a regulation when estim ating the to tal soc i al co s tof the regulation. However, a problem in using RPE multip lie rs in regulatory analysis is th at som e of the ind i rect cost components of the R P E m u ltiplier, such as fix e d depreciation costs, h e alth care costs for retired workers, or pensions, m a y not be affected by all vehicle modifications resulting from regulation. This repor t develops a modif i ed multip lie r, ref e rred to as a n indir ect co st (IC) m u ltiplie r, which specif i cally evaluates th e co mp onents of indirect costs that are likely to be affected by vehicle m o difications as sociated with environm ental regulation. A range of IC m u ltipliers are developed that 1) account for differences in the technical complexity of required vehicle modifications and 2) adjust over tim e as ne w technologies becom e assi m ilated into the autom o tive production process.
We started o u r analys is b y developin g an industry average R P E m u ltiplier for the passenger car industry. Using the m e thodology descri bed by V y as, Santini, and Cuenca (2000) as a guideline, we identif ie d contr i buting f actors to an autom o bile m a nuf acturer’ s RPE multiplier. We used the data from a nnual reports of Da i m lerChrysler, Ford, General Motors, Honda, Hyundai, Nissan, Toyota, and Volkswagen to calculate RPE multipliers f o r passenger car

ES-1

### m a nuf acture r s. Indiv i dua l m a nuf acturers’ RPE m u ltip lie rs ar e presented in Table ES-1 and range from 1.42 to 1.49. W e ighting by 2007 worldwide sales provides an industry average R P E multiplier of 1.46. Table ES-1. Industry Average and Indi vidual Company RPE Multipliers: 2007

Com p a n y Ann u al P r od u c ti on (n umbero f vehi cl es) (2 00 7 ) RPE Mul t i p l i er DaimlerCh r ysler a4, 63 5, 6 01 1. 47 For d 6, 24 7, 5 06 1. 45 GM 9, 34 9, 8 18 1. 45 Ho n d a 3, 91 1, 8 14 1. 47 Hy u ndai 2, 61 7, 7 25 1. 42 Ni ssan 3, 43 1, 3 98 1. 49 Toy o t a8, 53 4, 6 90 1. 48 V W 6, 26 7, 8 91 1. 43 Weighted Average 1.46

a On ly 2 006 sales were av ailab l e. Th u s , 2 006 sales and a 20 06 RPE mu ltip li er for DaimlerCh r ysler were u s ed in

calculating t h e industry a v era g e. Sou r ce: 2 007 C o m p an y An nu al Rep o rts. 

### We then ass e rt that no t all components of the RPE will be affected by future EPA environm ental regu lation s and conclu de that a ser i es of adjuste d IC m u ltipliers shou ld b e developed and be available for a range of po ssible regulatory alternat ives. We show that environm ental regulatory actions would have different impacts on cost contributors depending on the comp lexity of the technology associated w ith comp liance. W e introduce three levels of technology comp lexity: low, m e dium, and high. W e argue that low-comp lexity technologies would have a sm aller impact on m a nufacturers’ operations than high-comp lexity technologies. We also arg u e that the m a gnitude of i mpacts would decline over tim e . Based on these findings, we construc ted a series o f IC m u ltipliers, pre s en te d in Table E S -2, that m o re accu rately reflect the change in m a nufacturers’ indi rect costs associated with th e change in direct m a nufacturing costs under different scenarios. W e believ e usi ng these IC m u ltipliers is a more approp riate
m e thod for EPA to estim a te indirect costs associat ed with future regulatory actions compared to using a sing le RPE m u ltiplie r.

ES-2

### Table ES-2. IC Multipliers by Technology Complexity and Time Frame

Technol o gy Comple xity Time Frame Low Medium High Sh ort

- t e rm effect s 1. 05 1. 20 1. 45 Lo ng -t erm effe ct s 1. 02 1. 05 1. 26



### This approach to estim ating the indirect co sts of new technologies can be used in two ways. First, the values in Table ES-2 can be used directly once th e level of comp lexity of a new technology is determ ined. Second, if there is m o re detailed infor m ation about the indirect costs associated w ith a new technology, the m e thodology developed in this study can be used to develop a un ique IC m u ltiplier specific to that technology.

ES-3

### SECTION 1 INTRODUCTION
In addition to the direct m a nufacturing costs incurred during the vehicle production process, a m a nufacturer incurs certain indirect costs. These costs m a y be related to production, such as research and dev e lopm ent (R&D); corpo r ate operations, such as salaries, pensions, and health care costs for corporate staff; or selling, such as tr ansportation, dealer support, and
m a rketing. Indirect costs are generally recovered by allocating a share of th e costs to each unit of goods sold (Vyas, Santin i, and Cuenca, 2000). Becau se indirect costs affect th e retail price of a vehicle, m a rkup factors that relate indirect cost s to the changes in direct m a nufacturing costs have been d e veloped an d are of ten r e f e rred to as reta il p r ice equivalent ( R PE) m u ltiplie rs. Cost analys ts hav e f r equently used these multipliers to predic t the impact vehicle m odif i cations will have on the f i nal selling price. Using these m u ltiplie rs implic itly assum e s that increm ental changes in direct m a nufa c turing costs have a co mmon (percentage) change on all indirect cost
components as well as profits. Conceptually, RPE m u ltipliers p r ovide, at an agg r egate leve l, the re lative shares of dir e ct
m a nufacturing costs and all other item s that a ffe ct the business of auto manufacturing. The
num e rator o f this ra tio c o mp ri ses indirect costs and profits. RPE = (Revenues)/(direct m a nufacturing costs), or, equivalently,

RPE = (dire c t + ind i rec tcos t s + prof its) / (d ire c t m a nuf acturing cos t s) Regulatory agencies, including the U.S. Envi ronm ental Protection Agency (EPA), have used RPE multip lie rs to scale the in c r em ental dir ect m a nuf acturing costs associa t ed w ith a regulation to estim ate the tota l cost of the regulation. However, a problem in using RPE multipliers in regulatory analys is is that som e of the ind i re ct cost component of the RPE multiplier, s u ch as f i xed deprec iation costs, r e ti re es’ hea lth c ar e costs, or p e nsions, m a y not be affected by vehicle m o difications resulting from regulation. In additi on, RPEs assume that
m a rket prices will in crease by the full cost p l us constant p r ofit of the new technology ; in fact, other facto r s that influen ce pri ce (esp ecially cons um er dem a nd and preferences) will affect how much of those costs will be passed along into m a rket price.

1-1

### This study d e velops a m odified m u ltiplier, referr ed to as an indirect cos t(IC) m u ltiplier, which specif i cally evaluates th e co mp onents of indirect costs that are likely to be affected by vehicle m o difications associated with environm ental regulation. IC Multip lie r= (In crem ental d i rec t+ indir ect co sts)/( incr em ental d i rec tm a nuf acturing costs) A range of IC m u ltipliers are dev e lo ped that 1 ) account for differences in the technical
comp lexity of required vehicle m o difications and 2) adjust over tim e as modifications becom e assim ilated into the au to motive supp ly chain.
To calculate the IC m u ltiplie r, we be gan w ith the rela tive shar es ( %) f o r individua l indirect cost categories developed through pa st RPE studies and updated them based on
comp any-specific inform ation obtained from r ecent annual reports. W e then adjusted these indirect co st catego r y sh ares to reflect differe nce s in the tech nical comp lexity of auto motive modifications that could result from different environm ental regulations and to reflect how indirect co st impacts will change over tim e as ne w technolog ies are ass i milated in to th e industry supply chain.
The rem a inder of this se c tion des c rib e s how indir ect m u ltiplie r s have be en developed in the pas tand focuses on the applicability of ind i vidual ind i rect cost components when considering vehicle technology changes due to environm ental regulations. This discussion is followed by an overview of the m e thodology we used to calculate the IC m u ltiplier we recommend to be used to assess po ten tia l enviro nm ental regulations. 1.1 Previous In direct Cost Studies In past m obile source reg u lato ry actio ns, EPA has som e ti m e s used a m u ltiplier of 1.26 to account for the indirect costs associated with the direct m a nufacturing cost impacts of a regulation. This factor was origin ally derived for light-duty highway or passenger vehicles in the late 1970s and then updated (including other vehi cle types) in 1985 by Jack Faucett Associates under contract to EPA (Jack Faucett Associates, 1985). In 2000, researchers at the Argonne Nati onal Laboratory published a technical
m e morandum comp aring three d i fferent es tim ates of RPE multip liers (V yas, Santin i, and Cuenca, 2000). In their study, Vyas et al. comp ared their own estim ates (developed for passenger vehicles with an emphas i s on electric vehicles ) with those from Chrysler and Energy and Environm ental Analysis and found that the thre e estim ates, when put on a comp arable basis,

1-2

### were very sim ilar. Vyas et al.’s analysis es tim ated RPE factors of 1.5 for outsourced components and 2.0 for products developed and manufactured in ternally at an autom o tive m a nufacturer.
A m o re recent analysis co mm issioned by the autom obile m a nufacturing industry and conducted by Sierra Research, Inc. (2007) suggest ed that the 1985 Faucett report contains “basic
m e thodological errors that m a ke it unreliable for use in a regulatory analysis.” The S i erra Research analysis concluded thatan RPE factor for components m a nufac tured internally at an autom o tive m a nufacturer should be about 2.0 to accurately account for in direct costs. 1.2 Indirect Co st (IC) Mu ltiplier Developed as Part of This Study Building on the analysis developed by Vyas et al., we developed a m e thodology to evaluate which indirect cost components will b e affected by different potential regu latory actions. W e distinguished between regulations requiring different le vels of technical comp lexity. The underlying concept is that re gulations requiring m a jor changes in m a terials or m a nufacturing processes, o rsignificant invention of new tec hnology, will lik e ly have a significant impact on indirect costs. In contrast, regulations requiring simp le t echnology m odifications m a y have neglig ible impacts on in direct cos t s. For this reas on, imple m e n ting a s i ngle m u ltiplier includ ing all indirect costs across all t echnologies is not appropriate. Our analysis is presented in four sections. In Section 2, we discuss the relationship of multiplicativ e adjus t m e nt factors to a m a rket m o del based on a supply and dem a nd modeling approach. W e also exp l ain why we believe the IC multiplier approach is more approp ria t e than the RPE m u ltiplier appro ach when ca lcula ting a c h ange in ind i rec tcos t s as socia t ed with a regulation. In Section 3, we present an overview of how we used Vyas et al.’s m e thodology to calcu late RP E m u ltiplier s f o r individ u al m a nuf acturer s . W e then calcu l ated an aver ag e RPE multiplier fo r the au tom o bile m a nufa c turing indu stry us ing data from the annual repo rts of Daim lerChrysler, Ford, General Motors (GM), H onda, Hyundai, Nissan, Toyota, and Volkswagen 1



### . In Section 4, we present the m e thodology we us ed to calculate IC m u ltipliers custom ized for different types of regulations and presen t the application of the m e thodology for three potential technology categories. W e then develo ped adjustment factors for each component of that m u ltiplier for different comp lexities of tec hno logies b ecau se not all co mponents of the RPE will be affected by the in troduction o f new technol ogies. W e also m a de adjustm e nts for short-run

1 C a l c ul at i ons were base d o n t h e fi nanci a l st at em ent s of m a nu fact u r ers t h a t cove re d wo rl dwi d e a u t o m obi l e pr o duct i o n (i nc l udi n g passe n g e r car s a n d l i g h t tr uc ks)

. M a n u f act ure r s di d n o t b r eako ut fi n a nci a l res u l t s b y pr o duct i o n of passe nge r car vs. l i ght truc k vehi cl es, o r wo rl d w i d e vs. U n i t e d St at es p r o duct i o n.



### 1-3

### (approxim a tely the first 4 to 5 years of applicat ion of the new technology) and long-run (after 5 years of use) effects to account for technology assim ilation over tim e. The multipliers that resu lt f r om this adjustm e nt process ar e ca lled indirect c o st m u ltiplie rs, or IC m u ltiplier s. W e estim ated that the valu e of the IC multipliers v a ries from 1.02 to 1.45 for techno logies with different levels of technical comp lexity in the short and long runs.
Section 5 su mmarizes o u r conclus i o n s and provides a discu s sion of how IC m u ltiplie r s m i ght be affected by industry restructuring. Fi nally, in Appendix A we provide a detailed descrip tion of calcula tio ns and data sources of RPE m u ltiplie rs f o r indiv i dual m a nuf acture rs.

1-4

### SECTION 2 COMPARI NG RPE M U LTIP L IE R AND INDIRE CT COST MUL T IPLIER APPROACHES
Executive O r der 12866, “Regulatory Planning an d Review,” issued in 1993, requires federal agen cies to estimate th e benefits and cost s of significant regulatory actions. Circular A-4 of the Office of Managem e nt and Budget and the EPA’s Guidelines for Preparing Economic Analyses s t ipulate u s e of a m i croeconom i c fram ework to analyze the benefits and costs. This section disc usses the relationsh i p be tween the m u ltip lie rs de veloped in this repo rt an d the
m i croeconom ic fra m e w ork in which they will be used.
In this sectio n, we comp are two appro aches fo r es tim a ting the total co st of a regulation. One approac h is to use a n RPE m u ltiplie r to ac co unt f o r indir e ct cos t s and estim ate the price change. The second is to use an IC multip lier to estim ate the s h ift in th e su pply curve and then
use a m a rket m odel to es tim ate the c h ange in pr ice and quantity (which will inf l uence the to tal cost of a regulation). The RPE multip lier app r oach has b e en used as a m e thod to estim ate the change in indir ect co sts that are inc l uded in the tota l cost of a regulation. This approach has typically included u s ing all indir e ct cos tcateg ories and p r of its to deve lop a m u ltiplier that is th en applied to the estim ated direct m a nufacturing costs. The projected change in the retail price times the quantity affected is then used in the es tim ate of the full cost of the regulation.
W e believe the RPE m u ltiplier app r oa ch has pr oblem s in two areas. First, a s we discuss in the f o llow i ng sec tions of this repor t, regu lation s will m o st likely no t af f

ect a ll ca teg o ries of indirect co sts. The indirect cos t s affected will vary by the co mplexity of the technolo gy and will change over tim e (short r un versus lo ng run). In S ection 4, we develop a s e ries of IC multip lie rs to captu re th ese factors. Second, applying th e RPE alone does not yield an accurate estim a te of the change in price. Direct m a nufacturing costs and indirect costs resulting from a regulation reflect shifts in the total cost of production. In a m a rket fram ework, this is repres ented by a shift in the supply function. Consider the following sc enario presented in Figure 2-1. Initially the m a rket is in equilibrium

. Manufacturers produce quantity Q 1 

### and buyers purchase that quantity at the price of P 1 

### per vehicle (point A). Then a regulation is pa ssed requiring m a nufactur e r s to implement a new technology. The added cost shifts the supply curve upward. The shift equals the per-unit cost of regulation, which includes both di rect and indirect costs.

2-1

### The RPE multip lie r app r oach assum e s tha tthe m u ltip lie r cap tures the f u ll m a rket impact of the new cost. Sales continue at Q 1 

### , and the pr ic e will rise to P 2 

### (point B) . The RPE multiplier approach implies that dem a nd is perfectly inelastic and there is a full pass-through of costs to
consum ers.

Price S 1 : W ith Reg u l atio n

D P 2 P 3 S 0 : W itho u t Reg u l ation

P 1 A B C

Q 3 Q 2 Q 1 

### Quantity
Figure 2-1. RPE Multiplier vs. IC Multiplier Approach

However, if the dem a nd curve is less than perfectly inelastic (as shown in Figure 2-1),
consum ers will dem a nd f e wer vehic l es as the pr ice inc r ease s . A new equilibr i um will be determ ined at the intersection of the supply and d e m a nd curves (poin tC). The new price will b e P 3 

### and the n e w output will b e Q 2 

### . As a result, the final cost of th e regulation (social cost) will be slightly less than the o r ig inal co st es tim a te because of the decrease in qu an tity b e ing produced. The original cost estim ate, based on operation at point B, would be th e area between lines S 0 

### and S 1 

### , the price axis, and quantity Q 1 

### . The actual so cial cost is the area b e tw een lin es S 0 

### and S 1 

### , the price axis, and points A and C; it is s m aller than the orig inal c o st estim a te by triangle ABC.
The m a rket analysis represented in Figure 2- 1 also highlights that profits should not be included in the IC m u ltiplie r. The RPE appro ach implicitly ass u m e s disequ ilib rium in the
m a rket. Producer profits are calculated by assuming production at point B, even though
consum ers are not willin g to pay P 2 

### and buy Q 1 

### vehicles. In r eality, bot h price and qu antity will change in response to the shift in costs. The impact on producer profits is determ ined by the slopes (elasticities) of the supply and dem a nd curves. Producers and consum ers typically share the burden of the comp liance costs. Indeed, if profits were fully included in costs, then

2-2

### producers w ould not be affected by regulations: their profits would be the sam e befor e and after the change. It is comm on, however, for a rule to affect profits; i ndeed, manufacturers often object to rules on this basis. In a long ru n m odel of a perfectly co mpetitiv e in dustry, m i croeconom ic theory pred icts that full costs are passed along to consum ers. Th e perfect comp etition m o del assum e s that firm s m a ke zero econom ic profits (that is, profits includi ng all opportunity costs) before the regulation; the inc r eas e d costs as so ciated with the regulatio n will m a ke prof its nega tive if they ar e not able to pass them along. This is sim ila r to assum i ng that the supply curv e is horizontal in the long run. As a result, firm s will exit the industry, until qu an tity supp lied equals quan tity d e m a nded at price P 2 

### , quantity Q 3 

### . In an imperf ectly co mpetitiv e in dustry, f i rm s are pr edic te d to have pr of its grea ter than ze ro. W h en i mperfectly comp etitive firm s face incre a s e d costs, the y seek to m itiga t e los s es in productio n by not pas s ing along the full costs; the quantity will not fall as m u ch as Q 3 

### , and the price will no t ris e as m u ch as P 2 

### . Econom ists often, but not alwa ys, argue that the auto motive industry is imperfectly comp etitiv e. Another factor that is difficult to predict in this setting is the eff ects of new technologies
on consum e r dem a nd. Som e changes m a y be invisi ble to con s um ers and will not affect their dem a nd. Others, such as technolog ies that increase fuel econom y with little other observable effect to the consum er, m a y increase dem a nd. Fi nally, som e technological changes m a y reduce dem a nd, although autom a kers and regulators are not li kely to pursue undesirable changes as long
as m o re attr activ e altern ative s exis t. Any shif ts in the dem a nd curve due to new technologies should be included in regulator y impact analyses of new requirem e nts. They should not, however, affect the estimate of indirect costs used to shift th e supply curve. The RPE approach
om its dem a nd shif ts as well as m a rket adju stm e nts due to the shifting supply curve.
In conclus i o n, we believ e that the R P E approach has problem s because it

 typica lly inc l udes a ll ca tegor ies of indirect costs, t hus overstating the impa ct;

 typically includes profits in the m u ltiplier a nd thus cannot be used as a supply shift in a m a rket analysis ;

 does not ac c u rate ly pro j e c t the chang e in m a rket price o rqua ntity o rthe total co st of the regulation, as a result of the f i rst two bullets ; a nd

 does not provide a fram ework in which dem a nd s h ifts can be analyzed.
The IC m u lt iplier is pref erred b ecause it m ode ls the appropriate shift in th e supply curve (including direct m a nufa c turing cost s and relevant indirect costs) that then can be usedin a

2-3

### m a rket analysis to determ ine a new equilibrium pr ice and quantity, and henc e the tota l cost of the regulation. A m a rket an alysis, p i voting on the new equilib riu mgenerated from the IC m u ltiplier approach, determ ines the distribution of re gulatory burden between producers and consum ers consistent w ith econom ic theory.

