Analysis of the US automobile industry under the new fuel economy standards: a projection

The Energy Independence and Security Act of 2007 included updated fuel economy standards for light-duty vehicles in order to reduce the dependency on oil and emission of greenhouse gases in the US. The new Corporate Average Fuel Economy (CAFE) standards not only mandate higher fuel economy standards - measured as miles per gallon traveled - but also implement the standards in such a way as to stimulate technological innovation and competitiveness of the US domestic manufacturers relative to their Japanese counterparts. In this sense, the new legislation, a so-called attribute-based system defining CAFE standards individually with respect to type of vehicle, does not encourage downsizing as a path to achieving better fuel economies compared with what had been the case during the period of compliance with the 1975 standards. The purpose of this study is to model the US automobile industry's path to compliance with the new higher CAFE standards. To model this transition, we will concentrate on Toyota and General Motors (GM), two leading manufacturers whose combined market share in the US is about 40% as of April 2008. Toyota and GM's certain characteristics make this selection fruitful. First, trucks make up a larger share of GM's production. Second, Toyota has a smaller fleet and the Prius technology to begin with that help Toyota meet the standards set for cars as of today. According to our projections, GM needs to undergo a more drastic transformation to meet the standards set for 2015 by National Highway Traffic Safety Administration (NHTSA). Slightly smaller cars and trucks and technological innovation bettering the fuel economy of the pure gasoline-powered vehicles and the introduction of hybrids appear to be the recipe for hitting the 2015 standards. We conclude that CAFE standards stimulate technological innovation and help domestic manufacturers like GM stay competitive. However, the latter will also be dependent on the vehicle mix as consumer preferences shift towards smaller and more fuel-efficient vehicles.