i
The Ability of Automakers to Introduce a Costly, Regulated New
Technology: A Case Study of Automotive Airbags in the U. S. Light- Duty
Vehicle Market
By
ETHAN CHARLES ABELES
B. A. ( University of Massachusetts, Amherst) 1998
MASTER’S THESIS
Submitted in partial satisfaction of the requirements for the degree of
MASTER OF SCIENCE
in
Transportation Technology and Policy
in the
OFFICE OF GRADUATE STUDIES
of the
UNIVERSITY OF CALIFORNIA
Davis
Approved:
______________________________
______________________________
______________________________
COMMITTEE IN CHARGE:
2004
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Acknowledgments
This thesis is derived from work done for Contract 02- 310, Project No.
008545 Analysis of Auto Industry and Consumer Response to Regulations
and Technological Change, and Customization of Consumer Response
Models in Support of AB 1493 Rulemaking by the Institute of
Transportation Studies at the University of California, Davis under the
sponsorship of the California Air Resources Board. First, I would like to
offer my thanks to the almighty ambiguous higher power type being for
having such a great sense of humor. I thank my son Ulysses for helping
me see things in a new and better way every day, my partner Desiree for
not putting up with my nonsense and being a strong person when I most
need her, my sister because she is the true academic in the family and a
beautiful person to boot, my mother for the support and love she has
always given me, and my father whose unique brand of supportive
criticism has worked at least part of the time. Belinda Chen, who worked
on the project that hatched this thesis, is also deserving of thanks. I would
also like to extend my gratitude to my thesis committee: Daniel Sperling
for his many suggestions and corrections, Andrew Burke for his solid
mentoring and consistent frie ndship, and David Bunch as well. Lastly, I
thank the following members of the Air Resources Board for their insight
and guidance throughout the project: Corey Bock, Fereidun Feizzolahi,
Reza Mehvadi, and Bill Dean.
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TABLE OF CONTENTS
1 INTRODUCTION ............................................................................................................................... .............. 1
1.1 Background..................................................................................................................... ............................. 3
1.2 Research Approach....................................................................................................................... ............. 5
2 HISTORY OF PASSIVE RESTRAINT REQUIREMENTS .................................................................. 7
2.1 FMVSS 208 Develops into an Airbag Mandate..................................................................................... 8
2.1.1 The Passive Restraint Requirement Issued By Secretary Dole................................................ 8
2.1.2 The Intermodal Surface Transportation Efficiency Act of 1991............................................ 10
2.2 Penetration Rates for Airbags.................................................................................................................. 11
3 INDUSTRY RESPONSE....................................................................................................................... ........ 15
3.1 Barriers to Airbag Adoption from an Automaker Perspective .......................................................... 16
3.1.1 Cost........................................................................................................................... ....................... 16
3.1.2 Product Liability Claims .............................................................................................................. 16
3.1.3 Less Expensive Alternatives......................................................................................................... 17
3.1.4 Questions about Airbag Reliability and Performance ............................................................ 20
3.1.5 Airbag Regulation was viewed as Beatable by Automakers................................................... 20
3.2 Compliance Cost........................................................................................................................... ............ 22
3.2.1 Reported Airbag Cost Estimates 1969 – 2000.......................................................................... 22
3.2.2 Option Pricing of Airbags............................................................................................................ 29
3.2.3 Airbag Component Costs.............................................................................................................. 33
3.3 Evolution of Compliance Cost................................................................................................................ 36
3.3.1 Cost Reductions of Airbag Systems ............................................................................................ 36
3.3.2 Experience Curves for Airbag Systems...................................................................................... 40
3.3.3 Other Mechanisms that have Facilitated Cost Reductions..................................................... 44
3.4 Compliance Cost Impact on Vehicle Pricing........................................................................................ 45
3.4.1 Compliance Strategies.................................................................................................................. 46
3.4.2 Vehicle Pricing Policies of the Automobile Industry............................................................... 48
3.4.3 Cost Transfer for the Introduction of Airbag Systems............................................................. 51
3.4.4 Impact of Airbag Regulation on the Auto Industry.................................................................. 60
3.5 Marketing Compliance- Related Vehicle Attribute Changes.............................................................. 63
3.5.1 Advertising the Airbag.................................................................................................................. 63
3.5.2 Early Efforts by Mercedes- Benz.................................................................................................. 64
3.5.3 The importance of an Effective Marketing Campaign for GM .............................................. 65
3.5.4 Ford and Chrysler Follow Mercedes’ Lead in Different Ways ............................................. 68
3.5.5 Negative Portrayals of Airbags in Automakers’ Marketing................................................... 71
3.5.6 Implications for Marketing Technologies that could reduce GHG Emissions.................... 73
3.6 Business, Job, Wealth Creation Resulting from Compliance ............................................................ 80
3.6.1 Expansion of the Automotive Airbag Industry.......................................................................... 80
3.6.2 Technological Innovation with respect to Airbags.................................................................. 85
3.7 Unregulated Automotive Safety Systems .............................................................................................. 89
3.7.1 Anti- Lock Braking Systems ( ABS)............................................................................................... 90
3.7.2 Traction Control........................................................................................................................ ... 92
3.7.3 Side Airbags........................................................................................................................ ........... 92
4 CONSUMER RESPONSE....................................................................................................................... ..... 95
4.1 Impact of Compliance- Related Vehicle Attribute Changes and Accompanying Price Changes
on New Car Sales ............................................................................................................................... ...................... 96
4.2 Incentives to Speed up the Introduction of Airbags......................................................................... 101
4.2.1 The Insurance Industry............................................................................................................... 101
4.2.2 Automakers & Auto Dealers...................................................................................................... 106
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5 CONCLUSIONS AND LESSONS LEARNED....................................................................................... 108
5.1.1 Lessons Learned........................................................................................................................ .. 109
REFERENCES ............................................................................................................................... ........................... 115
ABBREVIATIONS ............................................................................................................................... ................... 123
APPENDICES ............................................................................................................................... ............................ 124
Appendix A: Changes in Price and Sales Volume for 27 Passenger Cars.................................................... 124
Appendix B: Detailed Airbag and ABS Installation Rates ............................................................................. 151
Appendix C: Descriptive Statistics for Price Analysis .................................................................................... 162
Appendix D: Bureau of Labor Statistics New Car Quality Improvements 1968 – 2002 ........................... 164
Appendix E: Description of Airbag Related Patent Subclasses ..................................................................... 165
Appendix F: Cost Figuring Methodology for NHTSA - Sponsored Studies and Reported Airbag Costs 168
APPENDIX REFERENCES ............................................................................................................................... ... 175
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TABLE OF FIGURES & TABLES
Figures
Figure 2- 1 Annual U. S. New Passenger Car Sales by Occupant Restraint System............................................ 11
Figure 2- 2 History of Consumer Valuation of Vehicle Attributes......................................................................... 12
Figure 2- 3 Driver- Side Airbag Installation Rates in US Passenger Cars by Automaker Region ..................... 13
Figure 2- 4 Passenger- Side Airbag Installation Rates in US Passenger Cars by Automaker Region............... 13
Figure 2- 5 Number of Airbag Units Installed on Passenger Cars Sold in the US ............................................... 14
Figure 3- 1 Trend in Producer Price Index for Airbag Components....................................................................... 41
Figure 3- 2 Estimated Experience Curves for Dual Airbag System Cost.............................................................. 42
Figure 3- 3 Average MSRP Increase with Airbags, ABS, and Neither Added..................................................... 55
Figure 3- 4 Average Fleet- Wide Percentage Annual Increase in New Car Prices ............................................... 57
Figure 3- 5 Average Retail Price Changes for Quality Improvements and Average Change in Car Price
($ 2001) ............................................................................................................................... ................................... 58
Figure 3- 6 Big 3 Automaker Advertisement on Airbag Safety ( 1997) ................................................................. 72
Figure 3- 7 First Generation Toyota Prius Ads ( c. 2000) ......................................................................................... 75
Figure 3- 8 Second Generation Prius Ads ( c. 2003) .................................................................................................. 78
Figure 3- 9 Growth in Airbag Production in Millions ( 1990 to 2000) ................................................................... 80
Figure 3- 10 Market by Product for Autoliv ( 1993- 2002) ........................................................................................ 83
Figure 3- 11 Global Outlook for Airbag Industry ( 1999- 2005) ............................................................................... 84
Figure 3- 12 Balance of Power Illustration between OEMs and Suppliers ........................................................... 85
Figure 3- 13 Patenting Activities in Automotive Emission Control Technologies, 1968 to 1998 .................... 88
Figure 3- 14 Anti- Lock Braking System Installation Rates on Cars Sold in the U. S. ......................................... 91
Figure 3- 15 ABS and Airbag Installation Rates on Passenger Cars Sold in the U. S.......................................... 91
Figure 3- 16 Traction Control Installation Rates on Cars Sold in the U. S............................................................. 92
Figure 3- 17 Side Airbag Installation Rates on Cars Sold in the U. S. .................................................................... 93
Figure 3- 18 Diagram of Modern Airbag Systems ..................................................................................................... 94
Figure 4- 1 Average Willingness to Pay for a Driver- Side Airbag ...................................................................... 100
Figure 4- 2 Allstate Airbag Advertisement ( 1975) ................................................................................................. 103
Figure 4- 3 Allstate Airbag Advertisement ( 1990) ................................................................................................. 104
Figure 4- 4 Automotive Supplier Airbag Advertisement ( 1991).......................................................................... 105
Tables
Table 3- 1 Reported Non- Proprietary Airbag Consumer Price Estimates ............................................................ 26
Table 3- 2 NHTSA Estimate of Airbag Costs............................................................................................................. 27
Table 3- 3 Consumer Costs ( RPEs) of Airbag Systems from Three NHTSA Contracted Studies.................... 28
Table 3- 4 Airbag Component Cost Summary............................................................................................................ 35
Table 3- 5 Expected Cost Reductions as a Function of Production Volume ......................................................... 40
Table 3- 6 Results from Experience Curve Estimation for Airbag Consumer Cost............................................. 43
Table 3- 7 Change in Average Vehicle Price when Airbags & ABS are made Standard ( Price) ...................... 54
Table 3- 8 Change in Average Vehicle Price when Airbags & ABS are made Standard ( Veh. Class)............ 54
Table 3- 9 Summary of Statistics related to the Introduction of Airbags ( 1987- 1997) ....................................... 59
Table 3- 10 Average Profit Margins for a Number of Industries ............................................................................ 61
Table 3- 11 Summary of Financial and Airbag Statistics for Select Automakers ( 1988- 1997)......................... 62
Table 3- 12 Shares in the Global and US automotive safety equip. markets, 2000 ( US$ market value) ......... 81
Table 3- 13 Summary of the Expansion of Autoliv ( Airbag Supplier)................................................................... 82
Table 3- 14 Relevant patents issued for automotive airbag technology................................................................. 87
Table 3- 15 Examples of Active and Passive Safety Attributes............................................................................... 89
Table 4- 1 Percentage of Passenger Cars and Light Trucks Sold in the U. S. ( 1987- 1997) ................................ 96
Table 4- 2 Annual Aggregate Sales and Price Changes ( All, Region, Vehicle Class)........................................ 98
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Abstract
A case study was conducted to better understand automaker behavior in
response to regulation. In this case, it was found that the potentially costly
impact of the rules was largely offset by a variety of automaker behaviors
and strategies, and by shifts in consumer demand for safety.
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EXECUTIVE SUMMARY
Background
AB 1493 requires CARB to propose a set of rules that would improve the
greenhouse gas emissions of light duty vehicles in California. To provide insight into
how future regulations of greenhouse gas emissions might impact automakers and
consumers, this case study examined historical federal passive restraint rulemaking.
Determining automaker behavior in response to regulation is a difficult task due to the
complexity of the market and the guarded nature of industry practices. The first passive
restraint standard was passed in 1984, calling for all model year 1990 passenger cars sold
in the U. S. to be equipped with a passive restraint system. In 1991, after a long fight
between automakers and regulators, legislation was passed that effectively made the
passive restraint standard an airbag mandate. Today, all light duty vehicles sold in the
U. S. must contain a dual frontal airbag system. This report examines the history of
passive- restraint regulation in the U. S. for 1970- 2003, with special emphasis on airbag
systems.
Findings
The cost of airbag systems fell dramatically as production ramped up and
economies of scale were realized. Automakers employed a variety of strategies in
meeting the passive restraint regulation. Once airbags were mandated, some automakers
rushed to place airbags across their entire vehicle line, while others introduced the
technology more gradually. Increased costs to meet airbag regulation had little impact on
the volume and mix of vehicle types offered at the time the regulation went into effect.
During the period of regulatory debate, automotive industry forecasts tended to
viii
overestimate the future cost of airbags, sometimes intentionally by assuming limited
production volumes and atypical amortization schedules, while government and advocacy
groups often underestimated costs. The prolonged struggle over the federal government’s
passive restraint regulations resulted in compromised rules and vehicle strategies that had
a lower benefit- cost ratio than alternative strategies and rules.
In pricing vehicles, automakers handle the added cost of airbags much as they do
other new technologies, and quality improvements generally. Vehicle pricing is a
complex process aimed at achieving the corporate objectives of maximizing profit and
market share.
