An in-depth look into the cost of compliance created by the latest round of fuel economy regulations.

1. Scenaria,
Perspective
1Issue
2012/10
A Member of the AVL Group.
CAFE 2025:
Finding Robust
Alternatives to
Weather Unexpected
Technology Costs.

2. In late August 2012, the federal
government formally announced
new light-duty Corporate Average
Fuel Economy (CAFE) and Green-
house Gas Standards for model
years 2017 to 2025, culminating
with an equivalent of 54.5 MPG for
cars and light-duty trucks by 2025.
CAFE 2025: Finding Robust Alternatives
to Weather Unexpected Technology Costs.
Scenaria,
Perspective

3. 3
Introduction
After accounting for air conditioning credits, the
National Highway Traffic and Safety Administration
(NHTSA) stated that the new CAFE standards create
“an estimated overall fleet average required level of a
range from 48.7 to 49.7 mpg in MY 2025. Considering
these combined car and truck increases, the standards
together represent approximately a 4.0 percent annual
rate of increase, on average, relative to the MY 2016 re-
quired CAFE levels.”[1]
Combined with the previously approved fuel econo-
my targets for 2012-2016, CAFE targets for the U.S. ve-
hicle fleet (Figure 1) will increase by 63 percent over the
next 13 years [1,2]. These regulatory targets represent
the most aggressive increases in the automotive indus-
try’s history.
While the new standards provide certainty about
fuel economy requirements, they also create new head-
aches for automakers and consumers. Which technolo-
gies should automakers use to meet the new standards?
How much will the new standards drive up vehicle prices
to consumers?
Introduction
The “Free Fuel”
Economy: Why It
Won’t Continue.
60
55
50
45
40
35
30
25
20
2005 2010 2015 2020 2025 2030
Today
15%
29%
63%
2016Fleet
Requirement
2020Fleet
Requirement
2025Fleet
Requirement
The“FreeFuel”
Economy:WhyItWon’t
Continue.
The cost of future technology has always been a
concern for the automotive industry.
The debate over regulations has consistently high-
lighted the fact that new technologies will be needed to
improve fuel economy, and those technologies will be
expensive. Yet recent improvements in fuel economy
have come without noticeable changes in vehicle prices
(Figure 2).
These regulatory
targets represent the
most aggressive increases
in the automotive
industry’s history.
NHTSA CAFE Targets (U.S. Vehicle Fleet)
Historical Fuel Economy – US Vehicle Fleet
Figure 1
Figure 2
FuelEconomy(MPG)
35
30
25
20
15
$100,000
$75,000
$50,000
$25,000
$0
2002 2004 2006 2008 2010 2012
FleetAverageFuelEconomy
MSRP

4. 4
How much will it Cost?
The Significant Difference Between Average Vehicle
Cost Increases and Those of Specific Vehicles.
How Much Will it Cost?
$ 1,540? $ 2,556? Or Over
$ 5,000? A Caution Regar-
ding Average Vehicle
Increase Projections.
In the final rule, NHTSA and EPA discuss their esti-
mated incremental cost increases and highlight average
per vehicle cost increases in 2025 of $1,540 (Figure 3).
From NHTSA/EPA’s own estimates for average per
vehicle incremental costs of meeting fuel economy/
CO2 standards of first the 2011-2016 rules and now also
the 2017-2025 rules, Scenaria calculated the cumulati-
ve average cost of compliance from 2011 to 2025.
Figure 3 shows NHTSA’s costs (EPA’s figures are
slightly higher). As you can see, the $1,540 per vehicle
average cost cited by NHTSA only refers to the addi-
tional cost of the 2017-2025 rules over and above the
2011-2016 rules.
Onlywhenthecostsoftherulesareaddedtogether
is it apparent that the agencies are actually expecting
the per vehicle incremental cost of the rule to be $2,556,
not $1,540.
From 2005 to 2012, average fleet fuel economy
increased 30% [3], yet the average vehicle price
(MSRP) only increased 3% [4]. Unfortunately, fu-
ture increases in fuel economy will not follow the
same path and here’s why.
Only when the costs of the two
rules are added together is it
apparent that NHTSA expects the
average cost per vehicle to
increase by $2,556, not $1,540.
While the agencies estimate an average vehicle will
go up by $2,556, how much do their data suggest prices
for the most popular vehicles will rise?
Downloading and using EPA/NHTSA’s input data publis-
hed on the docket along with the final rule which served
as the basis for their analyses, Scenaria leveraged its
proprietary FuelEconomyVIEW simulation tool to see,
according to the NHTSA/EPA figures, how much prices
may go up on individual vehicles. This allowed Scenaria
to evaluate the differences between the $2,556 average
andseveralhigh-volumevehicletypesaswellastocom-
pare them to previous estimates using the technology
data published in 2010 with the 2012-2016 rules.
Usingthe2017-2025NHTSAtechnologyinputfiles,
Figure 4 shows the minimum incremental price increa-
ses expected over time for three high-volume vehicle
classes to reach the standards. Those figures are shown
in comparison to the average, per vehicle increase. For
midsize cars, the increase is $1,330; for small cross over
vehicles, the increase is $1,992; and for full-size light
trucks, the increase is $4,542.
One can clearly see how misleading simply looking
at average per vehicle costs can be. The full-size truck,
for example, a major contributor to OEM profits and
therefore their ability to reinvest in advanced technolo-
gies costs, is projected to cost 3.4 times as much as a
midsize car to comply with fuel economy standards.
While the CAFE standards apply on an OEM vehic-
le fleet basis, meaning they can use over-target vehic-
les to compensate for under-target vehicles, consumer
priorities – not OEM compliance strategies, will dictate
how many of which vehicles are sold. Planning to spread
full-size truck costs over midsize car volumes is not only
difficult in a competitive market but also a risky strategy
to accurately forecast and confidently follow.
The Significant Difference
Between Average Vehicle
Cost Increases and Those of
Specific Vehicles.
Scenaria,
Perspective

