General Motors and the 54.5 Miles per Gallon EPA Target

GM's efforts to comply with EPA regulations by increasing sales of fuel efficient vehicles.

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 [1]. 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 [2]. 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 [3]. 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 [4]. 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 [2]. 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 [5]. 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 [6].

 

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 [7]. 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 [7].

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 [8]. 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 [9]. 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 [10]. 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.

 

Follow-Up Questions

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?

 

Word Count: 799 (includes titles and footnotes)

 

[1] Regulations for Greenhouse Gas Emissions from Passenger Cars and Trucks. United States Environmental Protection Agency. Retrieved from https://www.epa.gov/regulations-emissions-vehicles-and-engines/regulations-greenhouse-gas-emissions-passenger-cars-and

[2] Eisenstein, Paul A. (2017, March 16). Trump Rolls Back Obama-Era Fuel Economy Standards. NBC News. Retrieved from https://www.nbcnews.com/business/autos/trump-rolls-back-obama-era-fuel-economy-standards-n734256

[3] Crude Oil WTI (NYMEX) Price. Nasdaq. Retrieved from http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=5y

[4] Eilperin, Juliet. (2012, August 12). Autos must average 54.5 mpg by 2025, new EPA standards say. Washington Post. Retrieved from https://www.washingtonpost.com/national/health-science/autos-must-average-545-mpg-by-2025-new-epa-standards-are-expected-to-say/2012/08/28/2c47924a-f117-11e1-892d-bc92fee603a7_story.html?utm_term=.3b1a9066f197

[5] Auto Sales. Wall Street Journal. Retrieved from http://www.wsj.com/mdc/public/page/2_3022-autosales.html

[6] Krisher, Tom. (2017, April 28). GM is motoring as profit jumps 34 pct on US truck, SUV sales. Fox Business. Retrieved from http://www.foxbusiness.com/markets/2017/04/28/general-motors-profit-up-34-percent-on-us-truck-suv-sales.html

[7] Lynch, Jim. (2017, May 25). Lawsuit claims GM used VW-like defeat devices. The Detroit News. Retrieved from http://www.detroitnews.com/story/business/autos/general-motors/2017/05/25/gm-diesel-lawsuit/102144038/

[8] Neil, Dan. (2017, October 19). Chevy Bolt: Meet the First Practical, Mass-Market Electric Vehicle. Wall Street Journal. Retrieved from https://www.wsj.com/articles/chevy-bolt-meet-the-first-practical-mass-market-electric-vehicle-1508433885

[9] Muller, Joann. (2017, October 2). GM Plots All-Electric Future With 20 New EVs and Fuel Cell Vehicles Coming By 2023. Forbes. Retrieved from https://www.forbes.com/sites/joannmuller/2017/10/02/gm-plots-all-electric-future-with-20-new-evs-and-fuel-cell-vehicles-coming-by-2023/#37691ebf76ec

[10] Courtenay, Vince. (2017, April 26). Bolt’s Lead Designer Describes Clean-Sheet Creation. Wards Auto. Retrieved from http://wardsauto.com/technology/bolt-s-lead-designer-describes-clean-sheet-creation

[11] ( 2017, March 1). Orion Assembly. General Motors. Retrieved from http://media.gm.com/media/us/en/gm/company_info/facilities/assembly/orion.html

[12] Naughton, Keith. Welch, David. (2017, February 27). GM Dials Up Profit-Sapping Pickup Discounts as Rivals Gain. Bloomberg News. Retrieved from https://www.bloomberg.com/news/articles/2017-02-27/gm-dials-up-discounts-on-pickups-as-rivals-tread-on-truck-turf

[13] Sanchez, Edward A. (2017, April 27). Report: GM Retooling Signals Spring 2018 Launch for New Fullsize Trucks. Truck Trend Network. Retrieved from http://www.trucktrend.com/news/1704-report-gm-retooling-signals-spring-2018-launch-for-new-fullsize-trucks/

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6 thoughts on “General Motors and the 54.5 Miles per Gallon EPA Target

  1. An interesting read that highlights the growing conflict between long-term regulatory targets (related to sustainability) and optimizing for short-term profits that automotive manufacturers currently face.
    While I do agree that GM should align its long-term perspectives to reach emission targets, I do not think the short-term answer is as clear-cut. From an economic perspective, deliberately not reaching the EPA targets by 2025 could make sense depending on a couple factors:
    – The actual amount of penalties faced by GM if it does not reach the targets: Staying with a non-sustainable target in the short-term is feasible if penalties are low compared to the incremental profits made from staying with the sales of conventional combustion engine vehicles. This will also depend on how much efforts other automotive OEMs make to reach the EPA targets – as the government will have incentives to not overly punish an entire industry (for both political and economic reaosns).
    – The incremental amount of profits made that go into development of new energy vehicles: If GM’s incremental profits made from not switching to new energy vehicles immediately is actually diverted into development resources, it might actually benefit the company further in the long-term (esp. if there is a cash constraint).
    – The actual market demand for electric vehicles: Even offering a wide range of electric vehicles might not result in the right vehicle mix to reach the proposed emissions targets as customers might still choose to buy conventional combustion engine (especially due to low petrol prices)

