1 

### W A L T E R 

### M C 

### M A N U S



### , P H 

### D

D IR E CT O R



### , A U T O M O T I V E 

### A N A L Y SI S 

### D I V I SI O N



### U N I V E R SI T Y O F 

### M IC H I G A N T R A N S P O R T A T I O N R E S E A R C H I N S T I T U T E



### S E P T E MB E R



### , 2006 

# Ca n P ro

- A c t i v e F ue l

E c onom y S t ra t e gi e s H e l p

A ut om a ke rs M i t i ga t e

F ue l

- P ri c e Ri s ks ?

E X E CU T IV E S U M M A R Y2 

## Ex e c u ti v e S u m m a r y

T he hi gh o i l a nd ga s ol i ne p r i c e s w e ha ve e xpe r i e n c e d ove r t he pa s t t w o ye a r s ha ve

dr a m a t i c a l l y i nc r e a s e d t he a t t e nt i on pa i d t o ve hi c l e f ue l e c onom y by dr i ve r s

, ne w c a r

buye r s

, a nd t he gove r nm e nt

. D e t r oi t a ut om a ke r s

, w ho ha ve l ong de pe nde d on t he l e a s t f ue l

e f

f i c i e nt ve hi c l e s t o p r ovi de m os t o f t he i r pr o f i t s ( a nd s om e of w ho ha ve a r gue d t ha t f ue l

e c onom y di d not m a t t e r ve r y m uc h t o t he i r c us t om e r s ) a r e s e e i ng t he i r s a l e s a nd pr of i t s

e va por a t e

, a s ne w ve hi c l e buye r s s w i t c h t o m or e f u e l

- e f f i c i e nt ve hi c l e s

. M a na ge m e nt

a

ppa r e nt l y a s s um e d t ha t ( 1) f ue l p r i c e s w oul d s t a y l ow f or e ve r

, a nd/ or t ha t ( 2) t he i r

c us t om e r s w oul d not c ha nge t he i r ve hi c l e c hoi c e s be c a us e of hi gh f ue l pr i c e s

.

E ve nt s of t he pa s t t w o ye a r s ha ve de m ol i s he d bot h a s s um pt i on s

. T he pr i c e o f ga s ol i ne

s oa r e d i n 2005 a nd a ga i n i n 2006

, but m or e i m por t a nt l y t he r e a l pr i c e of ga s ol i ne ha s be e n

r i s i ng a t a 10 % a nnua l pa c e s i nc e 1999

, a nd a t a f a s t e r 16% a nnua l r a t e s i nc e 2002. T he

pr i c e of ga s ol i ne ( $2. 70/ ga l l on a ve r a ge s o f a

r i n 20 06) i s 98% a bove w ha t i t w a s i n 1999

a nd 83% a bove w ha t i t w a s i n 2002. B y l ow e r i ng ve hi c l e pur c ha s e pr i c e s ( i n c a s h, z e r o o r

l ow i nt e r e s t

- r a t e l oa ns

, e m pl oye e pr i c i ng f o r a l l )

, D e t r oi t m a na ge d t o m a i nt a i n t he s a l e s of

t he i r pr o f i t a bl e S U V s a nd p i c kups i n uni t s

, i f not r e ve nue or pr of i t

. B y t he l a s t qua r t e r o f

2005, t he a ut om a ke r s ’ a bi l i t y ( or w i l l i ngne s s ) t o c ut pr i c e s a ga i n a nd a ga i n s i m pl y t o s e l l

t he s a m e num be r of uni t s c ol l a ps e d. S i nc e t he n, c o ns um e r s ha ve m i gr a t e d t o m or e f ue l

e f

f i c i e nt opt i ons

, pr i m a r i l y a t t he e xpe ns e of D e t r o i t a ut om a ke r s ’ s ha r e a nd p r of i t s

.

I n t hi s s t udy

, w e e xa m i ne t he e c onom i c vi a bi l i t y o f i m pr ov i ng f ue l e c onom y a s a s t r a t e gy

t o m i t i ga t e t he r i s k o f hi gh f ue l p r i c e s a nd t o ga i n a c om pe t i t i ve a dva nt a ge

.

B y a dopt i ng a “ ga m e t he or y” a ppr oa c h t o r e pr e s e nt i ng t he c om pe t i t i ve i nt e r a c t i ons a m ong

t he a ut om a ke r s a nd us i ng di f f

e r e nt s c e na r i os t o r e p r e s e nt t he r i s ks a ut om a ke r s f a c e w i t h

r e s pe c t t o f ue l p r i c e s a nd c ons um e r de m a nd

, w e a r e a bl e t o i de nt i f y w hi c h s t r a t e gi e s

m a xi m i z e pr of i t s f or t he a ut om a ke r s a nd s uppor t U

. S

. a ut o i ndus t r y e m pl oym e nt

.



### R i s i n g f u e l p r i c e s a r e a p r i m a r y c o n t r i b u t i n g f a c t o r t o r a p i d

e r o s i o n o f D e t r o i t a u t o m a k e r m a r k e t s h a r e

, p r o f i t s a n d j o b s

.

 W hi l e G M

, F or d

, a nd D a i m l e r C hr ys l e r ha ve s i gni f i c a nt c os t di s a dva nt a ge s

c om pa r e d t o t he i r J a pa n

- ba s e d c om pe t i t or s

, s om e of w hi c h c a n be a t t r i but e d t o

i s s ue s be yond t he c ont r ol of c ur r e nt m a na ge m e nt ( e xc ha nge r a t e s

, he a l t h c a r e

a nd pe ns i on c os t s )

, poor f ue l e c onom y de c i s i ons by m a na ge m e nt ha ve

c ont r i but e d s i gni f i c a nt l y t o t he i r s i t ua t i on.

 A ut om a ke r s t ha t a r e hi ghl y l e ve r a ge d i n t r uc k

- ba s e d pr oduc t s ( t r uc k

- ba s e d

S U V s a nd pi c kups ) a r e e s pe c i a l l y vul ne r a bl e t o hi ghe r f ue l p r i c e s s i nc e t he s e

pr oduc t s a r e l e s s f ue l

- e f f i c i e nt

.

 D e t r oi t a ut om a ke r s ha ve e a r n e d a hi gh po r t i on o f t he i r pr of i t s f r o m t r uc k

- ba s e d

pr oduc t s

. I n 2004

, F o r d e a r ne d 62 % ( G M 6 1 %

, D a i m l e r C hr ys l e r 44 % ) of

va r i a bl e pr of i t s f r om t r uc ks a nd S U V s

, ve r s us 36 % f or N i s s a n a nd 28 % f or3 T oyot a ( H onda 0 % )

. C ons e que nt l y, w he n h i ghe r f ue l pr i c e s r e s t r i c t e d t r uc k

ba s e d pr oduc t pr i c e s a nd pr o f i t s

, D e t r oi t a ut om a ke r pr o f i t s w e r e

di s pr opor t i ona t e l y a f f

e c t e d

.

