User:HybridBoy/Automotive market

What Consumers Want
Detroit insists they are responding to U.S. consumer demand. Do they really understand

what American consumers want?

There are several important consumer indicators that have gone unheeded by automakers.

Fuel Prices and Vehicle Sales

As fuel price doubled between 2002 and 2006, SUV unit sales were seemingly strong.

But in reality, automakers were forced to offer expensive incentives, and deep discounts, dropping the SUV and truck price to offset fuel price increases. Sales may have stayed even, but revenue fell and profits fell.

Used vehicle prices are another critical indicator. From 2002 to 2006, large SUVs lost a third of their resale value. The market shift to trucks slowed, then reversed.

Consumers respond to higher fuel prices by buying more fuel-efficient cars.

Other key indicators point to consumer demand for fuel economy:


 * Fuel efficiency and hybrid technology are no mere passing fancies, but represent a“permanent” consumer shift that automakers must address, industry executives say.

Their belief is captured in a global survey of auto industry leaders released today by the U.S. tax and audit firm KPMG LLG

Coates, David and Christine Tierney.
 * Nearly one in five prospective buyers polled for an exclusive study conducted by J.D.Power and Associates for The Detroit News indicated that they would not consider a domestic brand -- and 40 percent of them named poor fuel economy as a reason.


 * New survey of automakers, suppliers and industry experts released by UMTRI shows surprising agreement that fuel prices are on a steep upward trajectory, and CAFE standards will rise.


 * “Oil is much more likely to finish the decade at $100 or more per barrel than at $50,” argues Stephen Leeb, president of Leeb Capital Management in NYC, and author of several books on energy markets and investments.


 * Oil addiction undermines our security because the volatility of oil prices threatens our economy. Because there is a world market for oil, supply interruptions anywhere affect the price of oil everywhere – therefore whether we import oil or make our own is relatively unimportant. Higher CAFE can mitigate the effects of oil price volatility, but real security can only come through finding a way to keep prices stable through more diverse supplies writes economist Ronald Minsk.


 * A Wall Street Journal survey of economists found strong support for government intervention in the transition away from fossil fuels. "Economists generally are in favor of free-market solutions, but there are times when you need to intervene," said David Wyss at Standard & Poor's Corp. "We're already in the danger zone" because of the outlook for oil supplies and concerns about climate change.” When asked to pick the greater geopolitical threat to the economy, by nearly a 3-to-1 margin the economists chose a disruption in crude oil supplies caused by tensions in the Mideast over the impact on spending and confidence that could follow a major terrorist attack.


 * A “strong and bipartisan” 78% of Americans want Washington to impose a 40-mpg fuel-efficiency standard for American vehicles, according to a new Opinion Research Corporation national opinion survey

Forty-six percent of today’s car shoppers say the feds ought to force automakers to meet higher fuel economy standards, according to Kelly Blue Book Marketing Research.

How is it possible for Detroit to spend millions on market research and yet be so dependent on price and incentives to sell? Easy, assume that you already know what customers want and “adjust” or ignore market research if it disagrees with your assumptions. When the automakers say, “consumers say one thing and do another about fuel economy,” they are really confessing to market research abuse. And then, when products engineered and built to meet these incorrect assumptions about what real consumers want are finally sold, it is at fire sale prices -- far lower than had the assumptions been accurate.

Effects of fuel economy
In July 2004 (before Katrina and spike in oil) UMTRI predicted that if fuel price went over $3/gallon that Detroit would lose $11 billion in profits. Detroit media ignored the story, and Detroit automakers denied it. One even said, “To link fuel prices and SUV sales is bad analysis and bad journalism.”

But when fuel price spiked two years later, Detroit lost more than $20 billion. The only thing wrong with our analysis was that we underestimated the extent of losses.

As a result, Detroit is now in the painful process of dramatic downsizing, closing plants, laying-off workers. And a new wave of large SUVs and trucks are facing difficulties in the market.

UMTRI released another study recently that shows if U.S. automakers increased their energy efficiency to accommodate increasingly conservation-minded customers, they could collectively increase profitability by $2 billion in model year 2010. Following their current plans, we concluded, they are projected to lose $3.6 billion that year.

Increasing their fleet wide fuel economy 2-3 miles above CAFE would increase profits in Detroit even if the price of gasoline falls to $2 a gallon.

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.

Feebates
Market based program needs combination of incentives and disincentives.

UMTRI is conducting research on a proposed program that combines incentives and disincentives to encourage consumers to purchase and manufacturers to produce cleaner vehicles. This ‘clean vehicle discount/polluter pays’ program, sometimes called ‘Feebates” combine incentives for clean, high fuel economy vehicles (rebates) with a similar disincentive for low fuel economy vehicles (fees). Such programs, which can be designed as self-financing, can have much greater impact on oil consumption and GHG emissions than one-sided rebates or fees alone. This is especially true when the feebate uses a sliding scale so that the size of the rebate or fee a vehicle has depends on the vehicle’s fuel economy relative to other vehicles. By shifting consumer demand toward more fuel-efficient vehicles, feebates give a manufacturer the incentive to improve its entire product range.

The final goal of feebates is that cleaner vehicles cost less than same power more pollutant ones.

Combination of Regulations and Feebates
The inconsistencies in current policies have reduced the effectiveness of instruments directed specifically at reducing oil consumption and greenhouse gas (GHG) emissions. Any attempt to create new instruments that does not also address inconsistencies will have limited success.


 * CAFE includes both a mandate and a market-based disincentive, but the magnitude of the disincentive is too small to have much impact, so the mandate is responsible for most of CAFE’s impact.

and trucks.
 * The two most important policies that create inconsistencies and weaken efforts to reduce oil consumption and GHG emissions are the differential treatment of cars and trucks in the Federal tax code and the existence of separate CAFE standards for cars


 * Consumer tax deductions and tax credits for advanced fuel efficient technology have given automakers incentives to produce and sell them.