2-4

### SECTION 3 RPE MULTIPLIER ESTIMATION
In this sec tio n, we identif y and quantif y the indir e ct cos tcomp onents th at c onstitu te RP E multipliers f o r the au tomobile m a nufactur ing ind u stry. W e present an ov e r view of how Vyas et al.’s m e thodology was used to calculate RPE m u l tipliers for individual manufacturers. W e then calcu late an average RP E m u ltiplier for the auto mobile m a nufacturing industry us in g data from the annual reports of Daim lerChrysler, Fo rd, GM, Honda, Hyundai, Nissan, Toyota, and Volkswagen. 3.1 Components of Indirect Costs We start our analysis by iden tifying components of indirectcosts that EP A regulations could potentially affect. Table 3-1 presents the categories deve loped in V y as et al.’s (2000) analys is 2 

### . The m a jor categories am ong these are m a nufacturing costs, 3 

### production overhead costs, 4 

### corporate overhead costs, 5 

### sellin g costs, 6 

### and profit. 7 

### Adde d together these categories contributed to an estim a ted RPE m u ltiplier of 2.0 for intern ally sourced co mponents. That valu e was estim ated to be 1.5 for externally sourced components (Vyas, Santini, and Cuenca, 2000). Since Ford spun off parts supplier Visteon in 1997, and GM spun off parts supplier Delphi in 1999, and since other manufacturers have independent parts suppliers (Denso for Toyota, Keihin for Honda, Bosch for Volkswagen, and Visteon for Dai m lerChrysler, Nissan and Hyundai), we
m i ght expect the RPE multip lie rs f o r

eight au tomobile m a nufactur ers we estim ate in this repo rt to be close to 1.5 as a prelim inary estim ate. Using Vyas et al.’s m e thodology as a guideli ne, we partitioned the indirect cost
components as shown in Table 3-2. T h e corpor ate overhead costs component was broken into general administrative, retirem e nt, and health care. The selling costs co mponent was broken into transpo r tatio n and m a rketing. W e also accounted fo r dealer co sts of selling new vehicles, and

2 Vy as et al

. ’ s r e po rt al so p r es ent s t h e res u l t s o f t w o st udi es per f o r m e d by C h ry sl er a n d E E A, I n c. H o we ver , ou r stu d y sp ecifically u tilized th e meth o d o l og y dev e lop e d b y Vyas et al. 3 Ma n u f

a ct uri n g c o st s r e f e rto th e to tal co st of m a k i n g v e h i cles, con s isting o f d i r ect pr oductio n laborco sts, d i r ect m a t e ri al s cost s, an d ot he r di re ct expe nses . 4 Pro d u ct i o n ov erhe ad is d e f i ned as ind i r ect co sts th at ar ise fr o m m a n u f act ur ing an d pr oducin g v e h i cles (su c h as t h e war r ant y , R & D, a n d dep r eci at i on a n d am ort i zat i on). 5 Co r por at e ove r he ad cost s re f e r t o t h e c o st s of ru n n i n g a co rp orat i o n, w h i c h i n cl ude sal a ri es o f no n p r o du ct i on wo rk ers, p e nsi ons , a n d heal t h care e x pense s . 6 S e llin g costs i n clude salaries of m a rketing s t aff, a d v e rtising co st, d ealer ad v e rtisin g etc. 7 Pro fit

( n et pr o f i t ) i s defi ne d a s t h e di f f ere n c e bet w ee n t h e t o tal of all th e man u f act u r ers’ rev e nu e and the to tal of all the m a nufacturers’ expe nditures.



### 3-1

### Table 3-1. RPE Multiplier Contributor s in Vyas et al.’s Methodology

Cos tC a te go ry Cos tC o ntrib u t or Rela tive to C o st of Ma nuf ac turin g Share of MS RP ( % ) M a nu fact u r i n g C o st o f m a nuf act ure 1. 00 50 .0 Pro d u ct i o n ove rhea d War r ant y 0. 10 5. 0 R & D/ en gi nee r i ng 0. 13 6. 5 Dep r eci at i o n a n d am ort i zat i on 0. 11 5. 5 Corporate ove rhead Corporate ove rhead, retirem e n t and health care 0. 14 7. 0
Sellin g Tran sp ort a t i o n, m a rket i ng, de al er sup p o rt , an d de al er di sc ou nt 0. 47 23 .5
Sum of c o st s 1. 95 97 .5 Pro f i t

Pro f i t 0. 05 2. 5 Tot a l co ntri but i on t o M S R P 2. 00 10 0. 0 Sou r ce: Vyas, A., D. San tin i, an d R. Cu en ca. April 2 000 . “C o m p a rison o f In d i rect Co st Mu ltip l i ers fo r Manufacturing.” Center for T r ans p or tation Research, E n ergy System s Divi sion , A r go nne N a tion a l Labo r a t o r y . 

### Table 3-2. RPE Multiplier Contributors in RTI’s Methodology

Contribu tor Man u f actur ing Man u f actur ing co st Pro d u ct i o n Ov erhea d War r anty R & D (p r o d u ct devel opm ent ) Depreciation a n d am ortization M a i n t e nance , r e pai r , o p erat i o ns c o st Corporate Ove r hea d Gene ral a n d ad m i nistrative (G &A ) Retire m en t Health care Sellin g Transpo r tation Mark eting Dealer Deal er ne w ve hi cl e net pr o f i t Deal er ne w ve hi cl e sel l i ng e x pen s e Profit



### 3-2

### dealer gross profits. 8 

### The increased level of disaggregati on allowed for m o re flexibility when estim ating the IC m u ltiplie rs pres ented in Sectio n 4. 3.2 Company-Level Indirect Cost Co mponents a nd RPE Multipliers Using automobile m a nufacturer s’ annual reports, we develo ped values f o r each of the indirect cost categories f o r individual autom obile m a nufacturers. The m a jority of the infor m ation was obtained from incom e statem ent tables in m a nufacturers’ annual reports. Appendix A presents detailed calcu lations of indirect co st co mponents an d RPE m u ltipliers for in dividual
m a nufacturers. Below we describe the lim itati ons, assump tions, and adjustm e nts for the data used in our analysis. 3.2.1 Data Origin and Limita tions The data f o r

comp any-level RPE (an d IC) m u ltiplie r analy s es were gathe r ed f r om publicly available annual reports. As a peer reviewer on this study, Glen Mercer, argues, although pu blic av ailability is an ad vantage, th ese reports are accounting statem ents and m a y not relate directly to actual engineering costs. Fo r example, depreciation is an accounting m e asure that m i ght not correspond to actual wear and tear on the equipm ent. Additionally, annual reports
m i ght be biased toward corporate strategy rather than actual engineering r ealities. For example, a
m a nufacturer m i ght not raise the price of a vehi cle by the full cost of a technology for m a rketing reasons. An alternative solution would be to requ est in tern al a ccounting infor m ation for various technology samp les from each of th e m a nufacturers, which would be slow , costly, and difficult. An argum ent can be m a de that som e of these i ssues would wash out by av eraging resu lts across multiple m a nuf acturer s ( M erce r, 200 9). 3.2.2 Data Assumptions and Adjustments In som e instances, assumptions and adjustm e nts were needed to m a ke the cost data
comp arable across comp anies. Mos tof the m a nufacturers did not repor t direct m a nufacturing costs (cost of m a terials and labor used in m a nufa c turing process). However, all m a nufacturers reported “cost of sales.” Investopedia, Forbes’s financial definitions W e b site, defines cost of sales, which is often referred to as cost of goods sold (COGS), as “direct co sts attributable to the production of the goods sold by a company, which in cludes the cost of the m a terials used in creating the good along with the di rect labor costs used to pr oduce the good.” Manufacturing cost excludes indirect ex penses such as costs and sales force costs. However, Investopedia (2008) warns that the exact cost s included in cost-of-sales cal culations m a y differ from one

8 A not her i t e m we rep o rt e d w a s “ot h er e x pe nses, , ” whi c h i n cl u d ed i n t e re s t expe nse , l e ga cy cost s a n d ot her miscellan e o u s ex p e n s es listed in an nu al reports as “o th er exp e nses.” Th is ex p e n s e is NOT in clud ed in RPE mu l tip liers, and was reported for co m p leten e ss of the sn apsh o t of m a n u f actu rers’ exp e nses.



### 3-3

### business to another. Nevertheless, co st of sales w a s the best estim ate of direct m a nufacturing costs reported by all comp anies.
“Health care” and “retirem ent” costs provide d in dom e stic m a nufact urers’ annual reports included expenditures for both m a nufacturing and corporate labor. The share of these costs related to m a nufacturing labor is a part of m a nu facturing expenses and, therefore, was added to the cost of m a nufacturing (i.e., to direct costs ) . The share related to corp orate work ers is a part of indir ect co sts and was ad ded to the R P E m u ltiplie r. To dete rmine how to a ttr ibute thes e shares, we looked at Ford’s and GM’s shares of m a nufacturing to production workers. 9 

### This showed that approxim a tely 70% of workers were involved in m a nufacturing, while 30% were corporate workers. Sin ce the sh are of m a nufacturing to production workers was not evident from other
m a nufacturers’ annual reports, a 70% to 30% share was used for all m a nufacturers.
Health care and retirem e nt costs could be attribu t ed to “legacy” or “cu rrent” cos t s. Legacy costs apply to w o rkers who have already retired. A change in direct m a nufac turing costs due to a new vehicle technology applied to comp ly with an environm ental regulation w ould have no effect on these cos t s. In c ontrast, current costs cover exis ting employe es. These costs m i ght change if the num ber of corporate employees were to chang e as a result of regulation (note that any increase in m a nufact uring labor would result in higher health care and retirem e nt costs for those workers but, for this analysis, those co sts w ould be captured under direct m a nufa c turing costs). Based on dom e stic m a nufacturers’ annual reports, we concluded that retirem e nt costs included on ly curren tco sts; ther ef ore, all of the s e costs wer e included in the RPE m u ltiplier. However, the reported h ealth care co sts appear to include both legacy and current costs. For
example, for Ford Motor Comp any, the split was 45% legacy to 55% current. W e used this share as a proxy for all dom es tic m a nufacturers and incl uded only 55% of health care costs in the RPE multiplier c a l cula tions (a s noted earlier, a r e gul a t ory change would have no ef f

ect on legacy costs). S i nce only a few foreign m a nufacturers repo rted actual health care costs, we app lied a proxy of 0.03 of the cost of sales (30% of which were applicable as the corporate labor share) reported in the Sierra Research report (Sierra Research, 2007). It is worth noting that legacy costs are changing rapidly. For example, GM is gradually phasing out legacy costs. This and other forward-looking issues are discussed in Section 5. Manufacturers did not report m a intenance, re pair, and operations (MRO) costs. The 2003 report from McKinsey was one source we identi fied for estim ates of MRO costs (d etailed

9 For d Mo t o r Co m p an y r e p o r t ed 6 4 ,000 h ourly ( 7 3 % ) and 23 ,7 00 salar i ed w o r k er s (2 7%) ( F o r d , 200 7, p. 12)

. Gen e ral Mo t o rs rep o rted exp e n d itures fo r m a n u facturin g labo r of $ 2 7

. 9 b illio n (6 6 % ) and sellin g , g e n e ral , ad m i n i strativ e an d o t h e r exp e n s es o f $14 .4 billio n (3 6 % ).



### 3-4

### calculations of indirect cost c ontributors estim a ted using data from the McKinsey repo rt are presented in Appendix B). However, McKinsey ’s estim ate of MRO (0.14) was not docum ented and likely included direct m a nufact uring costs (such as purchase of equipm ent, technician labor costs, etc.) that are covered in depreciation, am ortization, and cost of sales in our m e thodology. The Sierra Research (2007) report estim a ted the historic value of MRO to the cost-of

sales ratio for Chrysler Comp a ny, which equaled 0.03. This value was used to reallocate costs to this category when a m a nufacturer did not prov ide estim a tes. In these cases, the valu e was subtracted from the cost of sales to redistribute existing costs instead of creating additional costs. Sim ilarly, som e manufac turers di d not report health care costs. Since the McKinsey report did not provide an estim a te of health care costs, we used the 0.03 estim ate from the Sierra Research report to r e a lloca te cos t s to health care. A de ta ile d list of assu mptions and sources for each
m a nufacturer’s indirect cost contribu tors is presented in Appendix A. The only costs that were added (rather than re distributed from one of the indirect co s t
components) were dealer new vehicle net profit and dealer new vehicle s e lling expens es. These
components are part of the final price of a vehicle but are not reported by autom obile
m a nufacturers. As discussed in Appendix S ection A.2, we used the data from National Auto m o tive Dealer Association (NADA) and estim a ted dealer new vehicle net profit to be 0.004, and new vehicle selling expenses to be 0.06. 3.2.3 Indirect Cos t Components and RPE Multip lie r Values Table 3-3 p r esents the values of indir ect cos tcomponents and RPE m u ltipliers for individual manufacturers in 2007. Production overhead (and its subc omponents) were the largest contr i butor to the RPE multip lie r and stayed r e la tively cons istent ac ross a l l m a nuf acturers, ranging from 13% to 22% of cost of sales. Se lling and dealer contributing factors were the second largest contribu to rs to th e RPE m u ltiplier, with values ranging fro m0.12 to 0.18. Corporate overhead (prim a rily general and adm i ni strative co st) were a sm aller contributor to indirect costs and had greater vari ance, ranging from 4% to 14% of cost of sales. Other expenses, which are n o t par tof indirec tcos t s but are ref l e c ted in RPE multipliers, also var i ed s i gnif i can tly
across comp anies.
Som e corporations (e.g., Nissan and Daim le rChrysler) had lower corporate overhead costs but higher selling or pr oduction costs. The variance betw een comp anies can be explained by the differences in accounting definitions a nd practices. H o wever, the sum of corporate overhead and selling costs tends to be comp arab le across the comp anies. Indirect production overhead costs tend to be inversely related to th e sum of corporate a nd selling overhead. This

3-5

### indicates that, although individua l companies track and report indirect costs differently, aggregate in direct cos t s are sim ilar. Toyota, Hyundai, and Ford had the lowest tota ls of indirect cost components, equaling 38, 39 and 39 percen t of cost of sales

. Hyundai al so had the lo west RPE multip lier at 1 .42. Even though Toyota’s share of indirect co sts with respect to cost of sales was lower than Hyundai’s, Toyota’s profit (0.09) surpassed Hyundai’s (0.0 3). Volkswagen had the second lowest RPE multiplier of 1.43. Am ong the Am erican m a nufac tu rers, DaimlerChrys ler had the high est RPE multiplier of 1.47, followed by GM and Ford with 1.45. To ensure that 2007 was not an outlier year, we looked at a 5-year historical analysis of indirect cost contributors fo r individual m a nufacturers. For all but one m a nufacturer (Daim l erChrysler), the sum of three m a jor indirect cost contri buting factors (selling, adm i nistrative, and other expenses; operating and other expenses; and depreciation) deviated in the range of 10 percentage point s in the past 5 years (see A ppendix A for a historical RPE analysis for individual manufacturers). Keepi ng in m i nd that averag i ng manufacturers’ costs would create an unbias ed estim ate, we conclude d that 2007 RPE m u ltipliers are un likely to be underestim ated.

3-6Table 3-3.Individual Manufacturer and Industry Average RPE Multipliers: 2007Relative toCost of SalesIndustryDaimlerRPE MultiplierContributorAverageChryslerFordGMHondaHyundaiNissanToyotaVWVehicle ManufacturingCostofsales1.001.001.001.001.001.001.001.001.00Production OverheadWarranty0.030.040.030.030.010.020.030.040.02R&D (productdevelopment)0.050.040.020.060.070.040.060.050.06Depreciationandamortization0.070.110.050.060.050.060.090.080.09Maintenance,repair,operations cost0.030.030.030.030.030.030.030.030.03Totalproductionoverhead0.180.220.130.170.160.150.210.190.20Corporate OverheadGeneralandadministrative0.070.050.120.070.110.080.030.060.03Retirement< 0.010.010.000.01< 0.01< 0.01< 0.01< 0.01< 0.01Health0.01< 0.01< 0.010.010.010.010.010.010.01Totalcorporate overhead0.080.060.130.080.140.090.040.070.04SellingTransportation0.040.040.040.040.040.040.040.040.10Marketing0.040.020.040.050.030.050.080.030.02DealersDealernewvehicle netprofit< 0.01< 0.01< 0.01< 0.01< 0.01< 0.01< 0.01< 0.01< 0.01Dealer new vehiclesellingcost0.060.060.060.060.060.060.060.060.06Total selling and dealer contributors0.140.120.140.140.130.150.180.120.17Sum ofIndirect Costs0.400.400.390.400.440.390.430.380.41Netincome0.060.070.050.050.040.030.060.090.02Other costs (notincludedas contributors)0.040.040.110.060.020.010.01< 0.010.05RPEMultiplier1.461.471.451.451.471.421.491.481.43



### 3-7

### 3.3 Industry Average Indirect Costs and RPEs To arriv e at an RPE m u ltiplier for the industry as a whole, we weighted each
m a nufacturer’s RPE m u l tiplier by their 2007 10 

### worldwide production. Table 3-4 presents individu al comp any production alon gside th e RPE m u ltipliers. The weighted average RPE multiplier fo r the au tom o bile m a nufa c turing indu stry equaled 1.46 in 2007. The 2007 production figures presented in Table 3-4 were also used in Table 3-3 to ge nerate industry-weighted average individual cost components. Table 3-4. Weighted RPE Multiplier: 2007

A n nu a l Pro duct i o n ( n u m b e r of Com p a n y vehicles) (2007) RPE Multipli er Dai m l e rC hry s l e r 4, 63 5, 6 01 1. 47 For d 6, 24 7, 5 06 1. 45 GM 9, 34 9, 8 18 1. 45 Ho n d a 3, 91 1, 8 14 1. 47 Hy u ndai 2, 61 7, 7 25 1. 42 Ni ssan 3, 43 1, 3 98 1. 49 Toy o t a8, 53 4, 6 90 1. 48 V W 6, 26 7, 8 91 1. 43 Weighted Average 1.46 Sou r ce: In tern ation a l Org a n i zatio n of Mo to r Veh i cle Man u f actur er s ( O I C A) . 20 08 . “W orld Mo tor Veh i cle Produ ction ” . h ttp ://o ica.n e t/wp

- con t en t/up l oad s /wo r l d -rankin g -200 7.pd f.

