A Preliminary Assessment of the
Gaseous Fuels Aftermarket
Industry
Final Report
pnparodfor
Office of Mobile Sources
US Environmental Protection Agency
prepared by:
ICF Incorporated
under
EPA Contract No. 68-C1-0059
Work Assignment No. 1, Subtask 1
September 28,1992
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DISCLAIMER
This report was prepared under contract to an Agency of the United States
Government. Neither the United States Government nor any of its employees, contractors.
subcontractors, nor their employees makes any warranty, expressed or implied, or assumes
any legal liability or responsibility for any third-party use of any information or product
disclosed in this report, or represents that its use by such third parties would not infringe on
privately owned rights.
Publication of the data in this document does not signify that the contents necessarily
reflect the joint or separate views and policies of the US Environmental Protection Agency.
Mention of trade names or commercial products does not constitute endorsement or
recommendation for use.
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ACKNOWLEDGEMENTS
This reoort was funded by the Office of Mobile Sources (QMS) of the US Environmental
Protection Agency. The project was managed by Mr. Bryan Manning and Mr. John Mueller of
QMS. "he reoon was developed and written by ICF Incorporated. The following persons are
gratefully acxnowieoged for their contributions.
ICF incorporated
Andrea Cousins
Karen Doerschug
Barry Galef
Nathan Tiller
Endine. Fuel, and Emissions Engineering
Sean Turner
Christopher S. Weaver
In addition, thanks to other individuals and industry representatives who provided
information on the attermarket conversion industry.
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TABLE OF CONTENTS
Introduction 1
Chapter 1 - Methodology 3
1.1 Identification of Participating Companies and
Collection of Industry Information 3
1.2 Collection of Company-Specific Information 5
1.3 Development of Representative Model Companies 6
1.4 Estimating Potential Compliance Costs 7
1.5 Limitations of the Data 7
Chapter 2 - Industry Overview 9
2.1 History 9
2.2 The Conversion Industry is both Emerging and Transitional 10
2.3 Nature of Competition 11
2.4 Industry Structure 15
Chapter 3 - Industry Segments and Model Companies 18
3.1 Kit Makers 18
3.2 Installers 22
3.3 Engineered Converters 24
Chapter 4 - Demand for Industry Products and Services 27
4.1 Demand Based on Economic Factors 27
4.2 Demand Related to Air Quality and Regulation 29
4.3 Interaction of Market Segments 31
4.4 Elasticity of Demand 31
Chapter 5 - Cost Structure of the Aftemnarket Conversion Industry 33
5.1 Conversion Prices 33
5.2 Components of Conversion Costs 34
5.3 Economies of Scale 34
5.4 OEM Competition 35
Chapter 6 Preliminary Analysis of Impacts 36
6.1 Emission Tests 36
6.2 Low-Mile Certification Tests 38
6.3 Tailpipe Tests for CFF Vehicles 45
6.4 Summary of Estimated Regulatory Costs 46
6.5 Cut-Off Points 49
Appendix A - Glossary of Terms 50
Appendix B - Assessment of Demand Elasticity 51
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INTRODUCTION
Alternative transportation fuels like compressed natural gas, propane, electricity, and
methanol. are increasingly considered viable options to traditional transportation fuels such as
gasoline and diesel. There are an estimated 425,000 liquified petroleum gas (LPG) vehicles
and 30,000 compressed natural gas (CNG) vehicles in use in the US today.1 Advantages of
these alternative fuels include that they are cleaner burning, are less expensive than gasoline
per gallon equivalent, and can reduce vehicle maintenance. However, with few exceptions
such as the Ford CNG Crown Victoria and the GMC Sierra, one currently cannot purchase
alternative fuel vehicles (AFVs) from automakers. Nearly all of the AFVs on the road today
were retrofitted to enable them to run on fuels other than gasoline or diesel. This report
characterizes the industry that performs these retrofits, the aftermarket conversion industry.
Historically, the aftermarket conversion industry has been driven by economic factors.
The number of conversions fluctuated directly with the price of gasoline. Conversions were
done on a one-by-one basis. Conversion kits containing all the necessary components to
convert a vehicle were frequently "one-size-fits-all" and employed rudimentary technology. In
the past few years, however, the outlook for the conversion industry has changed
dramatically as a result of the 1990 Clean Air Act Amendments (CAA), state legislation
(especially in California, Texas, Oklahoma, and Colorado), and other state and local initiatives
that promote alternative fuels. Conservative estimates by the gaseous fuels industry indicate
that there will be at least 4.5 million AFVs on US roads by the year 2005.2
To meet the demand for AFVs, the aftermarket conversion industry is undergoing a
rapid transition: Many new companies are entering the industry; technology is becoming
increasingly sophisticated; original equipment manufacturers (OEMs - e.g., automakers) are
entering the market; and companies are facing significant learning curves. As demand for
AFVs grows, large companies may experience substantial economies of scale.
The purpose of this report is to provide information to be used in assessing the
potential impacts of EPA's proposed Gaseous Fuels and Clean Fuel Fleet rulemakings on the
aftermarket conversion industry. Therefore, the report will focus on issues germane to
determining these impacts (such as financial profiles of companies involved, future trends in
industry development and sales, and costs of complying with conversion requirements) rather
than assessing the viability of current technologies or the emissions benefits of alternative
fuels. Moreover, the report focuses on conversions to CNG and LPG as conversions to these
fuels are most viable at this time, even though EPA's proposed conversion regulations could
potentially apply to any fuel (e.g., liquid natural gas).
1 NPGA and U.S. Department of Energy, cited by LP Gas Clean Fuels Coalition.
2 Energy Analysis. American Gas Association Planning and Analysis Group, Appendix 1, January
1991.
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This report is divided into six chapters. Chapter 1 presents the methodology ICF used
to gather information and develop representative model companies for the three major
industry segments (kit manufacturers, engineered converters, and installers). Chapter 2
provides an overview of the industry and discusses factors relevant to assessing impacts
such as the industry structure and nature of competition. Chapter 3 provides information on
the major industry segments and presents model companies in each segment. Chapter 4
summarizes the cost structure of the aftermarket conversion industry. Chapter 5 discusses
demand for conversions. Finally, Chapter 6 provides a brief discussion of some aspects of
the potential impacts of the regulation of gaseous fuels and clean fuel fleet conversions.
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CHAPTER 1
METHODOLOGY
There are no publicly available, comprehensive reports on the US aftermarket
conversion industry nor even a complete list of participating companies. This chapter
explains the methodology and data sources used to characterize the aftermarket conversion
industry. It is presented in four sections: Identification of Participating Companies and
Collection of Industry Information; Collection of Company-Specific Information; Development
of Representative Model Companies; and Limitations of the Data.
1.1 Identification of Participating Companies and Collection of Industry Information
A two-pronged approach was used to generate a list of companies participating in the
conversion industry and to gather general industry information on trends and business
practices. First, ICF compiled an initial listing and partial characterization of firms involved in
manufacturing, assembling, installing, and/or distributing CNG and LPG conversion kits.
Second. ICF contacted industry organizations, national information sources, and state
representatives. Using this approach, ICF generated a list of companies in the conversion
industry and additional state and industry representatives who could provide general
information on the industry.
ICF then contacted these various organizations to obtain general information about the
industry, lists of participating companies, and recommendations of additional information
sources until it began to get repetitive recommendations. The organizations ICF contacted
are listed in Exhibit 1 -1.
Due to the limitations of the Paperwork Reduction Act, ICF spoke with only one or two
representatives of conversion kit manufacturers, engineered converters, and installers to
obtain public information about their companies and general industry and market information.
iCF's questions and the content of its conversations with each of these industry
representatives varied greatly because of the differences among companies and company
types.
Even though contacts with industry participants were limited, ICF is confident that this
thorough approach has allowed it to identify the majority of companies participating in the
aftermarket conversions industry and to develop a sound industry characterization. It is
unlikely, however, that ICF has identified all small and recent start-up companies as many
continue to enter the industry or all companies that have converted parts of their fleets on a
trial basis.
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EXHIBIT 1-1
ORGANIZATIONS CONTACTED
American Gas Association
Automotive Industry Action Group
California Air Resources Board
Clean Air Texas
Colorado Oept. of Health
Engine Manufacturers Association
Interstate Natural Gas Association
LP/Gas Magazine
LPG Coalition
National Highway Traffic Safety Administration
National Fire Protection Association
National Renewable Energy Labs
National Research Council Transportation Board
National Gas Transportation Association
National Propane Gas Association
Natural Gas Vehicle Coalition
Natural Gas Supply Association
Natural Gas Fuels Magazine
Oklahoma Alternative Fuels Program
Society of Automotive Engineers
Texas Railroad Commission
Texas Air Control Board
Texas General Land Office
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1.2 Collection of Company-Specific Information
Once ICF identified the majority of companies in the industry, it gathered publicly
available information on individual companies. Sources of data included Dunn & Bradstreet's
Business Information Reports. Market Identifiers. Electronic Business Directory, and Financial
Records Plus: and Trinet's US Businesses and Company Database.