Automakers employ a number of strategies to recoup the cost of a new technology
such as airbags. In this case, as shown later, auto manufacturers passed most of the added
cost of airbags onto consumers, but not necessarily in a straightforward manner. In
general, automakers pass costs incurred by regulation through vehicles that are in higher
demand and/ or have a higher profit margin. Automakers may recoup the cost over a
number of years to avoid price shock. Offsetting reductions in standard equipment
( decontenting) on some models and a disproportionate raise in dealer ( inventory) cost
may be used to mitigate the effects of cost pass- through pricing. Such cost recovery
behavior will differ somewhat between unregulated in- demand technologies and
regulated technologies that consumers do not value.
In this age of creative financing plans and significant financial incentives,
including rebates, automakers have an array of marketing tools, in addition to advertising,
with which to generate customer demand. In the case of airbags, advertising played a
prominent role in educating consumers about the technology and creating demand for this
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and other safety features. Automakers that pioneered the introduction of airbags ( e. g.
Mercedes and Chrysler) derived substantial “ halo effects” that aided their overall
marketing.
Conclusion
Although automakers resisted the passive restraint rules, they eventually
responded fully and effectively. They did so in ways that mitigated the economic impact.
The initial high cost of airbags was the principal source of concern about the passive
restraint standard by automakers. But once airbags were introduced, costs fell
dramatically. The safety devices were added across all vehicle segments, with no little or
no impact on quantity or mix of sales. Three findings stand out. First, requirements that
industry introduce new technologies or products should be made as flexible as possible
with appropriate phase- in periods to allow opportunity to utilize the many economic and
marketing tools at their disposal. Second, in this case, the cost of compliance may have
had some impact for the first year or two after regulation, but the impact on sales across
the industry appears to have been negligible. Third, the nature of the statutory authority
and the design of the regulations strongly affect the length of debate, which in turn delays
the implementation of the rules, and compromises the cost- effectiveness of automaker
responses.
1
1 INTRODUCTION
This report examines automaker behavior in response to passive- restraint
regulation roughly from 1970 to 2000. The report consists of the following three sections.
§ Regulatory Stimulus – This section will detail the timeline of the proposed and
enacted passive restraint regulation. The installation rate of airbags over the time
period of interest will also be presented here.
§ Industry Response – The focus here is the relationship between cost and price.
The analysis here first reviews cost and option price information for airbags as
reported in media, academic, industry, and government records and sources. An
original analysis is also conducted of the costs of integrating an airbag system into
a vehicle. The analyses presented here examine automakers decontenting to keep
prices down when airbags are added. Cost estimates for airbags and airbag
components, along with a technology that was not regulated, anti- lock braking
systems ( ABS) are estimated and evaluated. A discussion follows of the business,
job and wealth creation engendered by the nascent airbag industry to further
elucidate the economic impact of the regulation. Marketing practices used by the
industry to facilitate the adoption of an airbag regulation will be analyzed as well
to address how automakers repositioned themselves from their adversarial
position toward regulation in order to effectively promote the new safety features.
2
§ Consumer Response – This section examines the impact of airbags, and the
resultant price increase, on ve hicle sales. The marketing strategies for promoting
more ‘ public good’ type attributes related to safety, environment and fuel
economy are examined. Other impacts on consumer behavior will also be
analyzed.
3
1.1 BACKGROUND
The history of Motor Vehicle Safety Standard 208, which governs passenger
restraint systems in motor vehicles, is complex. This standard lays the foundation for the
repeated governmental attempts at airbag regulation that were finally realized with the
inclusion of the airbag mandate in the Intermodal Surface Transportation Efficiency Act
( ISTEA) of 1991. The history leading up to this point was filled with avoidance strategies
by the auto industry and regulatory compromises that shifted from one presidential
administration to another.
The automobile industry in the U. S. was relatively free of government regulation
in the 1960s, until mounting concern over air pollution and traffic safety, and later energy
use attracted the attention of policymakers. Both the Environmental Protection Agency
( EPA), which regulates vehicle emissions, and the National Highway Transportation
Safety Administration ( NHTSA), which regulates vehicle safety, were established in late
1970 under the Republican administration of President Nixon.
The explicit goal of NHTSA is to “… reduce deaths, injuries and economic losses
resulting from motor vehicle crashes. This is accomplished by setting and enforcing
safety performance standards for motor vehicles and motor vehicle equipment, and
through grants to state and local gove rnments to enable them to conduct effective local
highway safety programs.”[ 1] Congress directed that Federal safety standards should be
specified in such a manner that “ the public is protected against unreasonable risk of
crashes occurring as a result of the design, construction, or performance of motor
vehicles and is also protected against unreasonable risk of death or injury in the event
crashes do occur.”[ 1] The question of which strategy is most effective and desirable –
4
altering driver behavior or improving technology – played a key role in the airbag debate,
and continues to underlie debates about how best to improve safety. NHTSA has
historically pursued active technology- forcing rules, requiring improvements in auto
safety that were ahead of current technology. The courts have supported this approach.
For example, the U. S. Court of Appeals upheld the authority of NHTSA to issue an
airbag rule in 1972, stating that the agency “ is empowered to issue safety standards which
require improvements in existing technology or which require the development of new
technology, and it is not limited to issuing standards based solely on devices already fully
developed.”[ 2]
After years of deliberation, a passive restraint standard was passed in 1984,
requiring that 100% of new cars be equipped with airbags starting with the 1990 model
year. There were alternative ways to satisfy the standard other than airbags, so even on
1990 model cars, airbag penetration was minimal. This changed in 1991, when the
sweeping new transportation bill, the Intermodal Surface Transportation Efficiency Act
( ISTEA) included a provision mandating the use of dual airbags on all vehicles sold in
the U. S. beginning with the 1998 model year for passenger cars and 1999 for light trucks.
By 2003, over 117 million ( 54.6%) of the more than 216 million cars and light
trucks on U. S. roads were equipped with dual airbags. Another 21 million vehicles had
only a driver- side airbag. NHTSA has estimated that as of August 2003 12,776 people are
alive today because of an airbag.
5
1.2 RESEARCH APPROACH
The regulatory history of passive restraint standards is well documented in
government sources, the media, and the scholarly literature; but the costs of complying
with the rules, and how industry and consumers responded to the rules and technologies
is not well understood.
Methods
The following analysis employs a case study approach, which is a form of
qualitative descriptive research. While case studies are by definition context- specific, and
as research, do no t exhibit generalizability, automaker behavior in response to this
specific regulation can in many ways be considered indicative of such conduct toward
regulation overall. As a result, the emphasis of the paper will be on exploration and
description, addressing questions of who, what, where, how much, and how many.
Many studies used average estimated costs of airbags, but these numbers are
highly uncertain and disparate. Industry, government and lobby groups generated a wide
range of cost estimates over the years that used widely varying assumptions and methods.
A number of NHTSA- sponsored teardown economic analyses of real airbag systems in
the late 1980s and 1990s are the most reliable sources for cost information. We contacted
a number of airbag suppliers and two OEMs to elicit cost and pricing information, but
they were unwilling or unable to provide authoritative data.
The first step in this airbag case study is a brief overview of the regulatory history
and a description of the penetration rates of the technology after the standard was
enacted. We then analyze industry response by first detailing costs and prices for airbag
6
components and systems as reported in mass media, academic, industry, and government
records and sources, including an original analysis of the cost of integrating airbag
systems into a vehicle. A wide variety of industry responses to these safety regulations
were examined, including decontenting ( making standard features such as air
conditioning or anti- lock brakes optional), pricing and marketing practices, and
advertising. The response of consumers to these new technologies was also examined in
terms of prices, passenger car sales, and the public and private good nature of the new
technologies. In addition, parallels and contrasts with other regulations such as emissions
standards were identified, and an attempt was made to ascertain areas where lessons
learned from the passive restraint standard record could be applied to future government
actions with respect to greenhouse gas ( GHG) emissions.
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2 HISTORY OF PASSIVE RESTRAINT REQUIREMENTS
… the automobile industry waged the regulatory equivalent of war against the
airbag and lost.[ 3]
- The Supreme Court, 1983
While the legislative discussion of passive restraints began as early as the 1960s,
it took many years before the first rules and laws were passed. Throughout the public
debate that took place in the media and in Congressional hearings, the focal technology
of the pending regulation never wavered. The focus was the airbag. The auto industry
consistently diverted attention away from airbags in favor of competing technologies
thought to be much less costly to implement. Meanwhile, the NHTSA- Insurance coalition
touted airbags throughout, but had difficulty fully allaying the concern of Congressmen
and others about the cost, safety and public acceptance of airbags. Hence it was not just
an issue of cost, but rather a small array of factors that delayed the adoption of the
regulation.
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2.1 FMVSS 208 DEVELOPS INTO AN AIRBAG MANDATE
NHTSA was committed to making the passive restraint regulation a performance
standard that could be met with different technologies. The agency retained this principle
throughout the period of time leading up to the regulation, but then along with Congress
discarded it when an airbag mandate was passed in 1991. After airbags were designated
as the only available technology suitable for passive restraints, the regulation still had the
characteristics of a performance standard. This meant that the criterion for an acceptable
airbag system was based on crashing vehicle platforms with dummies at a certain speed
into a fixed barrier.
2.1.1 The Passive Restraint Requirement Issued By Secretary Dole
On July 11 1984, Secretary Dole announced a passive restraint requirement to be
phased in starting with the 1987 model year. Under the new rule, auto manufacturers
could satisfy the standard “ by using automatic detachable or nondetachable belts, airbags,
passive interiors, or other systems that will provide the necessary leve l of relief.”[ 4]
Anticipating that most automakers would opt for the less expensive option, namely
automatic safety belts, the rule provided incentives for new technologies by giving a 50%
additional credit for each car equipped with either airbags or a soft interior system
developed by GM. But Dole also declined to agree with the notion that automakers would
necessarily choose the cheapest way out. Dole stated that “ the Department does not agree
with this contention. It believes that competition, potential liability for any deficient
systems, and pride in one's product would prevent this.” By extending this logic,
automakers would forgo cheaper, potentially less safe restraint systems in favor of safer
9
alternatives - such as the one the agency identified as the safest alternative of all: “ An
airbag plus a lap and shoulder belt.”
Secretary Dole allowed an escape route from the regulation for the automakers if
states comprising two- thirds of the U. S. population were to pass mandatory seat belt
usage laws before April 1, 1989. The law would subsequently be rescinded if this
threshold were met. Partly in response to the U. S. Supreme Court’s finding that her
predecessor’s decision to rescind the standard was “ arbitrary and capricious” for its
failure to consider an “ airbag specific” requirement, Secretary Dole responded as follows:
· First, comparing the two, she said that “[ a] lthough airbags may provide greater
safety benefits, when used with belts, and potentially larger injury premium
reductions than automatic belts, they are unlikely to be as cost effective.”
· Second, Secretary Dole expressed concern that, due to public unfamiliarity with
the technology, a government- mandated “ airbags only” rule “ could lead to a
backlash affecting the acceptability of airbags.”
· Third, Secretary Dole noted that several commenters “ questioned the
Department's authority to issue an ‘ airbags only’ standard, claiming that it would
be a ' design' standard.” She said that, “[ e] ven if the Department could legally
issue a performance standard that could only be met by an airbag under present
technology,” doing so would create “ a number of problems” and could
“ unnecessarily stifle innovation” in other types of passive systems, such as
automatic belts and passive interiors.
The phase- in schedule was set as follows:
10
· Ten percent of all automobiles manufactured after September 1, 1986 ( 1987
model year).
· Twenty- five percent of model year 1988 automobiles.
· Forty percent of model year 1989 automobiles.
· One- hundred percent of model year 1990 automobiles.
2.1.2 The Intermodal Surface Transportation Efficiency Act of 1991
On December 18, 1991, President Bush signed the Intermodal Surface
Transportation Efficiency Act of 1991. Buried deep in the bill, which allocated $ 155
billion to various transportation activities over six years, was a requirement that all
automobiles and light trucks sold in the U. S. must be equipped with airbags. It required
that:
At least 95 percent of each manufacturer's passenger cars manufactured on or after
September 1, 1996 and before September 1, 1997 must be equipped with an air bag and a
manual lap/ shoulder belt at both the driver's and right front passenger's seating position.
Every passenger car manufactured on or after September 1, 1997 must be so equipped.
At least 80 percent of each manufacturer's light trucks manufactured on or after
September 1, 1997 and before September 1, 1998 must be equipped with an air bag and a
manual lap/ shoulder belt. Manufacturers may count towards compliance with the 80
percent requirement those light trucks it produces that are equipped with an air bag and
manual lap/ shoulder belt at the driver's position and a dynamically- tested manual
lap/ shoulder belt at the right front passenger's position.
Every light truck manufactured on or after September 1, 1998 must be equipped with an
air bag and a manual lap/ shoulder belt at both the driver's and right front passenger's
seating positions. Multistage light trucks are required to comply with the same
requirements that apply to comparable single stage light trucks.[ 5]
The twenty- year debate came to a close with this act of Congress. Indeed, the
widespread introduction of airbags was virtually a foregone conclusion at this point due
to the rising acceptance of airbags in the marketplace.
11
2.2 PENETRATION RATES FOR AIRBAGS
In 1984 Mercedes- Benz was the first automaker to offer optional airbags on
passenger cars since GM’s brief and ultimately unsuccessful flirtation with the airbag
during the 1974- 76 model years. Other automakers adopted a wait- and- see approach to
airbags due to uncertainty over how consumers would respond to the safety devices.
Figure 2- 1 displays the automaker incorporation of passive restraint technologies in cars
( excluding light duty trucks).