10 D a im ler C h r ysler ’ s RPE mu lt ip lierw a s calcu lated f o r 2 006 ( t h e last yeart h e co m p an y r e leased an an nual r e po r t ) ; th erefore, t h eir RPE mu ltip lie r was weigh t ed b y 2 006 rev e nu e.



### 3-8

### SECTION 4 INDIRE CT COST MULTIPLIE R ESTIMATI ON
This sec tion outlin es ca lc ulations of I C m u ltip lie r s that ref l ec t dif f

e rences in techno log y comp lexity and changes in indirect costs over tim e as m odi fications to production are assim ilated. The m o tivation is to m odel the d i ver s ity of poten tia l cost impacts that m a y inf l uence the design and production of autom o biles under a wide range of potential future environm ental regulations. In Section 3, we calculated an aver ag e RP E m u ltiplie r f o r the autom obile m a nuf a cturing industry of approxim a tely 1.46. This num b er includes m a rkup for all indirect costs and profit. In this section, we focus solely on comp onents of in direct costs that are likely to be impacted by future environm ental regulations. We show that only a portio n of the RP E m u ltiplier should be used as a m a rkup factor to account fo r the ch a nge in indirect costs from an environm ental regulation. Because th is factor refl ects indirect costs only, it is refe rred to as an IC m u ltip lier. Regulations that require imp lem e nting different levels of technology complexity are like l y to impact ind i re ct cost con t rib u tors with different m a gnitudes. Rath er than ass u m i ng that a single m u ltiplier is appropriate fo r all technologies, we consider the possibility that regulations with low technology complexity (such as simp ly replacing an existing technology) w ould have a lower IC m u ltip lier than a regul ation involving h i gh technolo gy co mp lexity (such as requiring significant new integration efforts). In addi tion, the m a gnitude of impacts of different technologies is also likely to ch ange over tim e as new technologies are assim ilated: for instance, although such expenses as research are likely to be high in the short run, in the long run, the new technology m a y no longer require special research efforts. In this section, we describe the m e t hodology used to calculate six autom o bile
m a nufacturing industry IC m u ltipliers, which cap ture technology differences associated with diverse EPA regulatory actions, as well as short- versus long-term i mpacts. Table 4-1 repeats the indirect cost contributors from Table 3-3, which are calculated as part of the industry average RPE m u ltiplier. Tab l e 4- 1 excludes d eale rand m a nuf acturer p r of its f o r re a s ons discus s e d in Section 2. O u r approach is to sc ale these values up or down depe nding on the comp lexity of the technology (which would be used by a m a nufacturer to m eet ne w EPA regulations) and the tim e fra m e (short or long run).

4-1

### Table 4-1. Weighted Average IC Mu ltiplier Contributors to RPE: 2007

C o stCo n t ribut o r Lig h tCa r I ndu s t ry A v erag e Prod uction O v erhe a d

War r anty 0. 03 R & D (p r o d u ct devel opm ent ) 0. 05 Dep r eci at i o n a n d am ort i zat i on 0. 07 M a i n t e nance , r e pai r , o p erat i o ns c o st 0. 03 To tal pr odu ctio n ov er h e ad 0

. 1 8 Cor p or ate Overhead

Gene ral a n d ad m i ni strat i v e 0. 07 Retire m en t 0. 00 Health care 0. 01 Total corporate overhea d 0.08 Selling

Tran sp ort a t i o n 0. 04 Mark eting 0. 04 Dealers

Deal er ne w ve hi cl e sel l i ng c o st 0. 06 To tal sellin g an d d ealer co sts 0. 14 Sum of Indire ct Cos t s 0. 40



### Technology comp lexity is defined in our m e thodology by the scope of the innovation in the autom a ker’s products, product architectures, and processes induced by the technology. The
more comp l e x the technology associated with a regulation (low, m e dium , or high), the m o re indir ect co st contr i butor s that con s titute the IC multip lie r would be af f

ected and to a g r eater degree. 4.1 Technology Complexity and Innovation Scope Figure 4-1 provides a visual representati on of the relationshi p between technology
comp lexity and indirect costs. The flow of i mpac t s from left to right in the figure starts with the technological comp lexity facing the autom a ker in m eeting a new or revised EPA regulation. The broader the innovation scope, the greater the impact on the company’s operations (e.g.,
m a nufacturing or purchasing of m a terials). The nature of the impact on operations determ ines which indirect costs will cha nge and by what amount. In the fo llowing sections, we clarify and describe each of the categories.

4-2

### Technology Comp lexity Innovation Scope Impact on Operations Impact on Indirect Cost Contributors

Figure 4-1. Impacts of Technology Complexity on IC Multiplier

As m e ntioned above, technology complexity is defined by the innovation in the autom a ker’s products, product architectures, a nd processes induced by the technology. The fra m ework to classify innovation was originally developed by Henderson and Clark (1990) and is based on the idea that successful product innovation requires tw o types of knowledge: knowledge about core design concepts of a produc t and knowledge about th e architecture of the product or how components are in tegrated and linked together in a coherent whole. F o llowing on Henderson and Clark, we identify four different innovation scopes, presen ted in Figure 4-2: increm ental, m odular, archite ctural, and differential.
Core ConceptsLinkages between Core Concepts andComponentsChangedUnchanged 

### R e inf o r ced Ove rt u rn ed

Increm ental Modular Innovation Innovation

Architectural Di fferent i a l

Innovation Innovation

Figure 4-2. Definition of Innovation Processes Adap t e d f r om : Hen d e r so n, R

. M ., a n d K.B

. C l ark, 1 9 9 0

. “ A r c hi t ect ural In n ovat i o n: T h e R econ f i g urat i o n of Exi s t i n g Produ ct Tech no log i es an d th e Failu re of Estab lish e d Firm s.” Ad mi ni st r a t i ve Sci e nc e Qua r terly 35 (1 ):1 2

.



### 4-3

### Incremental innovation introduces only m i nor changes to an existing product, using an established design. The underlying co re design concepts and the links between them rem a in the
sam e . A low-comp lexity technology would fall w ithin this scope. An example of such technology in the autom o tive industry is low rolling resistance tires because they simp ly replace existing tires and require no ve hicle redesign or part-integra tion effort by the autom a ker.
Modular innovation does not change the architecture of how the compone nts interact with each o t her, but it ch anges the co re c oncep t o f the technology. A m e dium -complexity technology would fall within this scope.
Architectural innovation changes the way in which th e product’s components are linked together without changing core design concepts . Again, a m e dium -compl exity technology would fall within this scope. A n example of such tech nology in the autom o tive industry is dual clutch transm ission (DCT) because such transm issions simp ly replace an exis ting transm issio n but, unlike the ca se with low rolling re sis t ance tire s, w ould require som e redesign and integration effort since the way that parts interact w ith each other would have to be changed. Differe ntia l innovation is based on different engineeri ng and scientific principles; it establishes a new dom i nant design and, hence, a new set of core design concepts em bodied in
components that are linked together in a new architecture. A high-comp lexity technology falls within this scope. An example of suc h technol ogy in the automotive i ndustry is the hybrid electric vehicle because it repr esents an entirely new approach to propulsion relative to total reliance on an internal combustion engine.
We classified these different kinds of innovation into different degrees of comp lexity of new technologies. Increm ental innovation involves low complexity for new system s. Medium
comp lexity is associated with either archit ectural innovation or m odul ar innovation. Finally, differential innovation in volves high comp lexity. Low, m e dium, and high comp lexities are th e m a jor categ ories that ar e used in the rem a inder of this sec tion

. 4.2 Impacts of a Ne w Technology on Auto motive Manufactu rers’ Operations Imple m entation of a new technology can affect company operations in several ways. A n obvious impact would be on the direct costs of op eration. Even som e thing as simp le as changing a bolt or screw would require a new part num ber in a parts database to ensure that the proper bolt is used in ev ery approp riate in stance. Such a chan ge could als o trigg e r req u irem ent for validation and/or durability testing. For operati ons, we have considered three ar eas of indirect costs that are

4-4

### likely to be affected by a change in a part or technology: R & D and retooling 11 

### (through the change in R & D costs and production overhead), indi rect labor costs (through increases in health care and retirem ent of corporate staff, corporate o v erhead, trai ning of dealer m e chanics to service new technologies, and deal er sales force to m a rket new t echnologies), and indirect costs linked to m a terials used (due to warranty costs). Table 4-2 illustrates possible impacts on each of the three areas. A technology’s
comp lexity determ ines to what degree thattechn o logy will impact comp any operatio ns. The addition of a new low-complexity technology woul d likely require m i nimal investm e nt in new tools and m achinery (sin ce exis ti ng tools can be used), and perhaps a m i nim a l investm e nt in R&D in order to validate the safety, comp atib ility and durability of the n e w compone nt. No additional labor would be required, b ecause cu rrent labo r can be shifted easily to acco mmodate Table 4-2. Impact on Operations

Technol o gy Com p lexit y Innova t i o n Scope One-Time R& D and Retoo ling Cor p or a t e an d De al er La bor Ma terials Low Inc r em ental Min i m a l No ad di t i onal Pur c hase o f ne w m a t e ri al s i s in no v a tion corporate la bor nee d ed req u ire d No labo r train i n g neede d . No impact on corporate la bor health care, retirem ent, corporate ove rhead M e di um Mo du lar So m e R&D effo r t s ar e M i nim a l addi t i onal Pur c hase o f ne w m a t e ri al s and in no v a tion req u ire d corporate la bor nee d ed part s i s re qui re d Arc h itectural in no v a tion Som e i nvest m e nt i n ne w t ool s i s re qui re d Labo rt r ain i ng is requ ired . Mi n i mal im pact on corporate health care, ret i rem e nt, corporate ove rhead. Hig h Diffe re ntial in no v a tion Extensi v e R& D e f forts are re quire d Additional corporate l a bo r neede d Pur c hase o f ne w m a t e ri al s, parts, and system s is require d Ext e nsi v e i nve stm e nt i n Ex ten s i v e lab o r new t o ol s i s re qui red tr ain i ng is r e quir e d

. Sub s tan tial imp act on corporate health care, retirem ent, corporate ove rh ead

11 Am ong t h e i n di rect c o st c ont ri b u t o r s , ret o ol i ng i s capt u re d i n de p r eci at i o n an d am ort i zat ion c o st

.



### 4-5

### the implem e n tation of such technology. The m a j o rity of the costs would be incurred to purchase
new m a terials. In contrast, the addition of a new m e dium -compl exity tec hnology would likely require
som e R&D effort to redesign a core component or a product’s ar chitecture such as replacing a larger 6-cylinder engine with a sm aller turbo charged 4-cylinder engine. New m achines and tools
m i ght need to be purchased to accom m odate the production o r assem b ly of redesigned parts. Minim a l addition a l labo r m i ght be required, andsom e labor tra i ning m a y be necess ar y. Comp anies m a y need to purchase n e w m a terial s and tooling to m a nufacture new designs. Finally, the addition of a ne w highly comp lex technology woul d likely require extensive R&D efforts and substantial inve stment in tools and m achinery to design and build new core concepts an d architecture. Add itional labor would likely be need ed, and extensive labor training would likely be required. Comp anies m i ght need to purchase new m a terial s, parts, tooling, and whole system s to support implem entati on of high-comp lexity technologies.

4.3 Evaluating Indirect Co st Contribu tors As the above discussion argues, the indirect costs associated with new technologies are expected to differ based on the degree of co mp lexity of the technology and the tim e fr am e involved. E P A’s National Vehicle and Fuel Em i ssi ons Laboratory assembled a team of engineers with experience working for auto m a nufacturer s to provide adjustm e nt factors for the contributions of indirect cost categories to the costs of new technologies. T h e team had am ong them 11 bachelor’s degrees in engineering and physics; 10 m a ster’s degrees in engineering, atm o spheric chem istry, and business; one Ph.D. in m echanical engineer ing; approximately 100 years of exp e rien ce working for auto and engi ne m a nufacturers and se rvice comp anies; and expertise in a wide range of auto technologies, including (am o ng others) engines, powertrains, onboard diagnostics, fuel econom y, and em issions controls. The team met five tim e s over a period of 3 weeks to discuss each in direct costcomponent and reach a consensus on the poten tial impact resulting from differ ent regu latory scen arios. For low-, medium -, and high-comp lexity t echnologies, for both the short run and long run, the team of engineers reviewed the indi rect costs required fo r new technologies. The baseline was the IC m u ltiplie r repo rte d in Table 4

- 1. To provide contex t f o r the an alys is, the team focuse d on three example technologies that are described in m o re detail in Sections 4.3.1, 4.3.2, and 4.3.3:

4-6

###  Low comp lexity: low rolling r e sis t an ce tires

 Medium complexity: dual clutch transm ission

 High comp l e xity: hybrid electric vehicle
For the low- and m e dium -complexity technologies, the team assum e d that the developm ent and
m a nufacturing of these components is prim arily pu rchased from suppliers. In contrast, the highcomp lexity example assum e s in-house de velopm ent and m a nufacturing. Using these technologies, the team identified ad justm e nt factors that capture the extent to which each indirect cost contributor would be affected by the new technology, both in the sh ort run (approxim a tely the first 4 to 5 years from putting the technology in to use) and in the long run (after 5 years of use). The adjustm e nt factors are presented Tabl es 4-3 (short run) and 4-4 (long run), along with the rationale for their m a gnitude. A value of 0 indicates that current expenditures on the
component will not change as a res u lt of the ne w technolog y. A value greater th an 0 indicates that the new technology will add co sts to that co mponent. The additional costs of th at
component then are calculated as the additiona l cost of the technology multip lied by the indirect cost con t rib u tor f o r the given ca tego ry m u ltiplie d by the adjustm e nt f actor. An adju stm e nt f actor of 1 indicates that the indirect cost contributor scales direc tly with the co st of the new technology. 4.3.1 Low Complexity : Low Rolling Resistance Tire s Low rolling resis t ance tires are d e sig n ed to re du ce the energy wasted as h eat from the flexing of the tire during driving and by reduci ng the tires ’ ro lling resis t an ce. The advances slightly change handling and braking but do not comp rom i se the overall comfort of driving a vehicle (NRC, 2002). The Departm e nt of Energy recen tly estim a ted that, on average, this technology can reduce CO 2 

### e m issions by 3% for light-duty vehicles (D OE, 2008).
Imple m enting this techno logy will req u ire au tom o bile m a nufa c turers to pu rchase low rolling resistance tires. Implem en ting this technology does not requir e a change in core structure or redes i gn of architectu r e. The lo w rolling resis t ance tire is instal led in p l ace of a sto c k tire with a low degree of additional testing and developm ent required. The developm ent work m a y include
som e tuning and validation of stab ility control, ride and handli ng, and anti-lock brake system s; new vehicle coastdown tests; and recertification of fuel econom y labels. This example assum e s that there will not be significant m odifications required in the chassis or suspension components. This technology is an example of a l o w-comp lexity technology.

4-7

### 4.3.2 Medium Co mplex ity : Dual Clutch Transmiss i o n s DCTs were recen tly in troduced into m a ss pr oduction (p rim a rily by the Vo lkswagen-A udi group in Europe). This technology combines th e high m echanical effi ciency of a m a nual transm ission with the shift control of an autom a tic transm ission. The benefits of this technology are lower CO 2 

### em issions and better fuel economy. Mechanically, DCT represents two transm ission paths in p a rallel, each contain i ng it s own clutch. A change in gear is achieved by disengaging one clutch, while sim u ltaneously engaging the other (R icardo Inc., 2007). Table 4-3. Short-Term Effects on Indirect Co st Contribu tors

Indirect Cost/ T echnol o gy Com p lexit y Low Medium High Prod uction O v erhe a d

War r ant y 1. 2 1. 6 2. 0 War r anty c o sts reflect t h e ris k o f failu re a n d the co st o f failure . I n t h e s h or t ru n, th e exp ectation is th at warran t y co sts will b e h i gh er fo r an y n e w p art o r configuration, because of t h e manufact ure r s’ lack of m a rk et exposure of the ite m . Warran ty, esp e cially risk , is ex p ected to be hig h e r for h i gh er lev e ls of co mp lex ity. The l o w and m e dium com p le xity warranty c o sts ar e ass u med to include s o m e shari n g o f t

h e cost s bet w ee n t h e m a nufact ur er of t h e c o m pone nt a n d t h e v e hi cl e m a nufact ure r . R & D 0. 2 1. 1 2 R&D is exp ected to in crease with th e co m p lex ity o f th e act iv ity. For a l o wco m p lex ity act iv ity, th e ad d itio n a l R & D associated with th e in crem en tal co st o f th e activ ity is ex p ected to be l e ss th an th e averag e R&D. For a m e d i u m co m p lex ity act iv ity, th e ad d itio n a l R & D is e x p ected to be slig h tly m o re than th e avera g e le vel. For hi gh-c om plexity, mu ch m o re R&D is ne cessary. D e pr eciatio n an d 0 0 1 am ort i zat i on Fo r low- and med i u m -co m p l ex ity activ ities, no n e w techn o lo g y is con s id ered necessary at the ve hicle m a nufacture rle ve l; th erefore, th ere is no in crem en t for d e preciatio n of n e w eq u i p m en t. For h i gh -com p l ex it y activ ities, th e av erage lev e l of

ne w e q ui pm ent i s e xpect e d

. M a i n t e nance , r e pai r , 0 0 1 ope rat i o ns c o st Fo r low- and med i u m -co m p l ex ity activ ities, th ere is no expected chang e i n m a i n t e nance or ot he r pl ant re q u i r em ent s beca use t h e new co m ponent or sy s t em replaces a n exi s ting one. For high-c om plex ity activities, the ave r age level of pla n t m a i n t e nance, r e pai r , an d o p er at i ons i s e x pec t ed. Cor p or ate Overhead

G& A 0 0 0. 5 Fo r low- and med i u m -co m p l ex ity activ ities, th ere is no expected chang e i n p e rson n e l i n corpo r ate offices. For h i gh -c o mp l ex ity activ ities, a sm all in crease in p e rson n e l, less th an propo rtion a l to t h e i n cre a se in direct m a nufacturing c o st, is expecte d

. R e t i r em ent 0 0 0. 5 These value s ar e e xpecte d to co rresp ond to th e v a lu es fo r G&A.