5. 5
Diminishing Returns
from Investments
Scenaria’s FuelEconomyVIEW tool not only evalu-
ates CAFE compliance costs – it also models each and
every possible combination of technologies account-
ing for all their synergies and mutual exclusions to see
which ones do best. It also provides visualizations of the
results that reveal unique insights.
Recall that earlier we showed midsize-car incre-
mental costs using NHTSA’s data to equal $1,330 in
contrast to the average vehicle cost of $2,556. Here we
show how Scenaria used “efficient frontier” mapping
from our FuelEconomyVIEW tool with NHTSA’s data to
determine this.
Figure 5 shows results for a mid-sized passenger
car in 2025 using the 2017-2025 NHTSA technology
data. Each blue point represents a possible technology
combination and the corresponding NHTSA/EPA-based
incremental-price estimate and fuel economy.
The leading edge, or “efficient frontier,” shown in
red, offers the best value for the dollar on fuel economy
versus vehicle-price increase. If manufacturers seek to
meet the standards at the lowest total cost to consum-
ers and pass along cost increases to consumers, then
the efficient frontier can be used to estimate minimum
consumer price increases due to the standards. The
green lines are the targeted fuel economy for this year
foramidsizecar(53.8MPG)andthecorrespondingmini-
mum incremental price ($1,330).
From inspecting the efficient frontier created from
using the NHTSA/EPA data, we see that fuel economy
and costs do not rise linearly. Instead, as the up-front
cost of technology increases, fuel economy benefits
encounter first diminishing returns and then, strangely,
increasing returns. This non-linear behavior shows why
one should not simply extrapolate from current price
and fuel-economy increases to estimate future costs of
fuel-economy gains.
Both the unexpectedly low $1,330 figure and in-
creasing returns phenomenon are highly unusual, lead-
ing us to question the NHTSA/EPA technology values
and estimated costs of compliance, as we discuss fur-
ther below.
Diminishing Returns
from Investments
Up-FrontPrice
$5,000
$4,000
$3,000
$2,000
$1,000
$0
$1,540
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2022
2024
2025
2021
2023
Cost of Compliance – NHTSA StatedFigure 3
Cost of Compliance – NHTSA Stated vs. NHTSA Vehicle Class DataFigure 4
2025 Midsize Passenger CarFigure 5
Car/Truck Average (NHTSA Stated)
Up-FrontPrice
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2022
2024
2025
2021
2023
Car/Truck Average (NHTSA Stated)
Large Truck (NHTSA Data)
Midsize Car (NHTSA Data)
Small Cross Over (NHTSA Data)
80
70
60
50
40
30
20
FuelEconomy(MPG)
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
Up-FrontPrice