Figure 2- 1 Annual U. S. New Passenger Car Sales by Occupant Restraint System
0
2
4
6
8
10
Millions
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Manual Lap/ Shoulder Belts Automatic Seatbelts Driver- Side Airbag Dual Airbags
Source: Ward’s Automotive Yearbook, Automotive News Market Databook – Various Years
By the 1990 model year, a full- fledged airbag race had emerged. The Big Three
Detroit automakers quickly ramped up production – from selling a little over 400,000
airbag- equipped vehicles in 1989 to nearly two million in 1990. Chrysler, and to a lesser
extent Ford, provided much of the impetus behind the move toward airbags. GM
followed its two smaller rivals. GM President Robert Stempel expressed concern over the
cost of airbags and how these costs would be passed on to the customer, along with the
yet unproven consumer acceptance of the safety devices.[ 6] European automakers, who
tended to sell more high- end cars in the US market, were also well out in front with
12
airbags. Asian automakers, except for luxury models, had taken the less expensive path
and embraced automatic seat belts instead of airbags. It has been hypothesized that the
domestic automakers adopted the technology relatively quickly in 1990 because the
American firms saw it as a way to positively differentiate themselves from Japanese
automakers.[ 7] The Japanese soon responded. During the 1990 model year, domestic
automakers offered airbags in one- third of their cars sold in the U. S., while Japanese
manufacturers had them in only 6% of their vehicles. In the 1992 model year 54% of
Japanese cars sold in US had airbags compared to 49.5% of U. S. cars.[ 8]
Figure 2- 2 History of Consumer Valuation of Vehicle Attributes
0
10
20
30
40
50
1980 1981 1983 1985 1987 1996 1998 2000 2001
%
Fuel Economy Dependability Low Price Quality Safety
Sources: For 1980s: J. D. Power ( data based on new car buyers). For 1996+: Opinion Research Corporation
International ( ORCI) for National Renewable Energy Laboratory ( NREL), Studies # 707089, 709318, & 710288.
As previously mentioned, the race to install airbags was to a great extent forced
by regulation, but a shift in car buyer’s valuations of vehicle attributes was also an
important motivation. Figure 2- 2 illustrates the ascendancy of safety concerns from the
1980s when it was the most highly valued attribute for less than ten percent of
consumers, to the 1990s when it was rated number one by roughly one- third of the
consumers polled. The arrows of causation for the rapid introduction of airbags and the
dramatic rise in concern for vehicle safety went both ways. Airbags benefited from
13
consumers new found awareness of safety. By the early 1990s, airbags even became a
metric of vehicle safety. The presence of airbags in vehicles, dealer’s showrooms, and the
media, heightened the car shopper’s interest in safety.
Figure 2- 3 Driver- Side Airbag Installation Rates in US Passenger Cars by Automaker Region
0%
20%
40%
60%
80%
100%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Big 3 Asia Europe
Figure Notes: 1. Big 3 is GM, Ford, and Chrysler 2. Asia is Toyota Group, Honda Group, Nissan Group,
Mazda, Subaru, Mitsubishi,. and Hyundai 3. Europe consists of Volkswagen, Audi, Mercedes- Benz,
BMW, Volvo, and Saab. Source: Ward’s Automotive Yearbook ( Various Years)
Figure 2- 4 Passenger- Side Airbag Installation Rates in US Passenger Cars by Automaker Region
0%
20%
40%
60%
80%
100%
1992 1993 1994 1995 1996 1997
Big 3 Asia Europe
Source: Ward’s Automotive Yearbook ( Various Years)
14
Figures 2- 3, 2- 4, and 2- 5 show in greater detail the installation rates of driver and
passenger airbags over the time period of interest. Automakers responded quickly to the
regulation, particularly in the case of passenger airbags. Due to the flexibility of the
phase- in schedule, automakers were able to introduce the safety devices into their vehicle
lines in ways that made the most sense for each automaker.
Figure 2- 5 Number of Airbag Units Installed on Passenger Cars Sold in the US
0
2
4
6
8
10
1990 1991 1992 1993 1994 1995 1996 1997 1998
Model Year
Passenger Cars ( Millions)
Driver
Passenger
Source: Ward’s Automotive Yearbook ( Various Years)
15
3 INDUSTRY RESPONSE
The prospective regulation of airbags became a heated debate that pitted
automakers and their sympathizers on one side, and the NHTSA, insurance companies
and various safety proponent groups and individuals on the other. One of the recurring
and most successful arguments put forth against the adoption of airbag regulation
concerned the added cost that would be incurred by the automobile manufacturers, and
the inability of the market to support that cost. Automakers claimed that NHTSA offered
highly optimistic, and in some cases, unrealistic cost estimates for the airbag system.
Meanwhile, government and safety proponents argued that carmakers inflated the true
cost of the systems in order to strengthen their case against airbags. Complicating matters
was the variability in airbag system complexity and modular construction among the
various carmakers and automotive suppliers. Varying amortization schedules and
projected production volumes added yet more layers of complication.
Here we compile, interpret and present the wide range of cost estimates that were
presented in the media, Congressional hearings, and other documents. Retrospectively,
we analyze the added cost of airbags to manufacturers and buyers, and explore whether
this cost differential was markedly dissimilar to typical annual changes in vehicle prices.
As part of this analysis, we estimate experience ( cost) curves for airbags and airbag
components. We also look at automotive safety technologies that were not regulated,
specifically anti- lock braking systems ( ABS), traction control, and side airbags.
16
3.1 BARRIERS TO AIRBAG ADOPTION FROM AN AUTOMAKER PERSPECTIVE
There were a number of obstacles that conspired against the swift adoption of a
passive restraint standard. This explains the drawn- out character of the passive restraint
regulation.
3.1.1 Cost
Cost is a central theme in this report just as it was in the drawn- out debate over
passive restraint regulation. Issues dealing with cost and pricing will be addressed at great
length later in this section. The automakers’ argument based on cost stemmed from other
arguments that could be made against airbags. If airbags were a considerably more
expensive possibility for meeting the passive restraint standard, then automakers would
choose the lower cost option, which in turn would make any airbags that were introduced
more costly. This circular relationship provided a strong case against airbags. NHTSA
could have eliminated much of the cost argument by mandating airbags exclusively. The
large cost associated with replacing a deployed airbag was also a deterrent. Questions
were raised whether a car may have to be declared totally destroyed in a minor collision
because the replacement cost of the airbag is higher than the car’s value.[ 9] Auto insurers
were universally in favor of airbags, which indicates insurance plans would address these
and other concerns.
3.1.2 Product Liability Claims
The legal complexities rooted in the liability concerns of automakers are beyond
the scope of this report. A number of lawsuits were filed, particularly after 1990,
involving accidents resulting in severe injury or death where the vehicle was not
17
equipped with an airbag. These lawsuits claimed that automakers possessed both airbag
technology and the knowledge of its life- saving potential, but chose not to install the
technology. These so- called ‘ no- airbag’ lawsuits resulted in settlements in many lower
courts, but were not upheld upon appeal when the Supreme Court settled the issue in
2000. Such liability claims were a concern to automakers, but greater concern was given
to product liability claims stemming from a possible inadvertent deployment, failed
deployment, or injurious deployment in a moderate collision.
3.1.3 Less Expensive Alternatives
As described above, automakers were granted flexibility when complying with
the passive restraint standard. Experience from the first ( and failed) attempt at a passive
restraint standard during the early 1970s may have helped inform the more successful
regulatory process that came in the following decade. In 1970 Ford Motor Company
petitioned the National Highway Safety Bureau ( NHS B), predecessor agency to NHTSA,
to allow ignition interlock devices, which would prevent the vehicle from being started
unless the seatbelt were fastened, in lieu of airbags. Ford argued that seat belt usage could
be bumped up to acceptable levels if “ a more sophisticated ignition interlock system,
exterior warning device, etc., [ could] be developed.”[ 10] An interlock system on all new
vehicles for the 1974 model year was included in the pending regulation, but once the
technology appeared in cars, consumers flatly rejected it, often by disconnecting the
wires, rendering the system ineffective. The House of Representatives soon voted by a
large margin to render the regulation requiring the device ( or airbags) null and void.[ 11]
The history of automatic seatbelts during the late 1980s and early 1990s was
similar to that of the interlock device. The unpopularity and awkward functionality of the
18
automatic seat belt may have benefited airbags. For some consumers the impetus behind
purchasing an airbag- equipped car may not have been, “ I want an airbag,” but rather, “ I
don’t want automatic seat belts.” But it was becoming apparent that the industry was
moving toward airbags and away from the unpopular belts. Automatic seat belts were
also considered dangerous because occupants could be lulled into a false sense of security
and fail to buckle their lap belt thus making the safety system potentially more dangerous
than no seat belt at all. As a result, it was reported in mid- 1991 that automakers would
phase out the automatic belts over the course of the next few years prompting the
president of the Insurance Institute of Highway Safety ( IIHS) to say, “ in a few years
automatic seat belts are going to be like dinosaurs.”[ 12] The head of NHTSA since 1989,
Jerry Curry, acknowledged in August 1991 that with the information on crashes that was
then available, airbags combined with seatbelts should have been mandated
exclusively.[ 13] The timing of this recognition of regulatory failure, which pointed out
the inferiority of automatic seatbelts, was curious because the belts were still being
installed in the millions despite the broad aversion consumers developed toward the
intrusive devices. The automatic seatbelts were quickly becoming the bête- noir of passive
restraint options, while airbags were being met with unexpected acceptance.
Standard 208, which includes occupant crash protection, was written to be a
performance- based regulation that would not specify one particular technology in a
mandate. This loophole left open the opportunity for automakers to seek out and develop
alternative passive restraint technologies that would meet the crash test criteria at a lower
cost than airbags. The automakers indeed did develop two competing technologies,
ignition interlock and automatic seat belts, but they were inferior to airbags, according to
19
crash tests, and provided no added protection above and beyond a lap and shoulder belt.
Instead, the ignition interlock and automatic safety belts would in theory simply force the
occupant to wear this pre- existing protection. Consumers ultimately and emphatically
rejected the entire premise these safety devices were based upon. As a result, it ended up
being a more costly and circuitous road to equipping cars with airbags than it may
otherwise have been if the regulations were more strongly written and implemented, and
if carmakers were more cooperative. Both the policymakers and the auto industry made
the pathway to airbags more circuitous than was necessary.
A possible alternative to a passive restraint standard altogether was a seatbelt law.
Passive restraints were deemed necessary in the first place because of the low usage rate
of existing seatbelt systems. One irony is that airbags are truly effective only if seatbelts
are also worn. Another irony is that automakers opposed regulation that would make
seatbelts mandatory because it would ruin the styling of their vehicles and reduce
sales.[ 14] Automakers pushed for a regulation that would provoke behavioral changes,
namely ‘ buckling up’, while NHTSA regulators and their supporters insisted that passive
restraints were also needed. As of today, we have both types of laws. Dual airbags are of
course mandatory on all new vehicles sold in the U. S., and 49 states have mandatory
seatbelt use laws, 18 of which are primary laws allowing police to treat a seatbelt
violation as a standard traffic violation.[ 15] A spokesperson for Ford Motor Co.
articulated the position of the auto industry on the matter at the time: “ the decision to
force the substit ution of unproven “ automatic protection” devices for proven, reliable,
and effective active safety restraint systems is so fraught with error as to be both lacking
in rational basis and unsupported by substantial evidence in the rulemaking record.”[ 16]
20
Automakers as a sign of solidarity banded together to support seatbelt usage laws and
informational campaigns to construct a meaningful alternative to passive restraints.
3.1.4 Questions about Airbag Reliability and Performance
Airbags are unique among automotive systems. Brakes, for example, can be
disassembled for inspection or maintenance, and can provide the driver feedback
regarding their condition when the brakes are used. Airbag systems may remain unused
for long periods of time, but must effectively deploy in milliseconds when a frontal crash
occurs. The fears surrounding airbags during the regulatory debate were not only that the
airbag would not deploy properly in the event of a crash, but also that it may deploy
unnecessarily during normal driving conditions. Despite the successful de facto field tests
done by State Farm and the owners of airbag- equipped GM cars, questions concerning
the reliability of airbags across an entire fleet of vehicles continued to be raised.
3.1.5 Airbag Regulation was viewed as Beatable by Automakers
Of the three main automotive regulatory initiatives at the time – fuel economy,
emissions, and safety – the airbag may have been viewed as the least tenable. While all of
these potential regulations were perceived as imposing significant cost, airbags had a
number of other strong arguments against them. Product liability concerns, uncertainty
about replacement costs, and lobbying for reasonable alternatives all worked against a
speedy adoption of an airbag standard. On a more fundamental level, the nature of
performance standards created problems in the safety area that were absent from fuel
economy or emissions. Any flexibility created for emissions and CAFE standards did not
21
impair the chances of a preferred technology as in the airbag case. The following passage
helps explain why automakers chose to fight aggressively against NHTSA.
They ( automakers) wanted relief from environmental requirements too, but they knew
that was impossible. They had already talked to William Ruckelshaus at the
Environmental Protection Agency ( EPA) and had been given a lesson in statutorily
mandated regulation. The Congress had put EPA emission control criteria under a strict
statutory timetable that neither agency nor industry could evade for long. Under that
statute manufacturers might get a year’s relief, but only if they could demonstrate their
own failure in good faith effort at compliance.[ 1]
Once automakers were granted a significant delay in meeting the passive restraint
regulation the first time, the difficulty NHTSA experienced in enacting the regulation
intensified.