### 4-8

### Table 4-3. Short-Term Effects on Indi rect Co st Contribu tors (con tin u ed)

Indirect Cost/ T echnol o gy Com p lexit y Low Medium High Cor p or ate Overhead (continue d)

Heal t h ca re 0 0 0. 5 These value s ar e e xpecte d to co rresp ond to th e v a lu es fo r G&A. Selling Tran sp ort a t i o n 0 0 0. 3 Th is v a lu e rep r esen ts th e cost o f transp ort i n g t h e new ve hi cl e t o t h e de al er. For lo w- an d m e d i u m -co m p l ex ity activ ities, th ere is no t ex p ect ed to b e an y i n crease in co st. For h i gh -co m p l ex ity act iv ities, it is po ssib le th at ad d i t i o n a l co sts m a y b e associated with trans p orting t h e ve hicl e beca use of special requi rem e nts and increase d value of the ve hicle. M a rket i n g 0 1 1. 5 The key fact or that affe cts m a rketing is w h et her co ns um ers not i ce t h e di ffe rence . Fo r low-co m p lex ity activ ities, con s u m ers are no t exp ected t o n o tice an y chan g e . Fo r m e d i u m - a n d h i g h -co m p l ex ity activ ities, con s u m ers are exp ected t o n e ed ad d ition a l inform at io n , with a greater m a rk etin g effort fo r hig h -co m p l ex ity activ ities th an for m e d i u m . Dealer ne w ve hicle selling 0. 1 1 1. 5 cost Deal er ne w ve hi cl e sel l i ng c o st s i n part de pe nd o n t h e c o st of t h e ve hi cl e and i n part de pen d o n t h e am ount o f tr ai ni n g f o r se r v i c i n g t h e ve hi cl es. The s e c o s t s are expecte d t o inc r ease with the com p lex ity o f t

h e v e h i cle. Low-co m p lex ity activ ities are ex p ected to have v e ry sm al l add itio n a l co sts, med i u m -co m p l ex ity activ ities are ex p ected to have an av erag e weig h t for ad d iti o n a l co sts, and h i ghco m p lex ity act iv ities will h a ve a wei g h t greater th an av erage. 

### Table 4-4. Long-Term Effects on Indirect Co st Contribu tors

Indirect Cost/ T echnol o gy Com p lexit y Low Medium High Prod uction O v erhe a d

War r ant y 0. 6 0. 8 1 W a rr an ty co sts r e f l ect t h e r i sk of f

a ilur e and th e cost of f a ilu r e . In t h e long ru n, th e exp ectation is th at warran t y co sts will b e d i rectly p r opo rtio n a l to d i rect co sts of

a pr od uct fo r hi g h -c om pl exi t y t echnol ogi e s , as m a nu fact ure r s wo rk t o r e duce th e failure rate for all pro d u c ts. Fo r l o w- and med i u m -co m p l ex ity tech no log i es, the ris k a n d cost of failure ar e expect ed t o f a ll m o r e th an t h ose of h i gh

co m p lex ity tec h no log i es.



### 4-9

### Table 4-4. Long-Term Effects on Indirect Co st Contribu tors
Indirect Cost/ T echnol o gy Com p lexit y Low Medium High Prod uction O v erhe a d

R & D 0 0 0. 3 Al m o st al l R & D i s e x pect ed t o be do ne ( b y defi ni t i on) i n t h e s h ort ru n. A n y rem a in in g R&D, ex cep t fo r hig h -co m p l ex ity activ ities, is ex p ected to be no diffe re nt tha n t h e R&D t h at woul d have take n place in t h e a b se nce of t h e regu lato ry actio n. In th e case o f a h i gh -co m p l ex ity activ ity, so m e ad d itio n a l R&D is expected e v e n in the l o ng run. D e pr eciatio n an d 0 0 1 am ort i zat i on Fo r low- and med i u m -co m p l ex ity activ ities, no n e w techn o lo g y is con s id ered necessary; therefore, t h ere is no inc r em en t for de preci at i o n o f new eq ui p m ent

. Fo r h i gh -co m p l ex ity activ ities, th e av erag e lev e l o f n e w equ i p m en t is ex p ected. M a i n t e nance , r e pai r , 0 0 1 ope rat i o ns c o st Fo r low- and med i u m -co m p l ex ity activ ities, th ere is no expected chang e i n main ten a n ce o r o t h e r p l an t requ irem en ts. For h i gh -co m p l ex ity activ ities, th e avera g e l e vel o f pl ant m a i n t e nance, re pai r , an d ope rat i o ns i s expect e d

. Cor p or ate Overhead

G& A 0 0 0. 5 Fo r low- and med i u m -co m p l ex ity activ ities, th ere is no expected chang e i n p e rson n e l i n corpo r ate offices. For h i gh -c o mp l ex ity activ ities, a sm all in crease in pers onnel is expected. R e t i r em ent 0 0 0. 5 These value s ar e e xpecte d to co rresp ond to th e v a lu es fo r G&A. Heal t h ca re 0 0 0. 5 These value s ar e e xpecte d to co rresp ond to th e v a lu es fo r G&A. Selling

Tran sp ort a t i o n 0 0 0. 3 Th is v a lu e rep r esen ts th e cost o f transp ort i n g t h e new ve hi cl e t o t h e de al er. For lo w- an d m e d i u m -co m p l ex ity activ ities, th ere is no t ex p ect ed to b e an y i n crease in co st. For h i gh -co m p l ex ity act iv ities, it is po ssib le th at ad d i t i o n a l co sts m a y b e associated with trans p orting t h e ve hicl e beca use of special requi rem e nts and increase d value of the ve hicle. M a rket i n g 0 0 0 In the l o ng run, cons um ers are expected to hav e ad ap ted t o an y ch ang e s, an d no ad d ition a l in cre m en tal in crease in m a rk eting is exp ected

. Dealer ne w ve hicle selling 0 0. 3 1 cost Deal er ne w ve hi cl e sel l i ng c o st i n part dep e n d on t h e c o st o f t h e ve hi cl e an d i n part de pen d o n t h e am ount o f tr ai ni n g f o r se r v i c i n g t h e ve hi cl es. The s e c o s t s are ex p ected t o in crease with th e co m p lex ity of t h e vehi cl e. I n t h e long r u n , low

co m p lex ity act iv ities are ex p e cted to h a v e no add itio n a l co st s, m e d i u m co m p lex ity act iv ities are ex p e cted to h a v e small ad d itio n a l co sts, and h i gh

co m p lex ity act iv ities will h a ve an av erag e valu e fo r d ealer su ppo rt.



### 4-10

### This example assum e s that implem enta tion of this technology in m a ss production requires th e vehicle m a nufacturer to integ r ate th e purchased transm ission with the o t h e r vehicle system s, such as the engine. However, the core task of the transm ission—to provide stepped gear ratios to m a xim i ze vehicle perform a nce and effi ciency—rem ains. This work is completed by the supplier, with the associated costs included in the direct cost. This techno logy is an example of a
m e dium -complexity technology. 4.3.3 High Complexity : Hyb rid Electr i c Vehicle Hybrid electric veh i cles are in v a riou s stag es of developm ent by alm o st all m ajor lightduty car m a nufacturers. Am ong the popular hybrid cars being developed are “m ild hybrids,” with regenerative breaking, integrated starter gene rator (ISG), launch assist, and m i ni mal battery storage. There are two basic t ypes of driveline structure foundin hybrid vehicles. The most common, pa rallel hybrid, is where the engine drives the pow ertrain and a generator helps recharge the battery. A second type, a series hybr id, is where the engine does not drive the powertrain but always drives the m o t o r/generator to m ove the vehicle and recharge the battery. Reductions in carbon dioxide em issions vary betw een 15% and 30% (Ricardo Inc., 2007). Production of a hybrid vehicle would requir e autom obile m a nufacturers not only to redesign the car’s phy sical and electronic archit ecture to acco mmodate the additional electric drive components, but also redesign the core structure of the m a in driveline compone nts, including the transm ission, engine, and other el em ents of the propulsion system . This technology is an example of a high-comp lexity technology. 4.4 Calculating IC Multipliers The adjustm e nt f actor s in Tables 4-3 and 4- 4 ar e then m u ltiplied by the in dustry weig hted average indirect cost con t ribu tors to RPE pres ented in Table 4-1. The adjusted indirect cost contr i butor s are th en summ ed to calculate IC m u ltiplie rs. These calcu lations are pr esente d in Table 4-5. A d justm e nt factors ar e in effect scaling up or down the m a gnitude of the impact of specific indirect cost categor ies based on technology comp le xity. The tim e fra m e adds another dim e nsion to our study. In the shor t run, indirect costs are likely to be higher, depending on the
comp lexity of the techn o logy, becau se of such f actors as increased R&D, training of workers and dealers. However, R&D, investm e nt in tools and m achinery, and traini ng represent one-tim e fixed costs. Thus, we expect to see higher indirect costs initia lly and lower impacts in the long
run as comp anies as sim ilate the new technolog ies

. Table 4-5 p r esents the final IC m u ltipliers for the different levels of complexity and tim e fra m e s .

4-11

### 4.5 Summary IC m u ltipliers are calculated to rang e from 1.05 to 1.45 in th e short run and from 1.02 to 1.26 in the long run. The differences between th e s hort- and long-run IC mu ltipliers are prim arily due to R&D and warranty costs, which are proj ected to decrease over tim e. R&D expenditures also vary greatly over the leve l of technology complexity, as does the need for dealer support. To use the multipliers p r esented in Table 4-5, a n alysts can s t ar t by asses s ing the d e g r ee of
comp lexity of the new technology under considerat ion. That identification process will lead to the short-ru n and long-run m u ltipliers for the new technolog y. If an analyst has add i tional inform ation about the role of indirect cost co ntributors for the new technology, that inform ation can be used to develop d i f f

e rent adju stm e nt f act ors than those in Tables 4

- 3 and 4-4. This will then le ad to the ca lcula t ion of project-specific adjustm e nt factors that can be substituted for those i n Ta bl e 4- 5.

4-12

### 4-13Table 4-5. Short- and long-Term IC Multiplier CalculationsRPEMultiplierApproachIC Multiplier ApproachShort -Term Effects Long-Term EffectsLow TechnologyComplexityMediumTechnologyComplexityHigh TechnologyComplexityLow TechnologyComplexityMediumTechnologyComplexityHigh TechnologyComplexityRPE and IC MultiplierContributorsWeightedAverageIndustryIndirect CostContributorsto RPEAdjustmentFactorICMultiplierAdjustmentFactorICMultiplierAdjustmentFactorICMultiplierAdjustmentFactorICMultiplierAdjustmentFactorICMultiplierAdjustmentFactorICMultiplierManufacturingCost of sales 1.00 1.001.00 1.00 1.00 1.00 1.00Production overheadWarranty 0.03 1.20 0.04 1.60 0.05 2.00 0.06 0.60 0.02 0.80 0.02 1.00 0.03R&D (product development) 0.05 0.20 0.01 1.10 0.06 2.00 0.10 0.00 0.00 0.00 0.00 0.30 0.02Depreciation and amortization 0.07 0.00 0.000.00 0.00 1.00 0.07 0.000.00 0.00 0.00 1.00 0.07Maintenance, repair, operationscost0.03 0.00 0.00 0.00 0.00 1.00 0.03 0.00 0.00 0.00 0.00 1.00 0.03Total production overhead 0.18 0.040.10 0.26 0.02 0.02 0.14Corporate OverheadGeneral and administrative0.07 0.00 0.00 0.00 0.00 0.50 0.03 0.00 0.00 0.00 0.00 0.50 0.03Retirement 0.00 0.00 0.00 0.00 0.00 0.50<0.01 0.00 0.00 0.00 0.00 0.50 <0.01Health 0.01 0.00 0.00 0.00 0.00 0.50<0.01 0.00 0.00 1.00 0.01 0.50 <0.01Total corporate overhead 0.08 0.00 0.00 0.04 0.00 0.01 0.04SellingTransportation 0.04 0.00 0.00 0.00 0.000.30 0.01 0.00 0.000.00 0.00 0.30 0.01Marketing 0.04 0.00 0.00 1.00 0.04 1.50 0.05 0.00 0.00 0.00 0.00 0.00 0.00DealersDealer net profit <0.01Dealer new vehicle selling cost 0.06 0.10 0.01 1.00 0.06 1.50 0.08 0.000.00 0.30 0.02 1.00 0.06Total selling and dealer contributors 0.14 0.01 0.09 0.15 0.00 0.02 0.07Sum of Indirect Costs0.40 0.05 0.20 0.45 0.02 0.05 0.26Net income 0.06Other costs (not included incontributing costs)0.04Total contribution to cost of sales 1.46 1.05 1.20 1.45 1.02 1.05 1.26

### SECTION 5 CONCL US ION The RPE multip lier app r oach has b e en used as a m e thod to estim ate the change in indirect costs which are included in the total cost of a regulati on. This approach has typically included u s ing all indir e ct cos tcateg ories and p r of its to deve lop a m u ltiplier that is th en applied to the estim ated direct m a nufacturing costs. Regu latory agencies, including EPA, have used RPE multipliers to scale the d i rec tm a nuf actur i ng cost s associa t ed with a regu lation when e s tim ating the to tal so cial cos tof the regulation. Howe ver, a key problem in using RPE m u ltiplier s in regulatory analysis is th at som e of t h e indirect cost components of the RPE m u ltiplier, such as fixed depreciation costs, health care costs for retired workers, or pensions, m a y not be affected by all vehicle m odifications resulting from regulation. This repor t develops a modif i ed multip lie r, ref e rred to as a n IC m u ltiplier, which specifically evaluates the component s of indirect costs that are lik ely to be affected by vehicle modification s associated with environ m ental regulation. A ran g e of IC m u ltipliers are d e veloped that 1 ) acco unt for differences in the technical co mplexity of required veh i cle m odifications and 2) adjust over tim e as new technologies becom e assim ilated into the automotive supply chain.
The IC m u lt iplier is pref erred b ecause it m ode ls the appropriate shift in th e supply curve (including direct m a nufa c turing cost s and relevant indirect costs) that then can be usedin a
m a rket analysis to determ ine a new equilibrium pr ice and quantity, and henc e the tota l cost of the regulation. The new equilib rium generated from the IC m u ltip lier approach and the m a rket analysis determ ines the distribution of re gulatory burden between producers and consum ers consistent w ith econom ic theory. 5.1 Applicability of the RPE and IC Multipliers in Future Years The results of this analy s is sugges tthat each m a nufacturer’s RPE m u ltiplier has b een fairly consistent from 2002 to 2007 (2002 to 2006 fo r Dai m lerChrysler). Further, the adjustm e nts to develop the IC m u ltiplie rs were ba sed on e ngin eering judg m e nt of the ef f

ects of new technolog ies

. W h ile the technologies to which they will be ap plied m i ght be very different in the future, there is unlikely to be a structural reason over tim e for th e adjustm e nt factors to change. These factors suggest that the m u ltipliers dev e lop e d here will continue to be appropriate in the fut u re. On the other hand, the econom i c recession th at began in 2008 had a strong effect on autom obile sales and, especially for the United St ates autom a kers, the industry’s access to the

5-1

### capital it needs to operate. As a result, the dom estic m a nufacturers have stat ed tha tthey intend to undergo significant restructuring in com i ng years to increase their productivity. This restructu r ing could affect the ratio of indirect costs to direct m a nufacturing costs th at fo rm s the basis f o r the RPE and IC m u ltipliers.

The dom estic auto m a nufacturers have propos ed plans to improve their financial viability. 12 

### All three comp anies are in the process of downsizing both thei r m a nufacturing and their white -c ollar workf o rce; th ey also are reducing their physi cal plan ts and changin g their investm e nt strategies. The m a gnitude of thes e changes m a y be sufficient to alter the RP E calcu lated h e re. W h ether the m u ltiplier f o r ea ch m a nuf acture ris like ly to incre a se or d ecrea se in response to the restructuring depends on the relative changes that will take place in the indirect and direct manufacturing cost categories.
Direct m a nufacturing costs consis t of direct production labor co sts, direct m a terials co sts, and other direct expenses. Direct m a terials costs and other direct expenses are not discussed in the res t ru ctu r ing plans. A change in m a terials co sts could result from a ma jor change in vehicle design. They m i ght increase if vehicles use m o re expensive inputs; th ey m i ght decrease becau se of using less expensive inputs or the increased emphasis on sm aller vehicles that the plans imply. Direct labor costs are on a traj ectory to decrease b ecause of th e new 2007 contract th at each
comp any negotia ted with the UnitedAuto W o rkers. Thus, it is likely but notcertain that direct
m a nufacturing costs will decrea se because of restructuring.
Indirect co st catego r ies include production overhead (including warranty, R&D, depreciation and am ortization, and MRO cost), corporate overhead (including general and adm i nistrative, retirem e nt, and health care), and selling (including tr ansportation, m a rketing, dealer support, discounts, and m a rkup). The rest ructuring plans all imply m a jor reductions in these categories. Each producer is closing plan ts and has reduced salaried labor costs. In addition, each plans to coordina te m o re across international divisions to achieve greater
econom ies of scale in design and production. W a rranty costs are expect ed to continue to decrease; health care andretirem e nt costs are becom i ng m o re contained ov er tim e , and they are closing a number of dealerships. W h ile the reports all discuss new technologies that the autom a kers plan to develop, it is not clear whet her these R & D expenditure s involve increases in that account. The plans all imply that the sum of t h ese costs is likely to go down significantly.

