In 2012, the Environmental Protection Agency (EPA) passed new vehicle fuel economy standards for cars and light trucks that mandated a fleet target of 54.5 miles per gallon (MPG) by 2025 . Although the standards were supported by auto manufacturers and other stakeholders, the past 5 years have progressed differently than many would have thought. How will General Motors, the largest automotive original equipment manufacturer (OEMs), adapt its supply chain to comply with the 2012 EPA regulations?
The 54.5 MPG Target
Regulators set emissions targets in a very different oil environment than they find themselves in today . When the targets were set in 2012, the benchmark price of crude oil hovered between $90-$120/barrel, but this price has decreased to $55/barrel today . Lower oil prices have had unexpected impacts on consumer vehicle preferences and have made it difficult for OEMs to keep up with regulators’ expectations.
Given that the EPA’s target of 54.5 MPG by 2025 is an average figure to be applied to the entire fleet, OEMs like General Motors can continue selling vehicles with low MPG as long as they compensated by increasing sales of fuel efficient vehicles . Although OEMs control what vehicles they offer to the public, they have less control over what consumers ultimately decide to buy. A sustained drop in crude oil prices starting in 2014 and lasting through today has led to lower prices at the pump, which in turn has shifted consumer preferences toward pickups/SUVs . Sales of GM light trucks (which have low MPG) are up 7% year-to-date while sales of all other GM vehicles are down 19%, making it harder for GM to achieve mandated reductions in fleet emissions . Exacerbating the effect of shifting consumer preferences is the fact that pickups/SUVs are among the most profitable types of vehicles sales for GM, leading to a conflict between monetary and regulatory incentives .
GM’s Solutions To the Problem
Over the past several years, General Motors has adapted to the regulatory environment by pursuing several initiatives.
In an effort to increase fuel efficiency for its fleet between 2011 and 2016, GM sold 705,000 Silverado and Sierra heavy-duty pickups with a newly developed Duramax diesel engine that had tested for lower emissions . The sale of these vehicles has proven to be controversial after a 2017 lawsuit was filed accusing the company of misrepresenting the Duramax by using software that produced lower emissions readings during testing periods .
More recently, General Motors has taken increasingly drastic steps towards its commitment to climate change by committing to an ‘All Electric Future’. GM’s first step towards full electrification of its fleet was its introduction of the 2017 Chevrolet Bolt, which is being touted as the first mass-market electric vehicle . GM announced in October 2017 that it hopes to ride the success of the Bolt by introducing 20 new electric vehicles by 2023, therefore helping to increase the average fuel efficiency of the fleet . The introduction of so many new vehicles will put a strain not only on GM’s manufacturing facilities but also on its entire supply chain – it took 180 GM employees more than three years to design the 2017 Bolt . This required design teams in Korea to collaborate with production teams in Michigan (where $160 million was spent to retool existing facilities) to successfully introduce the product [10,11]. Ramping up to introduce 20 new vehicles in 6 years will test not only GM’s manufacturing capabilities, but also its ability to collaborate globally not only internally but also with its suppliers.
Walk the Walk: Refocus Incentives and Allocate Resources Away from Pickups/SUVs
To increase sales, General Motors has been offering greater discounts for pickups/SUVs while also planning to introduce a new line of full-size trucks in 2018 [12,13].
I would advise GM against these two initiatives to better position the Company for an environment with more stringent emissions standards (although this could come at the expense of short term sales). Shifting incentive spending away from pickups/SUVs influences consumer preferences, while cutting resources allocated to pickups/SUVs allows GM to concentrate on the development of fuel-efficient vehicles. A narrower focus could help GM to more quickly develop their new line of products and minimize the strain on its supply chain.
One question that I would like to discuss is the impact that the Trump administration will have on EPA regulations. GM has announced that their goal for an ‘All Electric Future’ is not dependent on the regulatory environment, but will their pursuit stay on track if it isn’t mandated?
Another important question is the extent to which GM should take advantage of low oil prices today by focusing on selling high margin pickups/SUVs. Should GM prioritize social responsibility over corporate profits?
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