 S i nc e J a n ua r y 1999

, f ue l p r i c e s ha ve be e n r i s i ng

, a nd t he a bi l i t y of a ut om a ke r s

t o m a i nt a i n p r i c e s a nd pr of i t s of t r uc ks ha s s t e a di l y de c l i ne d. H ow e ve r

, s i nc e

D e t r oi t a ut om a ke r s w e r e he a vi l y c om m i t t e d t o t r uc ks

, a nd s w i t c hi ng pr oduc t i on

f r om t r uc ks t o c a r s i s c os t l y

, t he y a c c e pt e d l ow e r p r of i t s r a t he r t ha n l ow e r uni t

s a l e s of t r uc ks

.

 I n 2005, t he p r i c e of ga s ol i ne r os e 19 % a bove i t s 2 004 l e ve l

, a nd t he s ha r e of

va r i a bl e pr of i t s f r om pi c kups a nd S U V s f e l l 4. 0 pe r c e nt a ge poi nt s f or bot h F or d

a nd G M

. T hi s p r of i t e r os i on c ont i nue d i n t he f i r s t ha l f of 2006

— G M ’ s s ha r e of

va r i a bl e pr of i t s f r om pi c kups a nd S U V s f e l l a n a dd i t i o na l 5. 0 pe r c e nt a ge poi nt s

( F or d’ s f e l l 1

. 0 pe r c e nt a ge poi nt )

. T he c a s h c ow s a r e r a pi dl y dyi ng o f f

.

 N e w

- ve hi c l e de a l e r s

, be c a us e t he y a r e c l os e r t o t he r e t a i l m a r ke t t ha n t he

a

ut om a ke r s a r e

, ha ve m o r e a c c ur a t e l y r e a d t he m a r ke t ’ s s hi f t a w a y f r om ga s

guz z l e r s t ha n ha ve t he a ut om a ke r s

. D e a l e r s ha ve onl y i ndi r e c t i nf l ue nc e on t he

ne w pr oduc t s t he y ge t f r om t he a ut om a ke r s

, but t h e y di r e c t l y c ont r o l t he m i x o f

us e d ve hi c l e s t ha t t he y s e l l a l ongs i de t he ne w ve hi c l e s

. T he y obt a i n us e d

ve hi c l e s t o s e l l f r om w hol e s a l e a uc t i ons

. P r i c e s a t w hol e s a l e a uc t i ons r e f l e c t

de a l e r s ’ c ol l e c t i ve j udgm e nt a bout w ha t c ons um e r s a r e w i l l i ng t o pa y ( be f or e

a ddi ng a c om pe t i t i ve m a r k up)

. S i nc e J a nua r y 200 0, t he a uc t i on pr i c e o f us e d

f ul l

- s i z e S U V s ha s f a l l e n f r om 185 % o f t he a ve r a ge a uc t i on pr i c e o f a l l ve hi c l e s

t o 133 % ( J une 2006)

— a 52

- pe r c e nt a ge poi nt dr op

— w hi l e t he r e a l p r i c e of

ga s ol i ne r os e 88 % f r om $1

. 55/ ga l l on t o $2

. 92/ ga l l on. T he i m pl i e d r e l a t i ons hi p

i s s t r ong: a 1

. 0 % i nc r e a s e i n t he r e a l pr i c e o f ga s ol i ne i s a s s oc i a t e d w i t h a 7

pe r c e nt a ge

- poi nt r e duc t i on i n t he w hol e s a l e a uc t i o n pr i c e of f ul l

- s i z e S U V s

ve r s us t he a ve r a ge a uc t i on pr i c e o f a l l ve hi c l e s

.

 G M a nd F or d ’ s de pe nde nc e on t r uc k

- ba s e d pr oduc t s i s e r odi ng t he i r m a r ke t

s ha r e

. L a r ge r J a pa n

- ba s e d a ut om a ke r s ( T oyo t a

, H onda

, a nd N i s s a n) a r e s e e i ng

s ha r e a nd pr of i t gr ow t h

, a nd a r e i nc r e a s i ng t he i r N or t h A m e r i c a n c a pa c i t y

be c a us e t he y ha ve a l a r ge r s e l e c t i on of f ue l

- e f f i c i e nt ve hi c l e s t ha t a r e a t t r a c t i ve

t o A m e r i c a ns

. H ow e ve r

, be c a us e bot h G M a nd F o r d c om m i t t e d t o r ol l i ng out

ne w l a r ge S U V s m or e t ha n f ou r ye a r s a go

, t he y a r e not s i gni f i c a nt l y c ut t i ng

t he i r c a pa c i t y t o p r oduc e t he s e ga s

- guz z l e r s

. I ns t e a d a s t he i r ope r a t i ons c ont r a c t

due t o de c l i ni ng s a l e s

, t he y a r e c ut t i ng c a pa c i t y t o pr oduc e m i d

- s i z e a nd s m a l l e r

ve hi c l e s

.



### T e c h n o l o g i c a l O p t i o n s

W ha t opt i ons do a ut om a ke r s ha ve t o i m pr ove f ue l e c onom y by 2010? I n t hi s s t udy

, w e

a s s um e t ha t t he ba s i c pr oduc t por t f ol i o o f a ny m a nuf a c t ur e r i s m os t l y f i xe d. H ow e ve r

,

w i t hi n t he f i xe d pr oduc t por t f ol i o, a m a nuf a c t ur e r ha s t he opt i on of i m pr ov i ng t he f ue l4 e c onom y of i t s ve hi c l e m ode l s by a dopt i ng i m pr ov e d e ngi ne

, t r a ns m i s s i on, a nd ot he r f ue l

s a vi ng t e c hnol ogi e s

.