12 Rob e rt Nard el li, “Ch r ysler’s Plan for Sho r t-Term a n d Long -Term Viab ility,” Un ited States Ho u s e Co m m it tee o n Financial Services, Decem ber 2, 2008 ; “Ford Motor Com p any Business Pla n Subm itted to the House Fina ncial Services Com m ittee,” Dece m b er 2, 20 08 ; Gen e ral Mo t o rs Co rpo r ation , “Restru c turing Plan for Lon g -Term Viab ility: Su bmit ted to Sen a t e Bank ing Commi ttee & Hou s e o f Represen tativ es Fi n a n c ial Serv ices C o mmi ttee,” Decem ber 2, 2008; all found at http://financi alservices.hous e.gov/a u tosta b ilization.htm l

.



### 5-2

### How the m u ltip lie r is af fected by ind u stry r e struc t uring d e pen d s on whether the indire ct costs go down m o re quickly or less quickly than the direct m a nufacturing costs. Much of the restructu r ing implies larg e reduc tions in indirec t costs, through plant and dealership closures, reductions in salaried employees and warra nty costs, and greate r coordination across inte rnational division s. T h ese change s will r e duce the RPE m u ltip lie r. The revised UA W contract, on the other hand, will redu ce direct m a nufacturing cost s and th us increase the RPE multiplier. T h e net ef f

ect of these cha nges on the RPE m u ltiplier is dif f i cu lt to p r edict. The foreign autom a kers do not appear to be under the sam e pressures to restructure that the U.S. autom a kers app ear to face. Their RPE multipliers ar e not ve ry d i fferent from the U.S.
comp anies’ RPE m u ltipliers. As Tab l e 3-3 show s , Nissan has the highest RPE m u ltiplier in 2007, while Hyundai had th e lowest, with RPE m u ltiplie rs for U.S. producers b e tween them . If the U.S. restructuring leads them to have cost struct ures sim ilar to those of foreign automakers, their RPE m u ltipliers m a y not change gre a tly f r om the curren tvalu es. For low- and m e dium -c omplexity changes, the adjustm e nt factors are su ch that a change in the RPE multiplier is not lik ely to have very m u ch ef f

ect on the re leva nt IC m u ltiplie r. A change in th e RPE m u ltiplie r will h a ve a larger e f f

ect on the IC m u ltiplie rf o r high-co mplexity technologies.
In sum , whil e the RPE multip lier is likely to ch an ge because o f dom e stic auto industry restructuring, the direction of the change cannot be predicted at this tim e. The fact that foreign autom a kers have sim ilar RPE m u ltiplie rs and do not appear to face the sa m e restructu r ing pressur e s su ggests th at the RPE m u ltipliers m a y not in f act c h ange grea tly. The adjus t m e nt factors developed in Section 4.3 are unlikely to need m odific a tion in the f u ture. For these reasons, us ing the IC multip lie rs in Table 4-5 is like l y to be r easonable. It m a y nevertheless be worthwhile to re-ev a lua t e the RPE multip lie rs pe r i odica lly to exam ine the ef f

ect of changes in industry structure.

5-3

### REFE RE NCES Daim lerChrysler AG. 2005. Daim le rChrys ler: A nnual Report 2003. Available at: http://www.daim ler.com/dccom / 0-5-660593- 1-169901-1-0-0-0-0- 0-12591-7164-0-0-0-0

- 0-0-0.htm l . Accessed on Nove m b er 14, 2008. Daim lerChrysler AG. 2007. Daim le rChrys ler: A nnual Report 2006. Available at: http://www.daim lerchrysler.com / Proj ects/c2c/channel/docum ents/1003905_DCX_2006_ Annual_Report.pdf. Accessed on Novem b er 14, 2008. Departm e nt of Energy. 2008. Alternative and Ad van ced Vehicles : Low Rolling Res i stance Tires. Available at: http://www.afd c.energy.gov/afdc/vehicles/fuel _econom y_tires_light.htm l. Washington, DC: Departm e nt of Energy. Executive O r der 12866. October 4, 1993. “R egulatory Planning and Review,” Federal Register vol. 58 no. 190. Available at: http://www. archives.gov/federal-register/executive

orders/pdf/12866.pdf. Accessed on F e bruary 17, 2009. Ford Motor Comp any. 2006. Ford Comp a ny: 2005 Annual Report. Available at: http://www.ford.co m / m icrosites/annual -reports. Accessed on Septem ber 20, 2008. Ford Motor Comp any. 2007. Ford Comp a ny: 2007 Annual Report. Available at: http://www.ford.co m / m icrosites/annual-r eports. Accessed on Septem ber 20, 2008. Ford Motor Comp any. 2007a. 10-K Annual Repor t 2007. Available via E DGAR database from : http://sec.gov/edgar. Accessed on Septem ber 20, 2008. General Motors Corporation. 2005. 2005 Annual Report. Available at: http://www.g m .co m /corporate/investor_inf orm a tion/docs/fin_data/gm 05ar/index.htm l

. Accessed on August 20, 2008. General Motors Corporation. 2007. 2007 Annual Report. Available at: http://www.g m .co m /corporate/investor_inf orm a tion/docs/fin_data/gm 07ar/index.htm l

. Accessed on August 20, 2008. Henderson, R.M., and K.B. Clark, 1990. “Architect ural Innovation: The Reconfiguration of Existing P r oduct Technologies and th e Failure of Established Firm s.” Administrative Science Quarterly 35(1):12. Honda Motor Comp any. 2006. Annual Report 2005. Available at: http://world. honda.com /investors/ann u alre po rt/20 05/. Accessed on September 20, 2008

. Honda Motor Comp any. 2008. Annual Report 2008. Available at: http://world. honda.com /investors/ann u alre po rt/20 08/. Accessed on September 20, 2008

. Hyundai Motor Comp any. 2006. Annual Repor t 2005. Available at: http://csr.hyundai

motor.com / download/Annual_Repo rt_2005.pdf. Accessed o n October 1 0, 2008.

R-1

### Hyundai Motor Comp any. 2008. Annual Repor t 2007. Available at: http://csr.hyundai

motor.com / download/Annual_Repo rt_2007.pdf. Accessed o n October 1 0, 2008. International Organization of Motor Vehi cle Manufacturers (OICA). 2008. “ W orld Motor Vehicle Production.” A v ailable at: http: //oica.net/wp-content/uploads/world-ranking

2007.pdf. Investopedia. 2008. Cost of G oods Sold—COGS. Available at: http://www.investopedia.com / term s/c/cogs.asp>. Forbes Corp. Accessed on October 12, 2008. Jack Faucett Associates. Septem ber 4, 1985. “Upda te of EPA’s Motor Vehicle Em ission Control Equipm ent Retail P r ice Equivalent (RPE) Calculation Form ula.” McKinsey & Comp any. October 2003. Preface to the Auto Sector Cases

. In New Horizons: Multination a l Company Investmen t in Developin g Economies

. San Francisco, CA. Mercer, Glen. 2009. Review of the Estimating I ndirect Cost Multipliers for Individual Domestic and Foreign Automobile Manufacturers . Comme nts subm itted under contract to EPA. National Autom obile Dealer s Association (NADA). 2008. 2007 NADA DATA Report . Available at: http://www.nada.org/P ublications/NADADATA/2007/de fault.htm

. Accessed on January 20, 2009. National Research Council. 2002. Technologies for Improving the Fuel Ec onomy of Passenger Cars and Light-Duty Trucks. Available at: http ://books.nap.edu/openbook.php? isbn=0309076013. W a shington, DC: National Resear ch Council. Accessed on December 8, 2008. Nissan Motor Comp any. 2006. Annual Report 2004–2005. Available at: http://www.nissan

global.com / EN/IR/LIBRARY/AR/. Accessed on October 10, 2008. Nissan Motor Comp any. 2008. Annual Report 2006–2007. Available at: http://www.nissan

global.com / EN/IR/LIBRARY/AR/. Accessed on October 10, 2008. Office of Managem e nt and Budget. 2003. Circular A-4: Regulatory Analysis

. Available at: http://www.whitehouse.gov/om b/circulars/a 004/a-4.aspx. A ccessed on F e bruary 17, 2009. Ricardo, Inc. June 2008. “A Study of Potentia l Effectiveness of Ca rbon Dioxide Reducing Vehicle Technologies, R e vised Final Repor t.” EP A420-R-08-004a. Available at http://www.epa.gov/om s/technology/420r08004a .pdf. Accessed on February 17, 2009. Sierra Research, Inc. Novem b er 21, 2007. “Study of Industry—Average Mark-Up F actors Used to Estim ate Changes in Retail P r ice Equiva lent (RPE) for Autom o tive Fuel Econom y and Em issions Control System s.” Toyota Motor Comp any. 2006. Annual Report 2006. Available at: http://www.toyota.co.jp/en/ir/library/a nnual/index.htm l . Acc e ssed on October 10, 2008.

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### Toyota Motor Comp any. 2008. Annual Report 2008. Available at: http://www.toyota.co.jp/en/ir/library/a nnual/index.htm l . Acc e ssed on October 10, 2008. Volkswagen Group AG. 2004. Annual Report 2003. Available at: http://www.vwfsag.de/fsag/ucus/vwfsag/ en/investor_relations/annual_report/ archiv e_200 3.htx. Accessed on Octo ber 10, 2008

. Volkswagen Group AG. 2008. Annual Report 2007. Available at: http://www.volkswagenag.com /vwa g/gb2007/ content/en/annual_report_2007.htm l

. Accessed on October 10, 2008. Vyas, A., D. Santini, and R. Cuenca. April 2000. “Comparison of Indirect Cost Multipliers for Manufacturing.” Center for Transportation Research, Energy System s Division, Argonne National Laboratory. U.S. Environm ental Protection Agency. 2000. Guidelines for Preparing Economic Analyses. EPA 240-R-00-003. Available at: http://yosemite.ep a .gov/ee/epa/eed.nsf/webpages/ Guidelines.h tm l. Accessed on Febru a ry 17, 2009.

R-3

### APPE NDI X A CAL CUL ATION OF RPE MUL T IPLIERS FOR INDI VIDUAL MANUF ACTURERS This append ix descr i bes calcu lations of RPE multipliers f o r th e autom obile
m a nufacturing industry and for i ndividual automobile m a nufacturers. The section is structured in the follow i ng m a nner:

 Appendix A.1: Autom o bile Industry (McKinsey)

 Appendix A.2: Dealer Cost and Profit Calculation

 Appendix A.3: General Motors

 Appendix A.4: Daim lerChrysler A G

 Appendix A.5: Ford Motor Comp any

 Appendix A.6: Honda Motor Comp a ny

 Appendix A.7: Hyundai Motor Company

 Appendix A.8: Nissan Motor Company

 Appendix A.9: Toyota Motor Company

 Appendix A.10: Volkswagen Group A.1 Automobile Industry (McKinsey) A white paper developed by McKinsey & Comp any (2003) described an analysis of costs (in dollars per vehicle) observed by origin al equipm ent m a nufacturers (OEMs) and their contribution to the m a nufacturer’s suggested re tail price (MS R P). The analysis was based on data provided by Roland Berger Consultants, Deutsche Bank, and McKinsey. These costs are presented in Table A-1. Using cost categories and prof it reported in the McKinsey study, we developed an R P E multiplier. I n Table A-2, costs of m a teria l s (b o t h r a w and purc h ased par t s) and m a nuf actur ing costs are co mbined to comp rise the “cost of m a nufacturing” catego r y (th e se costs are listed separately in Table A-1). G& A costs were counted as pa rt of corporate overhead. Transportation costs and dealer di scount were counted in selling costs. A s Table A-2 indicates, the RPE m u ltiplier was 1 .70.

A-1

### Table A-1. McKinsey’s Automobile Industr y Manufactu rers’ Cost Contributions to MSRP
Cos tContributor Aver age Am ount Per Vehic l e ($) Percent Share Material cost (purc h ased part s) 10,030 41.6% M a t e ri al cost ( r aw m a t e ri al s) 1, 77 0 7. 3% M a nu fact u r i n g cost 2, 40 0 10 .0 % M a i n t e nance , r e pai r , o p erat i o ns c o st 2, 00 0 8. 3% Pro d u ct devel o pm ent 1, 60 0 6. 6% Tran sp ort a t i o n 50 0 2. 1% Sal e s & m a rke t i ng 1, 20 0 5. 0% Dep r eci at i o n a n d I n t e rest 1, 15 0 4. 8% War r ant y c o st s 60 0 2. 5% Gene ral & ad m i ni strat i v e 50 0 2. 1% Net p r ofi t 75 0 3. 1% Wholesale pric e to dealer 22,500 93.4% Deal er gr oss 1, 60 0 6. 6% M S R P 24 ,1 0 0 10 0. 0% Source: McKinsey & C o m p any. 2003. Preface to t h e Auto Sector C a ses . 

### Table A-2. Automobile Manufacturing Industr y RPE Multiplier (based on McKinsey’s Data)

Rela tive to C o st of Share of RPE

RPE Multipli er Co ntributor Ma nuf ac turin g Multiplier Man u f actur ing M a nu fact u r i n g cost 1. 00 0. 59 Pro d u ct i o n Ov erhea d War r ant y 0. 04 0. 03 R & D (p r o d u ct devel opm ent ) 0. 11 0. 07 Dep r eci at i o n a n d am ort i zat i on 0. 08 0. 05 M a i n t e nance , r e pai r , o p erat i o ns c o st 0. 14 0. 08 Tot a l p r o d u ct i o n o v e r hea d 0. 38 0. 22 Corporate Ove r hea d C o r p o r at e ove rh ead , ret i r em ent an d heal t h 0. 04 0. 02 Sellin g Tran sp ort a t i o n, m a rket i ng, de al er su p p o r t , d eal er di sc ou nt 0. 23 0. 14 Sum of In di rec t C o st s 0. 64 0. 38 Pro f i t

0. 05 0. 03 RPE Mu ltip lier 1

. 7 0 1

. 0 0



### A-2

### A.2 Dealer Cost and Profit Calculation This section describes a calculation of deal er net profit and new ve hicle selling cost as a share of manufacturers’ cost of sales. Car d ealer ships in the United Sta t e s prim arily e ngage in thr ee type s activities : new vehicle sales, us ed v e hicle sales, and service and parts sales. For autom obile industry RPE and IC m u ltipliers, we are only con c erned with p r ofit and cos tof new vehicle sales, because only th es e profits and costs will af fe ct new vehicle retail price. Sales of used cars are not directly related to m a nufacturers, and serv ice and parts operations are covered under warranties and otherwise paid for by consum ers and not by m a nufa c turers. We find that the industry average dealer ne t profit m a rgin on new vehicle sales as a share of m a nufacturers’ cost of sales was 0.004, and the industry average new vehicle selling costs as a sh are of m a nufacturers ’ cos tof sales was 0.06. W e will des c rib e calcu lation steps below. Table A-3 lists dealer gross profit margin on new vehicle sales, which w e re obtained from J.D. Power and Associates. Table A-3. Dealer Gross Profit Margin on New
- Vehicle Sales

Year Deal er Gro ss Profi tMar g i n 20 0 3 0. 04 4 20 0 4 0. 04 1 20 0 5 0. 03 9 20 0 6 0. 03 8 20 0 7 0. 03 4 Ave r a g e 0. 03 9
Source: Estimates of annu al U

. S. dealer gross prof it ma rgins on new vehicle sales b a sed on Walter McManus’ direct com m unication with J

. D. P o wer and As s o ciat es


### The National Autom o tive Dealer Association (N ADA) book s provide detailed inform ation on sales and profits, including new vehicle sales, and ne w vehicle net profits (NADA, 20 08). Using new vehicl e sales (NADA, 2008) and dealergross profit m a rgin on new vehicle sales (from J.D. Power and Associates ) we calculated gross profit (the difference between total sales and vehicle costs) on new vehicle sales (row C in Table A-4). W e then obtained new vehicle selling cost s (row E in Table A-4) by s ubtracting net profits on new vehicle sales (NADA, 20 08) from gro ss profit on new vehicle sales. Finally, we calculated ratios of net profit and selling expenditures on new vehicle sale s to n e w vehicle sales. To

A-3

### norm a lize th ese ra tios w e perf orm e d this c a lcu l a tion by first averaging new vehicle sales, net profits, and selling expenses and calculating the ratios then. Th e values o f these ra tios were: 

### Dealer new vehicle net profit =0.003 New vehicle sales 

### Dealer new vehicle selling cost =0.04 New vehicle sales The low ratio of net profits on new vehicle sales to new vehicle sales m a kes sense. The surge in dealers' net profits fr om new vehicles in 2001-2005 is largely the result of the rapid deflation of new vehicl e prices (through cash a nd interest rate incentives) by autom a kers. The autom a kers doubled con s um er incentives each y ear from 2002 through 2 004 (and a sm aller increase in 2005). Table A-4. Average U.S. Dealership Net Pr ofit and Sellin g Expenses on New Vehicle Sales, 2003–2007

R Aver age Deal ership Fin a nci a ls ($ T h ou sand) o w Source / 2 003 2 004 2 005 2 006 2 007 Calcul ati o n A N e w v e h i cle sales 1 9 ,359 2 0 ,116 1 9 ,469 1 8 ,795 1 9 ,545 N ADA B New ve hi cl e g r oss pr o f i t

m a rgi n 0. 04 4 0. 04 1 0. 03 9 0. 03 8 0. 03 4 J.D. P o we r C New ve hi cl e g r oss pr o f i t 84 8 81 8 76 8 71 4 67 2 A * B D New ve hi cl e n e t pr ofi t 14 7 14 1 44 -2 5 -4 1 NA D A E New ve hi cl e se l l i ng co st 70 1 67 7 72 4 73 9 71 3 C - D Source: NADA, 2008.



### W e then calculate a share of dealer n e t prof it and selling cost on ne w vehicle sales as a share of the autom obile m a nufacturers’ cos tof sa les ( t his w i ll allow us to include thes e costs as cost con t r i butors to th e R P E and IC mu ltiplie r calcu lations)

. W e started w ith indiv i d u al
m a nufacturers’ annual sales (row B in Table A- 5) and calculated new vehicle sales (row D in Table A-5) by adding average 13 

### dealer gross profit (row C in Ta ble A-5) f r om Table A-3. This new vehicle sales value is com p arable to deal er n e w vehicle s a les value from Table A-4. W e then ca lcula t e the r a tio s of new vehicle sa les to m a nufacturers’ cost of sales (row E in Table A- 5)

.

