Industry Analysis Case Study

CAFE Fuel Rules: Changing Auto Industry Dynamics in the US

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Abstract:
In a move to increase fuel efficiency and to reduce gasoline usage for travel, a bill was passed by US Federal government raising the standards of Corporate Average Fuel Economy (CAFE) standards to 35 miles per gallon (mpg), to be achieved by 2020 from the current standards of 27.5 mpg for passenger cars and 22.2 mpg for trucks. US car manufacturers like GM, Ford and Chrysler were apprehensive of this decision as they were in doubt in achieving the proposed standard in 12 years. The automakers were left with two options – either make cars more expensive or make them smaller and less powerful. By upgrading their manufacturing processes and investing in expensive technology, they hoped to reach the standards set by the Act. It was also found that Japanese manufacturers like Honda or Toyota were closer to the proposed standards as compared to the ‘Detroit 3’ and European car manufacturers. On the other hand, fearing a rise in oil prices, consumers are looking for fuel efficient and compact cars. Consumers as well as market analysts presume that new CAFÉ standards can be met by 2020 which is in contradiction to the view of the automakers. The case attempts to profile the needs of consumers and expertise of auto-manufacturers, in the wake of new CAFÉ rules.

Pedagogical Objectives:

• To comprehend the implications of environmental regulations on industry dynamics
• To understand the impact of CAFE bill on US customers and auto manufacturers
• To understand the prospects and challenges of US auto industry.

Keywords : CAFÉ rules; Environmental Standards; Industry Analysis Case Studies; Big three; Detroit three; Japanese Automakers; Customer preference; Competitive environment; US Auto industry