ICF used information from these sources and industry contacts to create a company
database with selected information:
* Company name;
Location;
Contact person;
Corporate status;
Name of parent company (if relevant);
Four digit Standard Industrial Classification (SIC) codes corresponding to the
principal business activities;
Activity or activities performed in the industry -
manufacture component(s) or entire kit, distribute components/kits, perform
conversions, type of conversions (CNG or LPG);
Number of conversions performed in the past year, past 5 years;3
Indication of whether the financial information presented pertains to the parent
company or affiliate/division/subsidiary/joint venture;
Financial information for the most recent fiscal year -
Annual revenues (sales)
Net worth
Current assets
Current liabilities
Current ratio
Working capital
Net profit (income)
Total assets
Estimated percent of income from conversion activities
Financial condition (fair, good, strong, unbalanced)
Trend (in sales, general financial stability);
Whether the company is located in a state with a centralized or decentralized
inspection and maintenance program (a proxy for accessibility of state emission
inspection facilities); and
Whtther the company is located in one of the 22 non-attainment areas.
3 This information was available for only a small minority of companies.
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1.3 Development of Representative Model Companies
To accurately characterize firms participating in the attermarket conversion industry, ICF
developed a set of model firms for each of the three segments of the industry: kit
manufacturers, engineered converters, and installers. Each set consisted of a model
company profile for the typical (median) large firm, typical (median) small firm, and lower
quartile small firm in the segment. The process by which ICF developed these model firms is
presented below.
Identification of Large and Small Companies
To develop model firms, ICF first categorized each identified firm as small or large. As
specified in the Regulatory Flexibility Act, ICF used Small Business Administration (SBA)
definitions of small firms to make an initial determination of small and large entities within
each segment. The SBA size cutoffs are typically at 100, 500, or 750 employees, depending
on the industry as defined by the four-digit SIC codes. Among the 60 firms identified as
participating in the aftermarket conversion industry, 43 four-digit SIC codes (most of which
have SBA cutoffs of 100 employees) are represented. This variety reflects the fact that the
industry is new, diverse, and changing.
To judge whether this initial determination was correct, ICF checked if the companies
known to be major players (e.g., IMPCO, ANGI) in the industry were large firms. This was
done because the primary purpose of a regulatory flexibility analysis is to detect
disproportionate impacts of regulations on small companies relative to large companies in the
affected industry segment (which may not be the industry represented by the company's SIC
code). In most cases, the initial determination seemed correct. However, a few small firms
mat had close to the cutoff number of employees and are considered major players in the
industry were classified as large firms for the purpose of this analysis.
Interpolating for Missing Data
Second, ICF utilized data from companies with complete financial information to
interpolate financial information that was missing for other companies in the same segment
and size category. For many of the smaller firms, for example, only information on SIC code,
employees, and sates was publidy available. To estimate other financial information needed
to develop representative model companies, ICF used regression analyses to identify
relationships among various characteristics. For example, because relationships between
sales and employees, and assets and employees, were generally very strong, missing values
could be filled in with a reasonable degree of confidence. Filling in missing data on return on
assets was more difficult, in part because profits tend to be more volatile and subject to
special factors (such as start-up costs and write-off). For firms for which data on profits were
unavailable, ICF assumed that the firm's return on assets was equal to the average profit for
its size category. ICF also tested whether rates of profit among small firms are related to size,
but was unable to confirm this hypothesis.
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Determining Characteristics of Model Companies
ICF's third step in developing model firms involved determining the actual
characteristics (e.g., number of employees, sales, assets, profits) of each model firm. This
was accomplished by separately sorting employment, sales, assets, and profits by magnitude
for small and large firms in each industry segment. Then, the initial characteristics for the
large model firms were chosen using the median employment, sales, assets, and profits for
the large firms. Similarly, the initial characteristics of the two smaller model firms were
selected using the median and lower quartile values from the employment, sales, asset, and
profit distributions of small firms in each segment. To make the model companies internally
consistent, other characteristics (e.g., return on assets) were calculated from the initial model
firm characteristics.
By using this approach, the nine model firms (three for each of three segments) are as
representative as possible (given the data and time restraints) of actual firms' characteristics
that are most relevant for projecting regulatory impacts. The creation of three models of
different sizes for each segment allows for the comparison of impacts on large and small
entities.
1.4 Estimating Potential Compliance Costs
ICF assessed the potential impacts of the proposed regulations by comparing
compliance costs to the revenues and profits in each model firm profile. The model firm
approach, as opposed to a direct assessment of impacts on each of the actual firms, was
chosen in response to data limitations and the inherent difficulties of projecting how specific
firms will grow and change in a rapidly developing industry.
To assess the impacts of regulatory costs using the model firms, ICF estimated the
magnitude of each regulatory cost element for each type and size of firm. Costs that cannot
be easily passed on to customers were compared to the assets and profits of the model firm
of the appropriate type and size; costs that will probably be passed on to customers were
compared to the model firm's sales, to determine whether a price increase large enough to
cover the cost increase would be large enough in percentage terms to affect sales
significantly.
1.5 Limitations of the Data
As a pralminary assessment of a new industry, this report is necessarily based on data
that are limited In significant ways. The limitations stem from lack of publicly available
information about industry participants, the methodology selected to accommodate data
inadequacies, and the inherent difficulties of projecting the characteristics of a changing
industry into the future.
Since the aftermarket conversions industry is relatively new and small, there are no
comprehensive sources of information available on the industry. Large classes of valuable
information, such as the number of kits sold per company, the type of technology used in
Final Report * * * September 28,1992 7
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each company's products, and the distribution of sales between light-duty and heavy-duty
vehicles, are neither tracked through a federal data collection effort nor otherwise publicly
available. Moreover, the ability to obtain data from companies directly was limited by the
Paperwork Reduction Act; even when contacts were made, many firms justifiably withheld
information they judged proprietary.
Even if complete information had been available on the industry as it now stands,
considerable uncertainty would remain regarding the industry's characteristics over the next
decade and beyond. This is a new industry, which is changing technologically and
structurally; the driving factor behind demand for the industry's products is in the process of
shifting from economic advantages to an emphasis on emissions reductions; and many new
companies are appearing each year. There is regulatory uncertainty in predicting when state
implementation plans (SIPs) will go into effect and what they will entail (e.g., Texas
emphasizes CNG, and does not consider reformulated gasoline an alternative fuel). Finally, it
is not clear how clean fuel vehicles will be distributed across all alternative fuels, and between
conversions and OEMs. Thus, no solid estimates are available even of the total number of
conversions per year in the future, and it is even more difficult to predict sales for individual
firms, regions, and types of vehicles (such as heavy vs. light duty vehicles). Nevertheless,
IGF used appropriate analytical and modeling techniques, plus information obtained from EPA
and others, to make the best possible projections for the future for the three market segments
and parameters of interest.
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CHAPTER 2
INDUSTRY OVERVIEW
In 1995, there are projected to be 45,000 clean fuel fleet vehicles (CFFVs) in the US.4
This number is expected to increase to 105,000 by 1998 and to 1.2 million by 2010.5
Approximately one-quarter of these vehicles are expected to use either CNG or LPG.6 This
demand for CFFVs will come about as a result of a number of Federal, state, and local
mandatory and incentive programs. In addition, there will be a few hundred thousand other
vehicles converted to use gaseous fuels as a result of the fuel cost-savings associated with
CNG and LPG. This growth will bring about dramatic technological, structural, and
competitive changes in the aftermarket conversion industry. This chapter first provides a brief
summary of the history of the US aftermarket conversion industry. It then discusses current
industry characteristics, the nature of competition, the industry structure, and how these
factors are expected to change in the coming decade.
2.1 History
The aftermarket conversion industry first developed in Italy during and after World War
II, when it became necessary to substitute domestic gas for unavailable oil. Aftermarket
conversions to CNG and LPG have since become significant in a number of countries,
including Argentina, Australia, Canada, Holland, Italy, New Zealand, and the US.
In the US, interest in LPG as a vehicle fuel was sparked by its low cost and by LPG
marketing campaigns in the 1950s and 1960s; interest in LPG has continued through the
present, increasing and decreasing with gasoline price movements. Because LPG has
relatively few uses and is produced as a byproduct of petroleum refining and natural gas
processing, supply chronically exceeds demand; this results in LPG having a relatively low
price. Many retail LPG supply companies provide low-cost LPG conversions as a marketing
tool to expand LPG demand and to smooth seasonal fluctuations. Customers for these
conversions are primarily fleets of vehicles with engines designed for gasoline use such as
city delivery trucks.
CNG has also been used as a vehicle fuel for some time in the US. Interest in CNG
has tended to peak in times of rising oil prices and/or limited oil supply. The major advocates
of CNG, and the major fleet users to date, have been the natural gas distribution companies.
4 Energy Analysis. American Qas Association Planning and Analysis Group, Appendix 1, January
1991.
5 U.S. EPA, QMS, Regulatory Impact Analysis, Clean Fuel Fleet Program, Draft, August 14,1992.
Table 1-8.
6 Office of Mobile Sources Memorandum to ICF, Estimates of Gaseous Fuels OEMs and
Conversions, July 9,1992.
