TABLE 3.8 Short- and Long-Term Indirect Cost Multipliers

 

Low Complexity

Medium Complexity

High Complexity

Industry Average RPE

Short term

1.05

1.20

1.45

1.46

Long term

1.02

1.05

1.26

1.46

SOURCE: Rogozhin et al. (2009), Table 4-5.

added to 1.0 to produce the IC multipliers. The multipliers range from 1.05 to 1.45 in the short run and 1.02 to 1.26 in the long run (Table 3.8). This implies that none of the fuel economy technologies considered, no matter how complex, could cause an increase in indirect costs as large as the industry average indirect costs, especially in the long run. This result would imply that the more that regulatory requirements increase the cost of automobile manufacturing, the lower the overall industry RPE would be.

FINDINGS

Large differences in technology cost estimates can result from differing assumptions. Carefully specifying premises and assumptions can greatly reduce these differences. These include the following:

  • Whether the total cost of a technology or its incremental cost over the technology that it will replace is estimated;

  • Whether long-run costs at large-scale production are assumed or short-run, low-volume costs are estimated;

  • Whether learning by doing is included or not;

  • Whether the cost estimate represents only direct inhouse manufacturing costs or the cost of the purchase of a component from a Tier 1 supplier;

  • Whether the RPE multiplier is based on industry average markups or is specific to the nature of the technology; and

  • What other changes in vehicle design, required to maintain vehicle quality (e.g., emissions, towing, gradability, launch acceleration, noise, vibration, harshness, manufacturability), have been included in the cost estimate.

Finding 3.1: For fully manufactured components purchased from a Tier 1 supplier, a reasonable average RPE markup factor is 1.5. For in-house direct (variable) manufacturing costs, including only labor, materials, energy, and equipment amortization, a reasonable average RPE markup factor is 2.0. In applying such markup factors, it is essential that the cost basis be appropriately defined and that the incremental cost of fuel economy technology is the basis for the markup. The factors given above are averages; markups for specific technologies in specific circumstances will vary.


Finding 3.2: RPE factors certainly do vary depending on the complexity of the task of integrating a component into a vehicle system, the extent of the required changes to other components, the novelty of the technology, and other factors. However, until empirical data derived by means of rigorous estimation methods are available, the committee prefers to use average markup factors.


Finding 3.3: Available cost estimates are based on a variety of sources: component cost estimates obtained from suppliers, discussions with experts at OEMs and suppliers, comparisons of actual transaction prices when publicly available, and comparisons of the prices of similar vehicles with and without a particular technology. There is a need for cost estimates based on a teardown of all the elements of a technology and a detailed costing of material costs, accounting for labor time and capital costs for all fabrication and assembly processes. Such studies are more costly than the current approaches listed above and are not feasible for advanced technologies whose designs are not yet finalized and/or whose system integration impacts are not yet fully understood. Nonetheless, estimates based on the more rigorous method of teardown analysis are needed to increase confidence in the accuracy of the costs of reducing fuel consumption.


Technology cost estimates are provided in the following chapters for each fuel economy technology discussed. Except as indicated, the cost estimates represent the price that an OEM would pay a supplier for a finished component. Thus, on average, the RPE multiplier of 1.5 would apply.

REFERENCES

Albu, S. 2008. ARB perspective on vehicle technology costs for reducing greenhouse gas emissions. Presentation by Assistant Chief, Mobile Source Division, California Air Resources Board, to the Committee on Technologies for Improving Light-Duty Vehicle Fuel Economy, January 24, Detroit, Mich.

Bussmann, W.V. 2008. Study of industry-average markup factors used to estimate retail price equivalents (RPE). Presentation to the Committee on Assessment of Technologies for Improving Light-Duty Vehicle Fuel Economy, January 24, Detroit, Mich.

Bussmann, W.V., and M.J. Whinihan. 2009. The estimation of impacts on retail prices of regulations: A critique of “Automobile Industry Retail Price Equivalent and Indirect Cost Multipliers.” Prepared for Alliance of Automobile Manufacturers, May 6, Southfield, Mich.

DOT/NHTSA (Department of Transportation/National Highway Traffic Safety Administration). 2009. Average fuel economy standards, passenger cars and light trucks, model year 2001: Final rule. 49 CFR Parts 523, 531, 533, 534, 536, and 537, Docket No. NHTSA-2009-0062, RIN 2127-AK29. March 23. Washington D.C.

Duleep, K.G. 2008. Analysis of technology cost and retail price. Presentation to Committee on Assessment of Technologies for Improving Light-Duty Vehicle Fuel Economy, January 25, Detroit, Mich.

EEA (Energy and Environmental Analysis, Inc.). 2006. Technologies to Reduce Greenhouse Gas Emissions from Light-Duty Vehicles. Report to Transport Canada, Ottawa, Ontario, March. Arlington, Va.



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