F or s i m pl i c i t y

, w e a na l yz e t w o di s t i nc t f ue l e c onom y s t r a t e gi e s

, “ B us i ne s s a s U s u a l ”

( B A U ) a nd ” P r oa c t i ve ” ( P R O A )

. A n a ut om a ke r f o l l ow i ng t he B A U s t r a t e gy i s a s s um e d t o

m a ke onl y t hos e i m pr ove m e nt s i n f ue l e c onom y t h a t w oul d be ne c e s s a r y f or f ut ur e C A F E

s t a nda r ds

. A n a ut om a ke r f o l l ow i ng t h e P R O A s t r a t e gy i s a s s um e d t o m a ke t hos e f ue l

e c onom y i m pr ove m e nt s be yond C A F E t ha t c ons u m e r s w oul d va l ue ( a nd pa y f o r )

. D e ve l opi ng t he s e s c e na r i os r e qui r e s a n e ngi ne e r i ng a s s e s s m e nt of w ha t f ue l e c onom y

t e c hnol ogi e s a r e a va i l a bl e a nd a de t a i l e d f or e c a s t o f e a c h m a nuf a c t ur e r ’ s f ut ur e pr oduc t

pl a ns i nc l udi ng w he n i ndi vi dua l m ode l s w oul d ha v e a n oppor t uni t y t o i nt e gr a t e ne w

t e c hnol ogy. 1

O ur da t a i nc l ude 1

, 145 s e pa r a t e m a ke

, m ode l

, e ngi ne

, t r a ns m i s s i on, a nd body s t yl e

c onf i gur a t i ons i n 2010

. O f t he s e

, 154 c onf i gur a t i o ns ( 13 % ) a r e e xpe c t e d t o ha ve ne w

e ngi ne s by 2010 t ha t a r e pot e nt i a l l y e l i gi bl e f o r t he a dva nc e d or m ode r a t e f ue l

- s a vi ng

pa c ka ge s a nd 931 c onf i gur a t i ons w i t h c a r r y

- ove r e ngi ne s a r e e l i gi bl e f o r f or e goi ng

pr oj e c t e d i m pr ove m e nt s i n hor s e pow e r dow ns i z i ng. 2 S i nc e t he a ut om a ke r s unde r s t a nda bl y

pr ot e c t i nf o r m a t i on a bout t he f ut u r e pr od uc t s a nd p ow e r t r a i ns

, our ba s e a s s um pt i ons f or

2010 c om e f r o m a f or e c a s t by T he P l a nni ng E dge

. I t i s pos s i bl e t ha t s om e a ut om a ke r s ha ve

a l r e a dy de c i de d t o i m pl e m e nt s om e of t he i m p r ove m e nt s w e a ppl y i n t he P R O A s t r a t e gy.

H ow e ve r

, s i nc e our ba s e a ve r a ge f ue l e c onom y f or D e t r oi t a ut om a ke r s i n 2010 i s e qua l t o

w ha t C A F E w i l l r e qui r e of t he m

, a nd s i nc e t he f ue l e c onom y of t he D e t r oi t a ut om a ke r s ha s

hi s t or i c a l l y not e xc e e de d t he r e qui r e m e nt

, D e t r oi t a ut om a ke r s a r e not l i ke l y t o ha ve

de c i de d t o i m pl e m e nt ou r c om pl e t e P R O A pa c ka ge s

.

B a s e d on t hi s a s s e s s m e nt

, w e de t e r m i ne d t ha t i f a l l a ut om a ke r s w e r e t o f ol l ow a P R O A f ue l

e c onom y i m pr ove m e nt s t r a t e gy a nd i m pl e m e nt t he f ue l

- s a vi ng pa c ka ge s w e i de nt i f i e d :

 O ve r a l l f ue l e c onom y w oul d i nc r e a s e 6. 0 % a bove ba s e l i ne 2010 f ue l e c onom y

or 7. 4 % a bove m ode l ye a r 2005 e s t i m a t e d f ue l e c onom y of 24

. 5 m pg ( E P A

2005)

. T he 7

. 4% i nc r e a s e ove r t oda y’ s l e ve l i s c on s i s t e nt w i t h t he 4. 0 %

- 8

. 2%

r a nge w e de r i ve d f r om a r e vi e w o f ot he r s t udi e s a nd a m ount s t o a m ode s t 1. 5%

a nnua l i nc r e a s e be t w e e n 2006 a nd 2010

 F or d ha s t he g r e a t e s t oppor t uni t y t o a ppl y a dva nc e d t e c hnol ogi e s ( 3 4 % of i t s

ba s e 2010 s a l e s )

. D a i m l e r C hr ys l e r c a n a ppl y a dva nc e d t e c hnol ogi e s t o e nt r i e s

a c c ount i ng f or 3 0 % o f i t s s a l e s a nd G M c a n a ppl y a dva nc e d t e c hnol ogi e s t o

e nt r i e s a c c ount i ng f or 19% o f i t s s a l e s

. T he D e t r oi t a ut om a ke r s ha ve m or e

1 W e de r i ve t he s e s t r a t e gi e s by c om bi ni ng a de t a i l e d ba s e l i ne 2010 s a l e s f or e c a s t by

m a nuf a c t ur e r

, m ode l

, e ngi ne

, t r a ns m i s s i on, a nd bo dy s t yl e f r om T he P l a nni ng E dge ) w i t h

a n e ngi ne e r i ng a na l ys i s by D r

. F e ng A n ( a n e xpe r t i n f ue l e c onom y t e c hnol ogi e s )

. 2 W e e xc l ude d a s i ne l i gi bl e f or i m pr ove m e nt hyb r i d s

, di e s e l s

, a nd a f e w ga s ol i ne e ngi ne s

( 60 c onf i gur a t i ons i n a l l )

.5 oppor t uni t y t o i m pr ove t he f ue l e c onom y o f t he i r v e hi c l e s t ha n do N i s s a n ( 16 % )

, T oyot a ( 8 % )

, a nd H onda ( 6 % )

.



### M e t h o d o l o g y & S c e n a r i o A n a l y s i s

T he i m pa c t o f a l t e r na t i ve f ue l e c onom y s t r a t e gi e s a nd f ue l pr i c e s o n t ot a l s a l e s by t he

i ndus t r y i s e s t i m a t e d us i ng a s i m pl i f i e d m ode l of t he t ot a l m a r ke t de m a nd f o r ve hi c l e s

. T o

a s s e s s t he c ha nge i n m a r ke t s ha r e f o r i ndi v i dua l ve hi c l e m ode l s unde r di f f

e r e nt f ue l

e c onom y s t r a t e gi e s a nd f ue l pr i c e s c e na r i os

, w e us e a n e c on om e t r i c m ode l of d i s c r e t e

c hoi c e a l ong w i t h e s t i m a t e s of c ons um e r s ’ w i l l i ng ne s s

- t o

- pa y f or a t t r i but e s of ve hi c l e s

. D i s c r e t e c hoi c e m ode l s m a t c h t he i nt ui t i ve not i on t ha t a ve hi c l e i s a bund l e of a t t r i but e s

a nd t ha t t he ve hi c l e ’ s va l ue t o a c ons um e r i s de r i ve d f r om t he va l ue t he c ons um e r pl a c e s on

t he a t t r i but e s

. T he de m a nd f or ve hi c l e s i s s e e n a s a de r i ve d de m a nd a r i s i ng f r o m t he

de m a nd f or ve hi c l e a t t r i but e s

.