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These companies see the vehicular market as offering the potential for expansion (at a time
when most of their other potential markets are already saturated), and as offering a useful
counter-peaking demand profile (automotive fuel use tends to peak in the summer, while
natural gas demand has a sharp winter peak for heating). Some gas utilities had established
test fleets of natural gas vehicles (NGVs) in the 1960s, but interest waned with the increase in
natural gas prices and limitations in gas use in the Natural Gas Policy Act passed in the late
1970s. Currently, the continuing low price of natural gas, the CAA emphasis on alternative
fuels, and substantial funding for promotion and R&D of natural gas vehicles are combining to
sustain interest in NGVs at a high level.
2.2 The Conversion Industry is both Emerging and Transitional
The aftermarket conversion industry is unusual in that it is both emerging - in terms of
technology and growth - and transitional - it may well be largely supplanted by automakers'
mass production of AFVs within 20 years or so. The following paragraphs describe general
characteristics of the aftermarket conversion industry.7
Embryonic companies. Many new and small companies are entering the conversion
industry, especially in the states such as Texas and Oklahoma that have alternative fuels
legislation and CNG/LPG suppliers.
Technological uncertainty. Conversion technology is rapidly changing. For example, it
is moving from mechanical to electronic controls and from open- to closed-looped fuel
metering controls. There is a large degree of uncertainty about which systems or
technologies will perform best and which companies will produce them.
Erratic product quality. There are few standards for conversion kits and no national
accreditation of mechanics who perform conversions. Therefore, the quality of kits and
installations to date has been erratic. Poor quality from a few firms could lead to image and
credibility problems for the entire industry.
Image and credibility problems with the financial and insurance communities.
Uncertainty about technology, demand, upcoming regulatory requirements, and mechanics'
capabilities is creating some hesitancy in the financial and insurance communities. Several
industry participants indicated that small companies are having difficulty obtaining adequate
insurance for performing conversions. Insurance is necessary to allow companies to bid on
state (and probably private) contracts for fleet conversions. New small companies may also
have a hard time Mcuring low-cost financing to purchase a dynamometer and other
necessary equipment (e.g., computers) and pay for the training that some kit makers require
before they allow a converter to use their kit.
7 Many of these characteristics are common to emerging industries as described by Michael E.
Porter in his book, Competitive Strategy: Techniques for Analyzing Industries and
Competitors.'
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Regulatory-driven. While the proposed Clean Fuel Fleet and Gaseous Fuels
rulemakings do not mandate aftermarket conversions or the use of gaseous-fueled vehicles in
general, they do require that conversions are performed with EPA-certified kits. The effect of
this requirement is that each conversion kit technology be thoroughly tested and certified to
assure it meets emissions standards. This process, unless managed correctly, may unduly
slow product introduction.
Absence of infrastructure. The conversion industry historically has been subject to the
"chicken and egg" syndrome. Fuel suppliers are unwilling to invest in an alternative fuel
distribution system until they are assured that there will be a sufficient demand for the fuel; kit
manufacturers and automakers are reluctant to invest in developing new and improved AFVs
until they are assured there will be easily accessible fuel for their customers. The CAA, state
legislation, and other initiatives have helped to resolve this impasse, at least in non-attainment
areas.
Perceived likelihood of obsolescence. Potential buyers may be hesitant to convert their
vehicles as they are aware technology is changing and fear that second- or third-generation
technology will make obsolete currently available kits. This hesitancy is somewhat lessened
for fleet owners by the fairly rapid turnover of fleet vehicles and by the institution of credit and
incentive programs.
First-time buyers. Nearly all AFV purchasers in the next five to ten years will be first-
time buyers. They will need to be convinced that a vehicle retrofitted to run on CNG or LPG
is right for them. This will take considerable amounts of consumer education about the pros
and cons of each alternative fuel and the technologies used to convert vehicles. This is
particularly important for fleets as it will take a relatively large investment to convert the
portions required by the CAA and to make the necessary changes in maintenance programs
and mechanic training.
2.3 Nature of Competition
The aftermarket conversion industry is very competitive - and it is growing more so
every year. Exhibit 2-1 depicts the competitive forces in the industry.8 It is the relative
strength of these forces that will determine the long-term profit potential of the industry.
8 This competitive forces model was first presented by Michael £ Porter in his book, Competitive
Strategy: Techniques for Analyzing Industries and Competitors.'
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EXHIBIT 2-1
COMPETITIVE PRESSURES ON THE AFTERMARKET CONVERSIONS INDUSTRY
Significant
Barganing
Power for
Critical
Components
SUPPLIERS
o Component
Manufacturers
POTENTIAL ENTRANTS
o Fuel Suppliers
o High-tech Manufacturers
High Threat of Entry
INDUSTRY COMPETITORS
o Kit Makers
o Engineered Converters
o Installers
Rivalry Among Existing Firms
High Threat of Substitution
SUBSTITUTES
o Reformulated Gasoline
o Conventional Vehicles
o Electric Vehicles
o OEM Vehicles
BUYERS
o Fleets
o Mass Market
Significant Barganing Power
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Industry Competitors.
There are two main activities in the aftermarket conversion industry: 1) The design and
manufacture of components necessary to convert a vehicle to run on a gaseous fuel; and 2)
the actual conversion of the vehicle. For the purpose of this report, companies who primarily
perform the first activity are called kit makers as they manufacture or assemble components
into conversion kits. Companies who perform the second activity are called installers since
they convert vehicles by installing conversion kits on vehicles, or assembling and installing
the necessary components.
An example of a hybrid company that performs both activities is the engineered
converter. These companies work closely with OEMs to develop and refine a conversion
system for a specific vehicle type. They generally perform large numbers of conversions and
participate in marketing the converted vehicles.
As the industry grows, the distinctions between these company types is fading. Kit
makers are integrating vertically by opening conversion centers and/or developing a network
of authorized installers. Engineered converters are packaging their conversion systems and
selling them to others to install.
As a result, companies in the aftermarket conversion industry compete both within and
across segments. For example, the larger kit makers compete with engineering start-ups in
the kit maker segment. Larger kit makers also tend to be vertically integrated and thus
compete (with price and knowledge advantages) with installers.
Currently, competition among and between kit makers and engineered converters (and
potential entrants) is via product differentiation. The companies with technologies able to
meet upcoming federal and state emissions standards, or optimize performance of AFVs, are
expected to dominate the industry. Currently, this competition is primarily among domestic
companies. However, competition is likely to become global as OEMs enter the market and
companies involved in the conversion industry in other countries introduce their products to
take advantage of the large demand for AFVs in the US.
Competition among kit installers is on a geographic and price basis. Buyers usually do
not travel significant distances to have their vehicles converted. Conversion companies
located in states with significant conversion activities (essentially Texas, Oklahoma, and
Colorado) witt gain an advantage over companies in other locations as they gain more
experience and move along the learning curve.
For conversion companies within a given area and for diversified companies (which
may have some cost carrying and competitive advantages), competition is on the basis of
price. Fuel suppliers (who often offer conversions at cost because of expected future profits
from fuel sales) and large conversion centers (who are able to purchase kits and other
supplies in bulk) may have a price advantage over other companies. Profits for small
installers are currently low or non-existent Each of the three segments will be discussed in
more detail in Chapter 3.
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Potential entrants.
As expected in a transitional auto industry, hi-tech auto parts manufacturers have a
high probability of entering the conversion industry. Suppliers of alternative fuels are
expected to continue entering the industry, particularly into the conversion segment. They
also are entering other segments by forming joint ventures wrth manufacturing or engineering
firms.
Suppliers.
Manufacturers of components that are critical to a kit's ability to meet emissions
standards (e.g., closed-loop carburetors) or increase performance (e.g., electronic fuel
injectors) have considerable bargaining power.
Substitutes.
The gaseous fuel conversion industry faces substantial threats of substitution from
OEMs producing gaseous-fueled vehicles. General Motors, Ford, and Chrysler all have
recently introduced CNG vehicles. While the incremental cost of a retrofitted vehicle and a
CNG OEM are roughly the same now, OEMs are. expected to have a substantial price
advantage due to mass production by the year 2000.9 The aftermarket conversion industry
also faces competition from manufacturers or converters of vehicles using other types of
alternative fuels. Threat of substitution of reformulated gasoline is particularly high as it
requires no alteration of the vehicle.
Buyers.
Fleets have large bargaining power within the conversion industry since they offer the
potential to convert large numbers of vehicles. To take advantage of potential cost-savings,
larger fleets may have an engineered converter develop a demonstration vehicle and then
train in-house mechanics to actually convert and maintain the fleet
In addition to these forces, government is potentially a significant competitive force in
the aftermarket conversion industry. Demand for AFVs is essentially being driven by the
federal CAA and state legislation and initiatives. Emission standards are affecting technology
and greatly increasing the amount of R&O on AFVs; they may also affect the relative
feasibility, cost, and quality of substitutes. Regulatory approval of technologies (e.g.,
durability and other emissions testing) will affect the cost structure of the industry. However,
since government primarily affects industry competition through the above-mentioned
competitive forces, it was not considered a force in and of itself.
9 California Energy Commission, Cost & Availability of Low-Emission Motor Vehicles and Fuels,
AB234 Report. Draft, August 1991, p. 37.
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2.4 Industry Structure
The conversion industry structure is closely related to the technological approaches
that have been used in conversions. Historically, conversions have been done on a one-by-
one basis, which left little scope for significant engineering. Conversion kits tended to be
fairly generic (i.e., "one size fits all"). The resulting "loose" industry structure is depicted in
Exhibit 2-2. OEMs have a small percentage of the AFV fleet market. Engineered converters
work primarily in concert with OEMs, but are starting to work directly with fleet customers.