13 5-year ar ithm e tic avera g e wa s use d t o norma lize the val u e of dealer gross profit m a rgin


### A-4

### W e then mu ltip lied the r a tios in row E in Ta ble A

- 5 by the r a tios in row s F and G in Table A-4 to arriv e at d e aler’s net pr ofit and selling expense on new vehicles: Dealer new vehicle net profit New vehicle sales Dealer new vehicle net profit x = New vehicle sales Manufactur er' s cost of sales Manufactur er' s cost of sales 

### Dealer new vehicle selling cost New vehicle sales Dealer new vehicle selling cost x = New vehicle sales Manufactu r er' s cost of sales Manufactu r er' s cost of sales 

### Finally, we weighted these valu es by individual m a nufactur ers’ annual production (row H in Table A-5) to arriv e at industry averages. As Table A-5 show s, dealer new vehicle net profit as a share of cost of sales equaled 0.004, and new vehicle selling cost as a s h are of cost of sales equaled 0.06. Thus, the value of these cost co ntributors would be 0.004 and 0.06 respectively.

A- 5Table A-5.Dealer Net Profit and Selling Expenses on NewVehicle Sales as a Share of Manufacturers’ Cost of Sales



### A-6RowCalculationofDealer Profitand Dealer ExpenseDaimlerChrysler1FordGMHondaHyundaiNissanToyotaVWSource/CalculationACost of sales 2007($Billion)$124.7$130.4$143.0$65.4$53.5$67.0$150.2$67.0AnnualReportsBAnnualsales 2007($Billion)$190.3$154.0$178.2$93.9$74.2$88.7$262.4$149.2AnnualReportsCDealer new vehiclegrossmargin3.9%3.9%3.9%3.9%3.9%3.9%3.9%3.9%J.D.Power(Table A-3)DNew vehicle sales ($ Billion)$197.7$160.0$185.1$97.6$77.1$92.2$272.6$155.0B x(1 + C)ENewvehicle sales /Costofsales1.591.231.291.491.441.381.822.31D /ALine itemsfor RPEmultiplierWeightedAverageFDealer new vehiclenetprofit0.0040.0030.0030.0040.0040.0040.0050.0060.004GDealer new vehiclesellingcost0.060.040.050.050.050.050.070.080.06HAnnualproduction20074,635,6016,247,5069,349,8183,911,8142,617,7253,431,3988,534,6906,267,89112006Sales andproductiondatawasusedfor Daimler Chrysler.

### A.3 General Motors Corporation 

### Cost information presented in GM’s annual re port did not alw a ys m a tch cost contributors useful to our analysis. We perf orm e d several calculations to ad just cos t s p r esented in GM’s annual report so they can be applied to our m e thodology. GM’s annual report did not clearly state m a nufa c turing labor costs and m a terial cos t s. However, it did p r ovide “m aterial cost, freigh t and policy, warranty” and “m anufacturing labo r, pensions and postretirem ent benefits, engineering expense and m a rketi ng related costs” catego r ies. Thus, m a nufacturing costs were calcu lated a s f o llow s : Manufacturing labor cost = Manufacturing labo r, pensions and postretirement benefits, engineering expense and marketing related costs – Pensions – Postretirem e nt Employee Benefits

–

Advertising – Dealer Advertising – R&D Material cost = Material cost, freight, wa rranty and policy – Warranty and policy – F r eight (was not readily available, so we used 2.07% McKinsey Industry Average) Calculated Manufacturing Costs = Manufac turing labor costs + Material cost



### Since no inf o rm ation on the MRO cost cate gory could be deduced from GM’s annual reports, we used 0.03 (see Table A-6) from the Sierra Research study as a proxy for reallocating MRO costs. Also, since GM experie n ced a lo ss of $4.4 billion in 2007, we used 0.05, the McKinsey study estim ate, to accoun t for long-term profit. The share of retirem ent and health
care co sts ap plicab le to the R P E mu ltiplier ( s ee th e discuss i on in Section 3. 2.2) w a s calculated as a ratio of selling, G&A, and other expenses to th e sum of selling, ad m i nistrative, and other expenses an d m a nuf acturing labor co st. The re m a ining con t ributors to the R P E mu ltiplie r are shown in Table A-6, which shows the result as 1.45 in 2007. Table A-7 provides historical indirect cost contributor s for GM. Her e and i n t h e rem a inder of this appendix, historical indirect cost contributors were based on high-level cost catego r ies : s e lling, adm i nistrative, and other expenses; ope rating and other expenses; and depreciation. Profit was also in cluded as part of the calcu latio n . Manufacturing cos t s are presented in the com p anies’ re spectiv e currency, and high-lev e l cos tcontributors are p r esented as a share of the cos tof sales. The co st of sa les n u m b ers are not adjus t ed as in Table A-6, but cited as they were stat ed in annual reports.

A- 7

### Table A-6. General Motors RPE Multiplier Calculation s : 2007 Expense ($ Rela tive to RPE Multipli er Co ntributor Billio ns) Cos tof Sales Calcul ati o n and Source Vehicle Manufac turing

Cost of sales Calculated Ma nufacturing C o st + 70% x (Retirem ent + 55% x Health Care) − 14 3. 0 1. 00 M a i n t e nance , R e pai r , O p erat i ons C o st Prod uction O v erhe a d

War r ant y 4. 7 0. 03 [p

. 72 , G e ne ral M o t o rs, 2 0 07] R & D (p r o d u ct devel opm ent ) 8. 1 0. 06 [p . 86 , G e ne ral M o t o rs, 2 0 07] Dep r eci at i o n a n d am ort i zat i on 8. 3 0. 06 [p

. 67 , G e ne ral M o t o rs, 2 0 07] M a i n t e nance , r e pai r , o p erat i o ns c o st 4. 0 0. 03 [p

. 9, Si e rra , 2 0 0 7 ] To tal pr odu ctio n ov er h e ad 2 5 .0 0

. 1 7 Cor p or ate Overhead

Gene ral a n d ad m i ni strat i v e 9. 4 0. 07 [p

. 49 , G e ne ral M o t o rs, 2 0 07] Retire m en t 30 % x ( Pe nsi o n E x pense ( 1

. 7 99 ) [p

. 84 , G e n e r a l Mo t o rs, 200 7 ] + Pensio n C ontri but i o ns ( 0

. 9 3 7 ) [ p . 8 4 , Gene ral 0. 9 0. 01 Mo to r s , 20 07 ]) Health 30 % x ( Pay r ol l and B e ne fi t s ( 2

. 1 4 8 ) [ p . 0. 7 0. 01 92 , Gene ral M o t o rs, 2 0 0 7 ] ) Tot a l co rp o r at e o v erhea d 11 .0 0. 08 Selling

Tran sp ort a t i o n 5. 0 0. 04 B a sed on M c K i nsey st u d y Mark eting Adv e rtisin g [p

. 86 , Gen e ral M o tors, 2 007 ] + D ealer Ad v e r tisin g [p. 52 , 6. 5 0. 05 Gene ral M o t o r s , 2 0 07] Dealers

Deal er ne w ve hi cl e net pr o f i t 8. 2 <0. 00 R T I cal cul a t i o n Deal er ne w ve hi cl e sel l i ng c o st 7. 9 0. 06 R T I cal cul a t i o n To tal sellin g an d d ealer co n t rib u t ors 2 7 .6 0

. 1 4 Sum of Indire ct Cos t s 0. 40

Net i n c o m e 7. 6 0. 05 B a sed on M c K i nsey st u d y Ot he r c o st s ( n o t i n cl ude d as Legacy Costs a + Au to m o tiv e In terest and cont rib u tor s ) O t h e rIn co m e ( 0 .9 61) [p . 50 , G e n e r a l 8. 8 0. 06 Mo to r s , 20 07 ] RPE Mu ltip lier 1

. 4 5

a Legacy C o st s = OPEB E xpe nse (2 .3 6 2 ) + VEB A W i t h d r awal s ( 1

. 6 94 ) + OPEB Pay m ent s ( 3

. 7 51 ) [al l p. 8 4 ,

Gene ral M o t o r s , 2 0 07] So urce: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o Est i m a t e C h anges i n R e t a i l Pr i ce Eq ui val e nt (R PE) f o r

A u t o m o t i v e Fuel Eco nom y and Em i ssi ons Control Syste m s.”. McK i n s ey & C o m p an y. 200 3. Preface to t h e Auto Sector C a ses . Gen e ral Mo t o rs Co rpo r ation

. 2 007 . 20 07 Ann u a l Repo rt. Av ailab l e at: http://www.gm.co m / corporate /investor_i nfor mation/docs/fin_data/gm 07ar /index.htm l . Accessed on A ugu st 20, 2 008

.



### A- 8

### Table A-7. General Motors Main Indirect Co st Co ntribu tors (as a share of Cost of Sales)

Indirect Cost Contribu tor 2007 2006 2005 2004 2003 2002 Sel l i ng, a d m i ni strat i v e, a n d ot her expe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Profit Ot he r e xpe nses ( not i n cl u d ed as cont ri b u t o r ) 0. 09
0. 05 0. 05

− 0. 23

0. 07 0. 08
0. 05 0. 05

− 0. 01

0. 07 0. 08
0. 06 0. 06

− 0. 07

0. 08 0. 08
0. 06 0. 04 0. 02 0. 08 0. 08
0. 06 0. 04 0. 03 0. 07 0. 08
0. 06 0. 04 0. 01 0. 05

Sum of m a i n i ndi rect cost contributors (i ncl u di n g pr o f i t ) 0. 96 1. 17 1. 13 1. 19 1. 21 1. 20

Sou r ce: G e n e r a l Mo t o rs Co rpo r ation : A nnu al Repo r t 20 07 , Ann u a l Rep o r t 200 5. 

### Table A

- 7 illustr ate s tha t sum of the m a in i ndirect cost contributor s had little var i ation between 2002 and 2004. It is worth noting that G M ’s sum of m a in indirectcost contributors was 0.96 in 2007 (see Tab l e A-7). This v a lue is mu ch sm aller tha n the RPE multip lie r value of 1.45, which was calculated using our m e thodology (Tab le A-6). The discrepancy was caused by the use of som e averages from other studies for m i ssi ng values ; th ese are cost contributors subtracted from the cost of sales in our m e thodology, but kept in the cost of sales in the sum of the m a in indirect cost contributors. Mi ssing co sts and overstated cost o f sales (where m i ssing costs are lum p ed together with our definiti on of cost of sales) force th e sum of the m a in indirect cos t contributors to be lower.
W e believe that our m e thodology is an im proved m e thod to account for costs. For
exam ple, in our m e thodology (Table A-6) we us ed a proxy of 0.05 for profit, while the sam e catego r y in the histo r ic calculation w a s -0.23. A.2 DaimlerCh r ysler AG 

### In our ana l y s is, w e inc l u d ed D a im lerC hrysler ’ s R P E mu ltiplie r, even thou gh Daim lerChrysler AG was dissolved and Chrysler wa s sold to a priva t e eq uity f i rm , Cerberus Capital Managem e nt, in 2007. This allows us to c onsider the cost structur e from what was one of the w o rld’ s largest auto m o tive f i rm s based on p ublic ly available inf o rm ation. The R P E multiplier c a l cula tions co ver the entire Daim le rChrysle r Corp oration for 2006. Releva nt RPE contributing factors gathered from Daim lerChrysle r’s annual report are pres ented in T a ble A-8.

A- 9

### Table A-8. DaimlerCh r ysler RP E Multiplier Calculation s : 2006

RPE Multipli er Co ntributor Expense (€ Millio n) Rela tive to Cos tof S a les Calcul ati o n and Source Vehicle Manufac turing

Cost of sales

Prod uction O v erhe a d

War r ant y R & D (p r o d u ct devel opm ent ) Dep r eci at i o n a n d am ort i zat i on M a i n t e nance , r e pai r , o p erat i o ns cost 12 4, 6 6 8

. 1
5, 26 7. 7 5, 33 1. 0 13 ,6 1 4

. 0 3, 49 0. 7 1. 00
0. 04 0. 04 0. 11
0. 03 1 2 5 , 67 3 [p . 50 , D a im ler C h r ysler , 2 006 ] + 70% x (Retire m ent + 55% x Health Care) − M a i n t e nance , R e pai r , Ope r ations C o sts

B a sed on M c K i nsey st u d y [p . 21 4, Dai m lerC h r y s l e r, 2 0 06] [p

. 20 5, Dai m lerC h r y s l e r, 2 0 06] [p . 9, Sie rra , 2 0 0 7 ]
To tal pr odu ctio n ov er h e ad

- 0

. 2 2 Cor p or ate Overhead

Gen e ral an d admin i strativ e
Retire m en t
Health 6, 29 2. 6
92 2. 8
18 5. 6 0. 05
0. 01
Less t h a n 0. 0 1 1 8 ,513 [ p . 5 0 , D a imler C h r ysler , 20 06 ] − Mark eting − Tran spo r tation − W arra nty 30 % x R e t i r em ent ( 2 24 7 + 8 2 9 ) [ bot h p. 18 4, Dai m l e rChry s l e r , 20 0 6 ] 30 % x 55% x Heal t h C a re ( 8 32 + 29 3 ) [b ot h p . 18 8, D a im l e rC hry s l e r, 2 0 06] Tot a l co rp o r at e o v erhea d Selling

Tran sp ort a t i o n M a rket i n g Dealers

Deal er ne w ve hi cl e net pr o f i t Deal er ne w ve hi cl e sel l i ng c o st 7, 40 1. 0
4, 38 9. 7 2, 56 3. 0
7, 15 8. 2 6, 87 3. 9 0. 06
0. 04 0. 02
<0. 01

0. 06 B a sed on M c K i nsey st u d y [p . 16 2, Dai m lerC h r y s l e r, 2 0 06]

R T I cal cul a t i o n R T I cal cul a t i o n To tal sellin g an d d ealer cont ri b u t o r s Sum of Indire ct Cos t s

Net i n c o m e Ot he r c o st s ( n o t i n cl ude d as cont rib u tor s ) 20 ,9 8 4

. 8
3, 22 7. 0

4, 69 9. 30. 12 0. 40 0. 07

0. 04 [p

. 21 4, Dai m lerC h r y s l e r, 2 0 06] Intere st Paid ( 4 ,1 93 ) [p

. 21 4, DaimlerCh r ysler, 20 06 ] + 4 5 % x Health Care RPE Mu ltip lier 1

. 4 7 So urce: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o Est i m a t e C h anges i n R e t a i l Pr i ce Eq ui val e nt (R PE) f o r

A u t o m o t i v e Fuel Eco nom y and Em i ssi ons Control Syste m s.” McK i n s ey & C o m p an y. 200 3. Preface to t h e Auto Sector C a ses . 

### As Table A-8 shows, Daim lerChrysler did no t provide warranty or MRO expenditures. Values were added for th ese factors from th e McKinsey and Sierra stud ie s. Marke ting ,
A-10

### transportation, and warranty costs were incl uded in G&A expenditures and, thus, were subtrac t ed. The estim ated RPE mu ltiplier for Da im lerChrysler was 1.47 in 2006.
Daim lerChrysler’s sum of the m a in indirectcost contributors in creased between 2002 and 2003. This was m o stly due to increasing sellin g, adm i nistrative, and other expenses, which increased from 0.05 to about 0.20 between those years. Other factors changed mu ch less during this pe riod. The sum of the m a in indirect cost contributors varied between 1.24 and 1.38 in the 2002–2006 tim e period (Table A-9). Table A-9. DaimlerCh r ysler Main Indirect C o st Co ntrib u tors (as a Share of Cost of Sales)
Indirect Cost Contributor 2 006 2005 2004 2003 2002 Sel l i ng, a d m i ni strat i v e, a n d ot her ex pe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Pro f i t Ot he r e xpe nses ( not i n cl u d ed as co ntri b u t o r) 0. 19 0. 05 0. 11 0. 03 0. 01 0. 20 0. 05 0. 10 0. 02 0. 01 0. 21 0. 05 0. 10 0. 02 0. 01 0. 21 0. 05 0. 11 0. 00 0. 01 0. 05 0. 04 0. 12 0. 04 0. 01 Sum of m a i n i ndi rect cost contributors (i ncl u di n g pr o f i t ) 1. 38 1. 38 1. 37 1. 37 1. 24 Sou r ces: D a imler C h r ysler A G

. 2007

. D a imler C h r ysler : Ann u a l Repo r t 20 06 . Av ailab l e at: h ttp ://w ww .d aimlerch rysler.co m /Pro j ects/c2c/ch ann e l/do c umen ts/1 00 3905 _D CX_2 006 _A nnu al_ R ep ort.p d f. Accesse d o n No vem b er 14 , 20 0 8

. D a imler C h r ysler A G

. 2005

. D a imler C h r ysler : Ann u a l Repo r t 20 03 . Av ailab l e at: h ttp ://www.d aimler.co m /d cco m/0

- 5

- 66 059 3-1

- 16 990 1-1-0

- 0

- 0

- 0-0-125 91-716 4-0-0

- 0

- 0

- 0

- 0

- 0

. h t m l

. Accesse d on N ovem b er 1 4 , 2 0 0 8

. 