I n t hi s s t udy w e e nha nc e d t he m ode l w e us e d p r e vi ous l y ( M c M a nus e t a l

. [ 2005] )

, by

i nc or por a t i ng m e a s ur e s of t he ke y ve hi c l e a t t r i but e s of pe r f o r m a nc e a nd s i z e

, a l ong w i t h

t he a t t r i but e s e xa m i ne d i n t ha t s t udy, f ue l e c onom y a nd r e t a i l pur c ha s e pr i c e

. W e upda t e d

our e s t i m a t e s of t he m ode l ’ s pa r a m e t e r s w i t h 2005 da t a

, us i ng e c onom e t r i c t e c hni que s t ha t

e xpl oi t t he c or r e l a t i on be t w e e n ve hi c l e p r i c e a nd v e hi c l e a t t r i but e s t o de r i ve da t a

- ba s e d

e s t i m a t e s of c ons um e r s ’ w i l l i ngne s s t o pa y f o r f ue l e c onom y, pe r f or m a nc e

, a nd s i z e

.

W e us e d s c e na r i o a na l ys i s t o c om pa r e a ut om a ke r p r of i t s i n f our m a r ke t

- de m a nd s c e na r i os

de f i ne d by f ue l pr i c e s ( $2

. 00/ ga l l on a nd $3. 10/ ga l l on) a nd c ons um e r di s c ount r a t e s ( 0%

a nd 7% )

. T he c ons um e r di s c ount r a t e m e a s ur e s t he r a t e a t w hi c h c ons um e r s di s c ount f ut ur e

ope r a t i ng s a vi ngs a nd c os t s t o m a ke t he m c om pa r a

bl e t o t oda y’ s pu r c ha s e pr i c e

. T e c hni c a l l y, t he d i s c ount r a t e e qua l s t he p r e va i l i ng m a r ke t r a t e of i nt e r e s t m i nus t he r a t e o f

e xpe c t e d i nf l a t i on i n f ue l p r i c e s

, a nd c a n be pos i t i v e or ne ga t i ve ( i f c ons um e r s e xpe c t e d

14% a nnua l pe r c e nt i nf l a t i on i n f ue l pr i c e s a nd t he m a r ke t i nt e r e s t r a t e w e r e 7%

, t he n t he

di s c ount r a t e s houl d be

- 7% )

. T he l ow e r t he di s c ou nt r a t e

, t he m o r e va l ue f u

t ur e s a vi ngs of

f ue l a r e w or t h. W e l i m i t e d t he l ow e r bound on t he di s c ount r a t e s i n our s i m ul a t i ons t o 0 %

t o be c ons e r va t i ve

.

W e a s s um e t ha t a ut om a ke r s a i m t o m a xi m i z e pr of i t s a nd de c i de w he t he r t o pur s ue P R O A

i nc r e a s e s i n f ue l e c onom y w i t h t ha t a i m i n f oc us a s w e l l a s i n l i ght o f unc e r t a i nt i e s

r e ga r di ng f ut u r e f ue l e c onom y s t a nda r ds

, f ue l pr i c e

, a nd ot he r a ut om a ke r s ’ f ue l e c onom y

s t r a t e gi e s

. C A F E s t a nda r ds put a l ow e r l i m i t on e a c h a ut om a ke r ’ s a ve r a ge f ue l e c onom y,

but do not pr e ve nt a ny a ut om a ke r f r om e xc e e di ng t he s t a nda r d.

T o i de nt i f y e a c h a ut om a ke r ’ s opt i m a l s t r a t e gy und e r t he s e unc e r t a i nt i e s

, w e a dopt a “ ga m e

t he or y” a ppr oa c h. W e m ode l f i ve a ut om a ke r

- c om p e t i t or s ( i ndi vi dua l D e t r oi t

, J a pa ne s e B i g

T hr e e

, a nd ot he r )

, a nd w e a s s um e t ha t e a c h m us t c hoos e e i t he r a n a ggr e s s i ve or a B A U f ue l

e c onom y s t r a t e gy. A n ou t c om e i n t he s i m ul a t i on

, o f w hi c h t he r e a r e 128

, i s de f i ne d by t he

f ue l pr i c e

, t he c ons um e r d i s c ount r a t e

, a nd t he c hoi c e s of e a c h of t he f i ve c om pe t i t or s

. L e t t i ng t hi s p r oc e s s r un unt i l i t r e s ul t s i n a s t a bl e o ut c om e i n w hi c h no a ut om a ke r c oul d

ga i n by s w i t c hi ng s t r a t e gi e s gi ve n w ha t t he ot he r a ut om a ke r s c hoos e ( N a s h e qui l i br i um )

,6 w e f i nd t ha t t he opt i m a l s t r a t e gy f o r e a c h a ut om a k e r i s t o pu r s ue P R O A i m pr ove m e nt s i n

f ue l e c onom y. T hi s c onc l us i on i s qui t e r obus t ; i t h ol ds w he n ne i t he r f ue l pr i c e no r

c ons um e r di s c ount r a t e s a r e know n ; a nd i t a l s o ho l ds w he n f ue l pr i c e a nd c ons um e r

di s c o unt r a t e s a r e know n ( a m ong t he f our de m a nd s c e na r i os )

.

A not he r w a y t o f i nd t he s ol ut i on o f t he s i m ul a t i on i s t o a ppl y t he m a xi m i n p r i nc i pl e o f

ga m e t he or y ( c hoos e t he s t r a t e gy t ha t m a xi m i z e s t he w or s t c a s e one c a n e xpe c t )

. F our

m a r ke t de m a nd s c e na r i os

, f i ve c om pe t i t or s

, a nd t w o s t r a t e gi e s yi e l d 128 pos s i bl e

out c om e s

, 32 out c om e s i n e a c h o f t he f our m a r ke t de m a nd s c e na r i os

. T he m a xi m i n

pr i nc i pl e r e a c he s t he s a m e s ol ut i on ; a l l a ut om a ke r s s houl d c hoos e P R O A

.