  2. Fascinating read on the challenges faced by GM as it looks to conform to emissions regulations. In addition to investing in a new supply chain and manufacturing capabilities to produce electric vehicles, GM will need to rethink its infrastructure for supporting electric vehicles once they are on the roads. How does GM support the supply chain for its key distribution network – dealerships – in converting capabilities to service and maintain electric vehicles? How will dealerships manage the range of equipment and competencies needed to support both gas and electric vehicles in the transition phase, and how might that change the way consumers experience GM?

  3. This article does a very good job of analyzing the difficult position GM faces in an increasingly regulated environment – an environment that certainly may change under the Trump administration as the author acknowledges. GM is clearly taking a long-term view and placing a heavy bet that consumers will prefer electric vehicles over more efficient gas vehicles going forward. Although this is a very plausible view of the future and would present significant progress towards mitigating climate change, my fear is that GM is shifting too much focus in the short-term towards this longer-term view during a time when competitors are ramping up spending to take advantage of the hot SUV market. Is GM risking losing its brand loyalty by taking too long-term of a view? Will consumers become loyal to other brands in the short-term such that they stick with GM’s competitors even when the All Electric Future arrives?

  4. In my opinion, economic incentives for OEMs, like GM, under current POTUS’ proposed withdrawal of the stricter fuel-efficiency standards the EPA has in place, and which have motivated OEMs to seek lighter materials to build automobiles in order to increase fuel efficiency, will be enough to, at least, stop the R&D practices that have succeeded in replacing steel with aluminum, however at a higher cost. In addition, currently troubled automotive industry in the U.S., will also be an incentive to GM to slow the process of reaching its ‘All Electric Future’ goal.

  5. GM is not alone in making bold pledges to increase the fuel efficiency of its fleet. Ford has said it will release 13 electric or hybrid vehicles by 2023. Abroad, Volkswagen and Volvo have set ambitious targets as well (30 electric cars by 2025, and a 100% electric or hybrid fleet by 2019, respectively).[1] The writing is on the wall, and all these companies seem to recognize the need to adapt. While the current anti-regulatory environment in the United States has temporarily created a potential opportunity for companies to roll back environmental standards, the world is moving in the opposite direction, and the US likely will return to the same path as well.

    In this environment, I think it’s a competitive imperative for GM to be partnering with it’s supply chain now to make the electric transition. Cutting edge technology and efficient, low-cost manufacturing will be essential to competing in the coming low-carbon vehicle market, and GM stands to lose major market share to rivals if it finds itself caught flat-footed. The timing is an open question – pushing trucks and SUVs in the short-term may allow GM to cash in on its higher margin vehicles in the near term, but holding off on investing in supply chain capabilities is only denying the inevitable.

    [1] “Automakers Say They’re Going Electric–But They’re Also Lobbying For Weaker Fuel Standards,” Fast Company, Nov 17, 2017 (https://www.fastcompany.com/40497293/automakers-say-theyre-going-electric-but-theyre-also-lobbying-for-weaker-fuel-standards)

  6. Fantastic analysis of the rapidly changing passenger vehicle industry and GM’s strategy for an “all-electric” future. I think the author did a marvelous job laying out the key issues at play here, including: viability of producing 20 EV models in the next 5 years, the disparity between vehicle types (gas guzzling SUVs vs EVs), and the regulatory environment pushing car companies toward aggressive efficiency targets. I believe the author and GM that the future of car technology clearly rests in the EV technology and the sooner that GM is up and running on a fleet of EVs the better. I think that the EPA will continue to set aggressive targets for emissions standards and MPG rates because there is already a market and consumer sentiment driving towards the goal. Additionally, even in a world where the EPA does repeal their regulations I think you’d see GM sticking with their strategy. Just as when the EPA repealed many of the Obama era coal regulations, utilities continued their push towards more efficient fuels and less coal. A few things that I would consider are what is the interplay with AI technology here? Presumably AI technology would improve car’s efficiency as acceleration and idling would be reduced. Finally, what is GM doing to build out a charging footprint for their vehicles? I assume they will have range constraints and for these vehicles to become truly viable alternatives to combustible engines consumers need some sort of confidence that they will be able to take their car on long trips without range anxiety.

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