### A.3 Ford Motor Company 

### Relevant RP E contributing factors gathered from Ford Motor Com p any’s annual report are presented in Table A

- 10. Fordincluded “freight, engineering, and research and developm ent (R&D)” costs in their co st of sales (Ford Motor C o m p any, 2008). W e subtracted this line item ($7.5 billion), together w ith the cost of e m ployee separati on (i.e., the recent buy-outs of
em ployees, reported as $2.21 billion + $0.22 bill ion + $0.15 billion) and cer t ai n “el e ctr i ci t y physical supply contracts” ($0.65 billion) and other factors (see Table A-10) from the cost of sales to arrive at an adjusted value for the cost of sales of $130. 4 billion. F o rd reported “selling, general, and other expenses” of $21.2 billion in th eir annual report. The re port also indicated that
m a rketing costs were included in “selling, general, and othe r expenses.” Marketing costs included advertising expenses and v a riab le m a rketing exp e ns es in th e United States an d were

A-11

### Table A-10. Ford Motor Company RPE Multiplier Calcu l ations: 2007
Expe nse Relative to RPE Multipli er Co ntributor ($ Bill ions) Cos tof S a les Calcu l ation an d S o u rce Vehicle Manufac turing

Cost of sales Cost of Sales [FS1, Ford, 2007b] − Cost of Emplo y ee Separation (1 .03 6–0.817) [FS36, Ford, 2007b] − Other Emplo y ee Separatio n Actions (2.435–0.22 5) [FS36, Ford, 20 07b] − Cert ain E l ec tric it y Ph ysic al Supplies Contr a cts (0.154) [90 , Ford, 2007a] − Hedge Accounting Designations (0 .65) [ p .101, Ford, 200 7a]

− Main tenan c e , Repair , Oper atio ns Cost - 130.4 1.00 Transportation Production Overhe a d

War r anty 3.3 0.03 [p. 117 , Ford, 20 07a] R & D (p r o d u ct devel opm ent ) 2.9 0.02 [p. 63 , Ford, 200 7a] - Transportation Depreciation a n d am ortization 6.8 0.05 [p. 56 , Ford, 200 7b] M a i n t e nance , r e pai r , [p. 9 , Sierr a , 200 7] ope rat i o ns c o st 3.7 0.03 To tal pr odu ctio n ov er h e ad 16.6 0.13 Cor p or ate Overhead

Gen e ral an d admin i strativ e Selling, Administrativ e and Oth e r Expenses (21.2) [FS2, Ford, 200 7] − Advertising (5.4) [p. 64, Ford, 15.8 0.12 2007a] − Tr ansportation Retire m en t 0.5 0.00 30% x Pensions (1.128+0.885 ) [1 07, Ford, 2007a] Health 0.4 0.00 30% x 55% x H ealth Car e a Total corporate overhea d 16.7 0.13 Selling

Transpo r tation 4.6 0.04 Based on M c Kin s ey stud y Mark eting 5.4 0.04 Advertising (5 .4 ) [p. 56, Ford, 20 07b] Dealers

Deal er ne w ve hi cl e net pr o f i t 7.5 <0.01 RTI c a lcu l a tion Dealer ne w ve hicle selling RTI c a lcu l a tion cost 7.2 0.06 To tal sellin g an d d ealer cont ri b u t o r s 24.7 0.14 Sum of Indire ct Cos t s 0.39

Net in co m e 6.9 0.05 Based on M c Kin s ey stud y Ot he r c o st s ( n o t i n cl ude d as cont ri b u t o r s ) Goodwill Impair m e nt (2.4) [p.54 , Ford, 2007 a] + Interest Exp e nse (10.92) [p.54 , F o rd, 2007a] + Provision for Cr edit (0.688) [p.5 4, Ford, 2007a] + 14.3 0.11 30% x 45% x H ealth Car e a RPE Mu ltip lier 1.45

aH ealth car e = H ealth car e (2.2) [11 , Ford , 20 07 a] + O P EB (0 .4 14 ) [10 7 , Fo rd , 2007 a] + Ben e f its Paid ( 3 ,937 )[ 108 , Fo rd , 2007 a] So urces: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o E s t i m a t e C h an ges i n R e t a i l Pri ce E qui v a l e nt (R PE ) fo r A u t o m o t i v e F u el Ec on om y and Em i ssi ons C ontr o l Sy st e m s.” McK i n s ey & C o m p an y. 200 3. Preface to t h e Auto Sector C a ses . Fo rd M o tor C o m p an y. 2 007

. Fo rd C o m p an y: 2 007 Annu al Rep o rt. Av ailab l e at: h ttp ://www.fo r d

. co m / m i crosi t e s/ ann u al -re p o rt s. Ac cessed o n Se pt em ber 20 , 20 0 8

. Fo rd M o tor C o m p an y. 2 007 a. 10 -KA nnu al Rep o r t 200 7. A v ailab l e v i a ED GA R d a tabase fr o m : http://sec.gov/e dgar. Accesse d on Se ptem ber 20, 2008.



### A-12

### lum p ed in G&A costs. W e subtracted m a rketing co sts ($5.4 billion) from “selling, general, and other expenses” to arrive at an adjusted G&A of $15.8 billion. Ford did not report “m aintenance, repair, and operations” costs; th erefore, we used an industry av erage of 0.03 from the 2007 Sierra study as a p r oxy. Results of these calculations ar e outlin ed in Table A-10.
As m e ntioned in Section 3.2.2 of this repor t, h ealth care and retirem e nt costs include expenditures for m a nufac turing and corporate wo rkers. Ford’s annual report provided the
num b er of hourly versus sala ried workers it em ployed. In 200 7, the num ber of hourly workers was 64,000, while the number of salaried workers was 23,700. W e used these values as estim ates for the number of m a nufacturing versus corporate workers. Thus, 73% of Ford’s retirem e nt and health care c o sts w e re in cluded in m a nuf acturing co sts, and 2 7 % w e re use d in the R P E mu ltiplier calcu lation. Ford did not separate out transportation costs and dealer support or dealer discount costs,
w h ich w e re lum p ed into R & D and G&A costs, r e spectively. Lastly, FordMotor C o mp any reported a $ 2 .7 billion loss in 2007, which is like ly a resu lt of the current econom ic conditions in the United S t ates. In the long run, Ford’s profits ar e expected to be closer to the industry average. Because of this, we subs titu ted th e McKinsey study estim ate of 0.05 for the net in co m e loss reported by Ford. A s a r e sult, the va lue of the R P E mu ltiplier f o r Ford Motor C o m p any w a s 1.45 in 2007. Table A-11 presents Ford’s sum of t h e m a in indirect cost con t ribu tors, wh ich are mu ch lower than the RPE value derived above for 2007. A.5 Honda Motor Company 

### RPE calculations for Honda Motor C o m p any ar e presented in Table A-12. Honda Motor Com p any’s annual report provided financials in Japa nese yen. In 2007, the cost of sales equaled ¥ 

### 7,865 billion. Honda did not repor t MRO costs or health care co st; therefore, the Sierra study values of 0.03 and 0.03 (which was then mu ltipli ed by 30% to account fo r corporate labor only) were used as a proxy. As opposed to U.S. m a nu facturers, Honda’s historical profits were rela tive l y co mp arable to that av ailable f o r the 200 7 R P E mu ltiplie r calcula ted using ou r m e thodology. The RPE multiplier fo r Honda Motor Com p any equaled 1. 47 in 2007. Table A-13 presents Honda’s sum of the m a in indirect cost contribu tors, which are again lower than the RPE value derived above for 2007.

A-13

### Table A-11. Ford Motor Company Main IndirectCost Contributors (as a Share of Cost of Sales)

Indirect Cost Contribu tor 2007 2006 2005 2004 2003 2002 Sel l i ng, a d m i ni strat i v e, a n d ot her ex pe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Profit Ot he r e xpe nses ( not i n cl u d ed as co ntri b u t o r) 0. 10 0. 01 0. 05

− 0. 02

0. 06 0. 09 0. 01 0. 04

− 0. 13

0. 06 0. 08 0. 04 0. 04

− 0. 03

0. 06 0. 08 0. 04 0. 05 0. 03 0. 06 0. 08 0. 04 0. 07 0. 00 0. 08 0. 08 0. 04 0. 08

− 0. 01

0. 10 Sum of m a i n i ndi rect cost contributors (i ncl u di n g pr o f i t ) 1. 13 1. 01 1. 13 1. 20 1. 19 1. 19

Sou r ces: Fo rd M o torC o m p an y. 2 006

. Fo rd C o m p an y: 2 005 A nnu al Rep o r t

. A v ailab l e at: http://www.ford.c o m / microsites/annual-reports. Acce sse d on Se ptem ber 20, 2008.
Fo rd M o torC o m p an y. 2 008

. Fo rd C o m p an y: 2 007 A nnu al Rep o r t

. A v ailab l e at: http://www.ford.c o m / microsites/annual-reports. A ccesse d on Se ptem ber 20, 2008. 

### A.6 Hyundai Motor Company 

### Table A-14 presents re le vant RPE cost contribu to rs and the R P E mu ltiplie r for Hyundai Motor Company in 2007. Hyundai Motor Company’s financials were reported in Japanese yen. R&D expenses were included in the cost of sales, which we subtract ed to arriv e at an adjusted cost of sales of ¥ 

### 53.27 billion. Hyund ai did no t re port MRO cost, so we us ed the Sie rra study value of 0.03 as a proxy. Health care cost wa s not reported, an d because th ere was no industry estim ate for this num ber, we used the Sierrastudy value of 0.03 as a proxy. Hyundai’s RPE multiplier v a lue was ca lculated to be 1.42 for 2007. Hyundai’s annual reports were available da ting back to 2004. Sim ilar to Honda, Hyundai’s historical profits presented in Table A

- 15 were relatively comparable to that available for the 2007 RPE mu ltiplie r calcula ted using our m e thodolog y.

A-14

### Table A-12. Honda Motor Company RPE Multiplier Calcu l ations: 2007 Expense Rela tive to RPE Multipli er Co ntributor (¥ Billio n) Cos tof S a les Calcul ati o n and S o urce Vehicle Manufac turing

Cost of sales Co st of Sales [p . 54 , Ho nd a, 2 007 ] + 7 0 % x Pensi ons an d P o stret i r em ent B e nefi t s − 7, 60 9. 8 1. 00 M a i n t e nance , R e pai r , O p erat i ons C o st s Prod uction O v erhe a d

War r ant y 11 3. 5 0. 01 [p

. 10 9, H o nda , 2 0 08] R & D (p r o d u ct devel opm ent ) 55 1. 8 0. 07 [p . 2, Ho n d a, 2 0 0 8 ] Dep r eci at i o n a n d am ort i zat i on 37 1. 5 0. 05 [p

. 11 3, H o nda , 2 0 08] M a i n t e nance , r e pai r , [p . 9, Sie rra , 2 0 0 8 ] ope rat i o ns c o st 21 3. 1 0. 03 Tot a l p r o d u ct i o n o v e r hea d 1, 24 9. 8 0. 16 Cor p or ate Overhead

Gen e ral an d admin i strativ e Sellin g , Gen e ral an d Ad m i n i strativ e (1 818 .2) [ p . 7 2 , Hond a, 2 008 ] − Tran sp ortatio n − M a rket i n g [p . 78 , Ho n d a, 2 0 08] – Deal er 88 3. 7 0. 12 Su pp ort Retire m en t 1 0 .6 Less th an 0

. 01 Health 30% x Retiree Health Care [p. 9, Sierra, 22 0. 9 0. 01 2 007 ] Tot a l co rp o r at e o v erhea d 1, 11 5. 2 0. 15 Selling

Tran sp ort a t i o n 26 7. 9 0. 04 B a sed on M c K i nsey st u d y M a rket i n g 24 7. 0 0. 03 [p . 78 , H o n d a, 20 0 8 ] Dealers

Deal er ne w ve hi cl e net pr o f i t 43 6. 9 <0. 01 R T I cal cul a t i o n Deal er ne w ve hi cl e sel l i ng c o st 41 9. 6 0. 06 R T I cal cul a t i o n To tal sellin g an d d ealer cont ri b u t o r s 1, 37 1. 5 0. 13 Sum of Indire ct Cos t s 0. 44

Net i n c o m e 26 8. 6 0. 04 Net I n c o m e [p. 7 2 , H o n d a, 2 0 08] Ot he r c o st s ( n o t i n cl ude d as Int e re st + Ot he r E xpe nses [ p . 72 , Ho n d a, cont ri b u t o r s ) 11 4. 6 0. 02 20 0] RPE Mu ltip lier 1

. 4 7 So urces: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o E s t i m a t e C h an ges i n R e t a i l Pri ce E qui v a l e nt (R PE ) fo r A u t o m o t i v e F u el Ec on om y and Em i ssi ons C ontr o l Sy st e m s.” McK i n s ey & Co m p an y. 2003

. Preface to t h e A u to Sector Cases

. H ond a Mo t o r Co m p an y. 2008

. An nu al Repo r t 20 08 . Av ailab l e at: http://world.honda .com /investors/a n nualre por t/2008/. Accessed on Se ptember 20, 2008.



### A-15

### Table A-13. Honda Motor Company Main IndirectCost C o ntributors (as a Share of Cost of Sales)

Indirect Cost Contribu tor 2007 2006 2005 2004 2003 2002 Sel l i ng, a d m i ni strat i v e, a n d ot her ex pe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Pro f i t Ot he r e xpe nses ( not i n cl u d ed as co ntri b u t o r) 0. 23 NA 0. 05 0. 08 0. 02 0. 24 NA 0. 04 0. 09 0. 01 0. 25 NA 0. 04 0. 08 0. 01 0. 27 NA 0. 04 0. 08 0. 00 0. 27 NA 0. 04 0. 08 0. 02 0. 26 NA 0. 04 0. 07 0. 02 Sum of m a i n i ndi rect cost co ntri b u t o rs (i ncl udi ng pr ofi t ) 1. 35 1. 36 1. 37 1. 39 1. 41 1. 40

NA = Not a v ai lable Sou r ces: H ond a Mo t o r Co m p an y: A nnu al Repo r t 20 06

. H ond a Mo t o r Co m p an y. 2008

. An nu al Repo r t 20 08 . Av ailab l e at: http://world.honda .com /investors/a n nualre por t/2008/. Accessed on Se ptember 20, 2008. 

### A.7 Nissan Motor Company 

### Relevant RP E contributing factors gathered from Nissan’s annual report are presented in Table A-16. Nissan Motor Com p any’ s annual report provided expenses in Japanese yen and did not provide an estim a te of MRO cos t; therefore, the Sierra st udy value of 0.03 was used as a proxy (see T a ble A-16). Selling expe nses (transp o rta tion, m a rketing, dealer support, a nd deale r discount) were reported as part of G&A expenses, so G&A was adju sted by that cost. Nissan also did not provide an estim ate of h ealth care cost, and si nce no industry average was available, this item w a s not included in N i ssan’s R P E mu ltipli er calcu lations. N i ssan’s R P E mu ltiplie r value was calculated to be 1.49 in 2007.
N i ssan expe rienc e d little varia tion in its su m of main ind i rect cost con t rib u tors (see Table A-17). Between 2002 and 2007, the sum of m a in indirect cost contributors varied between 1.39 and 1.51.

A-16

### Table A-14. Hyundai Motor Company RPE M u ltiplier Calculations: 2007

RPE Multipli er Co ntributor Expense (¥ Billio n) Rela tive to Cos tof Sales Calcul ati o n and Source Vehicle Manufac turing

Cost of sales

51 ,9 2 6 , 7 4 3

. 9 1. 00 Co st of Sales [p

. 52 , H yund ai, 200 8 ] + 70 % x Paym ent s of S e vera nce B e ne fi t s − Re s e ar ch and De vel o pm ent − Main ten a n ce, Rep a ir, Ope r ations C o sts Prod uction O v erhe a d

War r ant y 97 5, 8 2 5

. 0 0. 02 [p

. 10 9, Hy un d a i , 2 0 0 8 ] R & D (p r o d u ct devel opm ent ) 2, 19 3, 4 7 9

. 0 0. 04 [p . 86 , Hy u nda i , 2 0 0 8 ] D e pr eciatio n an d am ort i zat i on 3, 29 3, 4 7 9

. 0 0. 06 D e pr eciatio n [p

. 56 , H yund ai, 200 8 ] + Am ort i zat i on o f i n t a ngi bl es [ p . 5 6 , Hy un dai , 2 008 ] M a i n t e nance , r e pai r , ope rat i o ns c o st 2, 78 6, 4 3 3

. 0 0. 03 [p . 9, Sie rra , 2 0 0 7 ]
Tot a l p r o d u ct i o n o v e r hea d 9, 24 9, 2 1 6

. 0 0. 15 Cor p or ate Overhead

Gen e ral an d admin i strativ e Sel l i ng a n d A d m i ni strat i v e Ex pen s es [p

. 10 9, H yun d a i, 200 8] − E x p o r t R e l a t e d E xpe nses − Sal e s Pr om ot i on − S a les Co mmis s i o n − Sale s
4, 03 8, 3 7 8

. 0 0. 08 Warran ties − F r ei g h t an d War e ho usi n g − Ren t

− T r avel − Res earch − De prec i a t i on − Am ort i zat i on Retire m en t 24 1, 7 1 2

. 4 Less t h a n 0. 0 1 30 % x Pay m ent of Se vera nce B e nefi t s [ p . 5 7 , H yun d a i, 200 8] Heal t h 38 9, 4 5 0

. 6 0. 01 30 % x R e t i r ee Heal t h C a re [ p . 9, Si er ra, 2 0 0 8 ] Tot a l co rp o r at e o v erhea d 4, 66 9, 5 4 1

. 0 0. 09 Selling

Transpo r tation Ex po rt R e l a t e d Ex pe nses + Fr ei ght a n d Ware h ousi n g + R e nt + T r a v e l [al l p. 1 0 9 , 1, 97 5, 5 9 6

. 0 0. 04 H yun d a i, 200 8] M a rket i n g 2, 39 2, 6 4 4

. 0 0. 05 Sal e s Pr om ot i on [p

. 10 9, Hy u ndai , 2 0 08] Dealers

Dealer ne w ve hicle net RTI calculation pr ofi t 2, 98 1, 5 1 5

. 7 <0. 01 Dealer ne w ve hicle selling RTI calculation cost 2, 86 3, 1 2 2

. 9 0. 06 To tal sellin g an d d ealer cont ri b u t o r s 10 ,2 1 2 , 8 7 8

. 6 0. 15 Sum of Indire ct Cos t s 0. 39

Net i n c o m e 1, 60 0, 4 8 0

. 0 0. 03 [p

. 69 , Hy u nda i , 2 0 0 8 ] Ot he r c o st s ( n o t i n cl ude d as I n ter e st Exp e nse [p . 52 , H yund ai, 2 008 ] cont ri b u t o r s ) 43 0, 6 3 1

. 0 0. 01 RPE Mu ltip lier 1

. 4 2 So urces: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o E s t i m a t e C h an ges i n R e t a i l Pri ce E qui v a l e nt (R PE ) fo r A u t o m o t i v e F u el Ec on om y and Em i ssi ons C ontr o l Sy st e m s.” McK i n s ey & Co m p an y. 2003

. Preface to t h e A u to Sector Cases

.



### A-17Hyun d a i M o tor Co m p an y. 200 8. Annu al Re p o rt 2 007 . Av ailab l e at: h ttp ://csr.h yun d a i

m o t o r.com / downl oad/ An n u a l _R ep ort

_ 2 0 0 7

. p d f

. A ccesse d on Oct obe r 1 0 , 2 0 0 8

. 

