October 1999

National Institute of Standards and Technology Technology Administration U.S. Department of Commerce

Economic Impacts of 

Flow-Control Machining Technology:

Early Applications in the

Automobile Industry

NISTIR 6373

ADVANCED TECHNOLOGY PROGRAM
NISTIR 6373

Office of Applied Economics

Building and Fire Research Laboratory

Gaithersburg, Maryland 20899

U.S. Department of Commerce

Technology Administration

National Institute of Standards and Technology

Economic Impacts of Flow-Control Machining Technologies:

Early Applications in the Automobile Industry

Mark A. Ehlen

October 1999

Prepared for:

Economic Assessment Office

Advanced Technology Program

National Institute of Standards and Technology

Gaithersburg, MD 20899

U.S. Department of Commerce

William M. Daley, Secretary

Technology Administration

Gary R. Bachula, Acting Under Secretary for Technology

National Institute of Standards and Technology

Raymond G. Kammer, NIST Director
iii

Abstract

This study investigates the impact of two new process technologies developed in the ATP Flow-Control

Machining Project: abrasive flow-control machining (AFCM) and non-traditional combustion chamber

sizing (NCCS). These new processes offer large potential benefits to manufacturers who need to increase

the functional precision and performance of cast-metal machine parts.

The new processes advance the state-of-the-art in the finishing of cast-metal parts that carry fluids in

interior passageways. Currently, these parts often have manufacturing imperfections which decrease their

precision and therefore functional performance. Finishing processes exist which correct these

imperfections, but they are time consuming and costly, relegating their use to high-value, low-volume

production applications. The goal of the Flow-Control Machining (FCM) Project, a joint venture between

Ford, GM, Extrude Hone, University of Nebraska at Lincoln, University of Pittsburgh, and the ATP, is to

develop two new automated and cost-effective finishing processes which—by smoothing, sizing, and

balancing passageways—markedly improve the performance of cast-metal parts. This collaborative

project is on track toward completing its goals; when successful, the new processes will have potentially

wide application in automobile, aircraft, diesel-injector, and other manufacturing industries. 

The first application of the FCM processes is to airflow components in passenger-car and light-truck

engines and is, therefore, the subject of this study. The new processes will allow automakers to

manufacture engines that have higher precision and performance. The processes can be used to increase

engine horsepower or fuel efficiency by an estimated six percent.

This study finds that under current market conditions automakers will likely use the FCM processes to

increase the fuel efficiency of their automobiles. For the past twenty-five years, automakers have adopted

fuel-efficiency technologies in an effort to meet federal CAFE fuel-economy regulations; the FCM

processes achieve the same objective but with lower design and manufacturing costs. Profit-maximizing

assumptions in the face of CAFE fleet regulations lead us to conclude that the first applications of the

FCM processes will be in the light-truck classes of automobiles, such as large utility vehicles. 

Using the historical adoption rate of technologies that enhance automobile fuel efficiency, we model the

near-term five-year implementation path of the FCM processes in the ATP project. Ford and GM are

familiar with the capabilities of the technology and have tested precursors to the processes on some

production lines. Analysis indicates that adoption by Ford and GM in 130,000 light trucks, representing

one manufacturing line for each company, would allow further production and sale of 116,000 of these

automobiles within current CAFE regulations. This additional production would increase annual domestic

product (GDP) by an estimated $142 million, annual personal income by $196 million, and annual tax

revenues by $34 million, and create 1,800 new manufacturing jobs. In addition, we model a 15-year,

longer-term implementation path, following the historical adoption rate of fuel injection technology. This

implementation to 80 percent of the light-truck market is estimated to allow further production and sale

of 1.6 million large-utility-class light trucks while staying within current CAFE regulations. The additional

automobile production is projected to increase GDP by $1.9 billion, annual personal income by $3.3

billion, and annual tax revenues by $527 million, and create 29,000 new manufacturing jobs.

Keywords: advanced technology program, automobile industry, CAFE, economic impacts, evaluation,

fuel efficiency, government technology programs, macroeconomic analysis, technology impacts.
v

Preface

The Advanced Technology Program (ATP) at its outset developed a multi-component evaluation strategy

geared to deal with the varied needs of a complex program. The strategy is designed to develop tools for

providing feedback to management on the program’s performance and to develop the capacity for meeting

the many external requirements of and requests for ATP program results. The strategy components are (1)

descriptive (statistical) profiling of applicants, projects, participants, technologies, and target applications;

(2) progress indicators derived principally from the ATP’s Business Reporting System; (3) real-time

monitoring of project developments by ATP’s staff; (4) status reports on the accomplishments of completed

projects; (5) microeconomic and macroeconomic case studies of project impacts; (6) methodological

research to improve the tools of longer term evaluation; (7) special-issues studies; and (8) econometric and

statistical analyses of portfolios of projects.

The ATP is completing its first decade, and the number of microeconomic and macroeconomic case studies

of ATP project impacts is growing. The study reported herein is the tenth detailed economic case study of

an ATP project, and the second ATP study to employ a macroeconomic model to estimate national economic

impacts of a technology resulting from an ATP-funded project. The first such study evaluated the impact

of a new dimensional control technology used to reduce variation in auto body assembly and improve the

quality of automobiles (the 2mm Project evaluated by CONSAD, Inc., 1995). This second study to use a

macroeconomic model deals with a process technology that is also expected to find its first application in

the automotive industry. In both of these cases, conditions were conducive to the use of a model to extend

the impact estimates from the firm level to the national level. This type of model is not appropriate for all

case studies.

Many of the technologies funded by the ATP have the potential for applications in multiple industries.

Indeed, the flow-control technology described in this study has many potential applications, including uses

in the automotive, aerospace, and manufacturing tooling industries, and possibly even in the medical

industry. However, considerable time is usually needed for new technologies to become widely adopted

within a given industry sector; even more time is required for diffusion to other sectors. Because of the long

time generally required for diffusion, the case-study evaluations of ATP projects have thus far focused on

only a single, near-term application of each of the resulting technologies. The case study herein similarly

focuses on the earliest expected single application of the process technology: to enable increased production

of light trucks within existing regulations for fleet fuel economies. But ATP’s evaluation program is

interested in advancing the understanding of technology diffusion, and it plans to support follow-on work

to evaluate the potential of the flow-control technology to cross industry lines, and to track its diffusion

within and across industry sectors. 

For up-to-date information on the ATP and its evaluation program, the reader is referred to ATP’s

homepage: http://www.atp.nist.gov. Up-coming competitions are announced, meeting schedules are posted,

funded projects are listed, evaluation is discussed at the Economic Assessment Office listing, and

publications are available for downloading. To be added to ATP’s mailing list, call 1-800-ATP-FUND.

To request copies of this and other ATP evaluation studies, call 301-975-3189. Your comments and

suggestions are welcomed.

Rosalie Ruegg

Director, Economic Assessment Office

Advanced Technology Program
vii

Acknowledgments

Thanks are due to Larry Rhodes, Ralph Resnick, and Hillary Gilmore of Extrude Hone Corporation,

William Swanteck and Terry McCarthy of Ford Motor Corporation, Richard McBride of General Motors,

William Slaughter of the University of Pittsburgh, and Robert Williams of the University of Nebraska at

Lincoln, who described engine design and the new manufacturing and finishing processes being

developed by the ATP-funded project.

Thanks are also due to David Cole of the University of Michigan Office for the Study of Automotive

Transportation, Frank Field III of the MIT International Motor Vehicle Program, Randy Miller of the

Department of Commerce, and Doug Reed of the Society of Automotive Engineers for sharing their

knowledge of the automobile industry. 

Thanks are given to Drs. Bill Boettinger and George Mattingly at NIST for their ideas about the potential

application of the flow-control machining processes to other, non-automotive products and processes. 

Thanks are also given to Jack Boudreaux, Harold Marshall, Jeanne Powell, and Rosalie Ruegg for their

comments and suggestions. Finally, special thanks are given to Stephen Weber for the numerous

discussions upon which this analysis was based and the excellent editorial advice and support which

brought the report to its final form.

Cover image courtesy of Visionary Design Systems, Inc. (http://www.vds.com)
ix

Executive Summary

This study investigates the impact of two new technologies developed in the ATP Flow-Control

Machining Project: abrasive flow-control machining (AFCM) and non-traditional combustion chamber

sizing (NCCS). These two processes, by enabling automobile manufacturers to increase engine

horsepower and fuel efficiency and decrease emissions, offer significant potential benefits. For example,

in the event that there is a significant decline in available petroleum products such as in the 1970s, the

processes could be used in all autos to decrease fuel consumption. In the event that government increases

car safety requirements and thereby vehicle weight, automakers can add these features and use the two

new processes to keep the fuel economy of their fleets within the CAFE limits. If the government

increases CAFE fuel economy requirements, automakers can meet these standards more easily. 

The two processes advance the state-of-the-art in manufacturing finishing. Currently, a manufactured

part that carries fluids through its interior passageways often has fabrication imperfections which reduce

the part’s “functional precision,” that is, its ability to precisely allocate and distribute the fluid. Even

though the geometrical design of the part may be precise, the fabrication process causes flow to deviate

from the precise level for which the part is designed. Furthermore, a part which carries fluids through

groups of passageways can have unbalanced and therefore inefficient flow. Non-traditional finishing

processes exist which can correct these imperfections; in fact, they have been used to significantly

increase the horsepower and overall performance of automobile-racing engines and aircraft engines. In

their current form, however, the processes are done manually, are time consuming, and are relatively

expensive. For these reasons they are only used in low-volume, high-value manufacturing.

The goal of the Flow-Control Machining Project, a four-year $7.9 million research joint venture between

three businesses, two universities, and the Advanced Technology Program (ATP) at NIST, is to develop

two new automated finishing processes and make them cost effective for large-production, low-value

manufacturing. The Flow-Control Machining (FCM) processes advance the state-of-the-art in

manufacturing by allowing manufacturers to more effectively fabricate parts to their intended functional

performance. To achieve automation and the resulting cost savings, these FCM processes need new

neural-network models, new methods of manufacturing control, and new forms of abrasion. The project

is on track toward completion of its goals; when completed, the processes and associated manufacturing

control equipment have the potential of significantly increasing functional precision and performance and

decreasing the cost of engines and other machines made in many industries, including turbine engine,

diesel injector, and rocket fuel orifice manufacturing.

The first application of FCM processes is aimed at increasing the functional precision of airflow in

automobile engines and is, therefore, the focus of this study. Current engine performance is limited by

fabrication-based restrictions and imbalances in airflow. The two processes under development, AFCM

and NCCS, could significantly increase engine horsepower and fuel efficiency by increasing the

functional precision of airflow and combustion. For example, the two processes could reduce a typical

automobile engine’s fuel consumption by six percent. The current forms of the two FCM processes are

used successfully in racing engines to increase horsepower, proving they are technically well suited for

low-volume, high-value specialty engines. The FCM Project, in developing neural-network algorithms,

process control methods, and new abrading techniques, makes the processes economically well suited for

high-volume, relatively low-value passenger-vehicle engines.
x

The FCM Project, begun in 1996, brought together members of industry who can successfully develop

these advanced processes: Extrude Hone Corporation, a company currently using manual flow-machining

fabrication and chamber sizing for low-volume, high-value automobile engines; the University of

Pittsburgh and the University of Nebraska at Lincoln, who have expertise in developing neural-network

models for process control equipment; and Ford Motor Company and General Motors, potential adopters

of engines produced with the new processes. Three companies acting as advisors—Roush Industries (an

engine designer), CMI Castings (aluminum castors), and ALCOA—complete the vertical integration of

the project, thereby increasing the likelihood of its success. While Extrude Hone, the University of

Pittsburgh, and the University of Nebraska at Lincoln receive ATP funding, Ford and GM are providing

their own R&D funds for participating in the project.

This study estimates the economic impact of applying the two new FCM processes to automobile engines.

It first makes an assessment of whether automakers will adopt the two processes to a significant degree,

by analyzing the current structure of automobile demand and supply and their effects on competition and

innovation. The study then charts the near-term and longer-term implementation paths of the FCM

processes and estimates the impacts on individual firms, the automobile industry, and the U.S. economy.

The two FCM processes have great potential impact on the automobile industry. They can be used in all

passenger-vehicle engines to increase and balance airflow, thereby increasing horsepower and fuel

efficiency and reducing emissions. More horsepower allows automakers to increase the value embodied

in a car—for example, its carrying capacity, options, and safety equipment—without compromising fuel

economy. More horsepower also allows automakers to put smaller engines in cars, reducing costs. More

fuel economy saves consumers fuel costs, especially important in times of tight energy supplies.

Decreased emissions reduce the threats posed to the environment. These technical improvements offer

enormous potential benefits to car buyers and the rest of the economy. From their participation in the

project, GM and Ford are familiar with the capabilities of the technology and have had the opportunity

to test it out over the course of the ATP project.

This study concludes that, under current market conditions and government policies, automakers will

likely focus first on using the two processes to increase the fuel efficiency of their larger automobiles.

Consumers, currently more concerned about options and capacity than fuel economy, are increasingly

demanding large vehicles such as small trucks and sport-utility vehicles. U.S. automakers, under intense

global competition in the small passenger-car market, are focusing on selling larger vehicles with their

higher value added and profits. Federal Corporate Average Fuel Efficiency (CAFE) regulations set

minimum fuel economies for each automaker’s entire fleet of cars and entire fleet of light trucks, and are

limiting the production of these large, low-fuel-economy vehicles. For the past twenty-five years,

automakers have adopted fuel-efficiency technologies in an effort to meet federal CAFE fuel-economy

regulations; the FCM processes achieve the same objective but with lower design and manufacturing

costs. Automakers can increase the fuel efficiency and therefore sales of their largest, most profitable

automobiles.

The new processes are likely to be implemented at a rate similar to that of other fuel-efficiency-enhancing

engine technologies. In the first years of implementation, an automaker typically tests a new process

technology on a small production line. Later—and higher—levels of implementation tend to be less

certain, since they may be affected by changing market and production conditions. This study therefore
xi

provides two estimates of the potential economic impacts of the FCM processes: a conservative estimate

of the most likely near-term implementation, and a less conservative, longer-term estimate.

The near-term estimate assumes that domestic automakers will use the FCM processes on a small

production line over a five-year study period. This estimate assumes specifically that:

! consumers will continue to have demand for large light trucks in excess of what

CAFE allows;

! total consumer demand for light trucks will remain fixed—therefore, new large lighttruck sales will come at the expense of the existing sales of smaller, higher-fueleconomy light trucks;

! automakers will use the FCM processes to increase the fuel efficiency of large light trucks

by six percent;

! the FCM processes make the added performance available at a cost of $5 per unit of

horsepower gained; and

! the federal government holds the CAFE passenger-car and light-truck fuel economy

requirements at their current levels (11.7 kilometers per liter [27.5 mpg] for passenger cars,

8.8 kilometers per liter [20.7 mpg] for light trucks).

The near-term estimate assumes that Ford and GM implement the processes to 130,000 large utility

vehicles (65,000 each) in their existing production. The resulting FCM-based increases in CAFE fleet fuel

economy allow the automakers to produce and sell an additional 116,000 light trucks with the technology

(a total of 246,000 vehicles then are made using the FCM processes). Given that the price of each new

large utility vehicle is $5,370 more than the average price of all other light trucks, our analysis estimates

that in the fifth year:

! annual sales revenues for Ford and GM increase by $623 million,

! annual gross domestic product (GDP) increases by $142 million,

! annual personal income increases by $196 million (which is more that the GDP

increase due to production shifting to higher-wage sectors that, in aggregate, use less

capital), 

! annual tax revenues increase by $34 million, and

! 1,800 new high-wage manufacturing jobs are created.

This estimate of impacts is sensitive to changes in the underlying technical and economic parameters.

For example, if the FCM processes yield a lower fuel-efficiency improvement than six percent,

automakers will be able to increase the sale of large light trucks by a lower amount. If future fuel prices

increase sharply, car buyers may decrease their demand for larger, lower-fuel-economy vehicles.

Automakers will then increasingly need fuel-efficiency improving technologies to keep these and other

sales. If, as is currently being proposed by the EPA, the light-truck emissions standards are tightened to

level of those for passenger cars, automakers will increasingly need and use the FCM processes to reduce

emissions.

The less conservative estimate of longer-term implementation is based on a diffusion path comparable

to that followed by fuel injection technologies in all cars. It assumes that domestic automakers will

implement the FCM processes over a 15-year period to 80 percent of all light trucks. Under similar
xii

market, production, and CAFE assumptions as in the near-term estimate, the longer-term implementation

would allow further production and sale of 1.6 million of the large-utility class of light trucks while

staying within current CAFE regulations. The additional production is estimated to increase GDP by $1.9

billion, annual personal income by $3.3 billion, and annual tax revenues by $527 million, and create

29,000 new manufacturing jobs.

