Estimated Infrastructure Cost by Region in Billions, Nominal 2013 $US. Issue 14 - April 2013

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1 Issue 14 - April 2013 Editor: Kristin Dziczek, kdz@cargroup.org How Much Will it Cost to Build the Infrastructure Needed to Support Alternative Fuel Vehicles? Alternative Fuel Vehicles (AFVs) are becoming more common, and most manufacturers have plans to introduce new models that run on electricity, flex fuels, natural gas, or hydrogen in the coming years. Without a well-developed fueling infrastructure, these vehicles may face an uphill battle to win consumer acceptance. The Center for Automotive Research (CAR) recently completed a study with the Ford Motor Company that examines the cost of infrastructure investment to support alternative fuel vehicles (AFVs), and potential funding models that could be used to finance the infrastructure. The study, Financing the Infrastructure to Support Alternative Fuel Vehicles: How Much Investment is Needed and How Will It Be Funded? describes several types of alternative fuels, and summarizes the existing infrastructure investments to support AFVs in several countries. The report includes a projection of the likely future investment requirements, as well as an assessment of the gap between the level of infrastructure that will be needed by 2030 and what has been built so far. Particular attention has been given to the development of AFV infrastructure in the European Union, the United States, and China. Estimated Infrastructure Cost by Region in Billions, Nominal 2013 $US Billions of U.S. Dollars $45 $40 $35 $30 $25 $20 $15 $10 $5 CNG Flex-Fuel Plug-in Electric (BEV & PHEV) Hydrogen $42B $0.8 $23.8 $0.4 $17.2 $19B $0.03 $10.2 $1.2 $0 European Union United States China Source: Center for Automotive Research and Ford Motor Company $7.2 $34B $25.9 $8.3 Several examples of public financing programs and public-private partnerships to encourage sales of AFVs, construction of refueling infrastructure, and adoption of other environmental technologies are discussed. The report also evaluates the costs and benefits of various funding models (e.g. tax incentives, loan programs, and convertible bonds) which have been or could be put in place to support AFV infrastructure investment spending. Projections of future AFVs sales could vary substantially due to changes in adoption rates, government support, economic conditions, and technology maturity. Even at the relatively low levels of penetration that were used for the scenario in the study, nearly $95 billion in infrastructure investment would be required in Europe, the United States, and China by Of that $95 billion, the authors estimate that the three regions have already spent approximately $8 billion, meaning that between now and 2030, these regions will need to invest a combined $87 billion in AFV infrastructure. The paper was presented at a conference hosted by the Global Interdependence Center on April 9, 2013 in Richmond, Virginia. Joshua Cregger, jcregger@cargroup.org For more information, CAR s recent report entitled, Financing the Infrastructure to Support Alternative Fuel Vehicles: How Much Investment is Needed and How Will It Be Funded? is available in the Publications section at cargroup.org

2 Page 2 CAR s Forecast: U.S. Light Vehicle Sales U.S. light vehicle sales were 15.3 million at a seasonally adjusted annual rate for the first quarter of 2013, higher than the 15.0 million sales rate in the fourth quarter of 2012, and 1 million more than the same period a year ago. Economic indicators also imply a strong demand for light vehicles in the first quarter of 2013: real GDP grew by 2.5%; the new vehicle price index increased by 1% compared to last February; inflation was mild at between 0% and 1%; and household net worth continued to grow, largely due to invigorated stock markets and the recovery in housing prices. Positive economic indicators over the past few months have driven a 200,000 unit increase in CAR s 2013 sales forecast to 15.3 million units. However, the U.S. economy has not completely turned around. Total non-farm employment is still 3 million lower than it was five years ago, and while the unemployment rate has dropped, it remains high at 7%. Therefore, there is little change to CAR s long term sales forecast ( ); sales are estimated to be between 15 and 16 million units per year during the forecast period. Yen Chen, ychen@cargroup.org CAR s U.S Light Vehicle Sales Forecast, Source: Center for Automotive Research New Federal Fuel Rules to Require Cleaner-Burning Gasoline The Environmental Protection Agency (EPA) has announced it will promulgate a rule requiring two-thirds lower sulfur content in U.S. gasoline, and imposing fleetwide limits on pollution by The new standards are supported by the automotive manufacturers because they would mean a single fuel standard nationwide. Unlike increased standards for new vehicles, cleaner fuel standards will have a more immediate impact on air pollution by lowering the emissions of all vehicles that use the cleaner fuel not just newer models with the latest technology. The new, uniform federal clean fuel standard, known as Tier 3, will also enable production of vehicles with lean-burn gasoline direct injection technology (GDI), which will help the manufacturers meet the 54.5 mpg corporate average fuel economy standards by Direct injection technology is widely utilized in diesel engines, but it has not yet been broadly implemented in gasoline engines. The cost of a GDI engine is about 5% higher than that of a conventional engine, but emissions can be as much as 15% lower. The low-sulfur fuel itself is more expensive, as well; the EPA estimates the cost of a gallon of fuel will go up by less than a penny a gallon, but the petroleum industry estimates the costs will be much higher, due to as much as $10 billion in required upgrades to the nation s refineries, and $2.4 billion in higher annual operating costs. The EPA esimates the public health benefits of the ruling to be up to $23 billion by Sulfur in gasoline limits the effectiveness of catalytic converters, which leads to higher emissions of carbon monoxide, nitrogen oxides, volatile organic compounds, and particulates. While sulfur is not a direct health hazard, the higher tailpipe emissions it causes are related to increased incidences of respiratory ailments, heart disease, and related deaths. Kristin Dziczek, kdz@cargroup.org