### R e s u l t s : I n c r e a s i n g F u e l E c o n o m y P e r f o r m a n c e I n c r e a s e s

E x p e c t e d P r o f i t s

D e t r o i t A u t o m a k e r s ’ P r o f i t s a r e H i g h l y S e n s i t i v e t o F u e l P r i c e s u n d e r

B u s i n e s s

- A s

- U s u a l F u e l E c o n o m y S c e n a r i o s

 D e t r oi t a ut om a ke r s ’ p r of i t s a r e m uc h m o r e s e ns i t i ve t o f ue l pr i c e s t ha n t he

J a

pa ne s e a ut om a ke r s

. T he s e r e s ul t s a r e c ons i s t e nt w i t h t he f i nd i ngs i n M c M a nus

e t a l

. [ 2005 ]

. D e t r oi t a ut om a ke r s l os e $ 3

. 1

- $3. 6 bi l l i on i n va r i a bl e pr o f i t s w he n

f ue l c os t s $3. 10/ ga l l on c om pa r e d t o $2

. 30/ ga l l on

, a c c ount i ng f or 72

- 7 7 % of t he

t ot a l i ndus t r y l os s e s

. I n c ont r a s t

, t he t hr e e b i gge s t J a pa ne s e m a nuf a c t ur e r s

( T oyot a

, H onda

, a nd N i s s a n) a l s o s e e a r e duc t i on i n va r i a bl e pr o f i t s

, bu t a t a

m uc h l ow e r l e ve l

, $0. 8 bi l l i on

.

 C onve r s e l y, i f f ue l pr i c e s dr o p t o $2. 00/ ga l l on

, D e t r oi t a ut om a ke r s do be t t e r

t ha n t he J a pa ne s e a ut om a ke r s

. D e t r oi t ’ s va r i a bl e pr of i t s i nc r e a s e by $1

. 2 t o

$ 1

. 4 bi l l i on w he n f ue l c os t s $ 2. 00/ ga l l on c om pa r e d t o $2

. 30/ ga l l on. I n c ont r a s t

,

t he t hr e e bi gge s t J a pa ne s e m a nuf a c t ur e r s onl y ga i n a t ot a l o f $0

. 3 b i l l i on

.

 T he di f f

e r e nc e s i n D e t r oi t ’ s pr of i t s be t w e e n hi gh a nd l ow c ons um e r di s c ount

r a t e s a r e s m a l l c om pa r e d t o t he di f f

e r e nc e s ge ne r a t e d by f ue l pr i c e s

. T he

va r i a bl e pr of i t s o f t he t hr e e l a r ge s t J a pa n

- ba s e d a ut om a ke r s ( T oyot a

, H onda

,

a nd N i s s a n) a r e m uc h l e s s s e ns i t i ve t o bot h f ue l pr i c e s a nd c ons um e r di s c ount

r a t e s t ha n D e t r oi t ’ s a r e

. T he s ur pr i s i ng c onc l us i on o f our a na l ys i s i s :

E

ac h au t om ake r s h ou l d pu r s u e pr oac t i v e i m

pr ov e m e n t s i n f u e l e c on om y t h a t

e

xc e e d w h at C A F E r e qu i r e s , re gar dl

e s s of t h e f u e l e c on om y s t r

at

e

gi e s of ot h e r

au t om ake r s

, f or f u e l pr i c es be t w e e n $2. 00/ gal l o n an d $3. 10/ gal l on c on s u m e r

di

s c ou n t r at

es be t w e e n 0% an d 7 %

.7  T he s e r e s ul t s a r e dr i ve n by t w o c r i t i c a l f a c t o r s

. F i r s t

, i f f ue l p r i c e s i nc r e a s e t o

$3. 10/ ga l l on, ove r a l l s a l e s de c l i ne by 3

. 5 %

. A t $2. 00/ ga l l on, ove r a l l s a l e s

i nc r e a s e by 1. 3 %

. S e c ond, hi ghe r f ue l pr i c e s de c r e a s e c ons um e r de m a nd f or

f ue l

- i ne f f i c i e nt pr oduc t s

, e s pe c i a l l y t r uc k

- ba s e d S U V s

, a nd i nc r e a s e de m a nd f or

m or e f ue l

- e f f i c i e nt opt i ons

, i nc l udi ng c r os s ove r s

, m i ni va ns

, a nd c a r s

. A t l ow e r

f ue l pr i c e s

, t he r e ve r s e i s t r ue

. C ons e que nt l y, s i nc e D e t r oi t a ut om a ke r s s e l l a

m uc h l a r ge r f r a c t i on o f l e s s e f f i c i e nt t r uc k

- ba s e d v e hi c l e pr oduc t s

, t he y a r e

m uc h m or e vul ne r a bl e t o va r i a bl e f ue l pr i c e s t ha n t he J a pa n

- ba s e d a ut om a ke r s

a r e

.

P r o a c t i v e l y I n c r e a s i n g F u e l E c o n o m y w o u l d B e n e f i t D e t r o i t A u t o m a k e r s

T he r e s ul t s of our s i m ul a t i ons w e r e s ur pr i s i ng, e ve n t o us

. I n a l l f ou r m a r ke t

- de m a nd

s i t ua t i ons w e e va l ua t e d ( de f i ne d by f ue l p r i c e a nd c o ns um e r r a t e of t i m e di s c ount )

,

pr oa c t i ve l y i nc r e a s i ng f ue l e c onom y w oul d be t he opt i m a l s t r a t e gy f o r a l l a ut om a ke r s

, i n

t ha t i t w oul d r e s ul t i n t he hi ghe s t va r i a bl e pr o f i t t h a t e a c h a ut om a ke r c oul d be a s s ur e d of

e a r ni ng, no m a t t e r w ha t pr i c e o f f ue l ( be t w e e n $2

. 00

- $3. 10 / ga l l on)

, c ons um e r r a t e of t i m e

di s c ount ( be t w e e n 0%

- 7% )

, or a c t i ons by i t s c om p e t i t or s w e r e r e a l i z e d.

W ha t w a s e s pe c i a l l y s ur pr i s i ng w a s t ha t t he D e t r oi t a ut om a ke r s ( G M

, F or d

, a nd

D a i m l e r C hr ys l e r ) ha ve m or e t o ga i n f r om pu r s ui ng t he a ggr e s s i ve f ue l e c onom y

i m pr ove m e nt s t r a t e gy t ha n do t he t hr e e l a r ge s t J a p a n

- ba s e d a ut om a ke r s ( T oyot a

, H onda

,

a nd N i s s a n)

. T hi s i s be c a us e t he D e t r oi t a ut om a ke r s f a c e m or e r i s k ( a r e m or e vul ne r a bl e ) i f

t he y pur s ue B A U t ha n t he J a pa n a ut om a ke r s do

. T he D e t r oi t a u t om a ke r s a l s o ha ve m or e

oppor t uni t i e s f or i m pr ove m e nt

, s i nc e D e t r oi t a ut o m a ke r s c ur r e nt l y ha ve l ow e r a ve r a ge f ue l

e c onom y t ha n t he J a pa n a ut om a ke r s do.