6. 6
The 2017-2025 NHTSA/EPA computed costs of
compliance are far lower than their previous data would
have suggested. Since 2010, Scenaria has conducted
multiple analyses leveraging the NHTSA technology val-
ues developed in 2010 and used them to estimate 2025
costs at least two-times higher than stated in the 2017-
2025 rule. So what is causing such a difference?
Figure 6 compares some of the technology val-
ues published by NHTSA/EPA with the 2017-2025 final
rules to those published only two years ago with the fi-
nal 2012-2016 rule. We used the values for 2012 for the
same vehicle class with only some of the available tech-
nologies to ensure directly comparable numbers. For
that reason, these curves do not extend as far or as high
as they would if all technologies were included.
As you can see in figure 6, the new technology val-
ues released this August are less than half the cost and
have greater fuel economy benefits than what the agen-
cies released just two years ago in 2010. As can be seen
by contrasting the two orange-circled items for a direct
injection turbocharged and downsized engine – a tech-
nology that has been on the market even prior to 2010
– the agencies have decreased the expected costs by
$1,413 (54%) and increased the expected benefits by
7%. Another example using the blue circles for an ad-
vanced engine (with technologies included in cooled-
EGR engine) with a dual clutch transmission (DCT)
shows that the agencies now estimate decreased costs
by $1,650 (53%) and increased benefits of 18%.
Digging deeper into the technology packages to
see what the agencies are using for individual technolo-
gies, Figure 7 plots several engine technology costs that
do not appear to be logical. For example, turbocharging
and downsizing (including direct injection), major com-
ponents of how automakers are expected to improve
LookingIntoUnexpected
TechnologyCostsandCosts
ofCompliance.
fuel economy, have nearly zero cost for level 2 small and
level 1 medium displacement engines. Previous agency
estimatesforthistechnologywerenearly$400.Another
example is cooled exhaust gas recirculation (EGR) – level
2 for large displacement engines which has negative in-
cremental costs of about -$325 over the time period.
This is especially strange since other level 2 cooled EGR
costs for small- and medium-displacement engines in
the agency files are +$531. Finally, the cost over time, as
shown for diesel engines, goes both up and down for the
same technology.
Taken in combination, anomalies in the technology
cost and benefit values being used by NHTSA/EPA show
why neither the estimated total costs, nor the shape of
the curves, are likely to be as stated by the agencies.
Reverting to the technology values used two years ago
wouldleadtoanaverageincrementalpriceimpactofap-
proximately two times $2,556, or $5,112 per vehicle.
So what is our perspective on why the agencies
made such drastic changes to the technology values?
Did the industry make that much progress in only two
short years? We may never know. It is a fact however,
that the NHTSA values published in 2010 – commensu-
rate with the 2012-2016 final rule – were the result of
vigorous industry debate and engineering analysis con-
ducted throughout the rule-making period. In contrast,
we believe that with the recession, the need to maintain
unified standards and less industry involvement during
the 2017-2025 rulemaking period, resulted in the new
technology values not having anywhere near the same
level of debate before being published.
Looking Into Unexpected Technology
Costs and Costs of Compliance.
Scenaria,
Perspective

7. 7
The new technology
values released this August
are less than half the
cost and have greater fuel
economy benefits than
what the agencies released just
two years ago in 2010.
90.0 %
80.0 %
70.0 %
60.0 %
50.0 %
40.0 %
30.0 %
20.0 %
10.0 %
0.0 %
$0 $2,000 $4,000 $6,000 $8,000
IncrementalFuelEconomy
Improvement(%MPG)
Incremental Price ($ / Vehicle)
$12,000$10,000
Advanced Engine + Dual Clutch
Transmission Estimated in 2012
Price: -53 %, FE: +18 %
DI Turbo Downsized Engine
Estimated in 2012
Pice: -54 %, FE: +7 %
DI Turbo Downsized Engine
Estimated in 2012
Advanced Engine + Dual Clutch
Transmission Estimated in 2010
NHTSA Estimated 2012
NHTSA Estimated 2010
Cross Over Vehicle Costs – 2010 vs. 2012 NHTSA Data ComparisonFigure 6
NHTSA Incremental Technology Costs/ Vehicle - 2017-2025 FinalFigure 7
$ 2,000
$ 1,500
$ 1,000
$ 500
$ 0
$ (500)
20102005 2015 2020 2025
Turbocharging and Downsizing – Level 2
(24 bar BMEP) – Medium Displacement
Turbocharging and Downsizing – Level 2
(24 bar BMEP) – Small Displacement
Turbocharging and Downsizing – Level 1
(18 bar BMEP) – Medium Displacement
Cooled Exhaust Gas Recirculation (EGR) -
Level 2 (27bar BMEP) - Large Displacement
Advanced Diesel – Large Displayment
Advanced Diesel –Small Displayment
Advanced Diesel – Medium Displayment
Cooled Exhaust Gas Recirculation (EGR)
– Level 2 (27bar BmEP) –Medium Displacement
Cooled Exhaust Gas Recirculation (EGR)
– Level 2(27bar BmEP) –Medium Displacement
Turbocaching and Downsizing – Level 1
(18 bar BMEP) –Small Displacement