Future work will investigate the use of the two FCM processes in other, non-automotive industries. The

work will survey industries for application of the processes, likelihood of adoption, and potential

economic impacts. Future work will also track diffusion of the technology within the automobile industry

and in other industry sectors.
xiii

CONTENTS

Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Preface ......................................................................... v

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

1 Introduction .................................................................. 1

2 The Flow-Control Machining Project .............................................. 3

2.1 Forming the ATP Joint Venture ................................................ 4

2.2 FCM Project Tasks and Roles of the Participants .................................. 4

2.2.1 Part 1: Abrasive Flow-Control Machining of Intake Manifolds and Intake Ports ....4

2.2.2 Part 2: Non-traditional Combustion Chamber Sizing (NCCS) ..................6

2.3 Potential Economic Benefits of the FCM Processes ................................ 8

3 Economic Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.1 Economic Impact Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.2 Process Implementation vs. Process Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.3 Scope of Estimated Economic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3.4 The REMI Macroeconomic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4 Assessing Implementation of the FCM Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4.1 Market Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

4.2 Market Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

4.3 Market Performance: Price, Profits, Costs, and Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

4.4 Market Performance: Adoption of New Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4.5 Likelihood of FCM Processes Being Adopted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.6 The Most-Likely Implementation Path for the FCM Processes . . . . . . . . . . . . . . . . . . . . . . 35

5 Economic Impacts of Near-Term Implementation in the Automobile Industry . . . . . . . . . . . . . . 37

5.1 Firm Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

5.2 Industry Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

5.3 Macroeconomic Impacts on the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

5.4 Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

6 Economic Impacts of Longer-Term Implementation in the Automobile Industry . . . . . . . . . . . . 53

6.1 Implementation to 80 Percent of the Light-Truck Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

6.2 Macroeconomic Impacts on the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

7 Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

7.1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

7.2 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

7.3 Suggestions for Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
xiv

CONTENTS (continued)

List of Appendices

A. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

List of Figures

Figure 1. Machining to Geometry vs. Machining to Function .............................. 3

Figure 2. Top View of Intake Manifold ............................................... 5

Figure 3. Cross-section of Cylinder Head and Engine Block ............................... 7

Figure 4. Economic Impact Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 5. An Example of Process Implementation and Process Diffusion . . . . . . . . . . . . . . . . . . . . 13

Figure 6. Economic Variables and Causal Relationships in the REMI Model . . . . . . . . . . . . . . . . . 16

Figure 7. Example of Estimating Economic Impacts Using REMI Baseline and Policy Forecasts . . 18

Figure 8. Dynamic Employment Response of REMI Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Figure 9. U.S. Passenger-Car and Light-Truck Market Shares: 1994 . . . . . . . . . . . . . . . . . . . . . . . . 24

Figure 10. U.S. Passenger-Car and Light-Truck Market Shares: 1975-1994 . . . . . . . . . . . . . . . . . . 25

Figure 11. Actual and Required CAFE Levels for Passengers Cars: Model Years 1978-1997 . . . . . 31

Figure 12. Actual and Required CAFE Levels for Light Trucks: Model Years 1978-1997 . . . . . . . 31

Figure 13. Engine Displacement, by Number of Cylinders: 1975-1991 . . . . . . . . . . . . . . . . . . . . . . 32

Figure 14. Engine Horsepower, by Number of Cylinders: 1975-1991 . . . . . . . . . . . . . . . . . . . . . . . 32

Figure 15. Horsepower (HP), Liter Displacement (LD), 

and Specific Power (HP ÷ LD) of Light Trucks: 1975-1996 . . . . . . . . . . . . . . . . . . 33

Figure 16. Qualitative Summary of Firm, Industry, and Macroeconomic Impacts . . . . . . . . . . . . . . 35

Figure 17. Historical Adoption Rates of Technologies that Enhance Fuel Efficiency . . . . . . . . . . . 37

Figure 18. Change in Supply and Demand for Light Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
xv

CONTENTS (continued)

Figure 19. Change in Supply and Demand for Aluminum Castings and Flow-Machining 

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Figure 20. The Impact of FCM Processes on Value Added and Returns to Labor and Capital . . . . 47

Figure 21. Average Annual Wages and Change in Employment, by Sector: Year 2004 . . . . . . . . . 50

Figure 22. Historical Adoption Rates of Technologies that Enhance Fuel Efficiency, and 

Longer-Term Implementation Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

List of Tables

Table 1. Sales and Average Fuel Economy of Light Trucks, by Class: 1996 . . . . . . . . . . . . . . . . . . 39

Table 2. Impact on Firms of Near-Term, Five-Year Implementation Path . . . . . . . . . . . . . . . . . . . . 43

Table 3. Impact on Industries of Near-Term, Five-Year Implementation Path . . . . . . . . . . . . . . . . . 45

Table 4. Annual Impact on U.S. Macroeconomy of Near-Term, Five-Year 

Implementation Path: Year 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Table 5. Change in Output, by Demand Categories: 2000-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Table 6. Change in Industry Output, by SIC: 2000-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table 7. New Distribution of LUV Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table 8. Annual Macroeconomic Impacts of Longer-Term, 15-Year Implementation: Year 2014 . 55

Disclaimer:

Certain trade names and company products are mentioned in the text or are identified in an illustration

in order to adequately specify the experimental procedure and equipment used. In no case does such

identification imply recommendation or endorsement by the National Institute of Standards and

Technology, nor does it imply that the products are necessarily the best available for the purpose.
1

1. Introduction

The primary mission of the National Institute of Standards and Technology (NIST) is to promote U.S.

economic growth by working with industry to develop and apply technology, measurements, and

standards. The Advanced Technology Program (ATP) at NIST supports this mission by providing costshare awards to industry to develop high-risk, “enabling” technologies which can ultimately increase

economic growth, the quality of jobs, and the quality of life that comes from such growth. 

ATP projects are designed to be partnerships between government and industry. Individual awards are

made to single firms or joint ventures of firms to produce technologies that enable the development of

new products, processes, and services across diverse application areas. Universities, state and federal

laboratories, and other non-profit institutions also participate in the projects as members of joint ventures

and as subcontractors. Awards are made based on rigorous peer-reviewed competitions designed to select

those proposals best qualified in terms of their cutting-edge technological ideas and potential for national

economic benefits. Emphasis is placed on the difference that ATP funding will make. Awards have

specific cost-share rules: for example, joint-venture participants pay more than half of the total project

costs, and each award has a set of specific goals and completion dates. Single-company awardees pay

all indirect project costs and may also cover some of the direct costs. 

The Flow-Control Machining Project is an ATP joint venture, its partners being Extrude Hone

Corporation, Ford Motor Company, General Motors, the University of Pittsburgh, and the University of

Nebraska at Lincoln. The four-year project began in 1996 and its total funding is $7.9 million; $4.0

million is provided by Extrude Hone, Ford, and GM, and the remainder is provided by ATP. The project

goal is to develop two finishing processes—herein called “FCM processes”—which increase the

functional precision of cast-metal parts which carry fluids in interior passageways. Its first targeted

application is to airflow in automobile engines, where the increase in functional precision can be used to

increase engine horsepower, increase fuel efficiency, reduce emissions, and reduce the cost of engines.

If successfully developed and implemented in the automobile industry, the FCM processes could have

significant economic impacts. If diffused into a wide array of industries, such as aerospace, manufacturing

tooling, and medical, the impact could be quite large. 

This report provides an economic impact assessment of the Flow-Control Machining Project in its first

targeted application, in the automobile industry. It assesses the likelihood that the automobile industry

will implement the FCM processes, establishes a likely implementation path, and develops estimates of

the economic impact of near-term and longer-term implementation.

Chapter 2 describes the two FCM processes, the joint venture participants and their roles, and the current

status of the project, including the technical challenges solved and those remaining. Chapter 3 outlines

the economic impact framework, and Chapter 4 assesses the likelihood that the automobile industry will

implement the FCM processes and describes the most-likely implementation path. Chapter 5 estimates

the economic impacts of applying the FCM processes in the automotive industry over a near-term, fiveyear period, and Chapter 6 follows with estimates from the longer-term implementation. Finally, Chapter

7 summarizes, concludes, and outlines further areas of research.
Design Measuring while Machining

Machining to Function

Design Machining Measuring

Machining to Geometry Flow Precision

Acceptable range

Cubic feet per minute

Flow Precision

Acceptable range

Cubic feet per minute

3

2. The Flow-Control Machining Project

Many industrial machines rely on internal parts that carry and meter fluids precisely. For example,

aircraft fuel-flow meters precisely measure, during flight, the amount of fuel used by the aircraft’s

engines; fuel injectors dispense precise amounts of fuel into engine combustion chambers. This

component precision is largely dependent upon (1) how well the part is designed to meter flow, (2) how

well existing machining techniques can create the part as it is designed, and (3) how well after-fabrication

testing can measure whether the part is functioning as designed. This three-part dependency for precision

is illustrated in the “Machining to Geometry” panel in Figure 1.

Figure 1. Machining to Geometry vs. Machining to Function

Errors in any one of these steps—or a sequential compounding of these errors—prevents the part from

being functionally precise, that is, from carrying fluid within an acceptable range. Most fluid-carrying

metal parts are machined to specific dimensions, which is often the designer’s best predictor of eventual

flow performance. However, there are limitations to machining to geometry. If the geometry is a poor

predictor of performance, or there are significant errors in machining, the part’s functional performance

will not reliably fall within the desired range. In the case of fuel injectors, if measuring indicates that

flow is outside the acceptable range, the injector is thrown away.

Manufacturers could see significant increases in functional precision if they could “machine to function,”

i.e., machine a part until it reaches a targeted functional flow or capacity. As the “Machining to Function”

panel in Figure 1 illustrates, measuring the function of a part while it is being machined has the potential

of reducing precision dependency to two steps. There exist several non-traditional finishing processes

which offer the potential for true “machining to function,” but they are limited, are in their early stages,

and are time consuming and costly. While these non-traditional processes have been used effectively in
 Based on discussion with Larry Rhoades of Extrude Hone on April 3, 1998. 1

 The manifold shown is for the 1996 Ford Contour SVT. 2

4

the low-volume, high-value production of aircraft turbine blades, they are too slow and costly for highvolume, relatively low-value applications such as automobile-engine components.

2.1 Forming the ATP Joint Venture

The ATP Flow-Control Machining Project was formed by industry partners whose common goal is to

advance the functional precision and performance of intake manifolds, intake ports, and combustion

chambers. Ford and GM, looking for new ways to increase the horsepower and fuel efficiency of their

engines while reducing emissions and cost, are participating as end users and component suppliers.

Extrude Hone Corporation, a company that produces abrasive flow-machining equipment for use by the

aircraft and diesel industries, would like to use the FCM processes under development to more closely

“machine to function” parts in a wide array of industries, including automobile engines. The University

of Pittsburgh and the University of Nebraska at Lincoln, having already performed research in advanced,

non-traditional machining techniques, are looking for “real world” tests and applications of their research.

While not direct members of the joint venture, Roush Industries (an engine designer), CMI Castings

(castor of aluminum intake manifolds and cylinder heads), and ALCOA participated as supply-chain

advisors, vertically integrating the project. Extrude Hone Corporation, the joint-venture leader, formed

the project by eliciting the support of these key industry and university partners to apply to the ATP.

There are multiple reasons why the FCM Project would not likely have formed without the direct

involvement of ATP. Ford and GM are unlikely to unilaterally adopt a new process that has not been

proven to work; the FCM processes are particularly challenging since both constitute a radical departure

in finishing processes—manufacturing directly to functional performance. Ford and GM are also unlikely

to directly collaborate on a new process, since they are direct competitors on routine business matters and

have concerns about federal antitrust-law enforcement. They tend not to fund the research of their

suppliers. The suppliers would not perform the research themselves; they generally do not have the

capital to do extensive in-house research—particularly not high-risk research. University researchers are

typically interested in doing their own research, not the research of a supplier to automakers, and are not

able to self-fund this type of research. In the words of Larry Rhoades, President of Extrude Hone, “this

project would not have occurred without ATP.”1

2.2 FCM Project Tasks and Roles of the Participants

The FCM Project is divided into two parts, each composed of tasks designed to extend the state-of-the-art

in a manufacturing finishing process.

2.2.1 Part 1: Abrasive Flow-Control Machining (AFCM) of Intake Manifolds and

Intake Ports

Most automobile engines have an intake manifold, such as that shown in Figure 2, which carries outside 2

air to the combustion chambers.
Air

entry

Intake

runner

Side runner

Side runner

5

Figure 2. Top View of Intake Manifold

Air enters the manifold through an air entry and is then divided to side runners. The airflow in each siderunner is then divided again to intake runners which then carry the air to intake ports in the cylinder head.

Valves in the ports control the entry of air into the combustion chamber. Once the air enters the chamber,

a fuel injector sprays gasoline into the air. This air-fuel mixture is then compressed and ignited by a

sparkplug. Combustion converts the mixture into power which pushes the piston, crankshaft,

transmission, and ultimately the tires of the vehicle.

The efficiency of combustion—its ability to convert fuel into power—is sensitive to the level and

distribution of airflow in the intake runners. Most intake manifolds and intake ports are cast from

aluminum, and imperfections in the casting process cause airflow to deviate from the level dictated by

the engine’s design. If flow is lower than desired, the engine will operate reliably but inefficiently. If

flow is much higher than desired, the engine will not operate reliably: the air-fuel mixture in the

combustion chamber may spontaneously detonate or “ping” due to over-compression. Because repeated

and prolonged detonation damages an engine, automakers typically design combustion to a lower-thanoptimal level of efficiency. If the level and distribution of airflow were more functionally precise,

significantly higher horsepower, higher fuel efficiency, and lower emissions could be obtained.

For the typical assembly-line car, the current state-of-the-art in manifold finishing is to use the castaluminum intake manifold “as is”; the size and internal smoothness of each manifold runner are

determined by the quality of the design and aluminum casting processes. Automobile engineers

conservatively tune the allocation of fuel so that detonation will not occur. For low-volume, high-value

specialty engines, the state-of-the-art is to use the Extrude Hone process called abrasive flow machining,

in which a viscoelastic media impregnated with grit smooths, sizes, and balances the intake manifolds and

intake ports. Each manifold is flow-machined, measured for airflow, flow-machined, measured for

airflow, and so on, until it has the desired level and distribution of airflow. The 1998 Ford Contour SVT

engine, voted one of the top ten engines for 1998 by Ward’s Autoworld, has Extrude Hone abrasive flow-
6

machined intake manifold and secondary intake ports. Abrasive flow machining is also used by every

major aircraft turbine engine manufacturer to increase the functional performance of rotor blades. The

machining is time consuming and expensive and therefore is limited to low-volume, high-value

production applications.

The first part of the FCM Project advances the state-of-the-art in finishing by using both in-process

measurement and neural-network models to control abrasive flow machining until the part reaches its

functional target (i.e., abrasive flow-control machining, or AFCM). Instead of determining the required

flow-machining by iteratively measuring airflow before and after machining, the required machining is

determined in “real time” using the characteristics of the viscoelastic flow-machining media. AFCM is

expected to increase the fuel efficiency of engines by four percent. This provides significant economic

benefits to automakers, who can increase horsepower and fuel efficiency, and to consumers, who, in the

case of improvements in fuel efficiency, would benefit from decreased fuel costs.

The AFCM part of the project has four tasks, most of which are now completed. Extrude Hone and the

University of Nebraska at Lincoln first outfitted existing abrasive flow-machining equipment with new

flow-control components and new monitoring equipment developed in this project. The machine

determines the required machining by using a neural-network model which has as inputs the data from

acoustic-emissions monitoring equipment, the pre-machining airflow, and the in-process, viscoelastic

flow characteristics. Extrude Hone and university researchers developed the initial neural-network model

which correlates media flow with after-machining measurements of airflow. The model is based on

rheology, continuum mechanics, computational fluid dynamics, and statistical design of experiments.

Ford Motor Company measured the increase in functional performance by running numerous

dynamometer and road tests on engines fitted with the abrasive-flow-control-machined manifolds.

In the second AFCM task, Extrude Hone built a laboratory prototype AFCM machine. In the third task

Extrude Hone verified the process by running the prototype machine on 5,000 intake manifolds, and then

tested the robustness of the neural-network algorithms by calibrating the machine on a completely

different cast-metal piece. In the final task, to be completed, the AFCM machine will be installed in a

joint-venture partner’s production line with a video link back to the Extrude Hone Technical Support

group. The current challenge for the AFCM part of the project is to integrate the acoustic emissions

equipment into a laboratory prototype of the AFCM online manufacturing cell.

As a result of the project, Extrude Hone and the joint venture partners will be able to apply the AFCM

process to a wider class of intake manifolds and ports. Extrude Hone and other machining industries will

ultimately be able to apply this flow-controlled machining to many non-automotive industries.

2.2.2 Part 2: Non-traditional Combustion Chamber Sizing (NCCS)

Most internal combustion engines, such as the one shown in Figure 3, have combustion chambers where

fuel is mixed with air and ignited. 
Aluminum

cylinder head

Combustion

chamber

Cylinder head

surface that is

machined flat

Engine block

Piston

7

Figure 3. Cross-section of Cylinder Head and Engine Block

Because of imperfections created during the casting of the aluminum cylinder head, the set of combustion

chambers in the head typically have different volumes, resulting in different levels of combustion.

Analogous to flow in intake manifolds, increasing the functional precision of combustion chambers will

result in more horsepower and fuel efficiency and lower emissions. 