Kit makers generally sell their kits to distributors, which in turn, sell them to installers.
The two primary kinds of installers are gas companies and small, "mom and pop" auto shops.
However, some kit makers vertically integrate by owning installation facilities. One advantage
of doing this is that the kit maker has more control over the quality of the conversions
performed with its products.
The industry characteristics discussed in Section 2.2 and the competitive forces
discussed in Section 2.3 are forcing the attermarket conversion industry to change, thereby
causing major shifts in commercial relationships. Importantly, there is a trend toward vertical
integration (whereby one company makes and installs kits) and having authorized installers
(much like current automakers have authorized dealers). For example, one currently may get
a vehicle converted using Stewart & Stevenson or BKM technology only by going to
authorized, trained installers. For the installer to purchase Stewart & Stevenson and ANGI
equipment, s/he must attend multi-day training courses at company facilities. Stewart &
Stevenson also requires installers to use a laptop computer to install its kit and adjust the
vehicle's fuel system. Industry practices such as this will improve the quality of conversions
and increase the credibility of a specific firm and the industry as a whole. Such trends will
effectively realign the industry.
ICF's projection of the structure of the industry in five to ten years is shown in Exhibit
2-3. OEMs may supply 25 to 50 percent of fleet AFVs and are beginning to make AFVs
available to the public in general. Engineered converters hold a larger share of the market
than in 1992 and work with both fleets and OEMs. There will be a smaller set of technology-
driven, vertically-integrated firms producing conversion kits. These firms typically will be either
traditional kit makers or gas companies that have entered the kit business via acquisition or
joint venture in order to stimulate vehicle demand for natural gas. Distributors will function
much as they currently do; however, fewer kits may be sold through them as vertical
integration increases and kit makers ship kits directly to authorized installers. As discussed
above, the majority of installers will be authorized to convert vehicles using kits from one or
more kit makers. Many of these authorized installers will be the same companies that
currently perform conversions, namely gas companies and small auto shops. However, we
expect there will be a trend toward larger installation centers to obtain economies of scale. In
addition, some larger fleets may work out agreements with kit makers to allow fleets to
convert their vehicles in-house.
Final Report * * September 28,1992 15
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EXHIBIT 2-2
CURRENT STRUCTURE OF THE AFTERMARKET CONVERSION INDUSTRY
1 INDUSTRY
OEMs ENGINEERED
1
CONVERTERS
J
VERTICALLY
INTEGRATED
INSTALLERS
1
KIT
MAKERS
DISTRIBUTORS
J
GAS
COMPANY
INSTALLERS
1
J
"MOM & POP"
INSTALLERS
1
tr
ut
13
O
-------
DC
W
D
Q
V)
DC
UJ
5
O
EXHIBIT 2-3
PROJECTED STRUCTURE OF THE AFTERMARKET CONVERSION INDUSTRY
OEMs
ENGINEERED
CONVERTERS
VERTICALLY INTEGRATED
KIT MAKERS OR
FUEL SUPPLIERS
AUTHORIZED
7
CUSTOMERS
o
-------
CHAPTER 3
INDUSTRY SEGMENTS AND MODEL COMPANIES
There are approximately 60 firms currently participating in the aftermarket conversion
industry. As discussed previously, these firms can be categorized by their activities into three
primary segments (kit makers, installers, and engineered converters). Exhibit 3-1 provides
names of companies currently participating in the aftermarket conversion industry. This
chapter discusses the characteristics of each segment and presents financial profiles of
representative model companies for each segment.
3.1 Kit Makers
There are currently 15 US companies manufacturing or assembling conversion kits.
The majority of these companies (10) are industrial equipment manufacturers or wholesalers.
The others are fuel or engineering companies. While no exact information on market share is
available, two companies, IMPCO Technologies (IMPCO) and Automotive Natural Gas Inc.
(ANGI), account for an estimated 70 percent to 90 percent of kit sales. Both of these
manufacturers produce both CNG and LPG kits for all EPA vehicle classes. Several of the kit
makers (e.g., Stewart & Stevenson) only began selling conversion kits this year.
There is no readily available information on the annual number of kits sold by, nor the
number of kit/engine family combinations provided by, each kit maker. Kits often vary with
the model year of the vehicle as well as with the technological sophistication of the
componentry. ANGI, for example, has 159 CNG kit types certified by the Colorado State
Department of Health.10 Exhibit 3-2 lists kit makers and indicates whether they produce
CNG and/or LPG kits and if they have received any type of certification for them.
As mentioned in Chapter 2, kit technology is changing rapidly. There is the potential
for a shake-out as kit makers who do not have closed-loop air/fuel control technology (which
is necessary to bring NOX emissions from converted cars to below CAA standards) are forced
out of the industry. This would result in a smaller set of high-technology companies. In view
of the offsetting effects of growth in demand, technology, and start-up firms on one hand, and
the possibility of consolidation on the other, ICF expects that the total number of kit makers in
2000 will be stmtar to the current total of about 15.
10 Twenty-eight of these kits are certified for use in light-duty gasoline powered passenger cars,
73 for light-duty gasoline powered trucks, and 58 for heavy-duty gasoline powered trucks.
Final Report * * September 28,1992 18
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EXHIBIT 3-1
COMPANIES IN THE AFTERMARKET CONVERSION INDUSTRY
KIT MAKERS
Algas Industries Inc.
Automotive Natural Gas
BKM, Inc.
Bowgen Fuel Systems
Carburetion Lab
CleanFuels, Inc.
Garretson Equipment
IMPCO Technologies
Metre-pane, Inc.
Mogas Inc.
National Energy Service Co.
Natural Gas Resources
OHG Inc.
Propane Equipment Corp.
Stewart & Stevenson Power, Inc.
ENGINEERED CONVERTERS
BKM, Inc.
Cars and Concepts
Clean Air Partners
IMPCO Technologies
Intelligent Controls
NGV Technology Center
Stewart & Stevenson
Tecogen, Inc.
INSTALLERS
Amerigas
Autocraft, Inc.
Automotive Natural Gas
BKM, Inc.
Bus Manufacturing USA
Carburetion Lab
Carburetion & Turbo Systems
City Spring
CleanRMs, Inc.
CNG Futl Converters
CNQ Technologies Corp.
CNG Corp.
Crane Carrier Co.
Dallas Fleet Maintenance
Detsco, Inc.
Ecogas
Ferrellgas, Inc.
IMPCO Technologies
Mesa Operating Ltd Partnership
Motorfuelers
National Energy Service Co.
Natural Fuels Corp.
Natural Gas Resources
Northern Indiana Public Service Co.
Pacific Gas & Electric
Petrolane, Inc.
Southern Cal Gas Co.
Stewart & Stevenson Power, Inc.
Tom Gorman Company
Tren Fuels
Tri-Fuels, Inc.
Washington Gas & Light Co.
Final Report * * * September 28,1992
19
-------
EXHIBIT 3-2
Ust of Kit Makers by Kit Type and Certification
Company
Algas Industries Inc.
Automotive Natural Gas
BKM, Inc.
Bowgen Fuel Systems
Carburetion Lab
CleanFuels, Inc.
Garretson Equipment
IMPCO Technologies
Metropane, Inc.
Mogas Inc.
National Energy Service Co.
Natural Gas Resources
OHG Inc.
Propane Equipment Corp.
Stewart & Stevenson Power, Inc.
CNGKH
X
X
X
X
X
X
X
X
X
X
X
X
X
LPGKK
X
X
X
X
X
X
X
X
X
Certification
CARB
AGA. CARB, CO Dept. of Health
AGA
CARB. CO Dept of Health
AGA
AGA
CARB
AGA
CARB (pending)
Final Report * * * September 28,1992
20
-------
There is no comprehensive information available on the split among the kit makers
between heavy- and light-duty vehicle conversion kits. Available information suggests that all
kit makers will sell light-duty vehicle kits while only about two-thirds of kit makers (about 10)
will sell kits for heavy-duty vehicles.
Exhibit 3-3 provides financial profiles for three different sizes of kit makers. There is a
substantial difference between the resources of the median large and the median small
company profiles. The median large company has over 20 times the sales, and almost 10
times the assets, of the median small company. However, the median large company sells
only two and one half times as many kits as the median small company. This reflects the fact
that the larger kit makers tend to be diversified and obtain most of their income from other
industries. The smaller companies tend to be more focused on the conversion industry and
are benefiting from rapid industry growth (as evidenced by a return on assets of 9.5 percent).
However, is there is no clear indication whether size is correlated with the technological
sophistication of a company's kits. Technology will be one of the key determinants of a
company's success in this industry.