8. 8
In the past, commentators stated that rising fuel
prices would drive the adoption of hybrid vehicles [9]. A
common assumption was that after a certain point, fuel
prices and hybrid sales would be correlated. In this new
paradigm, fuel prices would become the driving force for
advanced technology vehicle-purchase decisions.
Suspendingjudgmentonthevalidityofcertaintech-
nologycosts,ScenariaagainleveragedNHTSAestimates
for technology fuel-economy benefits and price impacts
in its FuelEconomyVIEW simulation tool to evaluate the
expected payback to consumers and the effect of energy
prices.
For OEMs, predicting consumer behavior is a signifi-
cant factor in determining their ultimate success. Using
the wrong assumptions about fuel-price tipping points
that would change consumer behavior could lead to sunk
costs, stranded capital, lost market share, and possibly
bankruptcy.
Rather than try to “crystal ball” gas prices, a more
robust approach is to deploy technologies that are not
only on the efficient frontier for incremental cost, but
also aligned with consumer payback across a wide range
of fuel-price scenarios. That way, no matter what the fuel
price, the business case for technologies is robust.
As Figure 8 shows, the light blue points represent
technologycombinationsthatprovidea returnoninvest-
menttoaconsumer(i.e.,payback).Thegreendotsdonot
provide this return.
When gas is $3.00 per gallon, less than half of the
technology packages (each one represented by a dot) are
colored blue, with a number of scenarios not providing a
payback. When gas is $6.00 per gallon, however, all the
technology packages are blue and therefore are calcu-
lated as paying back.
What About
Consumer Payback?
80
70
60
50
40
30
20
FuelEconomy
2025 Midsize Passenger Car
Gas Price @ $6.00
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
80
70
60
50
40
30
20
FuelEconomy(MPG)
Up-Front Price
2025 Midsize Passenger Car
Gas Price @ $3.00
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
The reader is once again cautioned to remember
thattheseplotsareusingNHTSA’snewtechnologyinput.
Nevertheless, it is clear to see that fuel prices can have a
major impact on the cost effectiveness of technology.
This relationship directly impacts the time required for
technology to “payback” to the consumer and can heav-
ily influence demand. NHTSA/EPA assumed fuel price will
be $3.63 per gallon in 2017 rising to $3.87 in 2025. That
assumption, especially if lower than predicted, will have a
major impact on what consumers choose.
Effective Costs at $3.00 and $6.00 per gallon – 2025 Midsize Passenger CarRuleFigure 8
Up-Front Price
What About Consumer Payback?Scenaria,
Perspective