### Table A-15. Hyundai Motor Company Main Indirect Cost Contributors (as a Sh are of Cost of Sales)
Indirect Cost Contributor 2007 2006 2005 2004 Sel l i ng, a d m i ni strat i v e, a n d ot her ex pe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Pro f i t Ot he r e xpe nses ( not i n cl u d ed as co ntri b u t o r) 0. 20 NA 0. 05 0. 03 NA 0. 23 NA 0. 06 0. 03

NA 0. 23 NA 0. 05 0. 05

NA 0. 29 NA 0. 04 0. 04 NA Sum of m a i n i ndi rect cost co ntri b u t o rs (i ncl udi ng pr ofi t ) 1. 28 1. 32 1. 33 1. 37 NA = Not a v ai lable Sou r ces: Hyun d a i M o tor Co m p an y. 200 6. Annu al Rep o rt 2 005 . Av ailab l e at: h ttp ://csr.h yun d a i

m o t o r.com / downl oad/ An n u a l _R ep ort

_ 2 0 0 5

. p d f

. A ccesse d on Oct obe r 1 0 , 2 0 0 8

. Hyun d a i M o tor Co m p an y. 200 8. Annu al Rep o rt 2 007 . Av ailab l e at: h ttp ://csr.h yun d a i

m o t o r.com / downl oad/ An n u a l _R ep ort

_ 2 0 0 7

. p d f

. A ccesse d on Oct obe r 1 0 , 2 0 0 8

. 

### A.8 Toyota Motor Company 

### The RPE multip lie r ca lc ulations for Toyota Mo tor Com p any are presente d in Table A

- 18. Toyota Motor Com p any’s annual report provided expenses in Japanese yen. Toyota included their R&D expenses in cost of sales (which was called “cost of product sold” in its annual report) and G&A expenses. Because they did not report frac tions tha tw e re char g e d to either of those costs, 50% o f R&D costs were subtracted from the cost of sales and 50% from G&A e xpenses. Warranty costs included the actual costs paid throughout the year (¥336.5 billion) and the costs provisioned for warranties (¥290.0) . Again, the S i erra study valu e of 0.03 was used as a proxy for MRO cost, since those costs were lum p ed in to operations cost, whic h Toyota did not provide in its annual report. Research and developm ent a nd advertising costs were reported as part of G&A expenses, and these costs were subtracted f r om G&A. Health care cost was not reported in Toyota’s annual report, so the Sierra study value of 0.03 wa s used as a proxy. The RPE multiplier fo r Toyota Mo tor Com p any was calcu lated to b e 1. 48 in 2007. Toyota experienced very little variation in the sum of the m a in indir ect cost contributors: between 1.31 and 1.35 (see Table A-19). In this case, higher p r ofits are ass o ciated with lower selling, administrative, and other ex penses and higher m a nufa c turing costs.

A-18

### Table A-16. Nissan Motor Company RPE Multiplier Calcu l ations: 2007

RPE Multipli er Co ntributor Vehicle Manufac turing

Cost of sales
Prod uction O v erhe a d

War r anty

R & D (p r o d u ct devel opm ent ) D e pr eciatio n an d am ort i zat i on M a i n t e nance , r e pai r , ope rat i o ns c o st Expense (¥ Millio n)

7, 78 9, 6 6 0

. 3

22 2, 3 9 0

. 0 46 4, 8 3 9

. 0
70 5, 3 8 0

. 0
21 8, 1 1 0

. 5 Rela tive to Cos tof Sales

1. 00

0. 03 0. 06
0. 09
0. 03 Calcul ati o n and Source

Co st of Sales [p

. 50 , H yund ai, 200 8 ] + 7 0 % x Retiremen t Ben e fit Exp e nses
Accrual f o r warra nty costs (c ur rent ) [ p . 49 , Ni ssan , 20 08] + Acc r ual fo r war r anty c o sts (lo n g - term ) [p

. 4 9 , N i ssan, 2 008 ] [p . 63 , Ni ss an , 20 0 8 ] [p. 58, Niss an, 2008] [p . 9, Sie rra , 2 0 0 8 ]
Tot a l p r o d u ct i o n o v e r hea d Cor p or ate Overhead

Gen e ral an d admin i strativ e

Retire m en t Health 1, 61 0, 7 1 9

. 5

26 7, 0 5 4

. 0

2 1 ,079 .5

1, 63 5. 8 0. 21

0. 03 Less th an 0

. 01

0. 01 Sel l i ng, Ge ner a l , an d Adm i ni strat i v e Costs [p. 50, Nissan , 20 08 ] − Transpo r tation

–Mark etin g − Research and De vel o pm ent 3 0 % x Retiremen t Ben e fit Exp e nses 30% x Retiree Health Care [p. 9, Sierra, 2 0 07] Tot a l co rp o r at e o v erhea d Selling

Tran sp ort a t i o n M a rket i n g Dealers

Deal er ne w ve hi cl e net pr o f i t Dealer ne w ve hicle selling cost 28 9, 7 6 9

. 4

27 4, 2 8 3

. 8 65 8, 2 8 1

. 2

44 7, 2 6 4

. 6
42 9, 5 0 4

. 2 0. 04

0. 04 0. 08

0. 06
0. 06 B a sed on M c K i nsey st u d y B a sed on M c K i nsey st u d y

R T I cal cul a t i o n RTI calculation
To tal sellin g an d d ealer cont ri b u t o r s Sum of Indire ct Cos t s

Net i n c o m e Ot he r c o st s ( n o t i n cl ude d as cont rib u tor s ) 1, 80 9, 3 3 3

. 8

46 0, 7 9 6

. 0

93 ,3 4 3

. 0 0. 18 0. 43 0. 06
0. 01 [p

. 50 , Ni ss an , 20 0 8 ] Ot he r, net [ p . 5 0 , Ni ssa n, 2 0 0 8 ]
RPE Mu ltip lier 1

. 4 9 So urces: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o E s t i m a t e C h an ges i n R e t a i l Pri ce E qui v a l e nt (R PE ) fo r A u t o m o t i v e F u el Ec on om y and Em i ssi ons C ontr o l Sy st e m s.” McK i n s ey & Co m p an y. 2003

. Preface to t h e A u to Sector Cases

.



### A-19Nissan Mot o r Com p any. 2008. Annual Re port 2006– 2007. Available at: http://www.niss an global.com /EN/IR/LIBRARY/AR/. Acces se d on Oct obe r 10, 2008. 

### Table A-17. Nissan Motor Company Main IndirectCost C o ntributors (as a Share of Cost of Sales)

Indirect Cost Contribu tor 2007 2006 2005 2004 2003 2002 Sel l i ng, a d m i ni strat i v e, a n d ot her expe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Pro f i t Ot he r e xpe nses ( not i n cl u d ed as cont ri b u t o r ) 0. 21
0. 08 0. 10 0. 06 0. 02 0. 22
0. 06 0. 09 0. 07 0. 02 0. 22
0. 01 0. 08 0. 08 0. 02 0. 24
0. 09 0. 09 0. 10 0. 02 0. 25
0. 08 0. 08 0. 10 0. 01 0. 26
0. 01 0. 08 0. 08 0. 03

Sum of m a i n i ndi rect cost contributors (i ncl u di n g pr o f i t ) 1. 44 1. 44 1. 39 1. 51 1. 51 1. 43

Sources: Nissan Mot o r Com p any. 2006. Annual Re port 2004–2005. Available at: http://www.niss an global.com /EN/IR/LIBRARY/AR/. Acces se d on Oct obe r 10, 2008. Nissan Mot o r Com p any. 2008. An nual Re port 2006– 2007. Available at: http://www.niss an global.com /EN/IR/LIBRARY/AR/. Acces se d on Oct obe r 10, 2008. 

### A.9 Volksw agen Group 

### Relevant RP E contributing factors gather ed from Volkswagen ’s annual report are presented in Table A-20. The Volkswagen Group reported its financial results in Euros. As opposed to other m a nufa c turers, Volkswagen health care cost was relatively m i nor compared to the cos tof sales and thu s w a s substituted w ith th e Sierr astud y value 0.03 . The R P E m u ltiplier for the Volkswagen Group was estim a ted to be 1.43 in 2007. Volkswagen experiencedalm o st no variation in th e sum of the m a in indir e ct cos t contributors, which stayed around 1.28 (see Ta ble A-21). Higher profits f o r the Volkswagen Group are associated with lower deprecia tion stated in their annual reports.

A-20

### Table A-18. Toyota Motor Company RP E Multiplier Calcu l ations: 2007 Expense Rela tive to C o st RPE Multipli er Co ntributor (¥ Millio n) of Sales Calcul ati o n and Source Vehicle Manufac turing

Cost of sales Co st of Pro d u c t So ld [p . 71 , To yo ta, 2 007 ] − 50 % x Resear ch an d 17 ,4 6 3 , 5 8 2

. 6 1. 00 Devel opm ent + 7 0 % x Pensi ons Prod uction O v erhe a d

War r anty Warranties Paid T h rough t h e Year [p. 10 9, T o y o t a , 2 0 0 7 ] + Pr ovi si ons f o r 61 6, 1 3 3

. 0 0. 04 W a rr an ties [ p . 1 0 9 , To yo ta, 20 07 ] R & D (p r o d u ct devel opm ent ) 89 0, 7 0 0

. 0 0. 05 [p . 79 , T o y o t a , 2 0 0 7 ] Dep r eci at i o n a n d am ort i zat i on 1, 38 2, 5 9 4

. 0 0. 08 Dep r eci at i o n [ p . 9 4 , Toy o t a , 20 0 7 ] M a i n t e nance , r e pai r , o p erat i o ns [p . 9, Sie rra , 2 0 0 7 ] cost 48 8, 9 8 0

. 3 0. 03 Tot a l p r o d u ct i o n o v e r hea d 3, 37 8, 4 0 7

. 3 0. 19 Cor p or ate Overhead

Gen e ral an d admin i strativ e Sel l i ng, Ge ner a l , an d Adm i ni strat i v e − 50% x Researc h a n d De velopment − 96 9, 5 6 8

. 1 0. 06 Ad ve rt i s i ng − Transpo r tation R e t i r em ent 83 ,7 6 5

. 7 Less t h a n 0. 0 1 30 % x Pe nsi o n s Health 30% x Retiree Health Care [p. 9, Sierra, 13 0, 9 7 6

. 9 0. 01 2 007 ] Tot a l co rp o r at e o v erhea d 1, 18 4, 3 1 0

. 7 0. 07 Selling

Tran sp ort a t i o n 61 4, 9 1 4

. 9 0. 04 B a sed on M c K i nsey st u d y M a rket i n g 45 1, 1 8 2

. 0 0. 03 Ad ve rt i s i ng [ p . 9 7 , Toy o t a , 20 07] Dealers

Deal er ne w ve hi cl e net pr o f i t 1, 00 2, 7 1 9

. 3 0. 06 R T I cal cul a t i o n Deal er ne w ve hi cl e sel l i ng c o st 96 2, 9 0 2

. 4 0. 06 R T I cal cul a t i o n To tal sellin g an d d ealer cont ri b u t o r s 3, 03 1, 7 1 8

. 5 0. 12 Sum of Indire ct Cos t s 0. 38

Net i n c o m e 1, 64 4, 0 3 2

. 0 0. 09 [p

. 96 , T o y o t a , 2 0 0 7 ] Ot he r c o st s ( n o t i n cl ude d as I n ter e st Exp e nse [p

. 94 , To y o ta, 20 07 ] cont rib u tor s ) 49 ,3 2 6

. 0 0. 00 RPE Mu ltip lier 1

. 4 8 So urces: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o E s t i m a t e C h an ges i n R e t a i l Pri ce E qui v a l e nt (R PE ) fo r A u t o m o t i v e F u el Ec on om y and Em i ssi ons C ontr o l Sy st e m s.” McK i n s ey & Co m p an y. 2003

. Preface to t h e A u to Sector Cases

. To yo ta M o tor Co m p an y. 2008

. An nu al Repo r t 20 08 . Av ailab l e at: http://www.toy ota.co.jp/e n /ir/lib rary/annual/inde x.htm l . Acce ssed on October 10, 2008.



### A-21

### Table A-19. Toyota Motor Company Main IndirectCost C o ntributors (as a Share of Cost of Sales)

Indirect Cost Contribu tor 2007 2006 2005 2004 2003 2002 Sel l i ng, a d m i ni strat i v e, a n d ot her expe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Pro f i t Ot he r e xpe nses ( not i n cl u d ed as cont ri b u t o r ) 0. 14

0. 05 0. 08 0. 09 0. 00 0. 14

0. 04 0. 07 0. 08 0. 00 0. 14

0. 03 0. 07 0. 08 0. 00 0. 13

0. 03 0. 07 0. 09 0. 00 0. 16

0. 04 0. 07 0. 06 0. 00 0. 16

0. 04 0. 07 0. 05 NA

Sum of m a i n i ndi rect cost contributors (i ncl u di n g pr o f i t ) 1. 35 1. 33 1. 31 1. 32 1. 33 1. 33

NA = Not a v ai lable Sou r ces: To yo ta M o tor Co m p an y. 2006

. An nu al Repo r t 20 06 . Av ailab l e at: http://www.toy ota.co.jp/e n /ir/lib rary/annual/inde x.htm l . Acce ssed on October 10, 2008. To yo ta M o tor Co m p an y. 2008

. An nu al Repo r t 20 08 . Av ailab l e at: http://www.toy ota.co.jp/e n /ir/lib rary/annual/inde x.htm l . Acce ssed on October 10, 2008.



### A-22

### Table A-20. Volksw agen Group RPE Multiplier Calculations: 2007
Expense Rela tive to RPE Multipli er Co ntributor (€ Millio n) Cos tof S a les Calcul ati o n and Source Vehicle Manufac turing

Cost of sales Co st of S a les [p .1 35 , VW , 200 7 ]

− War r anty

− R&D

− MR O + 70% x 82 ,5 9 5

. 6 1. 00 Pensi ons an d P o stret i r em ent B e nefi t s Prod uction O v erhe a d

War r ant y 2, 05 6. 3 0. 02 B a sed on M c K i nsey st u d y R & D (p r o d u ct devel opm ent ) 4, 65 3. 3 0. 06 B a sed on M c K i nsey st u d y Dep r eci at i o n a n d am ort i zat i on 7, 27 8. 0 0. 09 [p

. 13 3, V W , 2 0 0 7 ] M a i n t e nance , r e pai r , o p erat i o ns [p . 9, Sie rra , 2 0 0 7 ] cost 2, 31 2. 7 0. 03 To tal pr odu ctio n ov er h e ad 1 6 ,300 .3 0

. 2 0 Cor p or ate Overhead

Gene ral a n d ad m i ni strat i v e 2, 45 3. 0 0. 03 [p

. 13 5, V W , 2 0 0 7 ] Retire m en t 30 % x Ol d- A g e Pen s i o ns [p . 14 3, V W , 38 6. 4 Less t h a n 0. 0 1 2 007 ] Health 30% x Retiree Health Care [p. 9, Sierra, 17 .3 0. 01 2 007 ] Tot a l co rp o r at e o v erhea d 2, 85 6. 7 0. 04 Selling

Transpo r tation 7, 86 4. 0 0. 10 Di stri b u t i o n E xpe nses − M a rk et i ng Mark eting Sel l i ng, ge nera l and adm i ni strat i v e expe nse − A d m i ni strat i v e Ex pen s es [p

. 1, 41 0. 0 0. 02 1 3 9 , VW , 2007 ] Dealers

Deal er ne w ve hi cl e net pr o f i t 4, 74 2. 5 <0. 01 R T I cal cul a t i o n Deal er ne w ve hi cl e sel l i ng c o st 4, 55 4. 1 0. 06 R T I cal cul a t i o n To tal sellin g an d d ealer cont ri b u t o r s 18 ,5 7 0

. 6 0. 17 Sum of Indire ct Cos t s 0. 41

Net i n c o m e 1, 45 5. 0 0. 02 [p

. 14 2, V W , 2 0 0 7 ] Ot he r c o st s ( n o t i n cl ude d as Fin a n c ial Result [p . 142 , VW, 20 07 ] cont ri b u t o r s ) 3, 79 9. 0 0. 05 RPE Mu ltip lier 1

. 4 3 So urces: Si erra R e sear c h , I n c. N ovem b er 2 1 , 2 0 0 7

. “ S t udy o f I n du s try —A vera ge M a rk -U p F act ors Use d t o E s t i m a t e C h an ges i n R e t a i l Pri ce E qui v a l e nt (R PE ) fo r A u t o m o t i v e F u el Ec on om y and Em i ssi ons C ontr o l Sy st e m s.” McK i n s ey & Co m p an y. 2003

. Preface to t h e A u to Sector Cases

.



### A-23Vo l k swag en Group AG. 200 8. Ann u a l Repo rt 2 007

. Av ailab l e at: h ttp ://www.vo l k s wag e n a g.co m / v w ag / g b20 07 /con tent/en / an nu al_r ep or t_20 07 .h tml. A ccessed on O c tob e r 10 , 200 8.



### Table A-21. Volksw agen Historical Main IndirectCost Contributors (as a share of Cost of Sales)

Indirect Cost Contribu tor 2007 2006 2005 2004 2003 2002

Sel l i ng, a d m i ni strat i v e, a n d ot her ex pe nses Ope r at i n g a n d ot he r e xpe nses Dep r eci at i on Pro f i t Ot he r e xpe nses ( not i n cl u d ed as co ntrib u to r) 0. 12 0. 05 0. 08 0. 05 NA 0. 13 0. 06 0. 09 0. 02 NA 0. 13 0. 04 0. 09 0. 01 NA 0. 13 0. 04 0. 10 0. 01 NA 0. 14 0. 04 0. 09 0. 01 NA 0. 13 0. 05 0. 08 0. 04 NA Sum of m a i n i ndi rect cost contributors (i ncl u di n g pr o f i t ) 1. 29 1. 29 1. 28 1. 27 1. 29 1. 29

NA = Not a v ai lable Sou r ces: V o l k sw ag en Gr oup AG . 200 4. Ann u a l Repo rt 2 003

. Av ailab l e at: h ttp ://w ww .v wfsag.d e /fsag / u c u s /vw fsag / en /in v e sto r _r elatio n s /annu al_ r eport/ arch i v e_ 2003 .h tx . A ccessed o n O c t o b e r 10 , 20 08

. V o l k sw ag en Gr oup AG . 200 8. Ann u a l Repo rt 2 007

. Av ailab l e at: http://www.vol kswa ge na g.c o m/vwag/ gb2007/content/en/a n nual _re p ort_2007.htm l. Accessed on Octobe r 10, 2008.



### A-24