 D e t r oi t a ut om a ke r s w oul d be ne f i t f r om r a i s i ng t he f ue l e c onom y of t he i r

ve hi c l e s r e ga r dl e s s of f ue l p r i c e s a nd c ons um e r di s c ount r a t e s

. O ur r e s ul t s s how

t ha t a P R O A

, i ndus t r y

- w i de p r ogr a m t o i nc r e a s e f u e l e c onom y pe r f o r m a nc e

w oul d i nc r e a s e t he pr of i t s of D e t r oi t a ut om a ke r s b y $0. 8

- $2

. 0 b i l l i on pe r ye a r

( de pe ndi ng on t he m a r ke t

- de m a nd s i t ua t i on )

.

 W hi l e t he ga i ns a r e g r e a t e s t i n t he c a s e of hi gh f ue l pr i c e s w i t h l ow c ons um e r

di s c ount r a t e a nd s m a l l e s t i n t he c a s e w i t h l ow f ue l pr i c e s a nd hi gh c ons um e r

di s c ount r a t e

, t he ga i ns a r e ne ve r t he l e s s pos i t i ve i n a l l f ou r pot e nt i a l m a r ke t

de m a nd s i t ua t i ons w e e va l ua t e d

.

 F or d s t a nds t o ga i n t he m os t i n a nnua l p r of i t s

, m or e t ha n t w i c e a s m uc h a s G M

or D C X

, by pr oa c t i ve l y pu r s ui ng f ue l e c onom y pe r f or m a nc e

. F o r d’ s ga i ns a r e

f r om $0

. 5

- $1

. 4 bi l l i on

, de pe ndi ng on t he m a r ke t

- d e m a nd s i t ua t i on. G M ’ s ga i ns

a r e f r om $0. 2

- $0. 5 bi l l i on

, de pe ndi ng on t he m a r k e t

- de m a nd s i t ua t i on. D C X ’ s

ga i ns a r e $0. 1 b i l l i on ( T he r e a r e di f f

e r e nc e s i n D C X ’ s ga i ns be t w e e n m a r ke t

de m a nd s i t ua t i ons

, but not s uf f i c i e nt t o r e gi s t e r a t t hi s l e ve l )

.8  O n t he ot he r ha nd, t he t hr e e l a r ge s t J a pa n

- ba s e d a ut om a ke r s s how ve r y di f f

e r e nt

r e s ul t s f r om t hos e o f D e t r oi t

. T he J a pa n

- ba s e d m a nuf a c t ur e r s a c t ua l l y s e e a

r e duc t i on i n t he i r p r of i t s o f $0

. 1

- $0. 6 bi l l i on

. I n l a r ge pa r t t hi s i s due t o t he f a c t

t ha t t he J a pa n

- ba s e d a ut om a ke r s ha ve m or e f ue l

- e f f i c i e nt f l e e t s t ha n t he D e t r oi t

a

ut om a ke r s ha ve

, a nd t he r e f o r e ha ve l e s s r oom f or i m pr ove m e nt

. U nde r a

P R O A f ue l e c onom y s t r a t e gy, D e t r oi t

- ba s e d m a nuf a c t ur e r s na r r ow t he ga p i n

f ue l e c onom y pe r f or m a nc e be t w e e n t he i r f l e e t s a n d t he f l e e t s of t he t hr e e l a r ge s t

J a

pa n

- ba s e d a ut om a ke r s

.

T he s e s ur pr i s i ng r e s ul t s a r e dr i ve n by t he f ol l ow i n g f a c t or s :

 T he hi ghe r f ue l e c onom y l e ve l of t he f l e e t he l ps t o i ns ul a t e t ot a l i ndus t r y s a l e s

f r om de c l i ni ng unde r t he hi gh f ue l p r i c e s c e na r i os

. T ha t i s

, t he e nt i r e i ndus t r y

m a ke s m or e pr of i t unde r hi gh f ue l pr i c e s i f f ue l e c onom y l e ve l s a r e hi ghe r

, ( $1. 2

- $1

. 4 bi l l i on)

. M or e s ur p r i s i ng i s our pr e di c t i on t ha t unde r l ow f ue l pr i c e s

,

t ot a l i nd us t r y p r of i t s a r e hi ghe r by $0

. 8

- $0. 9 bi l l i o n i f a l l a ut om a ke r s f ol l ow i ng

P R O A

. T hi s i s be c a us e a t $2

. 00 / ga l l on, s om e of t h e f ue l e c onom y t e c hnol ogi e s

a r e s t i l l c os t

- e f f

e c t i ve

. T hi s a s s e s s m e nt i s c ons i s t e nt w i t h r e c e nt N a t i ona l

R e s e a r c h C ounc i l f i ndi ngs on f ue l e c onom y ( N R C [ 2002 ] )

.

 T he ke y f a c t o r t ha t e xpl a i ns t he a dva nt a ge s t o D e t r oi t

- ba s e d a ut om a ke r s of

a dopt i on of a P R O A f ue l e c onom y s t r a t e gy i s opp or t uni t y

— t he D e t r oi t

- ba s e d

a

ut om a ke r s ha ve l ow e r f ue l e c onom y t ha n t he t hr e e l a r ge s t J a pa n

- ba s e d

a

ut om a ke r s a nd t hus ha ve m or e r oom f or i m pr ove m e nt

. I n t he t e c hnol ogi c a l

opt i ons s e c t i on of t hi s r e por t w e i de nt i f i e d a l a r ge r s e t of i m pr ove m e nt

oppor t uni t i e s ( f o r bot h ne w a nd c a r r y

- ove r pow e r t r a i ns ) f or t he D e t r oi t

- ba s e d

t ha n f or t he t h r e e l a r ge s t J a pa n

- ba s e d a ut om a ke r s

. ( W e e xc l ude d i m pr ove m e nt s

t ha t w e r e not va l ue d by c ons um e r s

, a nd s uc h t e c hni c a l l y pos s i bl e but not va l ue d

i m pr ove m e nt s w e r e m or e l i ke l y t o be e xc l ude d f or t he J a pa n

- ba s e d t ha n f or t he

D e t r oi t

- ba s e d a ut om a ke r s

. )

 T he t h r e e l a r ge s t J a pa n

- ba s e d a ut om a ke r s c oul d, i n pr i nc i pl e

, m a i nt a i n t he i r

f ue l e c onom y a dva nt a ge by a ppl yi ng m or e t e c hnol ogi e s t o m or e ve hi c l e s

, but

t he y w oul d do s o a t t he c os t o f p r of i t s

. I t i s i m por t a nt t o not e t ha t

, w hi l e t he

D e t r oi t a ut om a ke r s c oul d na r r ow t he i r f ue l e c ono m y di s a dva nt a ge r e l a t i ve t o

t he J a pa n 3 a ut om a ke r s t hr ough a pr oa c t i ve f ue l e c onom y s t r a t e gy, t he J a pa n 3

a

ut om a ke r s w oul d s t i l l ha ve a n a dva nt a ge

.