22
3.2 COMPLIANCE COST
3.2.1 Reported Airbag Cost Estimates 1969 – 2000
A large number of airbag cost estimates were produced during and after the time
of deliberation. Most of these were conducted before airbags were mass produced. All
suffer some shortcoming, often related to the interests of the sponsor or analyst. The
studies are confounded by asymmetric information. Industry groups that face potential
regulation generally have better information about the nature of compliance strategies
than regulatory agencies and advocacy groups. Industry cost estimates are often
susceptible to being too high, especially when firms do not fully anticipate cost- saving
measures they may discover once company efforts are directed toward compliance.
Indeed, regulation can trigger innovation that can offset some or all of the compliance
costs.[ 17] When companies are opposed to regulations, they will tend to be pessimistic
about cost improvements.
Similarly, government and safety advocacy groups tend to be optimistic about
cost improvements. Whether the bias in the opposite direction is equal in magnitude is
unclear. NHTSA did forecast the future costs of airbags with a reasonable degree of
accuracy, and tended to overestimate the benefits of airbags ( i. e. lives saved and injuries
reduced) to a greater extent than the cost reductions of airbags. At least one study argues
that government agencies tend to overestimate compliance costs more often than they
undervalue these costs.[ 18] This study states that most regulatory cost estimates ignore
the possibility of technological innovation mainly because it is difficult to predict.
Technical change tends to defy accurate forecasting, and based on historical experience,
23
the only thing that is certain is the cost of compliance will likely decline, but at what rate
is anybody’s guess. NHTSA employed thorough analyses based on available data to
arrive at reasonable forecasts that were more or less validated by what eventually
transpired.
This airbag case study does uncover some discrepancies in cost estimation over
the years and across the government and industry groups. NHTSA relied on cost
information from airbag suppliers and from its own teardown studies, which lead to fairly
reliable results. The complexity in estimating the costs of airbag technology is due to the
large economies achieved with mass versus limited production, and the progress achieved
in reducing the cost of airbag inflators and other components once a market was assured
by regulation. Despite these uncertainties, NHTSA made reasonably accurate cost
estimates, as did the industry given their tendency to use unfavorable assumptions of
production volume and amortization schedules. Once passive restraint regulation became
an airbag mandate, the cost estimation process was simplified considerably because
Congress made the regulation a design standard by requiring airbag technology to be the
sole compliance strategy. The economic complications associated with predicting firm-by-
firm compliance with a performance standard were thereby removed, though the
flexibility benefits of a performance standard were also removed. If policymakers had
insisted on airbag technology as the only suitable means to meet the standard from the
beginning, both cost estimates and actual costs would have been lower due to higher
production runs, a steeper learning curve, and a higher concentration of innovative energy
that focused exclusively on airbag technology. In many instances a performance standard
leads to the optimal means of compliance, but in the case of airbags, a performance
24
standard allowed automakers to explore avenues of compliance that were later found out
to be unacceptable, or poor substitutes for airbag technology.
Post- regulation history has validated both the approach NHTSA took and the
estimates the agency generated. Aside from the furor that arose in response to inadvertent
deaths mostly of smaller women, children and infants caused by airbag deployment in
low- speed crashes, the seven year or so transition to a 100% airbag- equipped vehicle fleet
went off without a hitch. In retrospect, the cost estimates generated by government,
airbag supplier and insurance sources have been shown to be more accurate and realistic
than OEM projections. Table 3- 1 summarizes the wide range of estimates that appeared
between 1976 and 1982 when the debate surrounding airbags and passive restraints raged
most intensely. The estimates produced by John DeLorean, a GM Executive turned
private consultant, were formulated using GM’s typical cost- figuring method.[ 19]
DeLorean argued that GM was using an unusual method for determining cost because the
company was opposed to the regulation. DeLorean’s 1976 estimate range of $ 241-$ 298
in 2002 dollars was in line with DOT estimates and was lower than some pro- regulation
insurance industry sources ( e. g. AIA and Nationwide) at the time. As shown in Table 3- 2,
the markup to arrive at consumer cost is between 2.6 and 2.8 times manufacturer cost for
Ford and GM systems. These results were made public from confidential sources by the
Center for Auto Safety. The great disparity between costs associated with low and high
production volumes can be seen in Table 3- 1. Low production volumes were allowed to
be considered for automakers such as GM and Ford that sold well over a million vehicles
per year because any pending passive restraint regulation could be met by the much less
expensive option of automatic seatbelts. This led to consumer cost estimates well in
25
excess of $ 1,000 ( 2002 $) for a driver side airbag. If the regulation called exclusively for
airbags, high production runs would be implicitly built into the assumptions behind the
cost formulation. Moreover, since airbag suppliers would be providing airbag systems in
large quantities, the smaller OEMs would benefit from the large price reductions that
would result from the large economies of scale.
26
Table 3- 1 Reported Non- Proprietary Airbag Consumer Price Estimates
Year Source of Estimation
Production
Run
( if specified)
Airbag Price
Estimate
($ 1982)
Airbag
Price
Estimate
($ 2002)
Chrysler $ 449 $ 800
Ford $ 431 $ 768
GM $ 329 $ 586
DeLorean1 $ 167 $ 298
AMC $ 449 $ 800
Toyota $ 644 $ 1,148
Amer. Insur. Assoc. $ 374 $ 667
Nationwide Insurance $ 192 $ 342
Allstate $ 150 $ 267
DOT1 $ 186 $ 332
DeLorean2 $ 135 $ 241
DOT2 $ 150 $ 267
1976
DOT3 $ 145 $ 258
GM 3.5 Million $ 273 $ 487
Ford $ 332 $ 592
DOT $ 158 $ 282
1977
Chrysler $ 368 $ 656
Ford ( Letter 1979) $ 353 $ 629
78
NHTSA ( Letter 1979) $ 263 $ 469
BMW $ 1,040 $ 1,854
Ford $ 832 $ 1,483
NHTSA ( Jaguar) $ 416 - $ 1144 $ 742 - $ 2039
Chrysler $ 1,040 $ 1,854
Renault 15 – 20% Car Price - - - - -
GM 100,000 $ 1,144 $ 2,039
DOT1 1 Million $ 196 $ 349
DOT2 1 Million ( Dual) $ 343 $ 611
Talley1 10,000 ( 3 airbags) $ 1,247 $ 2,223
Talley2 500,000 $ 291 $ 519
GM 400,000 $ 676 - $ 728 $ 1,205 - $ 1,298
Ford 200,000 $ 858 $ 1,529
Talley & NHTSA 100% installation $ 208 - $ 312 $ 371 - $ 556
Talley3 2 Million $ 220 $ 392
1981
Center for Auto Safety $ 208 $ 371
Ford ( U. S. GAO) Near 100% Install $ 235 $ 419
Ford ( U. S. GAO) 787,000 $ 575 $ 1,025
Ford ( U. S. GAO) 200,000 $ 828 $ 1,476
NHTSA ( U. S. GAO) Near 100% Install $ 112 $ 200
GM ( U. S. GAO) Near 100% Install $ 193 $ 344
GM ( U. S. GAO) 750,000 $ 509 $ 907
GM ( U. S. GAO) 400,000 $ 581 $ 1,036
Automobile Occupant Protection
Association ( AOPA)
10,000 $ 1,100 $ 1,958
AOPA 100,000 $ 500 $ 890
AOPA 500,000 $ 280 $ 498
AOPA 1,000,000 $ 240 $ 427
1982
AOPA 2,000,000 $ 185 $ 329
Average Auto Industry $ 579 $ 1,032
Average NHTSA, Insurance,
etc…
Etc… $ 266 $ 474
Source: All Sources Listed in the Bibliography of Data Sources
27
In Table 3- 2 a number of cost estimates generated by GM and Ford are presented.
The consumer cost indicates the retail price of an installed airbag system, while the
manufacturer’s cost is the cost incurred by the automakers for one complete airbag
system based upon a specified production volume. The manufacturer’s cost was
confidential before Clarence Ditlow of Center for Auto Safety released the internal DOT
memorandum to the press in 1979. The markup method used to arrive at the consumer
cost is not specified, but is higher than typical markup factors. For example, NHTSA uses
a typical markup factor of ( 1.33* 1.51), or about 2, in its teardown studies. In 1982, GM
sold 3,491,630 passenger cars in the U. S., and Ford Motor Co. sold 1,345,970 cars. GM
and Ford had high enough production volumes to achieve the much lower costs reported
in Table 3- 2.
Table 3- 2 NHTSA Estimate of Airbag Costs
System Volume Estimator Date Consume
r Cost
Manuf.
Cost
Ratio Consum.
Cost to Manuf.
Economics
GM 82 400,000 GM 3/ 79 $ 581 $ 221 2.6 ( 1979)
GM 82 750,000 GM 3/ 79 $ 509 $ 195 2.6 ( 1979)
Ford 82 885,000 Ford 8/ 78 $ 268 $ 101 2.7 ( 1976)
Ford 82 787,000 Ford 7/ 79 $ 575 $ 213 2.7 ( 1982)
Ford 82 200,000 Ford 7/ 79 $ 825 $ 300 2.8 ( 1982)
GM
80’ s 3,500,000 GM 11/ 78 $ 206 $ 96 2.1 ( 1982)
GM 73
Buick 100,000 DeLorean 10/ 78 $ 192 NA NA
Source: Internal DOT Memo, Subject: Outrageous Air Bag Costs. From Director of Office of Vehicle
Safety Standards, A. C. Malliaris to Associate Administrator for Rulemaking, Michael Finkelstein, 11 July
1979. Received from Clarence Ditlow, Center for Auto Safety, September 2003.
28
Table 3- 3 Consumer Costs ( RPEs) of Airbag Systems from Three NHTSA Contracted Studies
YEAR VEHICLE
PRODUCTION
RUN
AIRBAG PRICE
ESTIMATE
( CURRENT $)
AIRBAG
PRICE
ESTIMATE
( 2002 $)
Mercedes 190E1 150,000 $ 443 $ 670
Mercedes 190E1 350,000 $ 325 $ 492
Mercedes 190E2 350,000 $ 352 $ 533
Mercedes 190E3 350,000 $ 380 $ 575
Ford Tempo1 25,000 $ 815 $ 1,233
Ford Tempo1 350,000 $ 258 $ 390
Ford Tempo2 350,000 $ 286 $ 433
Khadilka[ 20] ( 1988)
Ford Tempo3 350,000 $ 308 $ 466
Ford
Crown Victoria4
300,000 $ 332 $ 417
Acura Legend4 300,000 $ 486 $ 610
Toyota Camry1 300,000 $ 308 $ 387
Buick Roadmaster1 300,000 $ 307 $ 385
Plymouth Acclaim1 300,000 $ 226 $ 284
Fladmark, et al.[ 21] ( 1992)
Chevrolet Camaro1 300,000 $ 278 $ 349
Chrysler
Cirrus/ Stratus 250,000 $ 354 $ 370
BMW 5- Series5 250,000 $ 730 $ 763
BMW Z3 250,000 $ 362 $ 378
Spinney, et al.[ 22]
( 2000)
Ford Taurus 250,000 $ 372 $ 389
1 – Driver- Side Airbag ( No Auto Seatbelts) 2 – Driver- Side Airbag w/ Auto Seatbelts
3 – Dual Airbags w/ Auto Seatbelts 4 – All are dual airbag systems + seatbelts 5 – System includes Side
Airbags and Head/ Curtain Airbags
Table 3- 3 summarizes the cost estimates derived from three DOT contracted
teardown studies that use NHTSA’s standard methodology. The considerations taken are
29
outlined in Appendix F. The Ford Tempo and Mercedes 190E estimates show costs at
two different production runs. The retail price estimate of the airbag system for a Tempo
produced at 350,000 units is less than one- third of the price when only 25,000 units are
produced. The economies of scale for the 190E are not as great, presumably because
much of the scale effect had already been achieved at 150,000 units. A standard cost-cutting
measure of automakers involves optimizing production overlap and benefiting
from economies of scale in their operations. A detailed discussion deriving from the cost
estimates shown in Table 3- 3 will be offered in section 3.3.1.
3.2.2 Option Pricing of Airbags
Once airbag ins tallation really took off around 1990, the safety devices were
almost exclusively offered as standard features. Also as the passive restraint regulation
segued into an airbag mandate during the same time period, automakers felt a sense of
urgency to introduce airbags into their entire lineup of cars as quickly as possible.
Consumer demand also accelerated rapidly at the same time further fueling the airbag
race. Analyzing how automakers priced the airbag as an option will help to paint a
complete cost picture, even though airbags were offered only selectively as options. Anti-lock
braking systems ( ABS) were by comparison presented more as optional equipment
because there was no mandate forcing the component’s installation. The option pricing of
airbags also tended to be well above cost because airbags were fast becoming a desirable
attribute.