3 Page 3 Eye on the Market: Alternative Powertrain Vehicles Face Competition from Conventional Counterparts Through 2012, electric and hybrid vehicles have achieved a modest 3.1% market share in the United States. Although both the availability of these vehicles and the vehicles fuel economy have increased in the last few years, their penetration of the U.S. market is constrained by several factors, including the significant price premium over conventionally powered vehicles, and inconsistent fuel economy achievement in real-world driving situations. While the prices of various hybrid and electric vehicle powertrain components have decreased over time, these vehicles continue to command considerable price premiums over conventional vehicles. The price of electric vehicles varies considerably from model to model, but the average hybrid costs between $3,000 and $5,000 more than a comparable conventional vehicle. Electric vehicles require a large battery, as well as motors and other specialized components. Both battery technology and cost performance have gradually improved over the last few years, but there have not been any technological breakthroughs that make electric technologies cost-competitive with conventional vehicles. Hybrid vehicles require a much smaller, and therefore less expensive, battery than fully electric vehicles, but these vehicles require two powertrains one conventional and one electric which adds to cost. The fuel economy gains that battery electric and hybrid vehicles provide Top Ten High Fuel Economy Gasoline Vehicles, 2013 Vehicle City Combined Highway Fuel 1 Scion iq Regular 2 Smart Fortwo Premium 3 Nissan Versa Regular 4 Chevrolet Spark Regular 5 Fiat Premium 6 Nissan Sentra Regular 7 Toyota Yaris Regular 8 Honda Civic Regular 9 Chevrolet Sonic* Regular 10 Ford Fiesta Regular *Assembled at GM-Orion Tounship Plant Source: Center for Automotive Research over conventionally powered competitors must be large enough to justify these cost premiums. Gasoline internal combustion engine powered vehicles have become increasingly efficient over the last few years. The sidebar table provides a summary of the ten most fuel-efficient conventionally powered vehicles available in the United States, along with the type of fuel they use. While all of these vehicles are either compact or subcompact cars, there are some larger vehicles that have also achieved impressive fuel economy performance. The base model Nissan Altima midsize sedan, UAW Membership Edges Up Slightly in 2012 for example, earned a highway rating of 38mpg even without hybrid or mild hybrid technologies. Fuel economy improvements in conventionally-powered vehicles can be achieved through the adoption of technologies such as direct injection, turbo and supercharging, transmissions with six or more gears, and weight savings resulting from use lighter materials throughout the vehicle. The fuel economy improvements in conventional internal combustion engines have raised the fuel economy threshold alternative powertrain vehicles must achieve in order to be cost-competitive. Bernard Swiecki, bswiecki@cargroup.org According to a March filing with the U.S. Department of Labor, UAW membership increased 0.5% in 2012 to 382,513 members, marking the third straight year of gains. The growth was largely due to the success of Chrysler, Ford, General Motors, and the automotive supplier sector. UAW membership is about one-fourth of what it was at its peak in 1979, and current membership is just 55% of what it was at the most recent peak in Kristin Dziczek, kdz@cargroup.org UAW Membership, UAW Membership 800, , , ,000 0 Source: U.S. Department of Labor

4 Page 4 Supplier Spotlight: DENSO in Michigan In the first quarter of 2013, automotive suppliers announced Michigan investments totaling $660 million; these investments are projected to create more than 5,000 new jobs in the state. Many of these investments were made by large, well known automotive suppliers, including American Axle, Faurecia, Lear, Magna, and DENSO. In January, DENSO announced that it will be investing more than $150 million to expand two of its existing facilities in Michigan, which is expected to create 440 new jobs. DENSO Group Companies in Michigan DENSO s complex in Battle Creek is its largest presence in the state, and has been in operation since The company is investing $105 million In Battle Creek to expand existing and build new manufacturing lines in order to increase production capacity of heating, ventilation, and air conditioning (HVAC) units, radiators, and condensers. In Southfield, DENSO is investing just over $45 million to expand its design, engineering, and testing facilities for powertrain, climate controls, body electronics, and safety systems at its North American headquarters. While DENSO was originally formed as part of Toyota s vertical supply chain, the company now serves automakers from around the world. DENSO s Michigan footprint includes seven group companies which are located in Battle Creek (Region 6), Southfield (Region 10), Novi (Region 10), and Parma (Region 9). Each of the four DENSO companies in Battle Creek produce automotive air conditioning and engine cooling components and systems. As previously mentioned, Southfield is the site of DENSO International America, Inc., DENSO s North American headquarters. In Parma, DENSO produces air conditioning compressors and magnetic clutches, and in Novi, DENSO conducts engineering support and North American sales planning. Bernard Swiecki, bswiecki@cargroup.org MEDC Region Focus: Company Address City DENSO Manufacturing Michigan, Inc. 1 Denso Road Battle Creek DENSO Air Systems Michigan, Inc. 300 Fritz Keiper Boulevard Battle Creek ASMO Manufacturing, Inc. 500 Fritz Keiper Boulevard Battle Creek Systex Products Corporation 300 Buckner Drive Battle Creek ASMO Detroit, Inc Lewis Drive Novi Michigan Automotive Compressor, Inc North Dearing Road Parma DENSO International America, Inc Denso Drive Southfield