 O ur s t udy c onc l ude s t ha t t he D e t r oi t a ut om a ke r s w oul d be ne f i t f r om pur s ui ng

P R O A f ue l e c ono m y i m p r ove m e nt s a bove w ha t C A F E r e qui r e s

. T hi s doe s not

i m pl y t ha t r a i s i ng C A F E r e qui r e m e nt s w oul d be ne f i t t he D e t r oi t a ut om a ke r s

. T ha t que s t i on w a s not di r e c t l y a ddr e s s e d i n t he s t udy, a nd i t i s i m po r t a nt t o

unde r s t a nd t ha t w he n w e s pe a k of a n i ndus t r y

- w i d e or m a r ke t

- w i de pr oa c t i ve

f ue l e c onom y i m p r ove m e nt s t r a t e gy, w e do no t m e a n a hi ghe r C A F E s t a nda r d,

w e m e a n t he s i t ua t i on i n w hi c h a l l a ut om a ke r s ha v e c hos e n t he P R O A f ue l

e c onom y s t r a t e gy.9 P r o a c t i v e l y I n c r e a s i n g F u e l E c o n o m y w o u l d P r o t e c t A m e r i c a n J o b s

W e e s t i m a t e d t he i m pa c t of s t r a t e gi c c hoi c e s by a u

t om a ke r s on U

. S

. e m pl oy m e nt us i ng t he

w e l l

- know n m ode l de ve l ope d a nd m a i nt a i ne d by R e gi ona l E c onom i c M ode l s

, I nc

. ( R E M I )

. T he R E M I m ode l t a ke s t he l a t e s t na t i ona l i nput

- ou t put c oe f f i c i e nt s

, w hi c h s how how m uc h

e a c h i ndus t r y buys f r om e ve r y o t he r i ndus t r y

, a nd t une s t he m t o pa r t i c ul a r ge ogr a phi e s

us i ng t r a de

- f l ow da t a ge ne r a t e d f r om t he U S C e ns us of T r a ns por t a t i on.

• U nde r hi gh f ue l pr i c e s

, a m a r ke t

- w i de P R O A f ue l e c onom y i m pr ove m e nt

s t r a t e gy w oul d c r e a t e 15, 0 0 0

- 35, 000 ne w j obs ( t hr oughout t he w hol e e c onom y)

due t o i nc r e a s e d pr oduc t i on by D e t r oi t a ut om a ke r s

. D e c r e a s e d pr oduc t i on by

f

or e i gn

- ow ne d t r a ns pl a nt s w oul d of f

s e t 10

, 000

- 19

, 000 j obs

, f o r a ne t i nc r e a s e of

5, 000

- 16, 000 ne w j obs

.

• U nde r l ow f ue l pr i c e s

, bu t w i t h l ow c ons um e r di s c ount r a t e s a s w e l l

, t he ne t

ga i n i n ne w j obs i s s m a l l e r ( 168 ne t ne w j obs )

, a s 11, 000 ne w j obs due t o

i nc r e a s e d pr oduc t i on by D e t r oi t a ut om a ke r s a r e ne a r l y f ul l y of f

s e t by r e duc e d

pr oduc t i on by f or e i gn

- ow ne d t r a ns pl a nt s

.

• O nl y i n t he c a s e w i t h l ow f ue l pr i c e s a nd h i gh c on s um e r di s c ount r a t e w oul d t he

m a r ke t

- w i de pr oa c t i ve f ue l e c onom y i nc r e a s e s r e s ul t i n j ob l os s e s

.



### P u b l i c P o l i c y I m p l i c a t i o n s

I n l i ght of our c onc l us i on t ha t t he opt i m a l s t r a t e gy f or a l l a ut om a ke r s i s a ggr e s s i ve f ue l

e c onom y i m pr ove m e nt

, e ve n w i t h $2

. 00/ ga l l on f ue l

, w hy ha s i t t a ke n a s t e a di l y r i s i ng f ue l

pr i c e f or f i ve ye a r s

, bi l l i ons i n l os t p r of i t

, a nd t e ns of t hous a nds of j ob l os s e s t o s t i m ul a t e

a c t i on by t he D e t r o i t a ut om a ke r s ? W ha t a r e t he ba r r i e r s t o i m pl e m e nt i ng t he opt i m a l

s t r a t e gy?

D e pl oyi ng ne w t e c hnol ogi e s t a ke s t i m e a nd m one y t o a c c om pl i s h, a nd t i m e a nd m one y a r e

i n s hor t s uppl y i n D e t r oi t

. T he c um ul a t i ve e f f

e c t s o f de c l i ni ng m a r ke t s ha r e

, r i s i ng f ue l

pr i c e s

, a nd unc om pe t i t i ve p r oduc t de ve l opm e nt a r e f or c i ng d r a s t i c a nd c os t l y c ha nge s a t

F or d, G M

, a nd D a i m l e r C hr ys l e r

. F or t he f i r s t t i m e i n m or e t ha n 20 ye a r s

, t he i r s ur vi va l i s

i n doubt

. G M a nd F o r d m a y ha ve j us t e nough c a s h f or one c yc l e of pr oduc t de ve l opm e nt t o

br i ng ne w ve r s i ons of t he i r f ul l pr oduc t l i ne s t o m a r ke t

. I t e m s s e e n a s i m por t a nt but

s e c onda r y t o ne w ve hi c l e de s i gns a r e not ge t t i ng f unde d.

P ubl i c pol i c y a c t i ons t ha t w i l l be a c c e pt e d by D e t r oi t a ut om a ke r s i n t he c ur r e nt s i t ua t i on

w i l l be a c t i ons t ha t e nha nc e t he i r a bi l i t y t o r e s pond t o c ha ngi ng m a r ke t c ondi t i ons

. O ur

r e s e a r c h s how s t ha t i nc r e a s e d f ue l e c onom y ha s t h e pot e nt i a l t o e nha nc e t he i r f l e xi bi l i t y,

but pr e s s i ng c onc e r n a bout w ha t a r e s e e n a s bi gge r i s s ue s m a ke a c hi e vi ng pr ogr e s s

c ha l l e ngi ng.

