Auto Service World
News   September 18, 2006   by Auto Service World

University of Michigan Releases Important Automotive Report

Financially strapped domestic automakers could turn their losses to profits at the expense of foreign car companies by improving fuel-economy performance across their model lineups — with Ford Motor Co. reaping the greatest profits, according to a new study by the University of Michigan’s Transportation Research Institute (UMTRI).
Conversely, Ford, General Motors Corp. and DaimlerChrysler Corp. stand to lose billions if they do not.
“Even the Big Three now acknowledge that high gas prices and their over-dependence on fuel-inefficient SUVs and pickup trucks have accelerated their financial freefall,” said Walter McManus, head of UMTRI’s auto analysis division.
“The findings of our report prove in sharp detail Detroit automakers’ long-term vulnerability to volatile gas prices and show that improved fuel economy fleetwide — above and beyond current regulation — is the key not just to their survival but their success, even if the price of gas goes down.”
Looking ahead to the 2010 model year, the study, “Can Proactive Fuel- Economy Strategies Help Mitigate Fuel-Price Risks?” uses three gas-price scenarios — $3.10, $2.30 and $2 per gallon.
McManus asks what would happen if automakers used a business-as-usual approach making only fuel-economy improvements mandated by law or a proactive strategy using off-the-shelf technology to make more ambitious increases to fuel economy, without changing automakers’ projected mix of vehicle types.
If all automakers follow a proactive strategy, the report finds that:
Ford has more opportunities to improve fuel economy fleetwide than do GM or DaimlerChrysler and can narrow its fuel-economy disadvantage against the Japanese automakers more than their U.S. rivals.
At $3.10 a gallon, domestic automakers could increase profits by $2 billion collectively, with an annual profit increase of $1.4 billion at Ford, $500 million at GM and $100 million at DaimlerChrysler.
At $3.10 a gallon, Japanese automakers could lose up to $600 million.
Even at $2 per gallon, the Big Three could increase profits by $1.3 billion, while the Japanese could lose $300 million.
If all automakers follow a business-as-usual approach, the study shows that: At $3.10 a gallon, U.S. automakers could lose as much as $3.6 billion in profits, compared with a smaller loss of $800 million for Japanese automakers.
At $2 a gallon, domestic automakers would fare better than their Japanese counterparts, with profits between $1.2 billion to $1.4 billion, compared to $300 million for the Japanese.
“What is surprising is that each automaker is financially safer if they follow a proactive fuel-economy strategy, regardless of what their competitors do,” McManus said.
“Sure, Ford might not capture sales if their competitors make a better car that has high fuel economy, but what is certain is that Ford cannot capture those sales without higher fuel economy.”
The study also estimated the impact of strategic choices by automakers on U.S. employment.
At $3.10 a gallon, a marketwide proactive fuel-economy strategy could save nearly 35,000 jobs at GM, Ford and DaimlerChrysler, while costing foreign automakers with plants in North America more than 19,000 jobs.
By contrast, a business-as-usual approach could result in Big Three job losses of nearly 43,000, compared to less than 1,900 job cuts at the foreign transplants.
McManus says his report delivers important information to policy-makers, as well as to automobile company management, labour unions and shareholders, who have resisted increases to fuel economy requirements for years.
His recommendations include:
Establishing a formal coalition of industry, labour, government and nonprofits with a mandate to develop federal policies designed to dramatically increase the fuel economy of all vehicles in the United States.
Enhancing regulatory rationality and certainty.
Supporting development of advanced technologies.
Building domestic supply chain for advanced technology fuel-efficient vehicles.
“Automakers must decide their fuel-economy strategies for 2010 today, knowing neither the future fuel prices nor the decisions their competitors have made,” McManus said. “With only cash on hand for one cycle of product development, as gas prices dip — for the moment — will these struggling automakers be tempted to remain dependent on their once-profitable gas guzzlers?
The report provides stark evidence that the riskiest thing domestic automakers could do is continue business as usual.
“Deploying new technologies takes time and money to accomplish, and time and money are in short supply in Detroit.
While management is currently focused on cutting capacity through massive layoffs, they need to undertake a deep transformation to much more fuel-efficient fleets to avoid going under.
The dilemma the Detroit automakers face is that while they may believe that they cannot afford to make fuel economy a high priority, in actuality, it turns out that they cannot afford not to.”

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