EXHIBIT 3-3
1992 FINANCIAL PROFILES OF KIT MAKERS
Employees
Sales
Profits
Assets
Return on Assets
Working Capital
Net Worth
Lower Quartile
Small Company
10
$1,777,300
$134,100
$1,411,500
9.5%
$222.200
$470,000
Median
Small Company
16
$2.540,700
$207.100
$2.180,300
9.5%
$317,600
$726,000
Median
Large Company
185
$30,530,400
$953,200
$19,249,600
4.9%
$3,816,300
$6,410.100
Protected Number of Kits SoM In the Year 2000
OFF Regulations
Gaseous Fuels
Regulations
Total
1,000
3,000
4,000
2,000
6,000
8,000
5,000
15,000
20,000
Final Report * * * September 28,1992
21
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3.2 Installers
There are more than 40 companies performing CNG and LPG conversions in the US
today.11 While these companies are located across the US, many new companies are
entering the industry in states with strong alternative fuel legislation (e.g., Texas and
Oklahoma). The number of conversion companies is expected to increase rapidly, especially
in states that pass new legislation and in non-attainment areas. By 2000, ICF expects that the
total will rise to as many as 120 installers, with a substantial majority (about 100 of the 120)
located in the high-demand non-attainment areas. A large fraction of these installers will be
performing conversions capable of meeting federal OFF standards, with the rest serving
economic demands and state-driven demands. In addition, only a fraction of these (perhaps
a third) are likely to offer heavy-duty conversions, due to the substantially lower total demand
for heavy- as opposed to light-duty OFF vehicles.
Currently, there are four types of conversion companies: vertically-integrated kit
makers; suppliers/distributors of fuels, or providers of fuel services (i.e., utilities); auto repair
shops; and small, start-up companies that are dedicated to conversions. Each type of
company is notably different in terms of size and competitive position.
Vertically-integrated kit makers such as IMPCO have always performed some
conversions; however, they are expected to do more as demand for AFVs grows. They have
several potential advantages over other installers including lower price (since they obtain the
kits at cost) and in-depth knowledge of the technology in their kit. Companies authorized to
use specific kits may also benefit from these advantages.
Fuel companies and gas utilities have historically dominated the conversion segment.
They are also the largest consumers of conversion kits and other conversion equipment.12
Although some companies supported gaseous fuels initiatives earlier, most gas utility
companies began their involvement in the aftermarket vehicle conversion industry in the early
seventies (1972-74) when gasoline prices (world market) were high. To avoid paying the high
prices of gasoline and to take advantage of the cost advantages of CNG and LPG, utility
companies began converting their fleet vehicles to use gas. These conversions tended to be
relatively low-tech and were not carefully checked for emissions. Today, many gas utility
companies own conversion facilities and are beginning to offer conversion services to outside
fleet operations (such as city police departments and school districts). Locally, utility
companies provide the majority of installation services. Even though utility companies may
have a significant role in the local market the utility conversion businesses are a small
percentage of 1ht companies' revenues (less than one percent) and sometimes represent a
loss of net revenue.
11 This estimate does not include distributors nor the thousands of gas and utility companies who
perform occasional conversions on their own vehicles.
12 School districts and other municipal operations with fleets are the other large consumers of
these products.
Final Report * * * September 28,1992 22
-------
In general, the number of conversions performed by individual utility and gas
companies per year is fairly small (fewer than 100); some, however, such as Southern Union
Gas and Enfuel 3 (both in Houston, Texas), have conversion centers capable of converting
on the order of 1,000 conversions per year. It is estimated that three large LPG conversion
companies (Petrolane, Ferrellgas, and Amerigas) account for about half of LPG conversions.
These large conversion centers experience significant economies of scale. They are able to
buy supplies and equipment in bulk, and purchase only the components they need rather
than complete kits. In addition, these companies perform conversions at or near cost to
promote the use of natural or propane gas as a fuel (they will earn profits from the future sale
of fuel to the converted vehicles). Their ability to provide these services at or near cost
enables them to submit low bids for contracts to perform fleet conversions. Smaller
companies, whose primary business may be conversions, often cannot afford to compete
with utility companies' low bids for these contracts.
The third type of conversion company, auto-repair shops, offers conversion services as
a side-line business. They tend to be small (fewer than 15 employees) and have performed a
minimal number of conversions (perhaps one to twenty). In general, these companies
probably will not invest large amounts of money in conversion equipment or become major
players in the industry. However, there may be profitable niches for some companies who
provide fleet maintenance services, for example.
The fourth type of conversion company, dedicated conversion companies, currently is
similar in size to auto-repair shops. However, they are committed to capitalizing on
conversion opportunities brought about by the CAA. They tend to be start-up companies and
are fairly vulnerable - they have not yet converted a significant number of cars and are in
debt. These companies may have a difficult time obtaining loans to purchase the necessary
conversion equipment and obtain the proper insurance. They are at a cost disadvantage
relative to the larger conversion companies as they cannot purchase supplies in bulk nor offer
conversions at cost.
As with auto-repair shops, these small conversion companies may be able to find niche
or regional markets. They may also be able to become affiliated with one or more kit
makers, thus gaining the resources and repute necessary to enable them to grow and
compete with larger installers.
As in many industries, though relatively small installers are likely to predominate in
terms of numbers, a substantial majority of all conversions will be performed by outlets
performing more than 300 conversions per year. ICF expects that in the year 2000, about
100,000 vehicle conversions will be performed, though only about 37,000 of these will be
attributable to the federal OFF requirements.15 Most of the conversions related to the
13 Enfuet's conversion center is expected to open in mid-1992.
14 Competition in the conversion segment is generally on a regional basis; fleets probably will not
travel large distances to have their vehicles converted.
15 The basis for these estimates is presented in Chapter 4.
Final Report * * * September 28,1992 23
-------
federal requirements can be expected to be performed within the 22 non-attainment areas.
Some (roughly 10 percent) will be performed outside of the non-attainment areas but close
enough to serve the demand originating within them.
Exhibit 3-4 presents financial profiles for three different sizes of conversion companies.
EXHIBIT 3-4
1992 FINANCIAL PROFILES OF INSTALLERS
Employees
Sales
Profits
Assets
Return on Assets
Working Capital
Net Worth
Lower Quartile
Small Company
3
$480,000
$1,100
$184,900
0.6%
$80,200
$110,900
Median
Small Company
15
$1,200,000
$6,100
$1,016,500
0.6%
$200,400
$609,900
Median
Large Company
2,800
$26£000,000
$42.584,700
$1,013,921,000
4.2%
$21,746,000
$253,480,300
Projected Number of Installations In ttw Year 2000
CFF Regulations
Gaseous Fuels
Regulations
Total
100
300
400
400
1,200
1,600
1,000
3,000
4,000
3.3 Engineered Converters
Engineered converters are firms investing substantial engineering resources in
developing and optimizing a conversion system for a specific vehicle model. Since the cost
of this optimization, emissions certification, etc., can easily run as high as $100,000 to
$500,000, costs mutt be recovered through significant sales volumes (typically over 500
vehicles per year). Engineered converters frequently work in concert with an OEM, and are
increasingly working with large fleets. The GM pickup trucks and Ford Crown victoria NGVs
are being produced in this way. In the future, these types of firms are expected to dominate
the conversion industry.
ICF has identified eight firms that perform engineered conversions. Three of these firms
are also kit makers (BKM, Impco, and Stewart & Stevenson), four are specialty engineering
firms (Cars and Concepts, Clean Air Partners, Intelligent Controls, and Tecogen Inc.), and one
Final Report * * * September 28,1992
24
-------
(NGV Technology Center) is a joint venture between Southern Union Gas Company and NGV
Development Corporation. As with the kit makers, ICF expects that the total number of
engineered converters will be approximately the same in 2000 as at present; thus, the total
number of firms certifying kits will be between 20 and 25. All or virtually all are expected to
be involved in light-duty conversions; many (roughly ten) will offer a kit or conversion for at
least one heavy-duty engine.
Five of the engineered converters are located in non-attainment areas; a sixth is located
in Texas, which has recently passed alternative fuels legislation. In five years, ICF expects
that most engineered converters will be found within non-attainment areas, as a result of the
growing demand for emissions-related conversions there.
While engineered conversion companies are generally small, both in terms of sales and
employees, they are expected to grow significantly in the next ten years. Exhibit 3-5 provides
financial profiles of three different sizes of engineered converters.
EXHIBIT 3-5
1992 FINANCIAL PROFILES OF ENGINEERED CONVERTERS
Employees
Sales
Profits
Assets
Return on Assets
Working Capital
Net Worth
Lower Quartile
Small Company
9
$759,700
$0
$1,230,800
0.0%
$95,000
$409,900
Median
Small Company
25
$2.523,300
$290,600
$3.264,700
8.9%
$315,400
$1,087,100
Median
Large Company
188
$23,815,200
$658,700
$21.957,800
3.0%
52.976,900
$7,311,900
Projected Numbw of Conversion* In th« Year 2000*
CFF Regulations
Gaseous Fuels
Regulations
Total
300
150
450
600
300
900
4,000
2000
6,000
These projections do not include vehicles that engineered conveners produce with OEMs.
Sales of the median large company are approximately nine times the sales of the
median small company, which are, in turn, approximately three times the sales of the lower
quartile small company. There does not appear to be a strong correlation between company
Final Report * * * September 28,1992
25
-------
size and return on assets (ROA): the median small company has the highest ROA at 8 9%
This could reflect the fact that the larger engineered converters tend to be diversified (and.
therefore, may gain the majority of their revenues from other, slower growing, businesses)
and the smallest engineered converters are essentially start-ups (which have performed few
conversions at this time).