5 Monthly Michigan Vehicle Production CAR Michigan Regional Automotive Focus, Issue 14, April 2013 Page 5 Michigan s February year-over-year vehicle production growth rate was 2.4%, the smallest since September Although the growth rate was low, production levels were still the highest level for the month of February since 2009 recession. According to Automotive News, the Detroit Three automakers inventories on February 1st, (measured as days of vehicle supply) were up significantly from a year ago. Chrysler s inventory was up from 73 days to 87 days, Ford from 63 days to 85 days, and GM from 76 days to 95 days. Inventory overstocks put downward pressure on vehicle prices, and could hamper vehicle production. As of April 1st, inventory levels have fallen, with Chrysler at 66 days, Ford at 64 days, and GM at 82 days. Yen Chen, ychen@cargroup.org Monthly Michigan Vehicle Production, January 2011-February , , , , , , , ,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Ward s Automotive News From CAR s Book of Deals CAR s Automotive Book of Deals is a proprietary database that catalogues the details of all major North American automotive investments--including both private and public investment, and job creation and retention estimates. In Q1 2013, automakers announced investments across North America totaling approximately $2 billion. Among these were several large investments in the Great Lakes region, including: Major Automaker Investments, Q Michigan: GM announced a $200 million investment at its powertrain group headquarters, retaining 400 jobs. The new wing will allow consolidation of work currently conducted at leased facilities. Detroit Electric announced it is setting up its new headquarters and production site that is expected to create 180 jobs in the state. Indiana: Chrysler announced a $212 million investment in its Kokomo transmission plant, and a $162 million investment to begin production at the former Getrag joint venture plant in Tipton. Subaru announced a $230 million investment to increase capacity at its Lafayette Assembly Plant. Ohio: Honda announced a $23 million investment in its Marysville Assembly Plant, and additional investment in wind turbines at its Russell s Point transmission facility. Source: Center for Automotive Research Ford will invest $200 million in its Cleveland Engine Plant to support 2-liter Eco- Boost engine production. Ontario: GM announced a $250 million investment in its CAMI plant in Ingersoll. Beyond the first quarter, GM announced engine and transmission investments at plants in Toledo, OH; Bedford, IN; Flint, MI; and Bay City, MI in April. GM also recently announced that it will increase investments in engine plants in Romulus and Saginaw, MI by $46 million. Joshua Cregger, jcregger@cargroup.org

6 Page 6 Michigan Vehicle Production Overall, Michigan s February 2013 vehicle production was up slightly over last February. Chrysler s Michigan car production increased about 9%, while the company s truck production dropped by 1%. Ford s Dearborn truck plant continued to produce over 30,000 trucks per month even in a short month. Ford s Flat Rock Assembly is retooling for the 2014 Fusion scheduled to begin production this summer, and therefore the plant s output will be low for next several months. The company s Michigan Assembly Plant has been running 3-crew/2-shift production since May 2012, and output is up significantly over last year. GM s Detroit-Hamtramck assembly plant output was up 52% over year ago levels; production of Chevrolet Impala was added to Hamtramck in April 2013, which should result in significant output growth at the plant in Yen Chen, ychen@cargroup.org Company Plant February 2013 Production % Change YOY CHRYSLER LLC CONNER AVENUE 32 N/A JEFFERSON NORTH 23, % STERLING HEIGHTS* 21, % WARREN 19, % FORD DEARBORN TRUCK 30, % FLAT ROCK* 9, % MICHIGAN ASSEMBLY* 29, % GM FLINT TRUCK 15, % *Passenger car plants Source: Ward s Automotive HAMTRAMCK* 5, % LANSING DELTA TWP 23, % LANSING GRAND RIVER* 3, % ORION* 13, % TOTAL 195, % about Michigan Regional Automotive Focus is sponsored by the Michigan Economic Development Corporation to advance knowledge of Michigan s automotive industry, and is produced by the nonprofit Center for Automotive Research (CAR). CAR is focused on a wide variety of important trends and changes related to the automobile industry and society at the international, federal, state and local levels. CAR conducts industry research, develops new methodologies, forecasts industry trends, advises on public policy, and sponsors multi-stakeholder communication forums. CAR Affiliates include over 60 automakers, suppliers, associations, and key stakeholders in the North American automotive industry, including: Chrysler Group LLC, Ford Motor Company, General Motors, Honda, Nissan North America, Toyota, and Volkswagen Group of America.