T o a de qua t e l y a ddr e s s publ i c pol i c y c onc e r ns a b out f ue l e c onom y i n t he c ur r e nt e c onom i c

e nvi r onm e nt r e qui r e s t he a c t i ve

, d i r e c t i nvol ve m e n t of i ndus t r y, l a bor

, gove r nm e nt

, a nd10 ot he r or ga ni z a t i ons i n t he s e a r c h f o r pol i c i e s t ha t a r e ge ne r a l l y a c c e pt a bl e t o a l l i nt e r e s t e d

pa r t i e s a nd, m o r e i m por t a nt l y, t ha t w or k

. N e w pol i c i e s a r e i ne vi t a bl e

. I f i ndus t r y l e a de r s do

not be c om e e nga ge d w i t h ot he r s t a ke hol de r s

, i t i s ve r y l i ke l y t ha t t he ne w pol i c i e s w i l l be

m or e one r ous

.

I m pr ovi ng t he f ue l e c onom y of A m e r i c a ’ s l i ght ve hi c l e f l e e t w oul d he l p r e duc e ou r

de pe n de nc e on oi l ( m uc h of w hi c h i s i n t he ha nds of uns t a bl e or hos t i l e r e gi m e s ) a nd

c ont r i but e s i gni f i c a nt l y t o r e duc i ng e m i s s i ons of p ol l ut a nt s a nd gr e e nhous e ga s e s

. O ur

r e s e a r c h i ndi c a t e s t ha t i m pr ovi ng t he f ue l e c onom y of D e t r oi t a ut om a ke r s ’ f l e e t s w oul d

a l s o r e duc e t he r i s ks t o p r of i t s a nd A m e r i c a n j obs of vol a t i l i t y i n f ue l p r i c e s

. R e duc i ng f ue l

c ons um pt i on ha s be c om e a na t i ona l pr i o r i t y f or l e a de r s f r om bot h pol i t i c a l pa r t i e s

. A n

e m e r gi ng c ons e ns us s e e s r e duc i ng f ue l c ons um pt i o n a s a m e a ns t o e nha nc e na t i ona l

s e c ur i t y, i nc r e a s e t he m a r ke t f l e xi bi l i t y of A m e r i c a n w or ke r s a nd c om m uni t i e s

, a nd he l p

a ddr e s s c l i m a t e c ha nge

.

T he r e a r e f our a r e a s t ha t a f or m a l c oa l i t i on of s t a ke hol de r s w i t h a f e de r a l m a nda t e t o

de ve l op pol i c i e s s houl d a ddr e s s : i m pr ovi ng f ue l e c o nom y, e nha nc i ng r e gul a t or y r a t i ona l i t y

a nd c e r t a i nt y, s uppor t i ng t he de ve l opm e nt of a dva nc e d t e c hnol ogi e s

, a nd bui l di ng a

dom e s t i c s uppl y c ha i n f or a dva nc e d t e c hnol ogy f u e l

- e f f i c i e nt ve hi c l e s

. T he s e ne e d t o be

c ons i de r e d i n c onj unc t i on w i t h t he ke y po l i c y l e ve r a ge poi nt s a t w hi c h i nt e r ve nt i ons c a n

ha ve s i gni f i c a nt e f f

e c t s : t he de c i s i on by c ons um e r s t o pur c ha s e a ve hi c l e

, t he de c i s i on by

a

ut om a ke r s of t he r a nge of ve hi c l e s w i t h di f f

e r e nt a t t r i but e s t o pr oduc e

, a nd t he de c i s i on by

s uppl i e r s of w hi c h t e c hnol og i e s t o de ve l op a nd p r o vi de t o t he a ut o m a ke r s

.

N o one w oul d que s t i on t he i m por t a nc e o f pu r c ha s e pr i c e ( c a pi t a l c os t ) i n c ons um e r s ’

ve hi c l e c hoi c e s

. T a x i nc e nt i ve s t o e nc our a ge c ons um e r s t o pur c ha s e f ue l

- e f f i c i e nt ve hi c l e s

a r e a l r e a dy pa r t of o ur pol i c y e nv i r onm e nt

, a s a r e t a x i nc e nt i ve s t o pur c ha s e i ne f f i c i e nt

S U V s a nd t r uc ks

. M os t obs e r ve r s be l i e ve t ha t a n i nc r e a s e i n t he f e de r a l e xc i s e t a x on

m ot or f ue l s w oul d not f i nd s uf f i c i e nt s uppor t i n C o ngr e s s

, ye t t he r e c e nt e xpe r i e nc e w i t h

hi ghe r f ue l pr i c e s ha s de m ons t r a t e d t he pow e r of r a i s i ng ope r a t i ng c os t s t o i nf l ue nc e

c ons um e r s ’ ve hi c l e c hoi c e s a nd t he r e by i m pr ove a ggr e ga t e f ue l e c onom y.

H ow e ve r i t i s di f f i c ul t f or c ons um e r

- f oc us e d i ns t r u m e nt s a l one ( i nc e nt i ve s a nd/ or f ue l

t a xe s ) t o a c hi e ve dr a m a t i c i m p r ove m e nt s i n f ue l e c onom y. A ut om a ke r s c a nnot r a di c a l l y

a l t e r t he i r pr oduc t m i x ve r y r a pi dl y

, no r do a l l c on s um e r s s w i t c h f r om one t ype of ve hi c l e

t o a not he r ove r n i ght

. W e ha ve s e e n s i gni f i c a nt e vi de nc e of t he be gi nni ng of a m ove f r om

S U V s t o c a r s by c ons um e r s

, a nd s om e a ut om a ke r s ha ve a c know l e dge d i t

, but t he p r e s e nt

c om pos i t i on of t he f l e e t i s no t goi ng t o c ha nge r a di c a l l y i n t he ne a r t e r m

. E nc our a gi ng t he

de ve l opm e nt of t e c hnol ogi e s t ha t i m pr ove t he f ue l e c onom y a l l ve hi c l e s e gm e nt s a c r os s t he

e nt i r e m a r ke t

, a r e ne e de d t o pr oduc e s i gni f i c a nt i m pr ove m e nt s i n f ue l e c onom y.

E nc our a gi ng a dva nc e d t e c hnol ogi e s a c r os s t he e nt i r e f l e e t o f ve hi c l e s c a l l s f or i ns t r um e nt s

t ha t i nc r e a s e t he por t f ol i o o f f ue l

- s a vi ng t e c hnol og i e s a va i l a bl e

, m a ke t he t e c hnol ogi e s now

or s oo n t o be i n t he por t f ol i o m or e a t t r a c t i ve t o a ut om a ke r s

, a nd/ or e nha nc e t he a bi l i t y o f

s uppl i e r s t o de ve l op a nd c om m e r c i a l i z e ne w t e c hnol ogi e s

.