Final Report * * September 28,1992 26
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CHAPTER 4
DEMAND FOR INDUSTRY PRODUCTS AND SERVICES
Demand for the products and services of the various segments of the industry-
conversion parts, kits, and installations-are ultimately derived from the demand for converted
vehicles. For this reason, a brief examination of the reasons for owning gaseous fueled
vehicles is worthwhile.
As mentioned in the introduction to this report, AFVs have many potential benefits
including cleaner emissions and low fuel costs and vehicle maintenance. However, the
choice of a converting a vehicle to use gaseous fuel also has several negatives sides: the
expense of the initial conversion; greater weight and reduced carrying capacity; generally
shorter range on the gaseous fuel; uncertain gaseous refueling at locations other than the
vehicles' home bases; and costs for fueling centers. The problems related to range and
fueling uncertainty are particularly important for dedicated gaseous fuel vehicles. For a
vehicle owner to choose to convert to gaseous fuel (especially if the conversion is to a
dedicated gaseous fuel vehicle), he or she must see advantages that outweigh these
drawbacks.
4.1 Demand Based on Economic Factors
Up to the present, the main advantages of gaseous fuel conversions were economic.
Depending on relative costs and availability of different fuels, natural gas and LPQ vehicles
can have significantly lower operating costs and greater actual or perceived security of
supply. If an alternative fuel costs on the order of half as much as gasoline on an energy-
equivalent basis vehicle owners can save hundreds of dollars per vehicle on fuel every year
by converting. The fuel cost per mile for a natural gas-fueled car, for example, has been
estimated by the American Gas Association at 1.6 cents per mile in comparison with a cost of
3.6 cents per mile for a comparable gasoline-powered car. (It was assumed that the car
travelled 25 miles per gallon of gasoline, that the cost of gasoline was $1.21 per gallon, that
uncompressed natural gas cost $3.15 per million Btu, and that the energy efficiency of the car
was the same for both fuels.) Savings of two cents per mile amount to $300 per year for a
vehicle traveling 15,000 miles per year.16 Vehicles that are used more intensively, and
vehicles that UM more fuel per mile, will show greater savings. Potentially lower maintenance
costs and great* certainty of supply (in the face of gasoline rationing, for example) can
contribute even more to the advantages of gaseous fueled vehicles. Whether savings of this
16 Energy Analysis. American Qas Association Planning and Analysis Group, p. 9, April 16,1991.
Final Report * * September 28,1992 27
-------
magnitude can be achieved depends a great deal on matters such as whether the vehicle is
optimized for gaseous fuels, and on tax requirements for CNG/LPG relative to gasoline.17
Whether these advantages outweigh the costs of the initial outlay on conversions and
refueling facilities (in addition to the range, weight, and capacity tradeoffs) depend in part on
* The cost of the alternative fuel,
* The certainty of the supply of the alternative fuel,
The number of vehicles using each refueling center, and
The availability and cost of capital for up-front expenses.
Fleets will be the most likely candidates for conversion in part because they have relatively
high annual mileage per vehicle and many vehicles over which to spread the costs of the
refueling system. Fuel suppliers (natural gas and propane distributors) will also be good
prospects because they will face particularly low fuel costs (wholesale rather than retail) and
will have a relatively certain supply. Finally, regulated utilities that are able to raise capital at
low effective cost will have an additional reason to convert.18 Given these factors, it is
understandable that the fleets of fuel suppliers (including natural gas utilities) are prominent
among existing conversions. Other types of fleets include package delivery services such as
Federal Express and UPS; repair vehicles such as telephone and electric companies;
beverage distributors; and local governments and school districts in many states.
It has been estimated that there are almost half a million gaseous-fueled vehicles in the
United States-30,000 using CNG and 425,000 using LPG.19 No firm estimates of the
current rate of gaseous fuels conversions are available. It is reasonable to estimate, however,
that between 5,000 to 8,000 CNG conversions and 70,000 to 100,000 LPG conversions are
being performed annually, for a total in the range of 90,000 per year.20
17 See Environmental Protection Agency, Office of Mobile Sources, Special Report, Analysis of the
Economic and Environmertal Impacts of Compressed Natural Gas as a Vehicle Fuel. Volumes 1
and Z April 1990.
18 Most rate-regulated utilities are able to cover the costs of approved capital investments through
rate incrMM*. Thus, they can be more favorably disposed toward making capital investments
than are businesses for whom an investment poses risks.
19 NPGA and U.S. Department of Energy, cited by LP Gas Clean Fuels Coalition.
20 If the total stock of converted vehicles is growing by ten percent per year (a moderate growth
rate for a relative new market segment) 3,000 CNG conversions and 42,500 LPG conversions
would be required even if no existing vehicles had to be replaced. An additional 3,000 CNG
and 42,500 LPG conversions would be needed to replace existing vehicles even if only 10
percent of the stock were scrapped each year. The ranges presented in the text allow for the
considerable uncertainty in the estimates of growth and scrappage rates.
Final Report * * * September 28,1992 28
-------
Numerous factors will influence the future demand for gaseous-fueled conversions. By
the year 2000, total demand for gaseous-fueled vehicles for economic reasons will have
grown from the range of 90,000 per year to almost 200,000 per year if demand grows at ten
percent per year from 1992 to 2000; this growth rate would not be out of line for relatively
new industry with a favorable economic basis and a growing availability of products and
infrastructure. ICF expects the growth rate to be even higher than ten percent, for three
reasons. First, OEMs are expected to enter the market with lower-cost gaseous fueled
vehicles. The OEM vehicles should achieve significant market penetration because of the
lower costs of their offerings (due to economies of scale) and because purchasing from a
major carmaker is a more familiar action than engaging an aftermarket converter. Second,
tax credits are likely to become available for gaseous-fueled vehicles. Finally, as the refueling
infrastructure expands, the convenience of using a gaseous-fueled vehicle will increase. ICF
estimates that these three factors could push economically driven demand for gaseous-fueled
vehicles above 300,000 per year by 2000.21
Some of the economically-driven demand for gaseous-fueled vehicles is likely to
overlap with the demand driven by air quality concerns (covered in Section 4.2). We have
assumed that half of the economically driven demand in the non-attainment areas is
preempted by the Federal OFF regulations and similar regulatory initiatives, which apply in
areas with almost thirty percent of vehicle sales. We have therefore reduced our estimate of
the sales of gaseous-fueled vehicles for strictly economic motives is reduced by 15 percent to
about 250,000 per year by 2000. .
Not all of these economically driven sales will be conversions of gasoline fueled
vehicles: because a total market of 250,000 vehicles is large enough for mass production of
a variety of models, OEMs are likely to be the most important factor in the market for
economically driven gaseous-fueled vehicles. However, it is difficult to estimate the
percentage of these gaseous-fueled vehicles which will come from conversions, and no
estimate is made here.
Of these sales, ICF assumes that almost all will be light-duty vehicles, with about four
percent (or 3,000 vehicles) in the heavy-duty category. This division between light and heavy-
duty vehicles is a rough estimate, based on EPA's estimates for the Federal OFF program
(see Section 4.2.2 below).
4.2 Demand Related to Air Quality and Regulation
The potential emission control advantages of gaseous fuels have, until now, been a
secondary coneWeration in the decision to convert Clean fuel fleet regulations resulting from
the 1990 amendments to the dean Air Act, in addition to related state initiatives, have
21 This increase of SO percent in demand, from 200,000 to 300,000, is based on rough
assumptions that favorable tax treatment and cost reductfans could bring the net cost of a
conversion down by $1,000, and ICFs estimate (presented below in this chapter and in
Appendix B) that each $100 drop in price could lead to between a four and eight percent
increase in the quantity demanded.
Final Report * * * September 28,1992 29
-------
introduced a major new component to gaseous fuel vehicle demand. Requirements to
convert larger fractions of fleets to alternative or clean fuels place gaseous fuels in a separate
competition with electric, methanol, ethanol, and (to some extent) reformulated gasoline-
powered vehicles.
Where the definition of clean-fuel vehicle excludes reformulated gasoline (as in Texas),
gaseous-fueled vehicles have a clear chance to capture a large share of the clean-fuel
segment of the market due in part to the limited availability and high costs of electric vehicles
and alcohol fuels. Even where gaseous-fueled vehicles are in competition with reformulated
gasoline for the clean-fuel market, the higher costs of reformulated gasoline, active
participation by the gas companies, and the potentially lower emissions from gaseous fuels
could lead to significant demand for gaseous fuel conversions. This demand is likely to be
pushed further by EPA's Inherently Low Emission Vehicle (ILEV) incentive program.
4.2.1 Light-duty Demand Related to Air Quality and Regulation
The majority of the vehicles affected by air quality regulations will be light-duty vehicles
(passenger cars and light trucks). Estimated sales of emissions-driven gaseous fueled light-
duty vehicles can be divided into three groups: sales driven directly by California's
regulations; sales driven by the Federal OFF regulations for non-attainment areas outside of
California; and sales driven by state clean air initiatives outside of California that go beyond
the federal program in geographic coverage or in scope. However, this analysis focuses only
on clean fuel fleet vehicles.
