Fixing Detroit: how far, how fast, how fuel efficient

Abstract

The Automotive Industry Crisis of 2009 is the worst the industry has ever experienced. This paper helps resolve the debate on how much and fast it should change and how it should it respond to demands for increased fuel efficiency. Looking at the actions of successful corporate turnarounds, the lessons are very clear: implement broad, deep, fast change, replace the management team, and transform the culture. We modeled the impacts of different fuel economy standards on profitability and sales, using the most accepted estimates of all the key parameters, and conducted an extensive sensitivity analysis on the key parameters. The impact of higher fuel economy standards on industry profits is very clear: increasing fuel economy 30% to 50% (35 MPG to 40.5 MPG) would increase the Detroit 3’s gross profits by roughly $3 billion per year, and increase sales by the equivalent of two large assembly plants. The sensitivity analysis showed our findings are very robust. The overall risk and reward profile is very positive, with only a small chance of losing and a very large probability of gain.