For the typical assembly-line car, the current state-of-the-art is to machine the cylinder head surface (see

Figure 3) so that (1) none of the combustion chambers are small enough to induce detonation (pinging),

and (2) the chambers have volumes as similar as possible. As a result, some chambers will be larger than

what is optimal for efficient combustion. For the typical specialty car, the current state-of-the-art in

chamber sizing involves manually grinding the interior of all but the largest chamber until they match the

volume of the largest chamber. At least one foreign automaker has used electrochemical abrasion to size

chambers, but difficulties with loss of tool abrasive and build-up of residue have prevented further use.

In addition, this abrasion technique is relatively time consuming and expensive, relegating it to lowvolume, high-value production engines such as those used in racing or luxury-car engines. Precision

chamber sizing is challenging: given the irregular shape of most chambers, accurate measurements of

volume are difficult to make. 

The second part of the FCM Project, non-traditional combustion chamber sizing (NCCS), advances the

state-of-the-art in chamber sizing by developing an automated and cost effective process which can

accurately measure and size combustion chambers. Three sizing processes are to be evaluated for their

effectiveness: orbital abrasion, electrochemical machining, and electrochemical orbital abrading (a

hybrid of the first two processes). Electrochemical orbital abrading is relatively untested and needs

development. Laboratory equipment that applies these processes to the engine assembly line needs to be

developed and tested. 
 The compression ratio is the ratio of the volume of the air-gas mixture when the piston is at the bottom of its stroke to 3

the volume of the air-gas mixture when the piston is at the top of its stroke.

8

The potential benefits of precision chamber sizing are significant. If NCCS can decrease the mean

variation in chamber volumes to 5 percent of the compression ratio and increase the mean compression 3

ratio by 0.225, engine fuel economy can increase by two percent. When coupled with the AFCM process

on intake manifolds and intake ports, they can increase engine fuel efficiency by a total of six percent.

NCCS provides significant economic benefits to automakers who—as in the AFCM case—can increase

horsepower or fuel economy, and to consumers who would, in the case of increased fuel efficiency,

benefit from reduced fuel costs.

The NCCS part of the project has four tasks. In the first task, Extrude Hone is to evaluate the

effectiveness of the three aforementioned sizing processes. In the second task, Extrude Hone builds a

laboratory prototype machine based on the best of the three. The machine will individually size each

combustion chamber in the cylinder head; the goal is to reduce the volumetric variance between chambers

and to increase the mean compression ratio by 0.225. In the third task, Extrude Hone and GM verify the

process by machining 2,500 cylinder heads, and in the final task Extrude Hone installs the laboratory

prototype machine in a joint-venture partner’s facility for in-line testing of the process.

Currently, the joint-venture partners are evaluating a new, promising technique for measuring combustion

chamber volumes, and are continuing to investigate the use of electrochemical orbital abrading. The

challenge in this new abrading technique is determining how to combine the strengths of its two

precursors: orbital abrasion, with its ability to aggressively remove material but without a feedback

mechanism; and electrochemical machining, which, with its feedback mechanism, is able to more

precisely (albeit slowly) remove material. Successful development of this chamber sizing process will

allow automakers to increase the functional precision of all internal-combustion engines, resulting in

improvements in horsepower, fuel economy, and emissions. In addition, the volumetric sizing and

electro-orbital abrading processes developed by the project will allow other industries to increase the

functional precision of cast-metal parts which must hold precise volumes.

2.3 Potential Economic Benefits of the FCM Processes

At this point in the project, it appears that the FCM Project will likely meet its technical goal of a

six-percent increase in engine fuel efficiency. The AFCM process has been prototyped and a working

machine has been tested on manifolds. This process seems capable of generating the four-percent increase

in fuel efficiency expected. The NCCS process is in a more nascent stage but is on track toward

completion of its goals; it will likely generate an additional two-percent increase in fuel efficiency beyond

what the ACFM process generates. Therefore, throughout this analysis we assume that the FCM Project

will meet its technical objectives of developing the two processes and the automated, in-line equipment

required to implement them on intake manifolds, intake ports, and combustion chambers. The possibility

of partial technical success, i.e., an increase in fuel efficiency of less than six percent, is considered in the

sensitivity analysis in Section 5.4.

The AFCM and NCCS processes, by enabling automobile engine manufacturers to increase horsepower

and fuel efficiency and decrease emissions, offer significant potential economic benefits. For example,
9

in the event that there is a significant decline in available petroleum products (such as in the early 1970s),

the processes could be used in all autos to decrease fuel consumption. In the event that government

tightens car safety requirements and thereby vehicle weight, automakers can use the FCM processes, add

these features, and keep fuel economy within the CAFE limits. If the government increases CAFE fuel

economy requirements, automakers can meet these standards more easily. What the automobile industry

will likely do with the FCM processes, however, is dependent on actual current and future market

conditions, as explored in Chapter 4.
10
 Edwin Mansfield, The Production and Application of New Industrial Technology (New York, NY: Norton, 1977). 4

 For more discussion about the impact framework, see Mark A. Ehlen and Stephen F. Weber, Estimating Economic 5

Impacts of Government Technology Programs: Manufacturing Studies Using the REMI Model, NISTIR 6107

(Gaithersburg, MD: National Institute of Standards and Technology, 1997).

11

3. Economic Approach

Given that the AFCM and NCCS technologies meet all their technical objectives, a major goal of the

FCM Project is to have Ford Motor Company and General Motors implement the FCM processes on a

significant fraction of their automobiles. While potential application is wide, broad implementation is

uncertain. This type of uncertainty has been examined by Edwin Mansfield, who identified three

sequential probabilities of whether a new technology—such as the FCM processes—will be successful

for a firm:4

1. The probability that technical goals will be achieved;

2. Given technical success, the probability that the resulting process or product will be

commercialized; and

3. Given commercial success, the probability that the commercialized product will be

economically successful.

This study follows a qualitatively similar approach in determining the economic impact of the FCM

processes, dividing impact estimation into sequential tasks. The study first assesses the likelihood that

the FCM processes will achieve technical success; this is covered in the previous chapter. Second, given

this technical success, the study determines whether the new processes will likely be implemented (i.e.,

commercialized) by automakers and to what extent. Finally, given this implementation path, quantitative

estimates of impacts are developed, and alternative paths and their impacts are discussed qualitatively,

relative to the implementation path selected.

3.1 Economic Impact Framework5

Economic impacts are measured using the framework in Figure 4. The framework gives explicit structure

to economic impacts: ATP cost shares with the Joint-Venture Firms to develop the FCM processes (Step

1). Once the processes are developed, the Joint-Venture Firms and Other Firms (such as the aluminum

manifold and cylinder head casters) change the types, amount, and quality of the products they sell, and

this in turn changes the price and quantity of goods sold in industry markets (Step 2). Finally, changes

in market prices and quantities affect the larger, U.S. macroeconomy (Step 3). 
Joint-Venture

Firm(s)

 Other-firm

Industry(s)

ATP

Firm’s 

Industry(s)

U.S. MacroEconomy

The Economy

Step 1

Step 2

Step 3

 Other

 Firm(s)

Step 1 (ATP Project)

Step 2

Step 3

 For a description of the structure-conduct-performance paradigm, see J.S. Bain, Barriers to New Competition 6

(Cambridge, MA: Harvard University Press, 1956).

 We expect to address cross-industry diffusion of the FCM technologies in a later study. 7

12

Figure 4. Economic Impact Framework

Each arrow in Figure 4 represents a computation requiring specific economic tools. Step 1 describes the

microeconomic impact that the ATP has directly on individual firms. The ATP impacts firms directly by

cost sharing the development and implementation of the FCM processes. The new technical capability

enables firms to change the quality, quantity, and price of their goods, and this, in turn, affects their

revenues and costs. Microeconomic analysis can be used to see if implementation of the FCM processes

is consistent with firms’ profit-maximizing goals. Step 2 estimates how entire industries change as a

result of firm changes. The Step 2 framework used in this report is the structure-conduct-performance

paradigm, which states that the number and structure of firms in an industry determine those firms’ price 6

and non-price conduct—how they compete—which in turn determines industry performance, in particular

whether the FCM processes will be implemented and to what extent. Finally, Step 3 estimates the impact

of the industry changes on the U.S. macroeconomy. This report uses the REMI macroeconomic model

of the U.S. macroeconomy to estimate the national impacts resulting from FCM-process-based changes

to the automobile industry.

3.2 Process Implementation vs. Process Diffusion

In this study, we focus exclusively on implementation of the FCM processes within the automobile

industry and not its diffusion to other, non-automotive industries, although that potential also exists. The 7

economic benefits of implementation are modeled to flow only along market channels, that is, by firms
airplane

 assembler

airplane fuel-flow

meter manufacturer

... versus

diffusion of the

core, enabling

processes to the

airline industry

implementation path

of the FCM processes

diffusion paths of the core,

enabling

processes

engine manufacturer

Extrude Hone

automobile

assembler

Firm sales to

other

firms

or end

users

inputs

to

firm

Legend

Implementation

of the FCM

processes

in the

automobile

industry...

aluminum caster

Automobile Industry

Airplane Industry

13

selling either the processes themselves or products and processes made from them. ATP affects

automakers by cost-sharing research and development; automakers affect the auto industry by introducing

new, competitive technologies; and the automobile industry affects the rest of the economy, for example,

by increasing demand for other goods and services, selling more goods to other industries, and paying

more wages to workers. 

We use the term diffusion to describe how the FCM processes are transferred to other, non-automotive

firms and their industries. The processes can diffuse to these non-automotive industries via market means

(such as licensing to a supplier base) and non-market means (such as industry trade associations, journals,

and university researchers). Figure 5 gives an example of this difference between process implementation

and process diffusion. Of course, non-market mechanisms can also help foster adoption of the knowledge

within the automobile industry.

Figure 5. An Example of Process Implementation and Process Diffusion

Each black box in the figure represents a firm with inputs (on the left) and sales (on the right). In the

Automobile Industry panel, Extrude Hone sells FCM-process machines to the aluminum caster, the

aluminum caster sells FCM-manifolds and cylinder heads to the engine manufacturer, and the engine

manufacturer then sells FCM-process engines to the car assemblers. The benefits of FCM-process
14

implementation accrue via market channels—to the aluminum castor, the engine manufacturer, the car

assembler, and finally the consumer. The FCM processes diffuse to the airplane industry if the aluminum

casters apply their knowledge in automobile FCM-process machining to produce fuel-flow meters with

the FCM processes, or flow-meter manufacturers start developing meters and production processes based

on licensing of the core FCM processes from Extrude Hone. These core processes can be described as

the process of smoothing, sizing, and balancing interior cavities of metal parts based on manufacturing

models which use, in real-time, the characteristics of the grinding media and the metal part to grind

until the metal part has the desired characteristics (e.g., flow or volume capacity).

For example, AFCM of intake manifolds is based on a process which uses the characteristics of the

viscoelastic media and the intake manifolds runners to control grinding until each runner has the desired

(predicted) level of air flow. The combustion chamber sizing is based on a process which uses the

characteristics of the orbital abrading tool, the media, and the chamber volume to abrade until the

chamber reaches the desired (predicted) volume.

Cross-industry diffusion of the technology is feasible in the case of the FCM processes; it is not just a

hypothetical construct. For example, an industry product to which the FCM processes could diffuse is

the precision flow meter, a crucial component in products ranging from machines that manufacture

semiconductors to jet-aircraft fuel systems. The ability of these meters to accurately measure air and

liquid flow is sensitive to the internal geometry of the meter. The FCM processes could be applied to

these flow meters to increase the precision to which they measure flow. An example of an industry

process to which the FCM processes could diffuse is one form of metal casting in which hot, liquid metal

is shot from a circle of nozzles into a central high-pressure stream of air. The air vaporizes the liquid

metal into powder which deposits on a plate to form a predefined metal shape. The functional precision

to which the metal-powder manufacturing machine can fabricate a part is sensitive to the circle of nozzles

that shoot hot metal. Injector precision could be increased using the FCM processes, increasing the

quality of the metal-powder-produced part. As noted earlier, however, the quantitative impact estimates

made here do not address cross-industry diffusion.

3.3 Scope of Estimated Economic Impacts

This study focuses on the economic impacts on three entities: the firms directly and indirectly involved

in the FCM Project, the automobile industry, and the U.S. macroeconomy. It quantifies how these three

are expected to be changed by implementation of the technology: prior to the FCM processes, each

automaker sold certain models and numbers of cars, the cars were sold at certain prices, and the U.S.

macroeconomy generated a certain level of output, employment, and income. After the FCM processes,

these cars, prices, output, employment, and income change. The estimated changes throughout the

economy represent the economic impact of the FCM processes.

This study estimates only some of the market-based impacts that result from the direct sale of automotiverelated goods from firms to other firms or to consumers. For example, it does not estimate changes in

consumer surplus. It also does not estimate impacts resulting from the manufacture and sale of nonautomotive goods (such as surgical supplies made using the new processes), the licensing of the

technology to other automotive and non-automotive firms, or the observed but not-paid-for use of the

processes by engineers in other industries. There may be additional organizational benefits—such as
 For a comprehensive description of the REMI model, see G.I. Treyz, D.S. Rickman, and G. Shao, “The REMI 8

Economic-Demographic Forecasting and Simulation Model,” International Regional Science Review, Vol. 14, No. 3,

1992, pp. 221-253. For an example of the use of REMI in a study of the NIST MEP, see Ehlen and Weber, Estimating

the Economic Impacts of Government Technology Programs: Manufacturing Studies Using the REMI Model

(Gaithersburg, MD: National Institute of Standards and Technology, 1997).

15

influences on companies to collaborate—which have a downstream effect on firms’ economic

performance. This study, however, does not estimate these non-market organizational, knowledge, and

other benefits.

3.4 The REMI Macroeconomic Model8

This study uses the REMI (Regional Economic Modeling, Inc.) macroeconomic modeling software to

estimate the impact of industry changes on the U.S. macroeconomy. Given changes in automobileindustry output and prices caused by implementation of the FCM processes, REMI can estimate the total

effect on national output, employment, and personal income. Because of the central role the REMI model

plays in the study, a brief description is given here.

REMI is a computer program that models the U.S. macroeconomy as a whole, for example, the aggregate

production of goods and services, employment, personal income, consumer spending, wage and price

determination, and international trade. As illustrated by Figure 6, the program is a set of structural

equations that link economic variables—such as output, prices, and consumer spending—via theoretical

and empirical relationships. These relationships, parameterized with publicly available historical data,

model the fundamentally dynamic and circular nature of the real economy. For example, output generates

employment, employment generates income, income generates spending on new output, this new output

generates new employment, and so on. The program is typically used to simulate the effects of

hypothetical changes in this dynamic and circular economy. 

Variables are grouped to reflect their part in the causal linkages. The Output block contains variables

representing the amount of goods produced; the variables are divided both by SIC industry—e.g., SIC

35, Industrial Machinery and Equipment—and by the “demand category” of the good—consumption,

investment, government spending, or net exports. Within the Output block, an input-output matrix

determines inter-industry demand and final demand, by industry.

The Population & Labor Supply block contains variables that track population levels and migration

between regions of the country (which are not important in the single-region, national REMI model used

in the study). The Labor & Capital Demand block contains variables that track the factors that impact

firms’ decisions about how much product to produce, how many workers to employ, and how much

equipment and other capital to acquire. The Market Shares block contains variables that track, by

industry, the supply-side and demand-side market shares, i.e., the fractions of U.S. production sold to

domestic and foreign customers and the fractions of U.S. demand satisfied by domestic production and

foreign goods. The bottom block, Wages, Prices, & Profits, contains price-related variables such as the

wage rate, the cost of producing goods, the profitability of firms, and the sales prices of goods. All of

the aforementioned variables are used to both simulate an economic change and to measure the impacts

of it. 
Output

Population &

Labor Supply

Labor &

Capital

Demand

Market

Shares

Wages,

Prices, &

Profits

 U.S. Bureau of the Census, Survey of Current Business. 9

 U.S. Bureau of the Census, Quarterly Financial Report for Manufacturing, Mining, and Trade Corporations. 10

16

Figure 6. Economic Variables and Causal

Relationships in the REMI Model

Each economic relationship in the model is one of three types:

! a technical relationship: e.g., how much of the aluminum castings industry’s

output is used by the automobile industry as an input,

! a definitional relationship: e.g., what the national income accounts are, or 

! a behavioral relationship: e.g., how consumer demand for cars responds to changes

in personal income or automobile price. 

For example, the arrow pointing from Output down to Labor & Capital Demand represents a technical

relationship stating that industry output determines industry employment. The arrow pointing from Labor

& Capital Demand to Wages, Prices, & Profits represents technical relationships stating that the number

of workers and equipment in production determine wages and the prices of goods. 

The parameters in these relationships are estimated using publicly available 1969-1996 government data.

Gross domestic product (GDP) measures are obtained from the Bureau of Economic Analysis and the

Survey of Current Business. The data on employment, wages, and personal income come from the 9

Bureau of Economic Analysis and the Bureau of Labor Statistics. The cost of capital is computed from

data in the Quarterly Financial Report for Manufacturing and from the Survey of Current Business. 10
 U.S. Bureau of the Census, Government Finances (Revenue). 11

 It is possible that if the economy were at less than full employment—where not all those who can work do work, then 12

a government agency could hire employees with no loss of private sector jobs. We are, however, trying to model the

general behavior of the economy based on employment at the full-employment level.