Sales of light-duty clean-fuel fleet vehicles that are driven directly by the Federal CFF
rules have been estimated by EPA at 209,000 in the year 2000. Of these, EPA expects no
more than 25 percent (52,300 per year) to be gaseous fueled, and estimates that OEM
penetration will be about 30 percent.22 Thus, the Federal CFF standards will result in
almost light-duty 37,000 conversions per year by the year 2000. This estimate of the
percentage of these vehicles that will be supplied by the OEMs is based on an examination of
potential economies of scale in supplying vehicles in response to the Federal CFF standards
in isolation. Considering the broader market for gaseous-fueled vehicles driven by the
California program, other state programs, and economically driven demand, ultimately a larger
fraction of Federal CFF demand may be met by OEMs, and a smaller fraction by conversions.
The split between CNG and LPG is currently uncertain. Industry groups have
confidence in thefr own products, as one would expect: the American Gas Association
projects that between 40 and 60 percent of dean fuel vehicles will run on natural gas, while
an LPG group reports a survey showing that LPG's share will be two to three times that of
electric or CNG vehicles.
22 Office of Mobile Sources memorandum to ICF Inc., Estimates of Gaseous Fuels OEMs and
Conversions, July 9, 1992.
Final Report * * September 28,1992 30
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4.2.2 Heavy-duty Demand Related to Air Quality and Regulation
A small number of gaseous fuel conversions will be of heavy-duty vehicles. EPA
estimates that by the year 2000, the Federal CFF program will result in an annual demand for
no more than 2.500 gaseous fueled heavy-duty vehicles, of which about 1,500 will be
conversions and 1,000 will be supplied by OEMs. Sales of 1,500 amount to only about four
percent of the 37.000 light-duty conversions driven by the Federal CFF program.
4.3 Interaction of Market Segments
In light of the preceding sections, it is apparent that there are two relatively distinct
segments to the demand for gaseous fueled vehicles: the existing segment, driven by
economic considerations; and a new segment, driven largely by clean fuel fleet requirements.
The distinction between these demand segments is not absolute. First, economic
considerations will affect the demand for clean fuel vehicles of different types relative to one
another. In addition, the emission reduction benefits of gaseous fueled vehicles may in some
cases add to their economic attractiveness in the eyes of vehicle owners not covered by
clean fuel fleet requirements (e.g., if clean fuel vehicles earn Transportation Control Measure
(TCM) exemptions, such as exemptions from high-occupancy vehicle (HOV) lane restrictions,
or where clean fuel vehicles earn marketable credits), and the cost advantages of gaseous
fuels will be enhanced in areas in which reformulated gasoline is required for all gasoline-
fueled vehicles.
An additional connection between the clean fuel based demand segment and the
economic-based demand may arise as a result of the spread of refueling outlets. Increases in
the stock of gaseous fueled vehicles resulting from the dean fuel fleet program may create a
demand for public refueling stations. By increasing the availability of fuel, an expanded
refueling network will reinforce the economic-based demand for gaseous fueled vehicles.
This effect is not likely to develop until there are substantial numbers of clean fuel vehicles on
the road.
4.4 Elasticity of Demand
Whether or not there are regulations mandating the use of dean fuels, there will be no
guaranteed market for any particular provider of gaseous fuel conversion products or
services. Instead, market penetration will be a function of all costs and benefits to the
potential purchasers. If the costs of conversions rise for an individual business or for an
entire industry segment (all other things equal), the number of conversions demanded will be
reduced.
Final Report * * * September 28,1992 31
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The extent to which demand will fall off in response to a given increase in price cannot
be predicted wrth any degree of certainty. Order-of-magnitude estimates can be made fairly
easily, however, for two of the most important classes of situations:
(1) Where prices are increased by a single supplier of a relatively standard
conversion part or installation service; and
(2) Where prices are increased by al| suppliers of conversion parts or services.
In the first class of situations, demand can be expected to be quite sensitive to small price
changes, for the same reason that prices of comparable grades of gasoline in the same area
match closely: if an individual station raises its price by more than a few cents, it loses its
customers to its competitors. Only those individual suppliers offering special products or
services, or serving a particular market niche, will be able to increase prices without seeing
substantial reductions in sales.
In the second class of situations, in which prices are increased across an entire
industry segment, the sensitivity of sales to price changes can be expected to be moderately
low. In the demand segment in which gaseous fueled vehicles are in competition with
gasoline powered vehicles, a conversion price increase of $100 might reduce the quantity
demanded by between four and eight percent; similarly, a $100 price decrease might increase
sales by four to eight percent.23 In the demand segment in which gaseous fuels are in
competition with electric vehicles only, the sensitivity to price changes is likely be to
considerably smaller.24 In a situation in which one type of gaseous fueled vehicle
increased in price'compared to another (e.g., if CNG rose in price compared to LPG), the
price sensitivity might be relative higher (than if prices of all gaseous fueled vehicles rose),
since these two segments of the industry are relatively close substitutes for one another.
23 This rough estimate was made on the basis of estimating the change in the fraction of fleet
vehicles for which a conversion to natural gas would no longer be cost effective after a first-cost
increase of $100, using an estimate of the distribution of miles travelled per year for different
fleet vehicles. See Appendix B.
24 This estimate is based on estimates of the demand for electric vehicles as a function of the ratio
between their lifecyde costs and the lifecycte costs of internal combustion vehicles. This
analysis is presented in Appendix B.
Final Report * * * September 28,1992 32
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CHAPTER 5
COST STRUCTURE OF THE AFTERMARKET CONVERSION INDUSTRY
An analysis of potential impacts of regulations that impose costs on the aftermarket
conversion industry requires an assessment of the costs of providing conversion products
and services, including an assessment of the relationship of costs to the size of the business.
This chapter provides an overview of the price of conversions (which reflects in large part the
full acquisition costs of conversions); the components that influence conversion costs; the
relationship between costs and the scale of the conversion operation; and the potential costs
of gaseous fueled vehicles from OEMs.
5.1 Conversion Prices
The price for converting a vehicle to use gaseous fuels at the present time depends
both on the type of fuel to be used (CNG or LPG) and the size of the vehicle (light-duty or
heavy-duty). Estimates of the price of a CNG conversion for a light-duty vehicle vary from
$2,000 to $3,500; the low end of this range may reflect lower-pressure fuel storage cylinders
and simpler open-loop technologies that are not likely to meet strict emission standards.25
Converting to LPG is less expensive, ranging from $1,000 to $2,000 for a light-duty vehicle.
26 These estimates of the costs for light-duty CNG conversions are consistent with EPA's
recent estimates of $2,550 to $3250. Conversions for heavy-duty vehicles are more
expensive: a minimum of $3,500 for converting a gasoline engine to CNG, and $7,000 to
$10,000 for LPG. Gaseous, fuels conversions for heavy-duty diesel engines are even more
expensive, with costs for converting to CNG estimated at between $12,000 and $30,000.28
Gaseous fuel vehicle prices are expected to drop in the future through mass production
and the participation of original equipment manufacturers (OEMs). The added cost of a light-
duty CNG vehicle from an OEM is projected to be between $900 and $1,600 for CNG at large
production levels; a similar range is projected for propane vehicles.29
Tramportatton Sector. Technical Report Ten: Analysis of Alternative-Fuel Fleet Requirements.
U.S. Department of Energy, Office of Policy, Planning, and Analysts, p. 23, April, 1992.;
Govemm'a Report. Table S.S: conversations with Christopher Weaver.
28 Final Report of the Governor's Alternative Fuete Task Force. Table 5.5, December 19, 1991.
27 Environmental Protection Agency, Office of Mobile Sources, Special Report, Analysis of the
Economic and Environmental Impacts of Compressed Natural Gas as a Vehicle Fuel. Volume 1.
p. 10, April 1990.
28 Final Report of Governor's Task Force. Tables 5.5 and 5.6, and p. 63.
29 Idem.
Final Report * * * September 28,1992 33
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5.2 Components of Conversion Costs
Conversion costs can be divided into the costs for the kits; the fuel storage cylinders;
and installation. Among the more technologically advanced kits, projected prices range from
31,100 to $4,000 at high production volumes.30 Fuel cylinder costs will depend on the
required fuel capacity and on the type of fuel. A typical value for CNG is $1,000 per vehicle:
fuel storage costs for LPG are lower due to the smaller volumes and lower pressures
required.
Costs for installations depend on the costs of labor, facilities, and equipment.
Currently, a gaseous fuel conversion takes about 20 labor hours. At a typical rate for auto
repair facilities of $40 per hour for trained labor, including a markup to cover benefits,
overhead, and profit, labor would be billed at $800 per conversion. Adding this cost to the
costs for fuel storage and a conversion kit produces a cost of $2,900 for a CNG conversion
for a light-duty vehicle.
A straight labor-hour calculation oversimplifies the full costs of installation, however,
especially for a small facility. Workers must complete training courses before being certified
to perform conversions; one kit supplier requires a multi-day training course at its own facility.
Beyond this formal training, installers need extensive experience to perform efficiently. Thus,
an installation business needs to make significant investments in labor before it can compete
effectively, and this investment must be amortized over the conversions performed. In
addition to its investments in labor, installers of sophisticated conversion kits need equipment,
including a dynamometer and electronic testing equipment to ensure that the conversions are
performed correctly. Dynamometers cost $35,000, and the rest of the specialized equipment
brings the investment in test equipment to about $50,000. Installers also require liability
insurance, which may be difficult to obtain for small operations. The total investment required
for a new conversion operation may be $250,000, including training, equipment, and initial
inventory. As this investment must be spread over the income earned from conversions, low-
volume operations will have higher unit costs.