GM was far in front of the competition when it first offered optional dual airbags
on a number of its full- size models during model years 1974 and 1976. GM offered the
airbag option on a number of Cadillacs, Oldsmobiles and Buicks. During the three years,
30
the company sold a little over 10,000 of these airbag- equipped cars, although the
company had tooled up to produce in excess of 100,000 such vehicles, and had initially
expected sales of 300,000 or more.[ 23] The dealers partly blamed the $ 225 to $ 315 price
tag for the poor sales of the safety option as being prohibitively expensive for most car
buyers. John Delorean, a GM executive turned private consultant argued that if GM had
employed its typical cost- figuring method, the airbag option would have been priced at
about $ 100.[ 19] Of course, at the small number of airbags that were actually produced,
GM was selling each option at a substantial loss. The failure of regulators to enact a
passive restraint standard that would support GM’s attempts at introducing airbags into
its vehicles, which at the time comprised 40% of the overall market, contributed
significantly to the collapse of the GM airbag program. Regulators sent and continued to
send mixed signals to the automakers, and set in motion a tendency toward stagnating
compromise and delay that continued until airbag regulation was finally passed. On the
other hand, GM abandoned the program quickly and did not get behind it with its full
marketing muscle. These issues will be examined in a further section that explores the
marketing of the airbag and safety.
Volvo publicized that it would offer driver- side airbags as an option on some of
its 1983 model year cars, but the plan to do so never materialized. The retail price for
these systems was expected to be $ 900 to $ 1000 per car.[ 24] Apparently undaunted by
GM’s rather disastrous attempt at selling the airbag, Mercedes- Benz announced in
January 1983 that the company would offer optional driver- side airbags at an additional
price of $ 800 to $ 900 per car on some of its 1984 models.[ 25] As described earlier, a
number of observers that had followed the airbag regulation closely were sharply critical
31
of the way GM marketed the airbag as an option in the mid- 1970s. Perhaps learning from
GM’s experience, Mercedes made the airbag a focal point of the company’s safety-oriented
advertising campaign. By 1989, it was reported that Mercedes was making
money on its airbag system, which at that point had become standard on all of the
company’s models sold in the U. S.[ 26]
Ford Motor Co. was the next auto company to take the airbag plunge, in the 1987
model year. Interestingly, Ford offered an optional driver- side airbag on one of its least
expensive models – the Tempo and its sister model, the Mercury Topaz. The price of the
airbag alone was between $ 622 and $ 815, but the safety device was also included in two
of Ford’s preferred optional equipment packages at a cost of about $ 300. The airbag was
grouped with other options, namely automatic transaxle and air conditioning for a total
package price of $ 984 and $ 1013.[ 27] Ford sold between 10,000 and 12,000 airbag-equipped
Tempos and Topazes during their inaugural year, but the company interpreted
this as a positive because the option was introduced mid- season with absolutely no
advertising support.[ 28] It was also reported that the company was losing money even at
an $ 815 price tag.
During the airbag race that ensued in the late 1980s and early 1990s, GM lagged
behind Chrysler and Ford, but it did begin to offer optional driver- side airbags on its 1988
model year Oldsmobile Eighty- Eights and 1989 Ninety- Eights and Cadillac DeVilles.
GM priced the option alone at $ 850, but also included it in an option package like Ford
did with the Tempo where the net price of the airbag was $ 300.[ 29] Unlike the Ford
assemblage of options, GM gave a $ 500 rebate directly to the consumer for purchasing
one of the option packages including an airbag. One of the optio n packages included 15-
32
inch aluminum wheels and automatic air conditioning, while the other included a high-end
stereo and tape deck. An internal debate surfaced inside GM during this time as to
whether lower- priced cars should offer optional airbags. The unofficial company position
was that these models ( e. g. Pontiac Grand Am and Buick Skylark) were too price-sensitive
to carry the burden of added airbag costs.[ 28] Higher- priced cars, all- new
models, and those getting major design and engineering revamping were thus designated
as the top priority vehicles to receive airbags. The engineering and manufacturing people
at GM leaned toward making airbags standard equipment because of the up- front
engineering and manufacturing work necessary to make modifications in order to install
the airbag system in the vehicle.
The Chrysler Corporation saw a completely different prospect for the airbag. First
of all, Chrysler intended to forgo option packages and introduce airbags as standard
equipment on its cars. Albert J. Slechter, the company’s director of federal government
affairs, explained: “ The concept of an optional system tends to lose significance when
you must have passive restraints in all vehicles. The idea of an optional system, certainly
in passenger cars at this time, loses meaning. They’ll be standard equipment as we move
toward 100 percent.”[ 28] Chrysler chose to install airbags in large cars and sporty cars
first because it is less difficult to implement a driver airbag on a larger vehicle than a
smaller one, and sporty cars were considered “ appropriate” vehicles for the safety device.
Chrysler fully expected that with the volumes being predicted for airbags, prices would
come down and be “ totally competitive in the marketplace.” Slechter predicted: “ As
airbag volume rises over the years, there’s a tendency for costs to be lower, because
you’re going to be amortizing development costs through that time frame.”
33
Nissan Motor Co. offered optional driver airbags on its 1991 model year 300ZX
and 1992 Maxima for $ 500, and on its 1993 and 1994 Sentra and NX for $ 575. Subaru
made airbags optional on its 1992 Legacy for $ 800. GM offered optional airbags on the
company’s 1992 Saturn division cars for $ 625.
The emerging market for airbags in England is interesting to consider because
there was no regulatory driver pushing the adoption of airbags along. The market in
England, unlike Canada, is not dominated by American automakers, which allows for a
better comparison. BMW announced it would offer airbags as optional equipment on all
of its cars sold in Great Britain in 1992. The cost to the consumer of this option was
reported to be 745£ (~$ 1340).[ 30] Mercedes- Benz, as the acknowledged leader of the
airbag race, had already been offering optional driver airbags. In October of 1991 it was
reported that Mercedes had slashed the cost of the airbag option nearly in half from
1433£ (~$ 2579) to 750£ (~$ 1350) perhaps to compete with other luxury automakers now
offering optional airbags, or possibly because the cost had come down sufficiently to
justify such a drastic cutting of cost.[ 31] Mercedes also began offering standard airbags
on the company’s more expensive models to stay a step ahead of the competition. One of
these competitors was Volvo, which was no stranger to innovations in auto safety. Volvo
began offering optional airbags on its mid- sized 400 series cars during the 1992 model
year for 730£ (~$ 1314).[ 32]
3.2.3 Airbag Component Costs
A number of components comprise an airbag system. The prices of these separate
components thus comprise the total price of the airbag system. The quality and type of
the components varies greatly across manufacturers and vehicle segments leading to a
34
great deal of variability. For instance, many luxury models will include airbags made out
of soft leather, and possess greater complexity in the electronic control systems.
The cost reduction of airbag systems has been dramatic. This large system
reduction is attributable to uneven subsystem reductions. A prominent airbag supplier
contacted for the purposes of this study estimates that the cost of a standard airbag
module, comprised of the inflator, airbag itself, and cover, has fallen from over $ 200 to
less than $ 50 over the last fifteen years.[ 33] According to the supplier representative, the
cost reduction is attributable to the large increase in production volume as well as through
improved technology, particularly of inflators. Table 3- 4 highlights some of the costs of
components that comprise an airbag system. This table differs from the informa tion
presented in Table 3- 3, which included seatbelt costs for some of the models, and
additional airbag ( e. g. side airbag) cost for other models. It is important to note that the
costs have consistently fallen, while the complexity, reliability, and safety of the airbag
systems have all risen significantly. In other words, the cost of a circa 1988 airbag system
in 2000 would be substantially lower than a circa 2000 system costs. As will be discussed
in Section 3.6.2, there has been a proliferation in technological innovation related to
airbags in the last 15 years. Such innovation has helped keep costs stable, while at the
same time greatly improving the performance of the airbag systems.
35
Table 3- 4 Airbag Component Cost Summary
Vehicle/ Year
Control
Module
Sensor( s)
Wire
Harnesses
Driver
Airbag +
Inflator
Assembly
Passenger
Airbag +
Inflator
Assembly
Clock
Spring
Assembly
Total
Ford Motor
Co. 1987* $ 42.60 $ 48.43 $ 37.88 $ 172.59 N. A. N. A. $ 391.35
Mercedes-
Benz 1987*
$ 67.88 $ 106.46 $ 64.42 $ 191.22 N. A. N. A. $ 493.24
Ford Crown
Victoria
1992**
$ 35.99 $ 13.64 $ 26.99 $ 73.79 $ 129.30 $ 17.83 $ 380.36
Acura
Legend
1992**
$ 172.25 $ 36.07 $ 37.85 $ 64.18 $ 117.08 $ 19.00 $ 560.81
Mercedes-
Benz 1997**
$ 155.65 N. A. N. A. N. A. N. A. N. A. N. A.
Chrysler
Cirrus-
Stratus
1998**
$ 108.04
Incl. in
ACM Cost
$ 9.77 $ 65.18 $ 109.78 $ 3.29 $ 317.78
BMW
5- Series
1998**
$ 159.47
Incl. in
ACM Cost
$ 18.12 $ 58.35 $ 94.26 $ 4.06 $ 334.26
BMW Z3
1998**
$ 156.33 Incl. in
ACM Cost
$ 17.45 $ 67.90 $ 110.50 $ 3.94 $ 361.50
Ford Taurus
2000**
$ 96.16 Incl. in
ACM Cost
$ 0.00 $ 81.34 $ 103.45 $ 3.29 $ 313.93
Table Notes: All values are Retail Price Equivalents in $ 2000. Airbag systems do not include seatbelt
cost, but do include knee bolster and other related restraint system cost. Sources: Khadilka, Fladmark et al.,
Spinney et al.
36
3.3 EVOLUTION OF COMPLIANCE COST
3.3.1 Cost Reductions of Airbag Systems
Arguments concerning airbag cost contributed greatly to the delay in
implementing a passive restraint standard, but once a regulation was adopted; cost was
not much of an issue. This was partly due to the large drop in airbag system costs. Much
of this reduction was achieved through economies of scale and learning effects. Out of
the roughly 10 million 1988 model year passenger cars sold in the U. S., about 220,000
contained a driver- side airbag, and greater than half of these were from luxury European
makers. As marginal as the market was at the time, the U. S. did comprise the largest
automotive airbag market in the world by a wide margin. Ten years later, every new
passenger car sold in the U. S. and virtually all light trucks were equipped with dual
frontal airbags. Clearly, the cost structure, as well as all other aspects of the industry,
underwent profound changes during this period. At the same time, the quality, reliability
and technology in general of the airbag systems was enhanced greatly as well. Comparing
the cost of a 1988 and 2000 airbag system is hence an apples and oranges comparison,
but the alternative of comparing what a 1988 system would cost in the year 2000 is also
problematic because cost data is not available for that level of analysis. All of the costs
discussed below are cost to consumers or retail price equivalents ( RPE), which include all
relevant markups, unless noted otherwise.
A teardown analysis that looked at the costs of airbags for the Mercedes- Benz and
Ford Tempo systems respectively was conducted in 1988. This study determined that the
cost for a Ford driver- side airbag was $ 391 at a production rate of 350,000 units and
$ 1,233 at 25,000 units ( 2002$; See Figure 3- 3).[ 20] The cost to Ford Motor Co. was
37
considerably higher than $ 1,233 since the company sold only 13,471 airbag- equipped
1988 model year cars. Before lowering the price considerably due to lack of demand,
Ford offered the airbags on MY1987 and 1988 Tempos and Topazes as an option for
$ 815 ($ 1,233 in 2002$), and admitted to selling them at a loss.[ 28] By way of
comparison, another teardown employing the same methodology ( see Appendix F) found
that a driver- side airbag on a 2000 Ford Taurus had a cost of about $ 180 at a production
volume of 250,000 units.[ 22] This $ 180 figure also included the added cost due to some
shared components with the passenger- side system. Unlike the 1988 cost estimates, the
actual cost in this case was most likely lower than $ 180 per unit since Ford sold 382,035
MY2000 Ford Tauruses, and similar airbag systems were found on all of the company’s
nearly 1.7 million MY2000 passenger cars sold in the U. S., not to mention the company’s
nearly 2.5 million MY2000 light trucks sold in the U. S., all of which had a dual airbag
system. Another teardown study conducted in 1992 examined the Ford Crown Victoria.
The analysts determined the cost for the driver- side airbag system to be about $ 251 in
2002$ at a production rate of 300,000 units.[ 21] This estimate suggests that much of the
eventual cost reduction had occurred in the first few years after airbags were introduced,
and the rate tailed off considerably after large quantities of airbag systems were being
produced. Ford Motor Co. sold roughly 707,000 MY1992 cars equipped with driver- side
airbags and another 284,000 cars outfitted with dual airbags. The 1992 airbag systems
resembled the 1987 systems more closely than those of 1998 and beyond. A trend
analysis conducted by NHTSA compared 1990 and 1998 airbag systems, and found great
changes in airbag design, airbag placement, inflator type and pressure characteristics, and
38
number, type, and placement of airbag controller sensors between the early and later
systems.[ 34]
For the 1987 Mercedes- Benz system, the cost was estimated at $ 492 at a
production volume of 350,000 and $ 670 when 150,000 units were produced ( 2002$; See
Figure 3- 3). In this case, the cost was also higher than $ 670 because only about ½ of the
150,000 airbags were sold annually in the U. S. around this time ( 77,945 for MY1988 and
78,840 for MY1989). Mercedes offered optional driver- side airbags for about $ 900
($ 1,400 in 2002$) on its 1984- 85 models.[ 35] By 1989, it was reported that Mercedes
was making money on its airbag system, and that the safety device had been standard
equipment on all of the company’s models sold in the U. S. since MY1987.[ 26] Cost
estimates for later Mercedes’ airbag systems were unavailable, but the cost of a driver-side
airbag on another luxury sedan – the 1992 Acura Legend – was estimated to be $ 444
in 2002$.[ 21] Acura sold nearly 66,000 dual airbag- equipped MY1992 cars in the U. S.,
and in 1989, 1990, and 1991 had sold 72,072, 57,133, and 61,321 cars respectively with
driver- side airbags. So although Acura lacked the level of airbag experience Mercedes
possessed, the subsidiary of Honda had been producing the safety systems at comparable
volumes. A teardown study conducted in 2000 found that cost of two MY1998 BMWs
driver- side airbag systems was $ 240 for the 5- series and $ 251 for the smaller Z3 at a
production volume of 250,000 units. The system complexity of the BMW system is
comparable to that of Mercedes, so comparing these figures with those generated in the
1987 study for Mercedes is reasonable.[ 36] Again the cost of airbag systems is shown to
have fallen considerably, particularly over the first few years that airbags were
introduced.