 REMI simulations in which the government does not offset new spending with higher taxes or lower spending in other 13

areas have attracted unwarranted criticism of the REMI model itself. For example, see Edwin J. Mills, “Misuse of

Regional Economic Models,” Cato Journal, Vol. 13, No. 1, Spring/Summer 1993.

17

State and U.S. corporate profits tax rates are obtained from the Government Finances (Revenue) and 11

the Survey of Current Business. 

The REMI model is used to simulate the effect on the total economy of changes to components of it. An

analysis is carried out in two steps. First, a baseline forecast of the U.S. economy is computed in which

there is no change to the economy. Second, an alternative forecast is generated in which a set of

simulation variables model a change in the economy. The economic impacts of the policy are measured

as the differences between the baseline and alternative forecasts.

The set of input variables should be comprehensive and balanced. To be comprehensive, the set should

model all changes relating to the new policy, such as changes in industry output, prices, consumption, and

government taxation and spending. To be balanced, the set of variables should leave unchanged the

economic resources used to carry out the policy. For example, suppose the policy calls for an increase

in transportation spending. Unless taxes are increased, one of the input variables must be a decrease in

spending in another area. Similarly, when modeling a new government program that requires new staff,

the set of input variables should include a decrease in employees in other sectors. As a general rule, the 12

set of input variables should reallocate resources from one part of the economy to another.13

Figure 7 illustrates how REMI measures impact. Consider a government policy that increases spending

on the nation’s highway infrastructure. One possible impact of this spending is an increase in personal

disposable income (the income available to workers). The lower, solid line in the figure shows the

baseline forecast of personal disposable income over the 1996-2001 period (i.e., without the new

infrastructure spending); the upper dashed line shows the alternative forecast of income (with the new

infrastructure spending). REMI measures the impact of the new spending as the difference between the

alternative and baseline forecasts for personal disposable income.

It is important to consider the years in which impacts occur. In the REMI baseline forecast, all markets

are assumed to be in equilibrium—that is, supply equals demand in each—and national employment is

assumed to stay at its long-run trend level. In the alternative forecast, however, individual markets, much

like real markets, can have excess supply or excess demand, and employment can deviate from its

long-run trend. Since these disequilibrium conditions as modeled can last three to four years, measures

of impact in the first four years of a simulation do not necessarily represent permanent changes to

economy but rather include temporary changes which diminish as the economy regains equilibrium. For

this reason, the best measures of permanent impact occur at least four years after the simulated changes

have stabilized.
Alternative Forecast

Baseline Forecast

1996

$)

time

Personal

Disposable

Income ($)

2001

 O.J. Blanchard and D. Quah, “The Dynamic Effects of Aggregate Demand and Supply Disturbances,” American 14

Economic Review, Vol. 79, No. 4, 1989, pp. 655-673; and W. Nordhaus, “Policy Games: Coordination and Independence

in Monetary and Fiscal Policies,” Brookings Papers on Economic Activity 2, 1994, pp. 139-199.

18

Figure 7. Example of Estimating Economic Impacts Using the

REMI Baseline and Alternative Forecasts

Additionally, in the alternative forecast, REMI uses the results of recent research to characterize the

Federal Reserve’s efforts to control inflation. According to the resulting REMI model, the Federal

Reserve Board takes action designed to keep national employment rate and inflation rate at long-run trend

levels. The Fed’s underlying policy is based on the belief that there is a long-run, economically optimal

rate of employment which maximizes national employment without causing inflation. When employment

is higher than its long-run trend level, signaling the potential for inflation, the Federal Reserve Board

induces employment to decrease by increasing market interest rates. Higher rates increase the cost of

business investment, causing investment and employment to decline. Conversely, if employment is lower

than its trend level, the Federal Reserve Board decreases market interest rates to stimulate investment and

therefore new output and employment. According to researchers the Federal Reserve takes an average 14

of three years to respond to deviations from the trend line and to return employment to the long-run trend

employment rate. The long-run, steady-state measures of impact therefore occur at least four years after

the modeled changes have been introduced.

The net impact of both market and Federal Reserve effects on employment levels can be illustrated with

an example, shown in Figure 8. Consider an impact that increases output in a particular industry. In the

first few years, national employment increases above the trend, as new jobs are created in both that

industry and the industries that supply inputs to it. 
Increase in

employment

National 

Employment

Baseline forecast

Alternative forecast

Time

Zero change in longrun employment

19

Figure 8. Dynamic Employment Response of REMI

Model

REMI models the alternative forecast of employment, shown as a dotted line in the figure, as a dynamic

disequilibrium response that persists for three years, at which point the Federal Reserve Board is assumed

to raise market interest rates to ward off inflation (caused by the newly tighter labor markets). This rise

in rates increases the cost of capital, decreases investment, and decreases employment until the national

employment returns to its long-run, baseline-forecast level. By the fourth year the deviation of

employment from its trend is brought to zero. 
20
 Walter Adams and James W. Brock, The Structure of American Industry (Englewood Cliffs, NJ: Prentice Hall, 1995), 15

p. 69, Table 3-1.

 These companies were Olds, Cadillac, Buick, and Chevrolet. 16

 Adams and Brock, The Structure of American Industry, p. 66. 17

 Ibid, p. 69, Table 3-1. 18

21

4. Assessing Implementation of the FCM Processes

In this chapter we assess the likelihood that U.S. automakers will implement the FCM processes, and if

so, to what extent. The FCM processes should, in theory, be important to the automobile industry; they

make available engines that have higher horsepower, better fuel economy, and lower emissions. Under

current market conditions, some of these potential benefits may be more important than others to the

decisions of automakers. Near-term implementation of the processes will depend on current market

forces, and future implementation will depend on how these forces change over time.

The sheer size of this industry makes predicting technology implementation arduous. The industry

generates $352 billion in sales and $92 billion in gross domestic product (GDP). It directly employs over

800,000 workers in a supplier-manufacturing base comprising over 4,000 plants in 48 states; another

900,000 workers are indirectly employed in 30,000 dealer franchises. Sometimes called “an industry of

industries,” the sector has a complex production and management structure designed to respond quickly

to changes in consumer taste, production needs and costs, and competition among firms. 

Because of this size and complexity, implementation assessments based solely on the current specific state

of the industry may be misleading. Current conditions may not represent general trends. Longer-term

assessments based on the historical, current, and expected future behavior of the industry give a stronger

foundation for predicting technology implementation. Indeed, the U.S. automobile industry has changed

dramatically since its inception in the 1890s. Fueled by the public’s continually increasing reliance on

automobiles, it has evolved through at least five eras to its current state of heavy market competition and

cost cutting. In the first era, from the 1890s to the 1910s, many independent companies formed to

produce cars based on a wide variety of power-train technologies. As many as 33 independent companies

were selling cars with gasoline, steam, and electric engines. Ford Motor Company ushered in a new era

by rationalizing these alternative technologies. It produced cars with a standardized power train and

produced them on a large, efficient scale. In doing so, Ford was able to significantly lower its production

costs and the prices of its cars. By 1923, Ford had 46 percent of U.S. market share. 15

General Motors, built from a consolidation of independent car companies, led the third era, shifting 16

focus from the Ford strategy of standardization and specialization to selling a diverse set of products.

While Ford sold the Model T “in any color as long as it was black,” GM sold “a car for every purse and

purpose.” GM blanketed the market with a wide variety of cars and modified them each year with 17

styling changes and convenience improvements. By increasing the costs of design, tooling, and

production, GM increased what it believed was the replacement demand for cars. By 1933, GM had 41

percent of U.S. market share, and Ford’s share had dropped to 21 percent. 18
 In 1998 Chrysler merged with Daimler-Benz to form DaimlerChrysler. 19

 For a description of the structure-conduct-performance paradigm, see J.S. Bain, Barriers to New Competition 20

(Cambridge, MA: Harvard University Press, 1956).

American Automobile Manufacturers Association (AAMA), Motor Vehicle Facts & Figures 1997, p. 46. 21

 Ibid, p. 64. 22

 Consumers and businesses each currently account for 50 percent of new-car purchases. 23

22

Consolidation continued in the era from the 1930s to the 1970s, as the number of U.S. automakers

declined from twelve to just three: General Motors, Ford Motor Company, and Chrysler Corporation.

Together, they constituted 96 percent of U.S. market share. From the 1970s to the present, however,

foreign car companies significantly increased their sales to U.S. buyers and eventually their production

in the United States as well. Today, only two U.S. car companies remain, GM and Ford, reflecting the

current trend of global consolidation of auto producers.19

Our main questions are: given this history, will current and future market trends motivate the two U.S.

automakers, both of whom are participating in the ATP project, to implement the FCM processes? If so,

what type of vehicles will utilize the processes and to what extent? We answer these questions within the

context of the structure-conduct-performance paradigm, a useful causal framework for assessing 20

technology implementation. The paradigm states that the structure of buyers and sellers in a market

determines the market’s conduct and ultimately its performance. Germane to this study, the framework

helps us examine the current and future structure of automobile buyers and sellers, how this structure

affects the price and non-price conduct of sellers, and how this conduct (and government policies) affect

the performance of the market—the price and quantity of goods sold and the utilization of new

technologies, such as the FCM processes.

4.1 Market Structure

The market for automobiles is composed of distinct buyers and distinct sellers. According to the structureconduct-performance paradigm, how cars are bought and sold—and, most importantly, whether the FCM

processes will be implemented—depends on the structure of buyers and sellers.

Automobile Buyers

Automobiles are an important, often necessary part of life in the United States. Domestically, there are

550 passenger cars per 1,000 people, the highest ratio in the world, and the annual miles traveled per 21

car has been steadily increasing. Most U.S. buyers fit within two broad categories: consumers who 22

purchase individual cars for themselves, and businesses—such as rental-car agencies, business firms, and

government agencies—who purchase fleets of cars. 23

Short-run demand for new cars is strongly influenced by changes in the economy. Since a car purchase

represents a major investment and can be delayed by keeping one’s current car, new-car demand is
 A REMI panel data study of consumer purchases on “Vehicles and Parts” found automobile demand to be almost twice 24

as income elastic as it is price elastic (1.42 vs. -0.82; see Regional Economic Modeling Incorporated, “Panel Study of

Consumer Purchases," mimeo, May 1998). Earlier studies (during the 1920s through 1960s) found income elasticities

in the 1.0 to 4.0 range (Lawrence J. White, The Automobile Industry Since 1945 (New York: MacMillan Publishing Co.,

Inc., 1971), pp. 94-95).

25 Over the 1980-1995 period, the share of household expenditures going to vehicle purchases increased from 7% to 8%

of all expenditures, but the cost of housing increased from 29% to 32%, health care from 4.5% to 5.4%, and

entertainment from 4.5% to 5.0%. The largest decrease in percent spending was for food, dropping from 19% to 14%.

AAMA, Motor Vehicle Facts & Figures 1997, p. 61.

The U.S. driving population increased 2.9 percent annually between 1967-1975, 1.9 percent annually between 1975- 26

1985, and 1.1 percent annually between 1985-1995. Ibid, p. 56.

 Ibid, p. 39. 27

 Gasoline prices increased drastically as a results of the two OPEC-related oil crises in the 1970s. 28

 Center for Transportation Analysis, Transportation Energy Data Book, Oak Ridge National Laboratory Report ORNL- 29

6898, August 1996, Table 1.3.

 See Murrell, Hellman, and Heavenrich, “Light-Duty Automotive Technology and Fuel Economy Trends Through 30

1993,” p. 7, Figure 15.

 For example, a National Highway Traffic and Safety Administration report, “The Effect of Decreases in Vehicle 31

Weight on Injury Crash Rates,” (Washington, D.C.: NHTSA, 1997) found that a 45.4-kilogram (100-pound) decrease

in the average light-truck weight results in an increase of 1,800 incapacitating injuries to the light-truck occupants.

 A study conducted in 1980 and in 1994 compared the ranking of vehicle attributes which new-car buyers considered 32

most important. In 1980, fuel economy was the 2 most important attribute and safety features were 9 ; in 1994, fuel nd th

economy was ranked 15 and safety features 4 (AAMA, “Environmental Responsibility,” web site th th

http://www.aama.com/environmental/cafe3.html, September 14, 1998). Regarding safety, a 1997 J.D. Power and

Associates survey found that 59 percent of new-car buyers surveyed said that they “definitely wanted” anti-lock brakes,

32 percent wanted “smart” passenger air bags, 23 percent wanted day running lights, and 18 percent said they wanted

electronic traction control (J.D. Power and Associates, “1997 APEAL Feature Contenting Report,” Agoura Hills, CA,

1997).

23

affected greatly by changes in: personal income, car price, the prices of substitutes (e.g., used cars, 24

leased cars), market interest rates, and non-automobile purchases (e.g., medical expense, entertainment).25

Underlying trends indicate that long-run demand for new cars may be leveling off or even declining. The

size of the U.S. driving population has leveled off and the average life of a passenger car has increased 26

from 6.6 years in 1980 to 8.6 years in 1996. The preferences of U.S. car buyers have changed over 27

time. From the 1960s to the 1980s, these buyers preferred smaller cars, owing to a change in consumer

taste and a marked increase in gas prices. With gas prices currently about half of what they were in 28

1975, consumers are now shifting back to large vehicles which weigh more, protect occupants better, 29 30 31

and have more interior space, but which have relatively poor fuel economy. These are increasingly in 32

the “light-truck” class of automobiles, including small trucks, mini-vans, and sport utility vehicles. 
Passenger Cars

Chrysler: 10%

Ford: 20%

GM: 32%

Transplants: 23%

Imports: 15%

Light Trucks

Ford: 29% Chrysler: 24%

GM: 29% Transplants: 9%

Imports: 9%

AAMA, Motor Vehicle Facts & Figures 1997, pp. 16-17. 33

 Ibid, p 20. 34

 Adams and Brock, The Structure of American Industry, p. 69. 35

 R.M. Heavenrich and K.H. Hellman, Light-Duty Automotive Technology and Fuel Economy Trends Through 1996, 36

Technical Report EPA/AA/TDSG/96-01 (Ann Arbor, MI: U.S. Environmental Protection Agency, 1996), Appendix E.

 Transplants are foreign-owned automobile plants located in the United States. 37

24

Automobile Sellers

Seller concentration is very high in the U.S. automobile market. The two U.S. automakers are General

Motors and Ford Motor Company, with combined 1996 retail sales of 4.5 million passenger cars and 33

4.0 million light trucks. While as early as 1985 these two had 88-percent market share, in 1994 they 34 35

accounted for only 52 percent of domestic passenger car sales and 58 percent of domestic light truck

sales, as shown in Figure 9. The light-truck market is increasingly important to GM and Ford, as domestic

buyers switch from passenger cars to light trucks. In 1998, U.S. light-truck sales exceeded passenger-car

sales for the first time.

Figure 9. U.S. Passenger-Car and Light-Truck Market Shares: 1994

For the past 6 years, Ford and GM have been steadily losing passenger-car market share to foreign firms.

As shown in Figure 10, the foreign share, consisting of imports and transplants, grew from 18 percent 36 37

in 1975 to nearly 48 percent in 1994, concurrent with the rise in the number of foreign nameplates sold

domestically. Japan and other foreign car producers that initially concentrated on selling small cars in

the U.S. have branched out to large cars, luxury cars, and light trucks.
Passenger Cars

foreign producers domestic producers

Year

1975 1979 1983 1987 1991

0

20

40

60

80

100

Light Trucks

foreign producers domestic producers

Year

1975 1979 1983 1987 1991

0

20

40

60

80

100

 AAMA, Motor Vehicle Facts & Figures 1997, p. 13. 38

 In 1993 the Big Three—GM, Ford, and Chrysler—operated 38 plants distributed across the United States, Canada, 39

and Mexico. Adams and Brock, The Structure of American Industry, pp. 71-73.

 See Michael J. Smitka, “The Invisible Handshake: The Development of the Japanese Automotive Parts Industry,” 40

Business and Economic History 19 (1990): pp. 163-171.

Adams and Brock, The Structure of American Industry, p. 76. 41

25

Figure 10. U.S. Passenger-Car and Light-Truck Market Shares: 1975-1994

This decline in domestic-firm share is less threatening if world sales are strong. Domestic automakers

had combined 1996 world market share of 23 percent, and this share is increasing, but largely due to 38

economic growth in Mexico and Canada, which may not last. The potential for passenger-car export

growth is very limited, since the world supply of new cars far exceeds world demand. As well, the

potential for light-truck export growth is limited, since these vehicles have relatively poor fuel economy

and the price of gasoline abroad is very high. With world-sales growth uncertain and the number of

domestic buyers constant or declining, regained sales will need to come from domestic markets.

The spatial integration of automakers continues to change dramatically. GM and Ford have historically

been integrated vertically, horizontally, and internationally. Starting in the 1930s and up to recently, GM 39

and Ford further increased vertical integration by buying supplier companies, thereby internalizing

automobile-parts production. By the early 1990s GM and Ford produced the majority of their parts inhouse. In the 1980s, Ford and GM increased vertical integration by purchasing minority stakes in rental

car agencies, the single largest business buyer of fleets of cars. Recent efforts, however, are to drastically

reduce vertical integration to reduce costs and to be better able respond to changes in consumer 40

preferences. In an effort to reduce costs and remain responsive to changes in market demand, first-tier 41

and second-tier suppliers are producing an increasingly larger fraction of the total value of a car. 
 For example, the automakers may coordinate prices by first announcing “preliminary” planned price changes and then, 42

once having seen each others’ prices, announce their “final” price changes. In another example, in 1981, when the federal

government put restraints on the number of Japanese imports into the U.S., Japanese automakers started exporting their

larger, higher-priced cars. GM, Ford, and Chrysler then followed the import-car price increases with price increases of

their own.