9. 9
Scenaria analysis shows that the costs of compli-
ance to the 2017-2025 standards will be far higher than
highlighted by NHTSA/EPA. Instead of $1,540 per ve-
hicle, it is more reasonable to expect the average per
vehicle increases to reach $5,112. Some vehicle classes
will experience higher or lower costs of compliance and
it is up to each manufacturer to balance their portfolio
accordingly. The ability to pass along these costs to con-
sumers will depend heavily upon the competitive lands-
capeofothervehiclechoicesavailableandtheprevailing
price of fuel. Just below the NHTSA/EPA assumed gas
price of $ 3.87 per gallon, less than half of the technolo-
gy combinations have a positive payback to consumers
– and that’s based on using the more aggressive 2017-
2025 NHTSA/EPA technology values.
Building robust product portfolios in a changing
environment has always been a key business challenge.
In order to profitably meet the accelerating fuel econo-
my standards, new technologies will need to be applied,
proven, and then built upon. This can be a big opportu-
nity or a major threat for manufacturers and suppliers.
Manufacturers will need to be very strategic about
credit banking, technology selections, and portfolio op-
timization decisions or else face the diminishing abili-
ty to invest in future sources of competitive products.
Suppliers, now competing for their OEM customers’
investments in technology against not just their direct
competition but rather against the whole field of fuel
economy improving technologies, must invest in the
right technologies or face certain commoditization and
obsolescence.
One thing is clear: tomorrow’s winners must trans-
form their technology market-research and decision-
making systems today to be in place with the right tech-
nologies. Whether their efforts are in-house, or with the
help of a company like Scenaria, leaders must identify
and build robust portfolios that can survive and thrive
amid rapid and continual change.
Summary
There is no question that the industry will be able to
bring to market the technologies required to meet the
2012-2025 fuel economy standards. There is a major
question, however, about the costs and economic viabil-
ity at which they will be met.
The wrong investments today may make your com-
pany“kingofthehill”tomorrow,butputyouonthewrong
mountain in 2025. Given the level of investment dollars
needed to bring new products to market, who can afford
to pick the wrong mountain?
Rapid change, particularly in the technology space,
has created a “new normal” where certainty can change
to uncertainty in a moment’s notice. How can automak-
ers and suppliers “read the tea leaves” and plan future
technology strategies? How can they balance the risks
andopportunitieswhenrelevantfactorssuchaschanging
fuel prices, consumer priorities, and material commodity
prices can change seemingly overnight? What systems
should be “green lighted” and rolled out in large volume?
And above all else…how do OEMs roll out new technolo-
gies without eroding profits?
Leading companies of the future will generate a war
chest of capital from vehicle profits to sustain their abil-
ity to invest billions of dollars into new technology invest-
ments. They will streamline and transform their technol-
ogy capital-allocation decision processes to be immune
to uncertainty, aligned with core capabilities that can en-
able robust, rapid, and efficient technology related deci-
sions.
Scenaria is leading the way with new-model based
market research and planning methods to support objec-
tive and informed decisions of technology, product, and
capacity. We help companies evaluate different technol-
ogy investments not from the context of right or wrong,
but from the viewpoint of finding robust alternatives that
are preferred against any scenario. The uncertainty over
technology costs, benefits and fuel prices discussed in
this analysis are great examples of why it is so important
to approach decision making in this new way.
Finding Robust Alternatives
to Minimize Risk
Finding Robust Alternatives
to Minimize Risk
Summary

10. But one thing is clear;
tomorrow’s winners must
transform their decision-
making systems today.
Whether their efforts are
in house, or with the help
of a company like Scenaria,
leaders must create pro-
cesses that can survive
and thrive amid rapid and
continual change.
Scenaria,
Perspective

11. 11
Scenaria Inc., a leader in analytics-based strategic
consulting in the automotive industry and a member of
theAVLGroup,hasexpertswhohavebeenatthecenter
of the CAFE debate for years. We advise several OEMs
and large global auto suppliers on the subject.
We’ve harnessed subject matter experts, peer-re-
viewed data, NHTSA & EPA information, and complexity
science to provide insight into the technology choices
OEMs will face as they seek to meet both consumer
needs and regulations.
For this analysis, we developed correlated, base-
line market models and applied NHTSA technology data
within our proprietary FuelEconomyVIEW tool. After re-
moving assumptions (unknowns) about fuel prices, ve-
hicle usage, and market size, we simulated the full range
of potential outcomes and scenarios. We then explored
the data for tipping points, efficient frontiers, and sensi-
tivities. Finally, we calculated demand for technologies
based on the most cost-effective, system-level perfor-
mance.
Proprietary data was excluded from this white paper.
Authors
Sandy Stojkovski is President of Scenaria, where
she is responsible for setting the company’s strategic
direction and driving profitable growth. She can be con-
tacted at sandy.stojkovski@scenaria.com.
Joel Wenger is a Senior Consultant with Scenaria,
where he manages projects associated with the Sce-
naria FuelEconomyVIEW toolset. He can be contacted
at joel.wenger@scenaria.com.
Contributors
Maxim Gorelkin, Scenaria, Inc.
Acknowledgements
Frederic Jacquelin, Manager, Scenaria, Inc.
Christopher Mollo, Scenaria, Inc.
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About
ourResearch
About our Research
References

12. © 2012 Scenaria, Incorporated.
All rights reserved.
Scenaria, Inc.
47603 Halyard Drive
Plymouth, MI 48170
USA
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Leaders in analytic
based strategic planning.
Produced in the United States of America.
September 2012. All Rights Reserved.
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may be trademarks or service marks of others.
References in this publication to Scenaria
products and services do no imply that Scenaria
intends to make them available in all countries in
which Scenaria operates. For more information
about this study, you may visit our website: www.
scenaria.com.