39
Improvements in certain areas of the airbag systems led to the most dramatic cost
reductions. A representative for the airbag supplier, Takata, estimates that the producer
cost of a standard airbag module, comprised of the inflator, airbag itself, and cover, has
fallen from over $ 200 to less than $ 50 over the last fifteen years.[ 33] According to the
supplier representative, the cost reduction is attributable to the large increase in
production volume as well as through improved technology, particularly of inflators.
Sensors have also contributed significantly to the price decline. A related air bag industry
trend is the move toward silicon micro- machined accelerometers in a single- point
configuration. These tiny sensors are cheaper than other types, and were estimated in
1992 to have a producer cost of about $ 5 to $ 6 each in large production volumes.[ 38]
Similarly, Siemens Components Inc. developed an improved electronic sensor for airbag
systems in 1994 that led to a manufacturing cost of $ 2.50 to $ 3.00 in volume.[ 39] Airbag
systems in early years relied primarily on 3 or 4 electromechanical sensors ( 85% of
systems in MY1990), while later systems typically use only one electronic sensor ( 50%
of systems in MY1998).[ 34] In summary, large cost reductions were achievable due to a
confluence of factors, particularly, technological innovation and learning effects,
economies of scale, and pricing pressure from OEMs and an intensely competitive
environment.
The effect of economies of scale on airbag components has been well
documented. Table 3- 5 highlights the expected cost reductions based upon escalating
production runs generated by airbag supplier groups for a 1979 Congressional hearing.
Even at this early date, the airbag suppliers exhibited a prophetic knowledge of the
40
relationship between cost and volume. The retrospective analysis offered in the above
paragraphs generally agrees with the prospective one given by the airbag suppliers.
Table 3- 5 Expected Cost Reductions as a Function of Production Volume
Volume Driver Bag +
Inflator Module
Passenger Bag +
Inflator Module
Sensors +
Diagnostic Parts
13,000 Base Base Base
25,000 34 % 8 % 7 %
100,000 62 % 40 % 19 %
200,000 68 % 50 % 22 %
900,000 75 % 67 % 24 %
Source: Reference [ 40]
These are exclusively production- level price effects, but when airbag production
ramped up, the technology did not stand still. Airbags became more reliable and safer,
while at the same time price came down. Although the reduction in price of airbag
systems did not necessarily behave uniformly across time or production schedules, it can
be argued that the quality- to- price ratio for airbags has steadily climbed from learning
and production volume effects. The estimated economies of scale effects shown in Table
3- 5 have been substantiated by the actual airbag component cost trends over time as
shown in Table 3- 4 and Figure 3- 2.
3.3.2 Experience Curves for Airbag Systems
Figure 3- 1 shows the trend in Producer Price Index ( PPI) since the BLS started
tracking airbag assemblies and parts data in December 1999. The PPI tracks the average
change in net transaction prices that domestic producers receive for the products that they
make and sell thus PPIs are output price indexes, not input cost indexes. The price
quotations that the PPI uses to build these indexes come from a statistically chosen
41
sample of representative transactions obtained from a representative sample of producers
in each of the 600 or so industries for which PPI tracks data.[ 41]
Figure 3- 1 Trend in Producer Price Index for Airbag Components
Source: Bureau of Labor Statistics, See: http:// www. bls. gov/ ppi/ home. htm
The drop in PPI indicates that prices received by producers for finished airbag
systems and modules fell about 8% in the three years or so it has been tracked. The curve
also appears to have leveled off somewhat in the last 6 to 8 months. The fall in prices
most likely has little to do with production rates since the airbag industry has been firmly
established during this timeframe. Part of the price drop may be a response to tightening
imposed by the automakers as the economy declined and profit margins shrank, but
another explanation may involve a combination of the following:[ 42]
§ Operator learning
§ Improved methods, processes, tooling, machines and design improvements for
increased productivity
§ Management learning
§ Debugging of engineering data
§ Production rates
§ Design of the assembly or part, or modifications
42
§ Specification or design of the process
The reduction in cost of airbag systems over time is thus a confluence of these
factors: the learning effects that accumulated as airbag suppliers and related companies
formed an established, profitable industry, the rapid expansion of the industry that led to
the well- documented economies of scales effects, and the innovation effects that helped
to inform the design and management processes. These effects that both lowered cost and
improved quality and performance are at least partially additive and are difficult to
disentangle from one another. Figure 3- 1 shows what is essentially a de facto experience
curve, which captures this confluence of factors. Unfortunately, BLS only recently started
tracking this PPI sub- index, so the curves for airbag components during the crucial period
of 1988- 2000 must be ascertained using another method.
Figure 3- 2 Estimated Experience Curves for Dual Airbag System Cost
$ 0
$ 500
$ 1,000
$ 1,500
$ 2,000
$ 2,500
$ 3,000
5000
15000
50000
150000
350000
500000
787000
1250000
2000000
Number of Units
Cost per Unit
Low
Mid
High
The learning curves in Figure 3- 2 were estimated by performing a regression
analysis using a power function, which has traditionally been the functional equation
43
form when estimating learning effects. Due to the limited data points from which the
equation was derived, the results should be used for illustration only. Table 3- 6 shows the
descriptive statistics from the analysis. The following equation is referred to as “ Wright’s
Cumulative Average Model.”[ 43]
Y = AXb
Y = cost per unit in constant 2002$
X = number of units
A = Cost for the first unit produced
b = slope of the function when plotted on log- log paper
Table 3- 6 Results from Experience Curve Estimation for Airbag Consumer Cost
Low Price Mid Price High Price
A 8,156 ( 3.87) 10,051 ( 3.84) 13,688 ( 3.25)
b - 0.2089 (- 9.79) - 0.1956 (- 9.11) - 0.2035 (- 8.01)
R2 0.85 0.83 0.79
Cumulative Production
Cost 3,500,000 Units $ 1,549,731,339 $ 2,295,008,094 $ 2,802,224,371
Average Production
Cost 3,500,000 Units $ 443 $ 656 $ 801
Notes: t- statistics in parentheses
Detailed cost information for airbag components and modules is difficult to
gather. From a limited set of data points, a reasonably accurate set of experience curves
can be developed for illustrative purposes. In this simple model, industry estimates would
tend to follow the high price curve, while government estimates, as expected, would fall
in the bottom range. Although the curves may seem close together the cumulative cost
difference between high and low estimates is almost $ 1.3 billion.
44
3.3.3 Other Mechanisms that have Facilitated Cost Reductions
Airbag suppliers have been under tremendous pressure from automakers to keep
finding ways to lower per unit costs. The extremely relatively low profit margins of the
motor vehicle industry, along with the control that auto manufacturers exert upon
suppliers, create a highly competitive market. This can be seen in figures in the following
section where the CPI and PPI for the motor vehicle industry increase more slowly than
average. The 2000 SEC 10k annual report for Autoliv, an airbag supplier that controls 29
percent of the global market, more than any other single supplier, sums up this
phenomenon.
As a consequence of the major automobile manufacturers' strong purchasing power, and
the competitive pressures on car occupant restraint system suppliers to increase such
suppliers' manufacturing capabilities, the unit prices of airbag systems and seat belts will
continue to decline in the future. In addition, similar to other automo bile component
manufacturers, Autoliv expects that Autoliv and its subsidiaries will, under certain
circumstances, quote fixed or maximum prices for long- term supply arrangements. The
future profitability of Autoliv will depend upon, among other things, its ability to
continue to reduce its per unit costs and maintain a cost structure, internally and with its
suppliers, that will enable it to remain cost- competitive. Autoliv's profitability may also
be influenced by its success in designing and marketing technological improvements in
car occupant restraint systems.[ 44]
The above statement clearly outlines a major airbag supplier’s general strategy
with respect to cost. Airbag suppliers, like most companies, must balance between
effective cost- cutting strategies and continuing to produce a reliable quality product.
45
3.4 COMPLIANCE COST IMPACT ON VEHICLE PRICING
Many auto industry observers have contended that competition is the primary
determinant of automobile pricing.[ 45] If this were true, it would not always make sense
for automakers to pass on the costs of added equipment identically across their fleet of
vehicles. Value pricing, popularized by GM with its launch of Saturn, is another strategy
increasingly used by automakers. Also known as one- price selling, value pricing consists
of a car with a fixed set of popular options and one usually nonnegotiable sticker
price.[ 46] It was also reported in the same source that European manufacturers such as
Mercedes- Benz and Saab have been cutting the cost of production, and effectively
passing the savings on to the consumer by keeping price inflation to a minimum. The
results of an economic analysis also suggest pricing behavior in the automobile market is
consistent with theory governing price leaders and followers, as opposed to a mutually
independent pricing rule.[ 47] This finding also contradicts to some degree the idea of
perfect cost pass- through to the consumer. Given the extreme complexity of car pricing,
and the often uncertain role that costs due to compliance play, documenting examples of
how price changes have accompanied adjustments to vehicles will be helpful at reaching
a fundamental understanding of the process.
Meanwhile, some auto industry analysts hold that carmakers are not able to fully
recover the cost of regulated technologies, since these features are added uniformly
across all vehicles disallowing for differentiation from competition.[ 48] The argument
follows that OEMs can add the cost of new technologies to the sticker price, but because
of over capacity and intense competition, it is difficult for automakers to recoup the cost
directly and quickly. Innovations that differentiate the vehicle from the competition allow
46
automakers to charge higher prices for some vehicles and in some segments of car
buyers. In general, this only lasts for a few years by which time the new feature has
already been integrated across many lines, or has been dropped due to small demand. The
reality, though, is that pricing is part of a highly complex planning, manufacturing, and
marketing process.
3.4.1 Compliance Strategies
Automakers utilize a number of pricing strategies to help mitigate the impact of
compliance induced cost increases. The costs associated with emissions and safety
regulations vary from small to significant. First and foremost, automakers seek to expand,
or at least maintain, their market share. This can be jeopardized by the “ sticker shock”
that consumers will experience if prices are raised substantially in an across- the- board
manner. For this reason, automakers recover compliance costs in a differentiated and
disproportionate manner across their entire line of vehicles. Some of the strategies used
by the auto manufacturers to maximize sales volume, while at the same time recouping
compliance costs, will be presented in this section of the report and include the following.
§ Automakers passed the costs incurred by regulation through vehicles that are in
higher demand and/ or have a higher profit margin. As will be shown in sections
3.4 and 4.1, and in Appendix A, the added cost of airbags is disproportionately
passed on in more expensive vehicles, and to a lesser extent, better selling ones.
§ If the technology is a future one, and is being introduced in a limited manner then
only a portion of the full cost ( including R& D) is reflected in the price of the
vehicle ( e. g. vehicles would have been prohibitively expensive if the retail price
47
truly reflected the high cost of airbags when the devices were first introduced, as
with hybrid electric vehicles and a host of other new automotive technologies).
§ Automakers may recoup the cost over the course of a number of years and
number of models to avoid price shock. Clearly automakers must recoup cost
much more often than not to remain profitable and viable. In the case of airbags,
the regulation took this into consideration by allowing a gradual introduction of
airbags across an auto manufacturer’s vehicle lines.
§ Offsetting reductions in standard equipment ( decontenting) on some models may
be used to mitigate the effects of cost pass- through pricing. There is some
evidence of this with respect to airbags. For instance, GM recently decontented
( i. e., eliminated) ABS and side airbags from some models as a cost- cutting
measure.
§ The impact of cost pass- through pricing may be tested by a series of minor price
increases. This strategy is difficult to verify, but has been used by automakers to
‘ test the waters’ and avoid ‘ price shock.’