 The average payment period of new-car loans has increased from 45 months in 1980 to 52 in 1996. AAMA, Motor 43

Vehicle Facts & Figures 1997, p. 59.

 Leases as a percent of new-vehicle retail transactions has increased from 3.5 percent in 1985 to 27.2 percent in 1996. 44

Ibid, p. 42.

 Program cars are cars that automakers sell to rental companies and buy back after a short period, allowing the 45

automakers to sell them as used cars.

White, The Automobile Industry Since 1945 (New York: MacMillan, 1971), pp. 94-95. 46

26

To sum up, U.S. car buyers are increasingly demanding larger vehicles. Ford and GM, once garnering

most of domestic sales, are now steadily losing passenger-car market share to an increasing number of

foreign car companies. Light-truck sales and market share, however, remain strong. To compete more

effectively, Ford and GM are divesting of supplier and buyer businesses to cut costs and to better respond

to changes in market conditions. 

4.2 Market Conduct

These recent changes in market structure have caused marked changes in the competitive behavior, or

market conduct, of GM and Ford. We divide this behavior into price conduct and non-price conduct.

Analysis of conduct helps determine the likelihood that the automakers will implement the FCM

processes.

Price Conduct

Prior to the 1970s, most U.S. buyers purchased from the Big Three: GM, Ford, and Chrysler. The pricing

of these firms was interdependent and oligopolistic, each recognizing that avoiding serious price

competition—especially “price wars”—was in their collective best interest. In the 1920s and early 1930s,

Ford led with price announcements and the other manufacturers followed with prices close to Ford’s or

saw their sales decline. After World War II, General Motors led price announcements in a similar way,

with Ford and Chrysler following with close prices. Since the 1970s, this three-firm oligopoly has

transformed into a more competitive market where automakers set prices more independently. Currently

there is no clear leader-follower price conduct, although a certain amount of coordination still exists.42

In addition to directly competing on sticker price, Ford and GM are reducing the total purchase cost of

a car, through marketing, incentive, and service programs. These programs include increasing the period

of the car loan, offering cash rebates, lowering loan interest rates, subsidizing leases, selling program 43 44

cars, and offering warranty and buyer-protection programs. 45

Several studies appear to agree that, indeed, car price matters greatly to car buyers, especially as the car

becomes larger and more specific in vehicle class and manufacturer. One study found the price elasticity

for all new cars to be between -0.5 and -1.5, while another found the elasticity for large cars to be about 46
 Andrew N. Kleit, “The Impact of Automobile Fuel Economy Standards,” Federal Trade Commission Working Paper 47

No. 160, February 1988, Technical Appendix, p. 3.

 For example, acceleration and top speed tend to decrease as fuel economy increases; see Murrell, Hellman, and 48

Heavenrich, “Light-Duty Automotive Technology and Fuel Economy Trends Through 1993,” p. 25.

 S. Berry, J. Levinsohn, and A. Pakes, “Automobile Prices in Market Equilibrium,” Econometrica, Vol. 63 No. 4, July 49

1955, pg. 870. The 100-percent “model” increase compares with (only) a sixty-percent increase in automakers selling

in the U.S. over the same period; AAMA, Facts & Figures 1997, pp. 15, 80.

 Car prices increased 18 percent more per year than general inflation. 50

27

-3.0 and that of a particular brand to be about -10.0. This means that automakers can increase sales by 47

lowering prices relative to other vehicles in its class; that is, they can compete on price. As the number

of sellers in the car and light-truck markets increase, price competition becomes increasingly important.

Non-Price Conduct

Automakers spend considerable effort determining what consumers’ key needs and desires are and then

developing a product strategy for cars with these characteristics. These characteristics include styling,

options, horsepower, and fuel economy, the latter two of which tend to be mutually exclusive.48

Automakers also engage in non-price competition through advertising, the introduction of new car

models, and research and innovation. For example, prior to intense foreign competition in the 1970s, the

Big Three often avoided “radical” product innovation or technological improvements, instead making

only styling changes each year. More recently, as the number of sellers has increased and domestic-firm

share has decreased, automakers have been aggressively non-price competing. For example, the total

number of models offered increased 100 percent over the 1974 to 1988 period, significantly more than

the increase in the number of automakers selling in the United States. GM and Ford have been 49

rigorously competing on a non-price basis with Japanese companies which, after mastering shorter

development cycles, lean production techniques, just-in-time delivery, and small batch production, have

shifted from selling inexpensive utilitarian cars (similar to the Ford strategy in the 1920s) to the current

strategy of extensive product diversity (similar to the GM strategy in the 1930s). 

To summarize, the increased number of sellers in the market and decreased domestic-firm market share

have drastically increased Ford’s and GM’s need to compete, both in price and non-price terms; Ford and

GM will likely be early adopters of the FCM processes if the processes allow them to better compete in

either or both of these terms.

4.3 Market Performance: Price, Profits, Costs, and Quality

This increased price and non-price competition among automakers ultimately affects market prices,

profits, and production costs, and the non-price qualities of new cars in the market. Regarding market

prices, while car prices have tripled in real terms over the 1967-1984 period alone, current prices are 50

expected to be flat and may decline 2 percent over the next few years. This price decline is not caused

by reduced income or other long-run market conditions: in 1996, the first year that car prices declined,

personal income increased 5 percent, general inflation increased 3 percent, and car sales increased by 2.2
 AAMA, Facts & Figures 1997, pg 60. 51

 One study (S. Berry, J. Levinson, and A. Pakes, “Automobile prices in market equilibrium,” Econometrica, Vol 63, 52

No. 4, July 1995, pg. 882, Table VIII) estimated profits (as measured by markup over marginal cost) to be between 16

percent of price for small cars and 29 percent for large luxury cars. Another study (P. Goldberg, “Product differentiation

and oligopoly in international markets: the case of the automobile industry,” Econometrica, Vol. 63. No. 4, July 1995,

pp. 891-951) found similar profits for similar car categories.

 GM has set up a system of worldwide competitive bidding, which saves an estimated $4 billion per year. See Fine, 53

St. Clair, Lafrance, and Hillebrand, The U.S. Automobile Manufacturing Industry, p. 60.

 Ibid, p. 65. 54

 For example, Fine, St. Clair, Lafrance, and Hillebrand (1996) found that the Big Three improved their productivity 55

from 24.1 direct labor hours per vehicle in 1989 to 20.7 hours per vehicle in 1994, a figure similar to that for Japaneseowned plants; Fine, St. Clair, Lafrance, and Hillebrand, The U.S. Automobile Manufacturing Industry, p. 10.

 In the 1998 Initial Quality competition conducted by J.D. Power and Associates, three of the seven car categories were 56

won by U.S. cars, three by Japanese cars, and one by a German car. In the light truck category, two of the six categories

were won by U.S. cars and five by Japanese cars (there was one tie). See J.D. Power & Associates, “1998 Initial Quality

Study 2,” June 3, 1998.

28

percent. All else being equal, car prices should have risen; instead, they declined by 1 percent. This price 51

decline (i.e., market-performance change) is caused by price competition (i.e., conduct) that follows from

stable or declining demand for cars, an increase in the number of foreign firms selling domestically,

decreasing domestic-firm market share, and decreasing prospects for long-term world market share (i.e.,

market structure).

Industry profits are largely a function of car size and of demand, the latter being sensitive to business 52

cycles and other economic conditions. Passenger-car profits have declined sharply as a result of severe

competition from foreign producers. Overall profits, however, have recently been large, owing to

increased sales of large, profitable light trucks and to massive cost cutting. 

Historically, production costs have been high due to the lack of competition, resulting in lax raw-materials

procurement, excess overhead, vertical collusion between the automakers and labor unions, and multilayered bureaucracy. Only in the last 10 years has price competition caused U.S. producers to markedly

increase efficiency in raw materials procurement, to increase recycling of tooling, and to make parts

management more efficient. Costs have also been drastically reduced in marketing, distribution, and 53

retailing (the latter of which represents 20 to 30 percent of the cost of a new car ). 54

Regarding quality, competition has forced U.S. automakers to increase the quality of their cars while

keeping costs down. U.S. automakers have closed the labor productivity gap and quality gap with the 55 56

Japanese, but generally still require more production units per model to be economically efficient.

Product development times have improved as well: the average time to market of U.S. automakers has

fallen to 52 months, below the Japanese average of 55 months in the early 1990s. Entire automobile subassemblies, such as the power train and dashboard, are increasingly made by others than the automakers,

improving component quality and reducing costs. 
 The rate at which a market adopts new technologies is sometimes called its dynamic efficiency. 57

 See Adams and Brock, The Structure of American Industry, p. 154. 58

Adams and Brock, The Structure of American Industry, p. 154.. 59

 Ibid. 60

 AAMA, Motor Vehicle Facts & Figures 1997, p. 53. See also Fine, St. Clair, Lafrance, and Hillebrand, The U.S. 61

Automobile Manufacturing Industry, p. 41.

 Light-duty vehicle petroleum consumption was and is significant; for example, it is currently 43 percent of all U.S. 62

petroleum consumption. National Research Council, Automotive Fuel Economy: How Far Should We Go? (Washington,

D.C.: National Academy Press, 1992), p. 13.

 The Clean Air Acts of 1970 required 90-percent reduction in the level of hydrocarbons (HC) and carbon monoxide 63

(CO) by 1975 and a similar reduction in nitrogen oxide (NO ) by 1976. x

29

4.4 Market Performance: Adoption of New Technologies57

Most important to our analysis is determining whether current and future market conditions will cause

the domestic industry to adopt new technologies such as the FCM processes. Except for the period during

the 1940s, when independent car producers were a particularly fertile source of product innovations,58

relatively few technological changes have been made to automobile technology. Laurence White stated

(in 1971), “the major features of today’s automobiles—V-8 engines, automatic transmissions, power

steering, and power brakes—are all WWII innovations. The suspension, ignition, carburetion, and

exhaust systems are fundamentally the same. Only the pressure of Federal regulation on air pollution has

effected any change in these last three systems.” John De Lorean noted (in 1981), “today’s transverse- 59

engine, front-wheel-drive layouts differ little from the British Leyland mini of 25 years ago.”60

General Motors and Ford previously relied heavily on their parts suppliers for technological advances,

allowing these suppliers to absorb the initial costs and risks. Currently, the influx of foreign automakers

and the resulting competition are creating a market where new technologies are increasingly used if they

generate new sales, decrease costs, or both. Toward this end, domestic automakers invest heavily in R&D.

GM and Ford both have large research departments: General Motors is the top corporate investor in R&D,

spending $8.9 billion in 1996, and is the largest private employer of PhDs. Ford Motor Company is

second in R&D spending and has 650 full-time scientists and engineers. 61

Effects of Federal Fuel Economy and Emissions Policies on Technology Adoption

One of the largest factors affecting the sale of automobiles in the U.S. is federal regulation of fueleconomy and emissions. In 1975 the federal government, responding to increased oil consumption and 62

uncertainty regarding the availability of oil reserves, passed the Energy Policy and Conservation Act. The

act required automakers selling cars in the United States to increase by 1985 the Corporate Average Fuel

Efficiency (CAFE) of their passenger-car fleets and light-truck fleets to 11.7 kilometers per liter (27.5

miles per gallon [mpg]) and 8.8 kilometers per liter (20.7 mpg). It drastically affected the production

decisions of automakers, since at the time they were not producing fleets with fuel economies—or

emissions levels —even close to the required levels. According to two studies, pollution emissions 63
 T. Bresnahan and D. Yao, “The nonpecuniary costs of automobile emissions standards,” Rand Journal of Economics, 64

Vol. 16 No. 4, Winter 1985, p. 451. These include nonpecuniary costs such as decreased driveability.

 D. Jorgenson and P. Wilcoxen, “Environmental regulation and U.S. economic growth,” Rand Journal of Economics, 65

Vol. 21 No. 2, Summer 1990, p. 316.

 AAMA, Automobile Facts & Figures 1997, pp. 80-81. In the light truck figure,“Domestic Fleet” data prior to 1992 66

is for two-wheel drive vehicles. Due to lack of data availability in and after 1992 the “Domestic Fleet” data is for

domestic and import two-wheel drive and four-wheel drive combined.

30

controls added $1,270 in compliance-related costs to each car and reduced automobile industry output 64

over the 1974-1985 period by 15 percent. By 1985, automakers had achieved the required emissions 65

and CAFE fuel efficiencies. Past and recent changes that automakers have implemented to increase fuel

efficiency include:

! reductions in vehicle weight, including the use of light-weight aluminum and plastic

components; 

! decreases in the exterior dimensions of the car (concurrent with increases in interior

volume); 

! the use of fewer cylinders, fuel injection, microprocessor-based engine-control

systems;

! catalytic systems;

! increases in drive-train efficiency, such as front-wheel drive;

! better aerodynamics; and

! reductions in tire-rolling resistance and other frictional losses. 

Indeed, as seen in Figures 11 and 12, over the 1986-1997 period the Big Three were able to develop and 66

sell fleets of cars and light trucks whose fuel efficiencies are very close to the required levels.

Since the Energy Policy and Conservation Act was passed, many of the original factors which motivated

the CAFE requirements have diminished: known oil reserves have increased since the 1970s, the price

of gasoline has dropped to levels prior to the oil shocks, and total fuel consumption per vehicle has been

reduced substantially. There is new international concern, however, about the link between automobile

pollution and global warming, spurring new (albeit unsuccessful) efforts to increase the CAFE

requirements to as high as 17.0 kilometers per liter (40 mpg). Furthermore, the shift of consumer taste

to large light trucks has increased interest in making the light-truck class of vehicles abide by the more

stringent passenger-car CAFE and emissions regulations.

While CAFE legislation discourages the sale, or supply, of fuel-inefficient vehicles, there is also

legislation which discourages the demand for large, low-mpg automobiles. This legislation imposes "gas

guzzler" taxes on buyers of low-mpg vehicles, and these taxes have increased substantially since their

inception. The tax on new cars that get less than 5.3 kilometers per liter (12.5 mpg; combined city and

highway driving) has increased from $550 in 1980 to $7,700 in 1991, while the tax on cars with 9.4 to

9.6 kilometers per liter (22.0 to 22.5 mpg) has increased from zero to $1,000. While these taxes increase

the real price of cars, consumers are still increasingly purchasing low-mpg light trucks, due to the shift

in tastes and the low price of gasoline. In fact, consumer demand is so strong that automakers, seeking
Federal Standard Domestic Fleet

Year

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996

16

18

20

22

24

26

28

30

Federal Standard Domestic Fleet

Year

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

15

16

17

18

19

20

21

22

31

to meet their CAFE targets, sometimes shift consumer purchases away from large cars to small cars by

increasing the price on their large cars and decreasing prices on small cars.

Figure 11. Actual and Required CAFE Levels for

Passengers Cars: Model Years 1978-1997

Figure 12. Actual and Required CAFE Levels for 

Light Trucks: Model Years 1978-1997

Industry will likely implement the FCM processes if there is a current and future need for increased

horsepower and fuel efficiency, and if the processes are cost effective. As it turns out, for the past 20
8-cyl

4-cyl

6-cyl

All cars

Model Year

Liter

Displacement

4.92

6.55

3.28

1.64

8-cyl

4-cyl

6-cyl

All cars

Model Year

Horsepower

32

years Ford and GM have drastically modified automobile engines so that they meet consumers’ increasing

demand for large vehicles that, as a fleet, satisfy CAFE requirements. As seen in Figures 13, 14, and 15,

automakers have been consistently and simultaneously decreasing engine size and increasing

horsepower, that is, increasing an engine’s specific power (horsepower per liter displacement). Increasing

specific power has allowed them to put smaller, more fuel-efficient engines in increasingly larger

vehicles. Port fuel injection, four-valve engines, and the FCM processes are examples of technologies

that increase specific power.

Figure 13. Engine Displacement, by Number of

Cylinders: 1975-1991

Figure 14. Engine Horsepower, by Number of

Cylinders: 1975-1991
Year

1975 1978 1981 1984 1987 1990 1993 1996

0

50

100

150

200

250

300

0.3

0.4

0.5

0.6

0.7

0.8

0.9

LD

HP

HP ÷ LD

0.0098

0.0147

0.0131

0.0115

0.0082

0.0066

0.0049

 Heavenrich and Hellman, Light-Duty Automotive Technology and Fuel Economy Trends Through 1996, p. 7, Figures 67

3 and 4.

 AAMA, Motor Vehicle Facts & Figures 1997, p. 82. Figure is expressed in 1996 constant dollars. 68

33

Figure 15. Horsepower (HP), Liter Displacement (LD), and

Specific Power (HP ÷ LD) of Light Trucks: 1975-1996

As Figure 14 illustrates, domestic automakers have used this increased specific power to increase the

horsepower of engines. But the specific power increase can also be used to keep fuel efficiency constant

as the weight of vehicles increases. Indeed, light-truck weight has increased by sixteen percent and

passenger-car weight by five percent over the 1987-1996 period, while fuel efficiencies have remained

essentially the same.67

Effects of Federal Safety Regulations on Technology Adoption

Another factor affecting industry technology implementation is safety regulations imposed on new cars.

