GM and Ford pursuing Carbon Fiber to Improve Fuel Efficiency and Increase Profits

Posted by PITHOCRATES - April 15th, 2012

Week in Review

Ford and GM following the lead of Airbus and Boeing.  Using composite materials to make their vehicles lighter.  And more fuel efficient.  For as Airbus and Boeing have proven, improved fuel efficiency during times of high fuel costs leads to more unit sales (see Ford, Dow to explore carbon fiber use in vehicles by Deepa Seetharaman posted 4/12/2012 on Reuters).

Ford Motor Co and Dow Chemical Co will work to develop cost-effective ways of using carbon fiber in high-volume cars and trucks as the No.2 U.S. automaker moves to cut vehicle weight to improve overall fuel economy…

Weight reduction is one way for automakers to boost the efficiency of their fleets in anticipation of rising oil prices and stricter fuel economy standards for upcoming model years…

Using carbon fiber in lieu of conventional steel can lower the weight of a vehicle component by up to 50 percent, according to the U.S. Department of Energy. Cutting a car’s weight by 10 percent can improve fuel economy by as much as 8 percent.

Carbon fiber, already used in racing cars and products like hockey sticks, is not new to the auto industry. BMW (BMWG.DE), for example, uses the material in its M3 coupe.

Yet carbon fiber’s high cost has blocked its wide-scale use. Industry experts say one way to lower the overall cost of carbon fiber is to find cheaper ways of preparing those materials…

Last month, the Obama administration announced it would provide $14.2 million in funding to spur development of stronger and lighter materials.

Really?  The government needs to fund this with subsidies?  You mean there is no incentive for automakers to make their cars lighter?  I think there is.  If they can make a car lighter without shrinking it down to something slightly larger than a shoe box they will improve fuel economy.  And increase sales.  For what family would not want to buy a fuel efficient car that lets them pack the family in it and take it on vacation?  Letting them take longer trips because the cost of gasoline doesn’t eat up the family vacation budget?  Or let families spend more on their grocery bill rather than on gasoline?  To enjoy more cookouts during their summer vacation?  One thing for certain is that if you can produce a more fuel efficient car that doesn’t trade anything else to get that efficiency (size, range, etc.), people will run to buy it.  And that is what we call incentive.

GM revenue in 2011 was $150.3 billion alone.  So Ford and GM are not doing this to get their hands on that piddling $14.2 million in federal money.  Which was about 0.01% of GM’s total revenue in 2011.  Which is little more than a rounding error.  They’re doing this to increase their market share in an increasingly competitive market.  In 2011 GM, Ford and Chrysler had global market shares of 8%, 8% and 3%, respectively.  If you divide GM’s revenue by 8 that comes to about $18.8 billion in revenue per percentage point.  Which is one heck of an incentive to increase unit sales to get just one more percentage point in market share.  And during times of high fuel costs one way to do that is to make a car cheaper to own by making it more fuel efficient.  That’s why they’re pouring money into carbon fiber technology.  Not because the government is offering what amounts to loose change under the sofa cushions as far as GM is concerned.  Because fuel efficiency equals higher market share when gasoline is expensive.  And market share equals higher revenue.  And profits.

Yes, it’s greed that’s making Ford and GM pursue carbon fiber to increase fuel efficiency.  Which is the best reason.  Because greed requires no government subsidies.

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Incentive and Competition

Posted by PITHOCRATES - December 19th, 2011

Economics 101

Prices set by the Free Market make Competitors Think and Innovate

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  Free labor sustained economic growth by increasing the number of people making economic exchanges.  Prices automated the process of assigning value and allocating scarce resources (that have alternative uses).  But that’s not all.  Prices also provide incentive and competition.

High prices signal high profits.  Or the potential for high profits.  Which encourages other people to enter the market to get their piece of these high profits.  People who think they can do a better job.  Make something better.  And sell it for less.  That’s right, to get rich they will sell it for less.  That’s key.  That’s how you gain market share.  The ultimate goal of all businesses.  Because with market share comes profit.  And often times this happens even with a price below that of the competition.

Prices set by the market allow this amazing phenomenon to happen.  It stimulates the creative juices.  It makes competitors think.  And innovate.  Providing incentive.  To improve on an existing idea.  Or replace an existing idea with a better idea.  All the while being guided by market prices.  Which tell them the current value a buyer places on a product or service.  And the final cost they have to remain below to bring their innovation to market.  If they do both they will gain market share.  By giving customers better value at a lower price.  And they will make themselves rich in the process.  The proverbial win-win of the free market.  The hallmark of capitalism.  Incentive and competition.

With Crony Capitalism Government Increases the Cost of Competition, Squelching any Incentive to Innovate

Free market prices are essential for free market capitalism.  If the market is not free to determine prices this amazing phenomenon will not occur.  Consumers will not get more value for less.  And business people and entrepreneurs will not take chances and create more value for less.  Because if there are outside forces influencing prices these forces also create uncertainty.  They throw unknowns into business calculations.  Things businesses have no power over.  Which makes them cautious.  And less prone to risk-taking.

We can see examples of this every time there is unrest in the Middle East.  Which tends to threaten the oil supply.  Everything in a modern economy uses energy.  Nothing comes to market without energy.  So anything that affects energy prices affects all prices.  Another example is government’s regulatory cost.  Such as Obamacare.  Which has caused great uncertainty.  And a lot of unknowns.  For entrepreneurs.  And business owners.  Who don’t know the ultimate regulatory compliance cost.  Freezing hiring.  And business expansion.  Extending the Great Recession.  Causing the economy to spit and sputter along.  Like an engine that just won’t restart.

Typically when government over regulates it’s to reward their friends and cronies.  Hence the term crony capitalism.  Which isn’t even capitalism.  Crony capitalism is about getting rich by who you know in government.  Not by creating more value for less.  The government fixes the game by keeping prices high for their cronies.  By enacting regulations that increase the cost of competition.  Squelching any incentive to innovate.  Leaving consumers stuck paying more for less value.

When Government Interfered with Market Prices they gave us the Great Depression and the Great Recession

Free market prices assign value.  Allocate scarce resources that have alternative uses.  Provide incentive to innovate.  Encourage competition.  Incentive and competition.  The hallmark of capitalism.  Which ultimately provides consumers with more value at lower prices.  And it does all of this automatically.  As long as government doesn’t interfere with this automatic pricing mechanism.

But government often does.  They interfere with this automatic pricing mechanism to reward friends and cronies far too often.  When they do the economy suffers.  And often goes into recession.  And when they really interfere, they cause Great Depressions.  And Great Recessions.

Government regulatory policy turned an ordinary recession into the Great Depression.  One of their greatest anti-business regulations being the Smoot–Hawley Tariff Act.  Which launched an all out trade war.  Killing the economy.  And government regulatory policy in the mortgage industry caused the Great Recession.    First by creating a housing bubble by forcing lenders to qualify the unqualified.  And then enabling this bad policy on a grand scale by having Fannie Mae and Freddie Mac buy the resulting bad subprime mortgages.  Which removed all risk from the lenders so they kept on approving bad subprime mortgages.

Say what you will about the Great Depression and the Great Recession.  But what you can’t say is that they were market failures.  Because they weren’t.  Both were government-made.  Because it was government that interfered with market prices.  Not the free market.  And the consumers paid the price for their crony capitalism.

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