Automakers also tighten their belts in other areas of their operation to maintain
profit levels. These include the increased scrutinizing of non- regulatory project proposals
and the exploitation of redundancies, scale economies, and other cost- cutting strategies
in achieving compliance. Tooling, manufacturing, and materials management costs are
also minimized through standardization techniques across differentiated product
lines.[ 49]
48
3.4.2 Vehicle Pricing Policies of the Automobile Industry
Pricing policy is one of the most guarded decision- making practices of
automakers. While an outsider could not document or accurately specify actual pricing
decisions, a general understanding and characterization of pricing actions can be inferred
from the literature and from the automakers’ actions in the marketplace. Pricing is an
integral component of automakers’ manage rial operations. For simplicity, price can be
considered the point “ where the value of the product to the customer and the company’s
compensation for producing the product intersect.”[ 50] Pricing methods are based on an
auto manufacturer’s overall business strategy. The obvious primary objective of private
firms is profit maximization. But in the auto industry with its highly differentiated
product lines this does not necessarily translate to profit maximization strategy for each
vehicle line in its portfolio. In addition, firms may adopt a sales volume objective, which
has traditionally been GM’s approach for expanding, or at least, maintaining market
share. As the industry price leader, GM has traditionally been able to establish its own
cost- based pricing that is denoted either by markup pricing or rate of return pricing.[ 51]
GM has lost its ability to dominate automobile price setting as its market share has
shrunk and foreign competitors such as Toyota and Honda have found ample territory
aside from price in which to compete with GM. Competition- based pricing is another
method automakers use when setting prices. In order to stay competitive in a market
segment, the price set by an automaker must coincide both with consumers’ willingness
to pay and be within the range of prices of comparable vehicle offerings. Better quality,
reliability, comfort and safety attributes, and other characteristics that differentiate a
vehicle from another vehicle in its segment allows for a higher price. The economics
49
literature is filled with studies that examine the price- quality relationship.[ 52] The brand
in addition to the price may assist the consumer in determining the overall quality of the
vehicle. Pricing that is too low may have the undesired consequence of convincing
consumers the product is of inferior quality. Of course, pricing that is too high may also
turn off consumers who believe that the price is not a fair one. In recent years, the
Internet in particular, has given consumers an advantage in new vehicle trans actions by
making the dealer cost readily available. This cost transparency, in addition to the
proliferation of rebate offers and other financial incentives, has made the MSRP an
increasingly inexact measure of the actual transaction price.
A detailed 1978 report prepared for the US Department of Transportation found
there to be four overarching factors that influence automakers’ pricing policies.[ 49]
1. Volume Orientation – According to the report, theoretical studies of elasticity
indicate that demand for new automobiles is not exceptionally sensitive to price
increases. But automakers position their product lines against those of their
competitors in such a way as to maximize their market share. The importance in
pricing then becomes how a certain vehicle is priced with respect to comparable,
competing vehicles. Automakers are usually willing to shrink profit margins to
some degree in order to sell more vehicles – especially when they have excess
manufacturing capacity and also because the initial selling of a vehicle is just the
first transaction in a revenue stream that may last the lifetime of the vehicle.
2. The Product Planning Process – There is no evidence that automakers employ a
uniform cost- based approach across their fleet of vehicles when setting prices.
Instead, profit margins in terms of both return on sales and return on investment
50
vary a great deal from vehicle to vehicle, and these inconsistencies are recognized
by automakers as essential in the effort to maintain a wide range of product lines
that appeal to a spectrum of market segments. For example, automakers can make
as much as $ 15,000-$ 20,000 on high- end luxury cars and SUVs, but at the same
time, essentially break even on fuel- efficient, ‘ budget boxes.’ As a result, price
targets are principally determined from both past experience and expectations of
future purchase behavior. A price target ( sometimes but not always the MSRP) is
the amount an automaker hopes a consumer will pay for a vehicle. The
fundamental question the automakers ask is: Given current market conditions,
how much are consumers willing to pay for a vehicle that has these attributes and
features?
3. Parochialism – This describes the tension that exists within an automaker
between finance groups that favor pricing policies that lead to higher profit
margins, and sales groups that favor slightly deflated pricing in order to achieve
greater sales volume.
4. Fine Adjustment Mechanisms – While automakers set an MSRP when a vehicle
is introduced, this list price may change numerous times over the course of the
year if consumer response does not meet original expectations. The manufacturer
may adjust the price and/ or demand by offering rebates directly to the public,
increasing advertising, enacting a sales incentive program, presenting a special
promotion such as option packages at a discount, providing the dealer with a
rebate, or offering fleet discount programs to volume buyers. Dealers who are left
51
with excess inventory may be forced to take similar measures that eat into their
profit margins.
3.4.3 Cost Transfer for the Introduction of Airbag Systems
The pivotal 1990 model year, driven by the passive restraint regulation, witnessed
the first widespread introduction of driver airbag systems in the U. S. vehicle market. The
number of such cars expanded from well under one million to well over two million
vehicles. It was reported that Ford Motor Co. and Chrysler Corp., the two companies
spearheading the airbag race, would pass on to consumers the cost of the federally
mandated airbags, contributing to price hikes as high as $ 1,300 on some models.[ 53] For
instance, it was reported that Chrysler would boost prices on its 1990 model cars by an
average of five percent. The company blamed much of the rise on the cost of federally
mandated passenger restraints, particularly airbags.[ 26] Chrysler added more than ½ -
million airbag- equipped cars over the previous year, which cost the company upwards of
a quarter of a billion dollars if each unit installed is assumed to cost $ 500. Similarly, Ford
and Chrysler had tentatively increased prices 3 percent to 9 percent over 1989 on early
1990 car and truck models being sold to fleet owners, in part because of the new
government requirement for air bags or passive seat belts.[ 54] Spokespersons for Ford,
Chrysler and General Motors also confirmed that the automakers would pass along to
buyers the cost of the mandated safety equipment on 1990 model year cars. The Big
Three stated that by choosing to install the pricier passive restraint option for many
models, the companies had to raise prices for 1990 cars much more than their Japanese
competitors, which equipped nearly all their models with the considerably less costly
automatic seatbelt ( See Appendix B for detailed installation rates).[ 55] The Big Three
52
raised their prices by an average of $ 805, compared with $ 205 for Japanese cars. While
1990 was a very pivotal year for Ford and Chrysler, GM committed to airbags later, so
the impact was felt more acutely for GM in the 1991 and 1992 model years. GM
announced big price increases on some of its 1992 models that the company said largely
reflected the addition of airbags as standard equipment.[ 56]
Tables 3- 7 and 3- 8 show the effect that making airbags standard equipment has on
vehicle prices on an aggregate basis. The Driver- side airbag column indicates that a
driver airbag was made standard, while the passenger- side airbag and dual airbags
columns indicate that a passenger airbag and dual airbags respectively were made
standard. Also included are the impact of ABS and the average cost increase for years
when neither airbags nor ABS were made standard. The tables also break down the
average cost and percentage increase by a number of price brackets and vehicle classes to
provide a clearer picture of the nature of the cost pass- through. The vehicles analyzed
were the base versions of particular models during the timeframe of 1988 to 2000.
Ward’s Automotive Yearbook was used as the source for vehicle price data and available
standard equipment. Other changes between model years were not taken into account in
the analysis. Automobile manufacturers traditionally make annual changes to vehicles to
enhance their marketability and to meet Federal and State requirements. These changes
include interior and exterior trim, minor exterior body parts, major structural design and
styling, drivetrain, and the platform. These changes may or may not be directly reflected
in the price of the vehicle. Trim changes usually occur every year and include the interior
trim, exterior bumpers, paint, and front and rear styling. Minor changes to exterior body
parts occur every two to three years and include fenders, hood, and trunk lid, but do not
53
include structural parts. A major change to structural design and styling may occur about
every four years and includes distinctive changes to the exterior body parts, which may
change the dimensions of the vehicle, but not the drivetrain. Changes to the drivetrain
often occur every two to three years and include engine displacement, type of engine,
transmission, and drive wheels. The change to the body family or platform occurs when
an entirely new vehicle is designed.[ 57] The vehicle prices were converted into constant
2002 dollars using the new vehicle consumer price index furnished by the Bureau of
Labor Statistics.
54
Table 3- 7 Change in Average Vehicle Price when Airbags & ABS are made Standard ( Price)
Car Price
( 2002$)
$/%
change
No
Change
( n = 556)
Driver-
Side
Airbag
( n = 78)
Passenger-
Side
Airbag
( n = 72)
Dual
Airbags
( n = 15)
ABS
standard
( n = 137)
< 15k $ $ 386 $ 393 -$ 311 $ 657 $ 770
% 3.00% 3.18% 0.11% 5.96% 6.74%
15k – 25k $ $ 581 $ 1,055 $ 799 $ 119 $ 1,148
% 3.12% 5.92% 4.29% 0.66% 5.99%
> 25k $ $ 830 $ 1,129 $ 1,341 $ 1,701 $ 1,135
% 2.54% 3.59% 3.43% 5.40% 3.15%
Average All
Vehicles
$
%
$ 606
2.76%
$ 861
4.14%
$ 898
3.34%
$ 581
3.51%
$ 1,045
5.28%
Table Notes: 1.) The ( n) refers to the number of consecutive year vehicle model pairs. In the case of ‘ no
change,’ there are 120 distinct models spread over multiple years, so there are a total of 556 ? price entries.
In the case of the other variables, ( n) equals the number of vehicle models tested. 2.) The cost change is
calculated as an aggregate average. 3.) No Change simply means airbags or ABS were not made standard,
although other major changes ( styling, new attributes, etc…) may have been made. 4.) The sample covers
model years 1988- 1998.
Table 3- 8 Change in Average Vehicle Price when Airbags & ABS are made Standard ( Veh. Class)
Vehicle
Class
$/%
change
No
Change
( n = 556)
Driver-
Side
Airbag
( n = 78)
Passenger-
Side
Airbags
( n = 72)
ABS
standard
( n = 137)
Small Car $ $ 268 $ 370 -$ 296 $ 1,502
% 1.97% 2.67% - 0.33% 10.29%
Midsize $ $ 449 $ 1,175 $ 1,185 $ 464
Car % 2.51% 7.68% 7.15% 2.60%
Large Car $ $ 572 $ 1,487 $ 1,035 $ 1,445
% 2.77% 7.62% 4.88% 6.94%
Luxury $ $ 710 $ 955 $ 1,170 $ 1,159
Car % 2.00% 2.80% 2.68% 3.61%
Sports Car $ $ 820 $ 551 $ 1,023 $ 927
% 3.99% 3.42% 5.78% 4.87%
Minivan $
%
$ 1,448
6.52%
$ 1,866
10.66%
$ 1,658
6.88%
$ 912
5.22%
SUV $
%
$ 1,463
5.04%
$ 1,208
4.35%
$ 1,827
5.82%
$ 1,351
6.40%
Average All
Vehicles
$
%
$ 606
2.69%
$ 861
4.14%
$ 898
3.34%
$ 1,045
5.28%
Table Notes: Same as Table 3- 7; Consult Appendix C for complete descriptive statistics associated with
this analysis.
The introduction of ABS as standard equipment was associated with the greatest
degree of change in price homogeneity in dollar terms. Vehicles that do not undergo a
safety attribute installment display the most consistent change in percentage change in
55
price. The cost of ABS, which has been reported to be in the neighborhood of $ 500 to
$ 1000 dollars or more depending on the make of vehicle, is passed on fairly consistently
to consumers of all price- level cars. A more stable cost pass- through may accompany the
addition of ABS because automakers had much more freedom to choose which vehicles
would receive the safety upgrade. Such a straightforward pass- through is not the case for
airbags perhaps partly due to the requirement to add the safety feature to all vehicles over
a relatively short period of time.. When a driver airbag is added, the cost burden is
disproportionately placed upon the most common price- level of cars ( i. e. $ 15,000-
$ 25,000). Strangely, cars costing over $ 25,000 have a smaller dollar figure increase than
when no safety feature is added. The small sample sizes ( n) mean that the results are not
statistically significant, and may be skewed in one direction or the other.
Figure 3- 3 Average MSRP Increase with Airbags, ABS, and Neither Added
-$ 500
$ 0
$ 500
$ 1,000
$ 1,500
$ 2,000
Small Midsize Large Luxury Sports Minivan SUV
No Change DS Airbag Added PS Airbag Added ABS Added
Table Notes: The data used in this figure is for vehicles ( all major manufacturers) from 1988 to 1998.
These results are the same as those presented in Table 3- 8. DS = Driver- Side; PS = Passenger- Side
As Figure 3- 3 shows, the trend in price shifts indicate that larger vehicles receive
a higher price increase on average than small cars. When a car moves from having a
single airbag to dual airbags, the cost pass- through is weighted toward the more
expensive cars ( as indicated by the fact that the price increase is no greater for 2 airbags
56
than one, even though the cost much be greater). In this case the price of cars that cost
under $ 15,000 actually see lowered prices in constant dollars. Automakers decided to
forgo an incremental installation on some models, and move straight to dual airbags. This
action is in many cases regulatory- driven because automakers thereby satisfy the dual
airbag requirement that went into effect during the 1995 – 1998 model years. In this
instance, the most prevalent price- level of cars once again yields unexpected results. The
cost of the dual airbag systems is clearly not passed on initially to the consumer of cars
costing between $ 15,000 and $ 25,000. The data indicate that the unregulated technology,
ABS, has a higher price premium than airbags. This may be due to automakers’ opinion
that there is less demand for a regulated safety feature, so the added cost must be kept
low in order to not negatively impact sales. More than anything these tables along with
Figure 3- 4 show the unpredictability and complexity of automaker’s pricing policies.
Consult Appendix A for detailed price and sales analyses in response to the introduction
of airbags for individual vehicle models. The results in the appendix more clearly show
how automakers pass on added costs across a number of their highly differentiated
vehicle offerings. For the most part, higher- end cars receive disproportionately higher
price increases than their more budget- targeted counterparts. There is also a great deal of
fluctuation in price setting from one year to the next, which highlights the range of
factors, only some of which are cost- related, which help to determine the price of a new
vehicle.
57
Figure 3- 4 Average Fleet- Wide Percentage Annual Increase in New Car Prices
- 1
0
1
2
3
4
5
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Model Year
%
GM
Ford
Chrysler
Big 3
Average
Source: Numerous issues of Automotive News ( 1988- 2000). The percentage change is strictly price
increases ( i. e. Cost of quality improvements like those generated by BLS to a car are not factored into the
change).