These regulations target air bags, side impact panels, and front and rear crumple zones, most of which

add weight. They also add costs, an average of $130 to the price of a car over the 1990-1995 period.68

As consumers increasingly demand larger automobiles, and as federal regulations increase the safety

requirements placed on cars and light trucks, Ford and GM constantly look for new ways to increase the

fuel efficiency of their vehicles.

4.5 Likelihood of FCM Processes Being Adopted

Given these current and expected future characteristics of the automobile industry, the FCM processes

are likely to be adopted. They can be used to increase horsepower, fuel efficiency, or both, and will be

inexpensive when compared to competing horsepower and fuel-efficiency enhancing technologies. FCM-
34

based horsepower gains allow automakers to add weight-increasing features to a vehicle without

compromising fuel economy. For example, styling options and safety features are key product

characteristics to many car buyers. These features, however, add weight, thereby reducing performance

characteristics such as acceleration and top speed.

Participation of two large U.S. automobile manufacturers in the vertically structured joint venture

includes them in the technology development process. This inclusion both signals their interest in the

technology and positions them for its early adoption.

The fleet of light trucks currently sold by Ford and GM just barely satisfies federally required CAFE fuel

economy. The FCM processes allow automakers to increase the fuel efficiency of their highly demanded

and highly profitable large vehicles, increasing the fleet’s average fuel economy, and therefore enable

them to sell more of the profitable light trucks. Fuel efficiency gains can also reduce the “gas guzzler”

tax imposed on a car, thereby reducing the real price to consumers. The FCM processes can also be used

to produce vehicles with a combination of horsepower and fuel efficiency increases.

The FCM processes are a relatively low-cost alternative to other engine performance technologies.

Increasing performance by switching to fuel injection or 4-valve combustion chambers involves a

“radical” change in the design of the engine (adding or changing parts). Implementing the FCM processes

would require no changes in parts and only minor changes to design, fabrication, and tuning. The FCM

processes do not fundamentally change engine assembly, a distinct advantage over other efficiencyenhancing technologies that have historically been adopted, such as fuel injection and four-valve engine

designs. Automakers can use the FCM processes to substitute smaller, less costly engines in their cars:

for example, if an automaker currently uses a 2.79-liter (170-cubic-inch) engine to produce 143

horsepower, FCM processes that increase specific power by six percent would enable the automaker to

use a 2.64-liter (161-cubic-inch) engine and still get the same 143 horsepower. Engines can also be made

at a lower cost if the FCM processes displace more-costly technologies such as four-valve combustion

chambers or dual-fuel systems. From their participation in the ATP-funded FCM project, GM and Ford

are becoming familiar with the capabilities of the technology and testing it on some production lines.

Given current and expected market trends, U.S. automakers are likely to use the FCM processes to

increase the fuel efficiency of their larger, more profitable light trucks. Buyers continue to demand larger

vehicles with more federally imposed, weight-adding safety requirements. Domestic sellers, facing

increasing competition from foreign firms and declining market share, are competing heavily in

passenger-car price, options, and styling. Whereas domestic passenger-car demand is far less than

domestic supply, demand for large light trucks is far more than supply. To make more of them and still

satisfy CAFE, domestic automakers must find new ways to increase fuel efficiency. The FCM processes

allow them to increase the sale of these vehicles and stay within the federal CAFE fuel economy

requirements.

Estimates of the cost to implement the FCM processes and historical data on actual fuel-efficiency and

emissions costs suggest that the FCM processes are a cost effective alternative to competing technologies.

For the past four years the average horsepower per car has increased from 118 to 126 (Figure 14) and the

increase in retail prices attributable to emissions improvements (fuel efficiency, exhaust emissions) has
$203

(126&118) horsepower ' $25.38

! Extrude Hone produces flowcontrol and chamber sizing

machines

! Automakers use FCM

processes to increase production

and sales of large vehicles

! Facilitates joint venture and

provides partial funding for

development of processes

! Aluminum casters increase

production of manifolds and

cylinder heads in response to

automakers’ new production

! U.S. gross domestic product

increases

! High-wage manufacturing

jobs increase

! Average wages and personal

income increase, increasing

consumption (and production)

of all goods and services.

! Government spending and

revenues increase

! Aluminum casting industry

increases output

! Extrude Hone’s industry

increases output

! Automobile industry

increases output and keeps

prices constant.

ATP

Joint-Venture 

Firms Industries Macro Economy

Other Firms Other Firms’ Industries

AAMA, Motor Vehicle Facts and Figures 1997, p. 56. 69

 Based on discussion with Larry Rhoades of Extrude Hone on April 3, 1998. 70

35

been $203. If these price increases reflect costs that automakers have incurred to increase horsepower 69

while keeping fleet fuel efficiency unchanged, the automakers have spent

 per horsepower gained for fuel efficiency improvements and emissions

controls. The cost of the FCM processes, on the other hand, is expected to be in the range of $3 to $5 per

horsepower gained per car. Given that the average horsepower of large-utility vehicles is estimated to 70

be 200 and the anticipated horsepower improvement from the AFCM and NCCS processes is six percent,

a conservative estimate of the cost to Ford and GM of implementing the FCM processes in light-truck

engines is (200 horsepower) × (0.06) × ($5 per horsepower per engine) = $60 per engine, far less than

the average cost of existing fuel efficiency and emissions technologies. 

4.6 The Most-Likely Implementation Path for the FCM Processes

Implementation of the FCM processes will follow a specific path in the automobile industry. Figure 16,

an application of the impact framework in Figure 4, gives a qualitative summary of the assumed path, in

terms of actions taken and the impacts of implementing the FCM processes to increase the fuel efficiency

of large automobiles. 

Figure 16. Qualitative Summary of Firm, Industry, and

Macroeconomic Impacts
36

ATP impacts firms by cost sharing the development of the FCM processes. These firms then produce the

technologies, implement them on the automobile-engine production floor, and increase production and

sales. Extrude Hone Corporation produces the new machines and sells them to the aluminum casters,

who make the FCM machines part of their manifold and cylinder head finishing processes. The new

production by automakers, Extrude Hone, and the aluminum casters create new output for their industries

(SIC 3711, SIC 3541, and SIC 3365, respectively). These industries then impact the general U.S.

macroeconomy by creating jobs, income, and consumption. ATP and the Flow-Control Machining

Project also affect the U.S. economy directly by changing government spending (on the program) and tax

revenues (the difference between program costs and increased taxes generated by the economic impacts).

(The dotted line across the top of Figure 16 indicates government spending for the ATP Flow-Control

Machining Project.) The next two sections give more complete definitions of the assumed near-term and

longer-term implementation scenarios, and make quantitative estimates of their impacts.
 Murrell, Hellman, and Heavenrich, “Light-Duty Automotive Technology and Fuel Economy Trends Through 1993,” 71

p. 14, Figure 12.

 Studies of the diffusion process show that adoption can be characterized well by an ogive curve such as the cumulative 72

logistic. See W. Baldwin and J. Scott, Market Structure and Technological Change (Chur: Harwood, 1987), pp. 128-144;

and C. Thirtle and V. Ruttan, The Role of Demand and Supply in the Generation and Diffusion of Technical Change

(Chur: Harwood, 1987), pp. 77-124.

37

5. Economic Impacts of Near-Term Implementation in the

Automobile Industry

Given that the FCM processes are successfully developed and broadly implemented, they will impact (1)

Ford, GM, Extrude Hone, and the aluminum casters that make intake manifolds and cylinder heads; (2)

the industries in which these firms operate; and (3) the U.S. macroeconomy. This chapter sequentially

describes the potential economic impacts on these three of the most-likely, near-term implementation of

the processes. Chapter 6 describes the impacts of a longer-term implementation of the processes.

The rate of FCM-process implementation depends on both automaker production needs and the maximum

possible adoption rate of the process technologies. The rate and level of implementation achievable can

be estimated from historical adoption rates of other fuel-efficiency enhancing technologies, examples of

which are shown in Figure 17.71

Figure 17. Historical Adoption Rates of Technologies that

Enhance Fuel Efficiency

These fuel-efficiency technologies have been implemented to varying degrees. Fuel injection and frontwheel drive, both following somewhat S-shaped curves, have achieved majority shares of the market. 72
mCAFE #

j

I

i'1

Ni

j

I

i'1

Ni

mi

,

 U.S. Department of Transportation, National Transportation Statistics 1998, Table 1-33. 73

38

Three-valve engines and throttle body injection, on the other hand, reached 10% of the market before

diminishing in use. Each of the displayed technologies, however, has a similar initial five-year period

of implementation. We assume the FCM processes will at least achieve the five-year implementation rate

common to all of the displayed technologies. We model the near-term, five-year implementation as Ford

and GM each applying the FCM processes to a single line of their vehicles. The following sections

describe this implementation and its impacts. Based on the experience of these other fuel efficiency

technologies, the FCM processes may go on to achieve majority market share thereafter, or may diminish

in use.

5.1 Firm Impacts

Use of FCM Processes by Automakers

If Ford and GM each use the FCM processes on a portion of their existing line of light trucks, and the

processes increase fuel economy by six percent, Ford and GM can produce and sell more of these vehicles

and still satisfy CAFE fleet fuel-economy requirements. The CAFE formula uses a harmonic mean, in

which low-fuel-economy vehicles are more heavily “penalized” than they would be in, say, an arithmetic

mean. Given an existing portion of production to which the FCM processes are applied, we can determine

the maximum additional production which will allow an automaker to still satisfy its CAFE requirement.

CAFE Fuel Economy Formula

Ford and GM each produce a fleet of light trucks whose CAFE fuel economy must be greater than or

equal to the required level. The CAFE formula for determining compliance of an automaker’s fleet is

(1)

where mCAFE is the required minimum fuel economy, I  is the number of CAFE vehicle classes, N i is the

number of class-i vehicles sold, and m is the kilometers-per-liter (miles-per-gallon) fuel economy of class i

i. The light-truck m is 8.8 kilometers per liter (20.7 miles per gallon) and the passenger-car m is CAFE CAFE

11.7 kilometers per liter (27.5 mpg). To illustrate how the formula is used, Table 1 shows the sales and

average fuel economy of each light-truck class in 1996 (in both kilometers per liter [kpl] and miles per

gallon [mpg]), along with the computed CAFE fuel economy for the entire group.73
(391%2202%1230%370%1379%641)

391

11.2% 22028.1 % 12309.7 % 3707.3 % 13799.1 % 6417.7

' 8.6 kilometers per liter (kpl) ,

 Each automaker, however, may still be individually satisfying the 20.7 mpg requirement. Indeed, both domestic 74

automakers are currently producing fleets of light trucks whose fuel economy meets the federally required minimum

level.

 See footnote 54 for evidence that large vehicles have higher profits than small vehicles. 75

 This is required so that automakers have a profit-maximizing incentive to use the FCM processes. If the most 76

profitable light truck already gets more than 8.8 kpl (20.7 mpg), then increasing its sales, with or without the FCM

processes, will improve the CAFE fleet fuel economy; in this case, the FCM processes are not needed.

39

Table 1. Sales and Average Fuel Economy 

of Light Trucks, by Class: 1996

Class (1000s) (%) (kpl) (mpg)

Ni ii Share m m

Small pickup 391 6.3% 11.2 26.3

Large pickup 2,202 35.4% 8.1 19.0

Small van 1,230 19.8% 9.7 22.7

Large van 370 6.0% 7.3 17.2

Small utility 1,379 22.2% 9.1 21.3

Large Utility 641 10.3% 7.7 18.1

All classes 6,213 100.0% 8.6 20.26

The fuel economy for “All classes” listed at the bottom of the table is computed as

(2)

which indicates that the CAFE fuel economy of all light trucks sold in the United States in 1996 was

actually below the required level of 8.8 kpl (20.7 mpg).74

Estimating the Additional Sales Allowable from a Six Percent Increase in Fuel Efficiency

Automakers will likely first apply the FCM processes on light trucks since per-unit profits are greater than

that for passenger cars. Assuming that the most profitable light trucks have fuel efficiencies below the 75

required level of 8.8 kpl (20.7 mpg), the automaker can use the FCM processes to increase fuel 76

efficiency, thereby increasing allowable sales. We model Ford and GM each increasing the production

of their profitable large utility vehicles (the “Large Utility Vehicle” [LUV] class in Table 1). The

allowable change is estimated by using the CAFE formula and the 1996 distribution of light-truck
(

" jik " Ni

N ̄ ' jI

i'1 Ni

ni ' Ni/N ̄

(

jik " Ni

"

 Ford and GM in actuality have markedly different compositions of light truck production, but we are discussing the 77

FCM-technology-based production increase as a generic decision to be made by firms in general.

 Note again that, while the actual requirement of each automaker’s light-truck fleet is 8.8 kpl (20.7 mpg), to simplify 78

construction we are modeling the representative automaker’s decision process as being subject to a constraint of 8.6 kpl

(20.26 mpg).

 This is a conservative assumption since light-truck demand is increasing and often comes at the expense of new 79

passenger-car sales. The sum of vehicle car demand and truck demand, however, is relatively fixed; see AAMA, Motor

Vehicle Facts & Figures 1997, p. 23.

40

production in Table 1 as the current truck distribution of a “representative automaker” who wants to use

the FCM processes to change its distribution of sales.77

Some additional variables are needed to calculate additional allowable sales. Since our representative

automaker’s fleet is assumed to currently be exactly at the CAFE required level of fuel economy, the 78

automaker will have to implement FCM processes on part of the existing fleet in order to increase

production. We denote the LUV class of light trucks as the kth class, and let be the fraction of the kth

class that gets the FCM processes and $ be the increase in fuel efficiency achieved with the FCM

processes. Assuming (conservatively) that total consumer demand for light-trucks is fixed, new LUV

sales must then come at the expense of reduced sales in the other light-truck classes (Table 1). If these 79

reductions occur as a fixed proportion of each non-LUV light-truck class, then the term 

represents the purchases that will shift from non-LUV to LUV vehicles. Finally, we denote 

as the total number of light trucks produced and as the production share of each class. 

After substituting these variables into equation 1, the automaker’s problem can be formulated as follows.

Given the fraction of existing production the automaker is willing to apply the FCM processes to, it

must choose the shifted-production share such that the average kilometers per liter (miles per

gallon) of its fleet is not less than the CAFE level, that is, it must choose such that 
mCAFE #

Nk % j

ik

"Ni % j

ik

(1&")Ni

(1 & ()

Nk

mk

%

(Nk % j

ik

"Ni

(1 % $)mk

% j

ik

(1 & ")Ni

mi

' N ̄

(1 & ()

Nk

mk

%

(Nk % j

ik

"Ni

(1 % $)mk

% (1 & ") j

ik

Ni

mi

' (1 & ()

nk

mk

%

(nk % "j

ik

ni

(1 % $)mk

% (1 & ") j

ik

ni

mi

&1

.

" '

1

mCAFE

& nk

mk

1 & ($

(1 % $) & j

ik

ni

mi

(1&nk)

(1 % $) mk

& j

ik

ni

mi

.

( ' 130,000

641,000 ' 0.20

jik "Ni

41

(3)

Solving this equation for ", 

(4)

Assuming that the automaker uses the FCM processes on 130,000 LUVs in its existing production

(representing Ford and GM lines of 65,000 units each), the fraction . The largest

increase in production of LUVs which still satisfies CAFE, expressed as the shift in consumer purchases

, is therefore
j

ik

"Ni ' j

ik

" N n  ̄ i

' " N ̄ j

ik

ni

' " N ̄ (1&nk)

'

1

mCAFE

& nk

mk

1 & ($

(1 % $) & j

ik

ni

mi

(1&nk)

(1 % $) mk

& j

ik

ni

mi

N ̄ (1&nk

)

'

1

8.6 & .1037.7

1 & (.20)(.06)

1.06 & 0.04365

(1&.103)

(1.06)(7.7) & 0.04365

(6,213,000) (1&.103)

' 116,000 additional LUVs.

×

 The figure of $5,370 is computed as the difference between the price of the GMC Suburban and the sales-weighted 80

average price of all other light trucks. Source of sales and price data: Automotive News, Market Data Book 1997

(Detroit, MI: Crane Communications, 1997), pp. 42-56.

42

(5)

Said another way, by using the FCM processes to increase the fuel economy of 130,000 LUVs by six

percent, the automaker can produce and sell 116,000 more LUVs (with the FCM processes) and still

satisfy CAFE requirements. 

As compared with other light trucks and passenger cars, LUVs have greater carrying capacity, protect

their occupants better in collisions, drive better in inclement weather, and have larger towing capacity.

These LUVs are in high demand, as seen by their very high profit margins. Since their sticker price is

estimated to be $5,370 more than the weighted average price of all other light-truck classes, combined 80

annual revenues of the two automakers increase by (116,000) ($5,370) = $623 million.
 This is supported by the fact that the capital fraction of output for the aluminum casting industry is 11 percent, 81

suggesting that an allowable capital cost for producing $60 of additional casting output would be $60 × .11 = $6.60.

Source of capital data: REMI, REMI Policy Insight (software), (Amherst, MA: Regional Economic Modeling, Inc.,

1998).

43

Aluminum Casters

The benefits to aluminum casters of the FCM processes are both an increase in the production of

manifolds and cylinder heads (by 116,000 units) and an increase in unit prices. As discussed in Section

4.5, automakers are willing to pay $60 per LUV engine for FCM processing. Assuming that Extrude

Hone supplies aluminum casters with AFCM and NCCS process machines at a cost of $6 per engine, the

unit production costs for aluminum casters will be between $6 - $60 per engine. 81

Extrude Hone Corporation

Extrude Hone Corporation benefits from the production and sale of AFCM and NCCS process machines

to aluminum casters at an estimated price of $6.60 per engine processed. Implementation of the FCM

processes would increase Extrude Hone’s revenues in the third year by an estimated (246,000 engines

× $6.60 per engine) = $1.6 million. Using the industry cost structure for Extrude Hone’s primary SIC

industry (SIC 3541), production costs will be approximately (0.79) × ($6 per engine) = $4.74 per engine.

Table 2 summarizes these impacts of implementation on automakers, aluminum casters, and Extrude

Hone Corporation.

Table 2. Impact on Firms of Near-Term, Five-Year Implementation Path

Change caused by FCM processes Effect on Firm(s) Amount

Annual

Automakers

Purchase FCM-process manifolds and Increases cost per engine $60 per engine

cylinder heads

Increase large utility vehicles fuel Increases allowable sales 116,000 large-utility

efficiency by 6 percent of large utility vehicles vehicles

Aluminum Casters

Implement AFM and NCCS processes Increases production costs $6.60 per engine

Produce more manifolds and cylinder Increases sales of manifolds and heads

heads manifolds and heads for 246,000 engines

Increase price of manifolds and heads Increase unit prices $60 per engine

Extrude Hone Corporation

Produce AFM and NCCS machines and Increases sales Machines for 246,000

consumables engines/year at cost of

$6.60 per engine
S

S

D

D

P

S

S

D

D

All other light trucks

Q’ Q’ Q

Large utility vehicles

Q Q 11 2 2

!

!

Aluminum Castings Flow-Machining Equipment

P’

S

D

S

D

Q’ Q

P

P

Q

! P’

S

D

S

D

Q’ Q

P

P

Q

!

44

5.2 Industry Impacts

The changes in sales and prices for automakers, aluminum casters, and Extrude Hone Corporation impact

quantities and prices in their industries. These industry changes can be expressed in terms of changes in

supply and demand, as shown in Figures 18 and 19.

Figure 18. Change in Supply and Demand

for Light Trucks

Figure 19. Change in Supply and Demand for Aluminum Castings 

and Flow-Machining Equipment
45

In Figure 18, there is current excess demand for large utility vehicles, created by the CAFE fuel economy

requirements; the market for “all other light trucks,” on the other hand, is in equilibrium. As the arrows

indicate, the FCM processes allow automakers to increase the sale of the large utility vehicles, shifting

the market quantity Q to Q ’. Under the assumption that total light-truck demand remains unchanged, 1 1

demand for “all other light trucks” shifts to the left and the net change in total light truck demand is zero.

The average market price for light trucks, however, increases as sales shift from the less expensive “all

other light trucks” market to the higher priced large utility vehicles market. In the aluminum castings and

flow-machining equipment markets (Figure 19), implementation creates an increase in the demand for

goods, shifting the demand curves to the right. In both cases, the equilibrium output Q increases to Q’,

with some increase in the market price.

These changes in market conditions change market prices and quantities, summarized in Table 3.

These market quantities are use in the REMI analysis of macroeconomic impacts.

Table 3. Impact on Industries of Near-Term,

Five-Year Implementation Path

Industry Annual Sales

(Four-Digit SIC) Change in Industry Performance Amount ($)

Change in

Automotive Increase in sales

(3711: Motor Vehicles) No increase in prices $623 million

Aluminum Casting Increase in sales

(3365: Non-Ferrous Foundries) Marginal increase in prices $13.0 million

Extrude Hone Increase in sales

(3541: Metalworking Machinery) Marginal increase in prices $1.6 million

5.3 Macroeconomic Impacts on the U.S. Economy

These changes in industry supply and demand impact the rest of the U.S. macroeconomy. Additional

automobile production increases parts and subassembly production, increases manufacturing employment

and wages, and increases personal income. More income increases consumer spending on goods and

services. To estimate these macroeconomic impacts, a REMI simulation was run in which the industry

changes were modeled over the five-year 2000-2004 implementation period. Since, as described in

Section 3.4, in the first 3-4 years individual markets can be in disequilibrium and national employment

can deviate from its long-run, natural rate, we use REMI’s estimates in the fifth year, 2004, as our

measures of macroeconomic impact. 

Table 4 lists selected results from the simulation. The first column of numbers lists the levels in the

baseline forecast (without the FCM processes), while the second column lists levels in the alternative

forecast (with the FCM processes). The “Impact (Difference)” column lists the difference between the

forecast and baseline levels, i.e., the macroeconomic impact of the FCM processes.
 The long-run trend level of employment, however, can increase as population levels increase, and job gains in one area 82

of the economy can offset job losses in another area.

46

Table 4. Annual Impact on U.S. Macroeconomy of Near-Term, 

Five-Year Implementation Path: Year 2004

Item Forecast Forecast (Difference)

“Without FCM “With FCM

Processes” Processes” Impact

Gross Domestic Product ($ millions) $142 $9,353,745 $9,353,887

Manufacturing $1,926,180 $1,926,407 $227

Durables $1,102,410 $1,102,623 $213

Non-durables $823,770 $823,784 $14

Non-manufacturing $7,427,565 $7,427,480 ($85)

Employment (#) 138,775,300 138,775,300 0

Manufacturing 17,823,188 17,824,985 1,797

Durables 9,873,558 9,875,191 1,633

Non-durables 7,949,630 7,949,794 164

Non-manufacturing 120,952,112 120,950,315 (1,797)

Personal Income ($ millions) $196 $8,661,460 $8,661,656

Income Tax Revenues ($ million) $34 $1,260,978 $1,261,011

Note: Dollar concepts are in 1998 constant dollars.

By the year 2004, annual GDP increases by $142 million (constant 1998 dollars), largely in durables

manufacturing ($227 million). Non-manufacturing output declines by $85 million, as consumers switch

spending from these goods and services to automobiles. The new automobile production initially raises

the level of national employment, but as indicated by the “Employment (#)” line, in a full-employment

economy it is assumed that the Federal Reserve actions to control employment and inflation bring the

employment back down to its long-run trend level. Still, there are employment effects: workers move 82

from non-automotive to automotive industries, durables manufacturing employment increases by 1,797

workers (occurring predominately in SIC 371, Motor Vehicles), and aggregate non-manufacturing

employment drops by the same amount. As a result of this move to high-wage sectors, personal

income—the sum of wage and salary disbursements, proprietors’ income, and other labor

income—increases by $196 million annually and taxes paid on new income are $34 million per year.

What appears to be a peculiar result—that increases in personal income (or returns to labor: $196 million)

exceed the increases in GDP (total returns to factors: $142 million)—can be readily explained with the

aid of Figure 20.
Without FCM With FCM

Rest

Value added

increases 

($142 million)

Personal

Income

Returns to labor

increase

($196 million)

Returns to the rest

decrease

($54 million)

Rest

Personal

Income

47

Figure 20. The Impact of FCM Processes on Value Added and

Returns to Labor and Capital

As consumers shift purchases from non-automotive products to automobiles, industry production shifts

from lower-wage, non-automotive sectors to higher-wage automotive sectors. While all value-added

created is returned to the economy in the form of payments to labor and capital, the particular

combination of industries affected cause aggregate returns to labor to increase and returns to capital to

decrease. 

The economy’s dynamic response, a result of both disequilibrium in markets and employment actions by

the Federal Reserve, can be characterized by the changes in demand for goods, industry output, and

employment and income. The increase in demand for automobiles and its indirect effect on the rest of

demand is illustrated in Table 5. The table shows how consumers switch their purchases toward

automobiles and how the new output alters over time the structure of demand.

In the year 2000, the first year that the FCM processes are assumed to be implemented, GDP increases

by $913 million, largely due to both the increased consumption of Autos and Parts ($626 million) and

increased investment ($308 million). By 2004, however, this distribution of demand changes. The

Federal Reserve, in response to employment being above the long-run trend level, is assumed to increase

interest rates, which causes domestic investment to decline. As consumers continue to spend more on

Autos and Parts ($594 million), they spend less on other categories such as Food and Beverages ($31

million) and Housing ($27 million). Total Fixed Investment—the sum of residential, non-residential, and

producers durable investment—declines by $158 million. 
48

Table 5. Change in Output, by Demand Categories: 2000-2004

Item 2000 2001 2002 2003 2004

TOTAL GDP (C+I+G+X-M) $913 $821 $454 $144 $142

TOTAL CONSUMPTION (C) $910 $844 $614 $416 $409

AUTOS AND PARTS $626 $621 $607 $594 $594

FURN & HSEHLD EQUATION. $30 $23 $1 ($17) ($18)

OTHER DURABLES $11 $9 $0 ($6) ($7)

FOOD & BEVERAGES $68 $54 $8 ($30) ($31)

CLOTHING & SHOES $26 $20 $1 ($14) ($14)

GASOLINE & OIL $10 $8 $0 ($7) ($7)

FUEL OIL & COAL $1 $1 $0 ($1) ($1)

OTHER NONDURABLES $6 $5 $0 ($3) ($3)

HOUSING $12 $10 ($9) ($26) ($27)

HSEHLD OPERATION $27 $22 $0 ($19) ($20)

TRANSPORTATION $17 $13 $1 ($9) ($10)

HEALTH SERVICES $4 $3 $1 $0 $0

OTHER SERVICES $73 $57 $3 ($45) ($46)

TOTAL FIXED INVEST (I) $308 $259 $28 ($164) ($158)

TOTAL GOVERNMENT (G) $3 $3 $0 $0 $0

TOTAL EXPORTS (X) $0 $0 ($18) ($37) ($41)

TOTAL IMPORTS (M) $307 $284 $170 $70 $66

All values in 1998 constant dollars

To sum up, the increase in domestic automobile consumption initially increases demand in all categories

except exports, but as the Federal Reserve responds, the higher cost of capital puts downward pressure

on investment, income, and purchases in non-automotive sectors, ultimately changing the composition

of demand.

Industrial output also responds dynamically to the new spending patterns. Table 6 lists the 2000-2004

change in output, by two-digit SIC manufacturing industry.
49

Table 6. Change in Industry Output, by SIC : 2000-2004

Industry SIC 2000 2001 2002 2003 2004

Durable Goods ($ millions)

LUMBER 24 $15.1 $12.3 $3.3 ($3.9) ($3.5)

FURNITURE 25 $12.0 $10.7 $5.2 $0.7 $0.8

STONE,CLAY,ETC. 32 $14.3 $12.5 $6.4 $1.5 $1.5

PRIMARY METALS 33 $61.1 $57.4 $44.8 $34.3 $33.8

FABRICATED METALS 34 $68.8 $63.9 $48.3 $35.3 $34.4

MACH / COMPUTERS 35 $55.4 $47.2 $14.3 ($12.6) ($13.6)

ELECT. EQUIPMENT 36 $46.0 $41.5 $18.3 ($1.8) ($2.1)

MOTOR VEH. 371 $716.8 $710.9 $684.7 $661.5 $660.8

REST TRANS EQUI R37 $10.6 $9.1 $0.8 ($6.1) ($6.2)

INSTRUMENTS 38 $22.5 $19.9 $5.7 ($6.3) ($6.2)

MISC. MANUF. 39 $4.1 $3.4 $0.5 ($1.9) ($1.9)

Non-durable Goods ($ millions)

FOOD 20 $39.9 $32.0 $5.6 ($16.8) ($17.4)

TOBACCO MANUF 21 $0.4 $0.3 $0.0 ($0.3) ($0.3)

TEXTILES 22 $11.8 $10.4 $5.2 $0.8 $0.7

APPAREL 23 $13.0 $11.7 $6.9 $2.8 $2.8

PAPER 26 $16.6 $14.6 $7.2 $0.8 $0.7

PRINTING 27 $19.3 $16.6 $7.4 ($0.5) ($0.6)

CHEMICALS 28 $37.2 $34.2 $20.7 $9.0 $8.5

PETRO PROD 29 $18.3 $15.6 $4.4 ($5.4) ($5.6)

RUBBER 30 $48.1 $46.5 $37.8 $30.1 $30.3

LEATHER 31 $0.6 $0.4 $0.0 ($0.4) ($0.4)

All values are expressed in 1998 constant dollars

In the year 2000, output in all sectors rises in response to new motor vehicles production and

consumption. By the year 2004, after the assumed Federal Reserve-based interest rate increase, motor

vehicle output has maintained relatively the same increase ($660.8 million, shown in bold). The

production levels of Primary Metals and Fabricated Metals also increase in support of the automobile

production (shown in bold), but most other sectors experience declines. 

Sectoral employment and personal income respond dynamically to the output changes, and since

automobile-related sectors have high-wage jobs, the transfer of workers to these sectors increases

aggregate personal income. As illustrated in Figure 21, automobile production increases employment

mostly in high-wage durable-goods sectors, thereby increasing aggregate personal income.

When aggregate employment returns to its long-run trend, employment has shifted from

non-manufacturing sectors to durables and non-durables sectors. Since durables sectors have the highest

average annual wages, aggregate personal income increases.
Average Annual Wages ($) (Y1) Change in Employment (Y2)

Durables

Nondurables

Mining

Contract construction

Transport+Pub Utilities

Finance, Ins, RE

Retail Trade

Wholesale trade

Services

Ag/For/Fish

-20000

-10000

0

10000

20000

30000

40000

50000

-1000

-500

0

500

1000

1500

2000

2500

50

Figure 21. Average Annual Wages and Change in Employment, by Sector: Year 2004

5.4 Sensitivity Analysis

These impact results depend on the estimates and assumptions made about several key parameters.

Variations in these parameter values will affect the firm, industry, and macroeconomic impacts. The

implications of such variations are considered here.

Technical Success of FCM Processes

If the realized fuel efficiency increase turns out to be less than six percent, then the potential additional

sales and associated economic impacts would be less. For example, if the achieved increase in fuel

economy were only five percent, then additional LUV production would be 85,000 vehicles. Holding

everything else constant, the macroeconomic impacts reported would also decrease. The economic

impacts are therefore quite sensitive to the realized gain in fuel efficiency.

Gasoline Prices

Buyers’ purchase decisions are sensitive to the price of gasoline at the pump. The real price of gasoline

is low today relative to thirty years ago, making it a minor factor in the purchase decision. If the price of

gasoline were to increase, say due to a shortage of oil reserves, buyers would likely revert back to buying

smaller cars with higher fuel efficiency, which are less profitable for automakers. Automakers would then

have an increased incentive to use the FCM processes on more light trucks. To the extent that they can

offset the increased fuel prices with increased fuel efficiency, automakers could retain at least a portion

of the (profitable) light truck sales. 
 See W. Baldwin and J. Scott, Market Structure and Technological Change (Chur: Harwood, 1987), pp. 128-144; and 83

C. Thirtle and V. Ruttan, The Role of Demand and Supply in the Generation and Diffusion of Technical Change (Chur:

Harwood, 1987), pp. 77-124.

51

Consumer Preferences

Consumers are increasingly demanding larger vehicles. If this demand were to stop or revert back to

smaller cars, automakers would have less incentive to implement new fuel-efficiency technologies, unless

the technologies significantly reduce production costs. To the extent that the FCM processes are cost

effective alternatives to currently used fuel-efficiency enhancing technologies (net of implementation

costs), automakers would still likely adopt the new processes.

Industry Structure

Our modeling assumption is that the structure of the light-truck market stays in its current form, where

demand is high and domestic producers have the majority of sales. If, however, Ford and GM’s share

were to erode significantly, they would be forced to compete vigorously on price and on non-price factors

such as performance (e.g., horsepower). FCM process implementation, then, would hinge on its ability

to reduce production costs (and thus car prices) and to increase performance. 

On the other hand, if Ford and GM were to gain more share of the light-truck market, FCM-process

implementation would be less likely. With increased market share comes market power and the ability

to influence car price, even if key product characteristics—such as performance, options, and

quality—decline. Unilaterally developing new technologies to enhance performance or reduce costs is

not required. 

Who Implements the Technology and Where

Not considered in the study is the implementation of the FCM processes by foreign firms selling

automobiles in the United States, and the export by GM and Ford of FCM-process vehicles. First, foreign

automakers seem less likely to use the FCM processes in the cars or trucks they sell in the U.S., since their

fleets of both types of vehicles currently exceed the CAFE required fuel economies. If a foreign firm

were to initiate implementation, Ford and GM would likely implement quickly: research suggests that

technology is likely to be imitated faster in highly concentrated industries such as the automobile industry

than in less-concentrated industries.83

Ford and GM could use the FCM processes in exported vehicles but, again, this not estimated to be

sizeable. Domestic light trucks currently have poor fuel economies which make them prohibitive in most

foreign car markets, marginal increases are not likely to significantly induce demand. Passenger-car

exports are not likely to be affected by fuel efficiency increases since world supply far exceeds demand

and competing foreign cars already have higher fuel efficiencies.