The Bureau of Labor Statistics publishes the price differential for quality changes
to new vehicles. These quality changes include such items as powertrain improvements,
corrosion protection, theft protection, changes in levels of standard and optional
equipment, as well as mandated safety and emissions control improvements. For
example, BLS tracks the price change resulting from the Federal Motor Vehicle Safety
Standards, such as FMVSS 208, that governs airbags, and the price change in accordance
with the Clean Air Amendments of 1990. BLS decided that, beginning in 1999, it would
no longer treat modifications to goods and services that are made solely to meet air
quality standards as quality improvements in the CPI. Price increases associated with
such modifications were to be treated as increases in the index. The rationale behind this
decision is that a change in pollution control in no way changes the satisfaction derived
from the vehicle by the individual consumer. This fundamental difference between
emissions regulations that primarily lead to public benefits and safety regulations where
the derived private benefits are transparent will be discussed at length in Section 4.4.
58
Consult Appendix D for a synopsis of quality adjustments for passenger cars from 1969
to present.
Figure 3- 5 Average Retail Price Changes for Quality Improvements1 and Average Change in Car Price2 ($ 2001)
($ 600)
($ 400)
($ 200)
$ 0
$ 200
$ 400
$ 600
$ 800
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
($ 997)
Safety Total New Car Price
Source: Bureau of Labor Statistics, Reports on Quality Changes for New Cars as reported in Ward’s
Automotive Yearbook 2002. U. S. Department of Commerce, Bureau of Economic Analysis, National
Income and Product Accounts, underlying detail estimates for Motor Vehicle Output, Washington, DC,
2002. ( Additional resources: www. stat- usa. gov) These data apply to passenger cars only ( not light trucks).
See Appendix D for Source Data.
BLS estimates the value of quality change based on a review of data supplied by
producers for similarly equipped previous model year and current model year domestic
models priced for the Producer Price Index. Essentially, price changes above and beyond
the change due to quality improvements can be construed as a change that is not covering
an explicit cost. An implicit cost such as this would perhaps cover manufacturing or some
other cost that would not be considered to add quality to the new vehicle. BLS lists both
producer prices as well as the retail price equivalent of quality improvements. Figure 3- 5
highlights the retail price adjustments over the period between 1987 and 2001. The most
important years for passive restraint regulation and airbags are 1988 ($ 78.12), 1990
($ 205.26), 1991 ($ 239.60), 1994 ($ 188.94), and 1995 ($ 120.36). The cost figures in
59
parentheses are the retail safety adjustments, which are almost entirely attributable to
passive restraints for those years. For the 1988 model year, the regulation called for 25%
of automakers’ passenger cars to be equipped with passive restraints up from 10% the
previous year. In 1990 this number jumped from 40% to 100%, which was reflected in
the price increase. Up to this point, a mix of mostly automatic safety belts and some
driver airbags caused the cost of these mandated safety improvements. This changed in
the following years when airbag installation approached 100% of vehicles. Table 3- 9
highlights the compliance cost per vehicle for passive restraints according to BLS data.
Note that cost appears to be spread out over the course of a number of years and, if these
numbers are to be believed, may not be recouped at all judging by the average change in
new car price. Of course, the average change in new car price is not a good measure for
determining cost pass- through dynamics because it fails to get at what is happening on a
manufacturer by manufacturer ( and vehicle class by vehicle class) basis.
Table 3- 9 Summary of Statistics related to the Introduction of Airbags ( 1987- 1997)
Model Year
Average per
unit safety
cost1 ($ 2001)
Average
Change in
New Car
Price2
($ 2001)
Number Cars
Sold
w/ Auto
Seatbelts3
Number Cars
Sold w/
Driver
Airbags3
Number Cars
Sold w/
Passenger
Airbags3
Passenger
Car Sales3
1987 $ 0.00 $ 355.59 1,570,000 106,789 0 10,277,000
1988 $ 78.12 -$ 304.24 3,100,000 210,137 0 10,530,000
1989 $ 27.11 -$ 537.19 3,900,000 630,295 0 9,772,000
1990 $ 205.26 -$ 388.66 6,050,000 2,331,614 20,657 9,300,000
1991 $ 239.60 -$ 492.60 5,100,000 3,015,945 72,456 8,175,000
1992 $ 37.68 $ 202.55 3,800,000 3,995,231 431,988 8,214,000
1993 $ 0.00 -$ 39.59 2,500,000 5,030,813 1,257,478 8,518,000
1994 $ 188.94 $ 323.74 950,000 7,238,642 5,008,146 8,990,000
1995 $ 120.36 -$ 684.01 0 8,152,637 7,220,844 8,735,197
1996 $ 16.31 $ 125.56 0 8,366,340 7,911,639 8,653,927
1997 $ 8.97 $ 164.22 0 8,200,000 8,200,000 8,257,404
Sources: 1) Bureau of Labor Statistics, Reports on Quality Changes for New Cars as reported in Ward’s
Automotive Yearbook 2002. 2) U. S. Department of Commerce, Bureau of Economic Analysis, National
Income and Product Accounts, underlying detail estimates for Motor Vehicle Output, Washington, DC,
2002. 3) Ward’s Automotive Ye arbook, ( Various Years).
60
3.4.4 Impact of Airbag Regulation on the Auto Industry
Motor vehicle manufacturing accounted for 3.7% of the overall U. S. GDP in
2000.[ 58] The US automobile market is the largest in the world, and the automotive
industry ranks among the top in the nation in terms of R& D spending and employee
payroll.[ 59] Although average profit margins tend to be relatively small, great variability
can be found across vehicles. American automakers in particular display a range of profit
margins from close to zero for some vehicles to upward of $ 20,000 for others, such as
luxury SUVs. Many small and midsize cars from Detroit such as the Dodge Neon,
Chevrolet Malibu and Ford Focus have very little if any profit margin, but play an
important role in helping automakers meet CAFE standards and attracting first- time
buyers. American automakers have increasingly moved away from passenger cars in
favor of light trucks, particularly SUVs. In 2002, the percentage of total vehicle sales
accounted for by light trucks was 58% for GM, 65% for Ford, and 76% for Chrysler.[ 60]
Most premium American SUVs generate profits between $ 5,000 and $ 15,000 per vehicle,
while highly profitable lines such as the Lincoln Navigator and the Cadillac Escalade can
generate up to $ 20,000. The optional accessories package on a Hummer H2 has an
average profit margin of $ 1,300, which helps overall profitability.[ 61] Overall, though,
the profit margins for the auto industry are slim compared with other industries ( See
Table 3- 10). Table 3- 11 summarizes select automaker financial statistics and number of
airbags during the period of 1988 to 1997 when automakers introduced airbags across
their entire vehicle lines to satisfy the regulation. The ratio of corporate revenue to profits
illustrates the thin profit margins in the auto industry, but also the enormous revenues the
industry generates.
61
Table 3- 10 Average Profit Margins for a Number of Industries
Industry Net Profit Margins
Automobile & Truck Manufacturing 1.43%
Mobile Homes & RVs 5.66%
Aerospace & Defense 5.79%
Computer Networks 6.44%
Insurance ( Life) 9.17%
Computer Hardware 9.38%
Healthcare Facilities 9.88%
Waste Management Services 10.90%
Office Supplies 12.63%
Motion Pictures 15.71%
Biotechnology & Drugs 19.28%
Software & Programming 27.68%
Source: Reuters Investor Website, See:
http:// cnnfn. investor. reuters. com/ Home. aspx? target=% 2f& page= home
62
Table 3- 11 Summary of Financial and Airbag Statistics for Select Automakers ( 1988- 1997)
1988- 1997
2,988,526
2,925,674
408,040
10,926
3,492,434
7,248,789
963,785
9,949
6,639,506
8,534,947
1,284,492
4,844
13,120,466
18,709,410
2,656,317
25,662
860,989
3,093,602
750,263
20,442
73,224
527,611
470,865
2,524
1997
32,565
770,222
$ 56,967
$ 2,805
0
1,674,107
$ 122,935
$ 4,714
113,444
2,532,303
$ 153,781
$ 6,698
146,009
4,976,632
$ 333,683
$ 12,363
0
836,651
$ 99,730
$ 3,143
0
173,037
$ 63,664
$ 765
1996
46,355
757,841
$ 58,004
$ 3,529
0
1,491,167
$ 118,023
$ 1,655
408,346
2,298,506
$ 145,427
$ 4,963
454,701
4,547,514
$ 321,454
$ 11,882
0
782,296
$ 101,177
$ 2,426
0
156,681
$ 64,491
$ 437
1995
48,316
770,669
$ 49,747
$ 2,025
0
1,941,570
$ 110,496
$ 2,056
823,653
2,331,314
$ 143,754
$ 6,881
871,969
5,043,553
$ 303,997
$ 9,044
5,700
768,197
$ 89,715
$ 1,458
0
128,440
$ 61,168
$ 233
1994
341,823
458,297
$ 49,534
$ 3,713
346,357
1,232,702
$ 107,137
$ 3,824
1,263,420
1,191,766
$ 141,576
$ 4,901
1,951,600
2,882,765
$ 298,247
$ 14,418
12,240
644,420
$ 91,317
$ 1,227
0
61,669
$ 50,930
$ 95
1993
521,403
168,645
$ 41,247
($ 2,551)
552,411
625,119
$ 91,568
$ 940
1,385,698
161,570
$ 125,253
$ 2,466
2,459,512
955,334
$ 258,068
$ 855
229,403
62,038
$ 95,063
$ 1,643
8,501
7,784
$ 44,774
($ 1,134)
1992
537,761
0
$ 33,409
$ 723
707,195
284,124
$ 84,407
($ 8,628)
1,031,246
19,488
$ 118,572
($ 23,498)
2,276,202
303,612
$ 236,388
($ 31,403)
407,498
0
$ 80,128
$ 1,875
18,195
0
$ 53,977
$ 93
1991
603,125
0
$ 26,707
($ 795)
879,240
0
$ 72,050
($ 3,186)
917,965
0
$ 109,157
($ 4,661)
2,400,330
0
$ 207,914
($ 8,642)
144,726
0
$ 71,731
$ 3,140
13,174
0
$ 48,826
$ 713
1990
653,536
0
$ 26,965
$ 68
770,305
0
$ 81,844
$ 99
416,648
0
$ 110,797
($ 1,986)
1,840,489
0
$ 219,606
($ 1,819)
61,422
0
$ 59,962
$ 2,878
31,864
0
$ 45,429
$ 725
1989
144,912
0
$ 31,039
$ 359
223,455
0
$ 82,879
$ 3,175
276,190
0
$ 112,533
$ 4,224
644,557
0
$ 226,451
$ 7,758
0
0
$ 61,440
$ 2,652
1,490
0
$ 37,606
$ 597
1988
58,730
0
$ 34,421
$ 1,050
13,471
0
$ 92,446
$ 5,300
2,896
0
$ 123,642
$ 4,856
75,097
0
$ 250,509
$ 11,206
0
0
NA
NA
0
0
NA
NA
Statistics
Driv. AirBag
Dual Airbag
Net Revenue
Net Profit
Driv. AirBag
Dual Airbag
Net Revenue
Net Profit
Driv. AirBag
Dual Airbag
Net Revenue
Net Profit
Driv. AirBag
Dual Airbag
Net Revenue
Net Profit
Driv. AirBag
Dual Airbag
Net Revenue
Net Profit
Driv. AirBag
Dual Airbag
Net Revenue
Net Profit
Auto-maker
GM
BIG 3
Total
Toyota
VW
Chrysler
Ford
Source: Ward’s Automotive Yearbook 2002, Compiled from annual company reports. Table Notes:
Revenue and Profit are reported in $ 2001 and represent global figures. Airbag statistics are for the U. S.
vehicle market only.
63
3.5 MARKETING COMPLIANCE- RELATED VEHICLE ATTRIBUTE CHANGES
3.5.1 Advertising the Airbag
After years of fighting proposed regulation that would require airbag systems,
many in the auto industry did an about face and embraced airbag technology as a
desirable safety feature. The most dramatic illustration of this reversal is Lee Iacocca
who, as president of Ford in the 1970s, fought vigorously against the adoption of an
airbag rule on the grounds of cost and the difficulty of competing with import
automakers. Then, as CEO of Chrysler Corporation in the late 1980s, he committed to
airbags before regulation required such a committal, and before the consumer demand
and acceptance of airbags was clear. In 1988, it was reported that manufacturers and
dealers, who understandably found risk of injury and death an unattractive item to
market, had yet to actively promote the safety technology.[ 62] Until fairly recently it was
not automakers who advertised the airbag most directly, but rather auto insurers and
suppliers. The importance of advertising in the overall corporate marketing strategy
cannot be dismissed. Automakers support dealers through extensive advertising and
promotional campaigns. As a whole, automakers led all other industries in spending on
broadcast, print, and billboard advertising in the U. S, with total expenditures of $ 7.43
billion in 1998, up from $ 6.79 and $ 5.74 billion in 1997 and 1996.[ 63] GM alone spent
$ 2.94 billion on advertising, or about $ 643 per passenger vehicle it sold that year. In
addition to these advertising expenditures, carmakers also spent an average of $ 2,000 per
vehicle in rebates and other incentives to both consumers and dealers in 1998, costing the
64
industry more than $ 30 billion.[ 64] The trend toward more generous rebates has
continued to the present time.
3.5.2 Early Efforts by Mercedes- Benz
Mercedes- Benz was the first prominent automaker to include airbags in its
marketing pitch as part of an overall safety and superior engineering and design
campaign. The company slog