Government Fuel Efficiency Requirements

The current CAFE fuel economy requirements are 11.7 kilometers per liter (27.5 miles per gallon) for

passenger-car fleets and 8.8 kilometers per liter (20.7 miles per gallon) for light-truck fleets. Because

automobile use and total emissions are increasing, the government is not likely to repeal these

requirements. In fact, currently there are efforts to make the light-truck emissions requirements as

stringent as those for passenger cars. This would put further pressure on light-truck producers to

implement fuel-efficiency enhancing technologies such as the FCM processes.
52

Competing Fuel-Efficiency Technologies

Other fuel-efficiency technologies are being developed, tested, and implemented in domestic vehicles.

Variable timing ignition, for example, once used only in luxury cars, is now being implemented in some

minivans. A key assumption of the study is that there is not another technology that produces as much

increase in fuel efficiency at as low a cost. If there were, it could supplant use of the FCM processes and

thereby decrease its likelihood of implementation and impact.
F

53

6. Economic Impacts of Longer-Term Implementation in the

Automobile Industry

6.1 Implementation to 80 Percent of the Light-Truck Market

The previous chapter takes the near-term, conservative view that the FCM processes would be adopted

at an introductory level and maintained for five years.A longer-term, broader implementation of the FCM

processes could also occur, likely at the historical adoption rate of fuel injection technologies, which were

implemented to 80 percent of the market (Figure 22). If the FCM processes are implemented just to light

trucks at this rate, automakers would be able to produce substantially more LUV-class light trucks while

still satisfying CAFE requirements. 

Figure 22. Historical Adoption Rates of Technologies that

Enhance Fuel Efficiency, and Longer-Term Implementation Rate

Equation 3 is used again to estimate how much the production of LUVs can increase if the FCM

processes are applied to 80 percent of light trucks. As in the near-term five-year implementation, we

assume that total demand for light-trucks is fixed and that consumer purchases shift between the classes.

If represents the fraction of each class that uses the FCM processes, then total light-truck production

can be expressed as the sum of the five values listed in Table 7. 
jik

F (1&") Ni

jik

(1&F) (1&") Ni

F Nk

(1&F) Nk

jik

" Ni

N ̄

mCAFE #

N ̄

j

ik

F (1&") Ni

(1%$) mi

% j

ik

(1&F) (1&") Ni

mi

%

F Nk % j

ik

" Ni

(1 % $) mk

% (1&F) Nk

mk

.

"

"j

ik

Ni ' " N ̄ (1 & nk)

'

1

mCAFE

& 1& F$

1 % $ j

ik

ni

mi

% 1& F$

1 % $

nk

mk

(1 & nk)

(1 % $) mk

& 1& F$

1 % $ j

ik

ni

mi

N ̄ (1 & nk

)

' 1.6 million LUVs.

54

Table 7. New Distribution of LUV Production

# Description Value

1 Non-LUVs that use the FCM processes and are not

displaced by the FCM-process LUVs

2 Non-LUVs that do not use the FCM processes and

are not displaced by new LUV production

3 Existing LUVs that use the FCM processes

4 Existing LUVs that do not use the FCM processes

5 New LUVs that use the FCM processes

Total LUVs

Equation 3 is rewritten as 

(6)

Following the methodology for the near-term implementation, we use the distribution of light trucks in

Table 1 as the fleet of the “representative automaker.” Setting F = 0.80, and solving equation (6) for ,

the increase in LUV production made possible by the use of the FCM processes can be expressed as the

number of displaced sales of non-LUVs:

(8)

Therefore, automakers can increase production of LUV-class light trucks by 1.6 million units while

satisifying CAFE requirements. If the value of each new LUV-class vehicle is $6,000 more than the
 The figure of $6,000 is computed as the difference between the price of LUVs and the sales-weighted average price 84

of all other light trucks. Source of sales and price data: Automotive News, Market Data Book 1997 (Detroit, MI: Crane

Communications, 1997), pp. 42-56. 

55

average value of all vehicles in all other light-truck classes, industry revenues increase by ($6,000) × 84

(1.6 million large utility vehicles) = $9.6 billion. 

6.2 Macroeconomic Impacts on the U.S. Economy

As in the near-term implementation case, estimates are made of the total impact of this additional

automobile output on the U.S. economy. A 15-year simulation is run in REMI over the 2000-2014 period,

in which automobile production is gradually increased to reflect the implementation rate shown in Figure

22. Table 8 lists the estimates of the steady-state annual change on the macroeconomy after 15 years of

implementation.

Table 8. Annual Macroeconomic Impacts 

of Longer-Term, 15-Year Implementation: Year 2014

Item Forecast Forecast (Difference)

Baseline Policy Impact

Gross Domestic Product ($ millions) $10,776,624 $10,778,501 $1,877

Manufacturing $2,229,751 $2,234,203 $4,452

Durables $1,301,636 $1,305,932 $4,297

Non-durables $928,115 $928,271 $156

Non-manufacturing $8,546,873 $8,544,298 $(2,576)

Employment (#) 146,511,500 146,511,500 0

Manufacturing 16,404,606 16,433,203 28,597

Durables 8,770,639 8,795,962 25,323

Non-durables 7,633,967 7,637,241 3,274

Non-manufacturing 130,106,894 130,078,297 (28,597)

Personal Income ($ millions) $14,238,366 $14,241,645 $3,279

Income Tax Revenues ($ million) $1,890,022 $1,890,549 $527

Note: Dollar concepts are in 1998 constant dollars.

The dynamics of the macroeconomic impacts are similar to those of the near-term implementation but

occur on a larger scale and over a longer period of time. By the fifteenth year, GDP has increased by $1.9

billion per year, largely due to new durables manufacturing ($4.5 billion). Twenty-nine-thousand new

manufacturing jobs have been created, largely causing the $3.3 billion increase in annual personal

income. As with the near-term implementation, personal income increases more than GDP does, as

production shifts to sectors that, in aggregate, return more to labor factors of production than to capital

factors.
56
57

7. Summary and Conclusions

7.1 Summary

The Advanced Technology Program at NIST cost shares research in promising but high-risk new

technologies with the goal of producing large and broadly diffused economic benefits. The goal of the

Flow-Control Machining Project, a joint venture between Extrude Hone Corporation, Ford Motor

Company, General Motors, the University of Pittsburgh, and the University of Lincoln at Nebraska, is

to develop two advanced, automated, and cost-effective finishing processes that will be applied in the

automobile industry as well as in other industries. The technology will allow automakers to produce

automobile engines that are more powerful, more fuel efficient, produce less pollution, and cost less to

build. It will also allow other, non-automotive industries to produce machines and parts with significantly

higher functional precision and performance.

To date, the joint venture partners have achieved significant technical success toward achieving the

project goals. The abrasive flow-control machining (AFCM) algorithms have been developed and

prototype machines have been tested with intake manifolds. In the non-traditional chamber sizing (NCCS)

part of the project, the partners have researched a precision means of measuring chamber volumes, tested

the three alternative chamber sizing techniques, and are on track for completion of project goals.

Together, the two processes will make possible long-term gains in fuel efficiency and horsepower of

approximately six percent.

The automobile industry is likely to adopt the two flow-control machining (FCM) processes since they

allow automakers to continue their long-run trend of increasing the specific power (horsepower divided

by liter [cubic-inch] displacement) of engines at a cost substantially lower than the current technologies.

Higher specific power allows automakers to increase the sale of sport utility vehicles, minivans, and large

utility vehicles—autos that consumers currently demand—while keeping overall Composite Average Fuel

Efficiency (CAFE) at the federally required level. Adoption, however, hinges on two conditions: (1) that

the joint venture successfully complete the development of machines both that embody the AFCM and

NCCS process and that can withstand the rigors of the automobile manufacturing environment, and (2)

that the two processes are cost effective when compared with alternative fuel-efficiency enhancing

technologies. A high level of interest in applying the technologies is demonstrated by the automakers’

participation in the joint venture.

The AFCM and NCCS processes will have significant economic impacts if they are successfully and

broadly implemented. A most-likely near-term implementation scenario was developed and simulated,

based on the initial implementation paths of other fuel-efficiency enhancing technologies. It assumes that

over a five-year period

! consumers will continue to have demand for large light trucks in excess of what

CAFE allows;

! total consumer demand for light trucks will remain fixed—therefore, new large

light-truck sales will come at the expense of the existing sales of smaller, higherfuel-economy light trucks;
58

! automakers will use the FCM processes to increase the fuel efficiency of large

light trucks by six percent;

! the FCM processes make the added performance available at a cost of $5 per

horsepower gained; and

! the federal government holds the CAFE passenger-car and light-truck fuel

economy requirements at their current levels (11.7 kilometers per liter [27.5 mpg]

for passenger cars, 8.8 kilometers per liter [20.7 mpg] for light trucks).

The study assumes that Ford and GM implement the processes on one production line each, for a total

of 130,000 large utility vehicles in existing production lines. The resulting FCM-based increases in CAFE

fuel economy allow the automakers to produce and sell an additional 116,000 light trucks with the

technology (a total of 246,000 vehicles then are made using the FCM processes). Given that the price of

each new large utility vehicle is $5,370 more than the average price of all other light trucks, our analysis

finds that in five years

! annual sales revenues for Ford and GM increase by $623 million,

! annual gross domestic product (GDP) increases by $142 million,

! annual personal income increases by $196 million (which is more that the GDP

increase due to production shifting to higher-wage sectors that, in aggregate, use

less capital), 

! annual tax revenues increase by $34 million, and

! 1,800 new high-wage manufacturing jobs are created.

Changes to the underlying assumptions affect the magnitudes of these impacts. For example, a gain in fuel

efficiency of less than 6 percent will yield lower additional sales and macroeconomic impacts. If gasoline

prices were to increase in real terms to their levels in the 1970s, the large, low-fuel-economy light trucks

would be less desirable to consumers; this would give automakers added incentive to implement the FCM

processes. Additional market competition or additional federal regulations on light-truck fuel economy

and emissions would also increase incentives to use the processes. The numbers reported, then, can be

used to represent the order of magnitude of impacts.

If implementation over a subsequent 10-year period follows the path of past fuel injection technologies

to 80 percent of the market, the FCM processes will produce substantially higher impacts. Under similar

market, production, and CAFE assumptions as in the near-term estimate, a longer-term implementation

over 15 years to 80 percent of the light-truck market would allow further annual production and sale of

1.6 million of the large-utility class of light trucks while staying within current CAFE regulations. The

additional production would increase GDP by $1.9 billion, annual personal income by $3.3 billion, and

annual tax revenues by $527 million, and create 29,000 new manufacturing jobs.

7.2 Conclusions

This study has shown that there are at least five important issues to consider when evaluating the impacts

of new technologies like the two flow-control machining (FCM) processes: (1) whether there are

incentives for the intended industry to use the technologies and whether they are involved in the

technology development process; (2) whether there is an effective means (cost and otherwise) for

developing and implementing them; (3) how the technologies affect the economy; (4) whether there are
59

alternative technologies that provide the same benefits but at a lower cost; and (5) how economic and

other important conditions may change over time. 

The automobile industry has strong incentives to use the two new processes, as indicated by participation

by the automakers in developing them. The industry is hindered by CAFE regulations from selling the

light-truck classes of vehicles that consumers currently demand. The earlier, precursor processes on

which the FCM processes are based have been proven on race circuits and in other low-volume, highvalue production, signaling that the resulting engine modifications have passed a proof-of-concept stage.

Automakers and automobile engineers know the desirability of these processes if they are automated in

a cost-effective manner.

The ATP facilitates technology adoption by funding technologies that match industry needs. The

automobile industry is constantly seeking and developing new technologies that help it sell cars, reduce

production costs, and meet federal fuel, emissions, and safety regulations. This report demonstrates how

economic market analysis is used to verify whether industry is likely to adopt the technologies that ATP

funds and to what extent.

Equally important is determining whether there are effective means for implementing the technologies.

The FCM processes are relatively easy to adopt, given that the FCM Project can develop finishing

processes that cost between $3 and $5 per horsepower gained, much cheaper than other approaches.

Extrude Hone Corporation can produce and license to others the two finishing machines for use in

aluminum casting plants. ATP facilitates development and implementation of the technology by not just

awarding “seed” money but by stimulating the formation of a partnership comprised of various firms and

academic researchers with the necessary expertise. Microeconomic and industry analyses verify whether

the development and application is cost effective for industry.

It is also important that the broader economic consequences of a technology are understood. Our analysis

has shown that FCM processes will permit automakers to produce more of the larger light trucks while

still complying with CAFE requirements, as well as to produce more fuel-efficient vehicles in general.

The light-truck category of vehicles is typically associated with higher pollution than smaller passenger

cars. Because of the harmonic averaging used to compute CAFE, it is not possible with available

information to determine whether the assumed implementation path would increase or decrease total fleet

pollution. Clearly, using the technology across the fleet to increase fuel efficiency would decrease their

total fleet pollution.

It is important to determine what alternative means might exist for achieving the goals of the ATP project.

If the FCM-technology is not used, then some other fuel-efficiency enhancing technology will likely be

developed. The automobile industry needs technologies that allow it to continue increasing the average

fuel efficiency of its cars. Since current U.S. market demand favors light trucks, and there are technical

limitations to making larger cars increasingly lighter, an attractive option is to increase fuel efficiency by

increasing the specific power of an engine—the horsepower produced per liter (cubic inch) of engine

displacement. Car producers have increased specific power by adopting fuel injection and four-valve

cylinders; the two FCM processes have the same benefits but are less costly and easier to implement. 

Aluminum casting plants continue to find ways to make the interior cavities of intake manifolds and

cylinder heads more balanced, precise, and smooth. Researchers are developing new precision molds and
60

inexpensive plastic intake manifolds. The Partnership for a New Generation of Vehicles (PNGV) at the

Department of Commerce is promoting strategic alliances between automakers to develop an entire new

vehicle and power system with fuel efficiency of 21 kilometers per liter (50 mpg) or more. Automakers

continue to work on viable electric-powered cars. USCAR, a partnership between DaimlerChrysler, Ford,

and GM, does pre-competitive research in new automobile technologies. 

Finally, one must consider that the other conditions affecting demand for the technology could change,

such as changes in fuel prices, consumer preferences, and government regulations. Indeed, the

implementation path we use to estimate impacts is subject to change. Our estimates of impact do,

however, serve to suggest the order of magnitude of implementation and resulting impacts. And, indeed,

implementation may occur also in other industry sectors.

7.3 Suggestions for Future Research

This study identified several additional evaluation projects that would help better assess the incentives

for using new technologies, the means for effectively implementing the technologies, and the potential

broad economic impacts of the technology’s use. First and foremost is a better understanding of the other

potential markets for the FCM processes, and how the technology might diffuse to them. Economic

analysis can then be conducted to identify the broader, long-run impacts of advances in flow-control

machining on economic growth, quality jobs, and a better quality of life.
61

References

Adams, Walter, and Brock, James. The Structure of American Industry, 9 edition. New York: th

MacMillan Publishing Company, Inc., 1998.

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64
About the Advanced Technology Program

The Advanced Technology Program (ATP) is a partnership between government and private industry

to conduct high-risk research to develop enabling technologies that promise significant commercial

payoffs and widespread benefits for the economy. The ATP provides a mechanism for industry to

extend its technological reach and push the envelope beyond what it otherwise would attempt.

Promising future technologies are the domain of the ATP:

# Enabling technologies that are essential to the development of future new and

substantially improved projects, processes, and services across diverse application

areas;

# Technologies for which there are challenging technical issues standing in the way of

success;

# Technologies whose development often involves complex systems problems

requiring a collaborative effort by multiple organizations;

# Technologies which will go undeveloped and/or proceed too slowly to be competitive

in global markets without the ATP.

 The ATP funds technical research, but it does not fund product development. That is the

domain of the company partners. The ATP is industry driven, and that keeps it grounded in real-world

needs. For-profit companies conceive, propose, co-fund, and execute all of the projects cost-shared by

the ATP.

Smaller companies working on single-firm projects pay a minimum of all the indirect costs

associated with the project. Large, Fortune-500 companies participating as a single firm pay at least

60 percent of total project costs. Joint ventures pay at least half of total project costs. Single-firm

projects can last up to three years; joint ventures can last as long as five years. Companies of all sizes

participate in ATP-funded projects. To date, more than half of the ATP awards have gone to

individual small businesses or to joint ventures led by a small business. 

Each project has specific goals, funding allocations, and completion dates established at the

outset. Projects are monitored and can be terminated for cause before completion. All projects are

selected in rigorous competitions which use peer-review to identify those that score highest against

technical and economic criteria.

Contact the ATP for more information:

# On the World Wide Web: http://www.atp.nist.gov;

# By e-mail: atp@nist.gov;

# By phone: 1-800-ATP-Fund (1-800-287-3863);

# By writing: Advanced Technology Program, National Institute of Standards and

Technology, 100 Bureau Drive, Stop 4701, Gaithersburg, MD 20899-4701.

About the Author

Mark A. Ehlen is an industrial economist in the Office of Applied Economics at NIST. Since 1995, he

has conducted studies on the economics of automotive, manufacturing, and construction technologies.

Dr. Ehlen received his Ph.D. in economics from Cornell University.

The Office of Applied Economics, part of the Building and Fire Research Laboratory at NIST,

provides economic research and consulting to industry and government agencies in support of

productivity enhancement, economic growth, and international competitiveness.