Amortization of equipment will depend on the discount rate, the number of years that
the equipment can be used, and the number of conversions per year. To amortize $50,000 in
equipment over 5 years, with a 10 percent discount rate, is about $13,000 per year. To
spread this investment over 250 conversions per year (or one per day) would mean a per-unit
cost of about $50, which is a relatively small fraction of the total cost of a conversion.
5.3 EconomiM of sole
One LPG group has asserted that economies of scale in installations are small due to
extensive labor on individual vehicles, rather than on assembly lines. However, there are
likely to be substantial economies in larger volume pan or kit orders; in fully utilizing
equipment, and in developing labor skills. As in the example presented above, spreading
$50,000 worth of specialized testing equipment over 250 conversions per year for five years
30 Conversations with Stewart and Stevenson and Christopher Weaver of EF&EE.
Final Report * * * September 28, 1992 34
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amounts to only about $50 per conversion. Spreading the costs over only 50 conversions a
year, or one per week, raises the unit cost by a factor of five to about $250. Similarly, at
1.000 conversions per year the unit cost falls to less than half of one percent of the total cost
of the conversion. In the carefully studied "learning curve" phenomenon, it has been
found that each doubling of cumulative output can cut labor inputs by 20 percent. Thus, a
facility where cumulative volumes are eight times greater (as in dedicated facilities where
workers install conversion kits full time), labor costs are expected to be only half as great.32
Thus, costs would be in the neighborhood or $2,500, or perhaps less, depending on the
economies of scale in larger volume kit orders.
5.4 OEM Competition
Eventually, OEMs will compete strongly in the market for gaseous fueled vehicles. Their
advantages include greater buying power; the efficiencies of the assembly line; and savings
on pans that do not have to be added only to be removed at the time of conversion. One
estimate is that OEM gaseous fueled vehicles will cost only $800 more,-as opposed to $2,500
more for retrofit gaseous fueled vehicles.33 Still, models on which OEM will offer gaseous
fuel option is likely to be limited to those for which substantial sales are possible (for
example, 10,000 units per year). Limited offerings by OEMs will leave substantial sales
opportunities for aftermarket conversions both for economic and clean fuel uses.
31 Assumes that $50,000 is amortized over five years at a real discount rate of 10 percent and
that a conversion costs roughly $3,000 in all.
32 H. Asher, 'Cost Quantity Relationships in the Airframe Industry,' Rand Corporation Technical
Report no. 17Z
33 Technical Report Ten: Analysis of Alternative-fuel Fteet Requirements. U.S. DOE, p. 25, April
1992.
Final Report * * * September 28,1992 35
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CHAPTER 6
PRELIMINARY ANALYSIS OF IMPACTS
Both the Gaseous Fuels and the Clean Fuel Fleet regulations will require that
aftermarket conversions be performed with kits that have been certified by EPA to meet the
applicable emissions standards. In addition, each converted clean fuel fleet vehicle may be
required to pass a tailpipe test to ensure that the certified kit used for the conversion has
been installed correctly.
These requirements will impose costs at three levels:
An $80,000 durability test to "prove" a basic technology;
A $10,000 low-mile emission test for each kit/engine family combination; and
A $5 $25 tailpipe test on each converted vehicle to verify the kit was properly
installed.
For each of these levels, the following sections describe the requirements, assumptions
regarding unit testing costs, projected number of tests, and impacts of the costs on the
model firms.
6.1 Emission Tests
Given the relatively low annual sales expected for each kit/vehicle engine family
combination, gaseous conversion kit makers will be considered small volume manufacturers
for certification purposes. They will therefore be required to conduct low-mileage tests only
for any kit using "proven technology." Kits using "unproven technology," on the other hand,
will require a durability test to determine deterioration factors, in addition to meeting the
standards at low mileage.
6.1.1 Unit Cost
Once a particular technology has undergone a durability test, the technology it uses will
be considered "proven." Subsequent kits certified using the same technology will therefore
be required to pass a low-mile emission test only. EPA has estimated that each durability test
will cost approximately $80,000, and that low mile emission tests for conversions will cost
about $10,000.
6.1.2 Total Costs
EPA anticipates defining individual technologies broadly, meaning that a relatively small
number of basic technologies will suffice to cover all conversion kits. While the exact number
of technologies that will be used is necessarily uncertain given ongoing progress in the
Final Report * * * September 28, 1992 36
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industry, ICF expects the total number of basic technologies to range between 3 and 10.
Thus, given per-test costs of $80,000, the total cost of the durability tests will range from
S240.000 to $800,000 for the industry.
6.1.3 Incidence and Impact of Coats
Given that the technologies used for kits aimed at the Federal CFF standards are likely
to overlap substantially with the technologies used for kits affected by the Gaseous Fuels
standards, there is no meaningful way to attribute the costs of the durability tests to one set
of rules or the other.
The total costs of the durability tests are minor when compared to the total number of
conversions expected, or to the total revenues of the conversions industry. Assume the
testing costs can be amortized over a five year period, they will amount to between $63,000
and $210,000 per year.34 Given that the volume of gaseous fuel conversions is expected to
be in the range of 150,000 units per year, the durability testing costs will add less that two
dollars per unit. This cost increase is an insignificant fraction of the $3,000 or greater cost of
a typical conversion.
Because there are no statutory mechanisms to require sharing of the costs of durability
tests, all of the costs will be bom by the first firms to certify a kit using each basic technology.
Other kit makers certifying kits that use the same technology as one of the "pioneering* firms
will have the advantages of durability tests while incurring none of the costs. On the other
hand, the pioneering firms will have the advantage of introducing a new technology
somewhat earlier that the firms that follow.
Because durability testing costs are imposed only on the first firm to employ each
technology, they take on the characteristics of sunk costs. A firm that has incurred a sunk
cost (that is, a cost that is unrelated to its production volume) will not have an increased
incentive to raise prices to recover them. Rather, the firm will want to keep its prices low, in
order to generate enough sales volume to spread the up-front costs over more units. Thus, it
is more appropriate to compare the testing costs to the assets and anticipated profits of the
firms most likely to incur them than to compare these costs to revenues, or to estimate the
increase in revenues needed to cover the costs.
Large kit makers and engineered converters are the most likely candidates for
leadership in certifying unproven technologies. Estimates of the assets and profits of kit
makers and engineered converters are presented in Exhibits 3.1.2 and 3.2.1. The large model
firms in each of that* industry segments are relatively similar in scale, with assets dose to
$20,000,000 and profits on the order of $800,000. For these firms, the costs of performing a
durability test would dearly be manageable. A cost of $80,000 would be less than half of one
percent of assets, indicating that financing the test would not be a problem, and the
annualized cost of a test (of about $22,000) would have a minimal impact on profits of less
than three percent Even if a median small company found it necessary to perform a
34 Assumes that costs $240,000 to $800,000 are amortized over five years at a 10 percent
discount rate.
Final Report * September 28,1992 37
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durability test, the impacts on assets and profits would be relatively low: $80,000 is on the
order of a few percent of the assets of median small kit makers and engineered converters,
and the annualized testing cost of $22,000 is no more than a tenth of profits, which are
currently strong for firms of this size.
6.2 Low-mile Certification Tests
Low-mileage certification tests will be required both for gaseous fuel and clean fuel fleet
conversions kits. An attempt is made to separate the costs attributable to these two
programs individually, though there is likely to be considerable overlap in the demand for
vehicles certified under the two programs. The cost of each test is expected to be about
$10,000. While a given kit may be applied with minimal changes to several engine families, a
separate low-mileage certification test is required for each kit sold for each engine family. We
first examine costs for light-duty vehicles, and then consider the costs for the smaller heavy-
duty vehicle segment.
6.2.1 Estimation of Total Costs for Low-mileage Tests for Light-duty Vehicles
The number of tests for light-duty vehicles, and thus the total costs, depends on how
many engine families for which the kit makers decide to offer kits. The number of potential
engine families is quite large, if there are no constraints on a kit maker adding additional
families. For example, ANGI has offered (and has certified) kits for over 100 different engine
families in the State of Colorado. If every kit maker and engineered converted offered kits for
100 different engine families, the total number of low-mile tests would range into the
thousands.
ICF considers it unrealistic to assume that all kit makers would certify kits for all
possible engine families if a low-mile test were required. The reason is three-fold:
(1) Firms will not spend $10,000 on a test for a given engine family, in addition to the
costs of calibrating the kit for the particular needs of that engine family, if they
cannot recoup that investment by charging more for each kit sold for that family.
(2) Not every engine family offers the same sales potential for kit makers. The
lowest-volume engines may provide such low kit sales that recouping a $10,000
testing investment would require a prohibitive increase in the cost of the kit.
(3) Due to their size or other operational or technological constraints, some families
such as diesels or those intended for subcompacts are not good candidates for
conversions.
This reasoning is illustrated by Exhibit 6-1, "Distribution of Sales by Engine Family.' The
chart is based on sales share data for heavy-duty diesel engines, though the concept it
illustrates is likely to hold for light-duty engine as well. The chart shows the sales shares for
Final Report * * * September 28,1992 38
-------
all but the highest-selling engines.35 The engine families are ranked by sales share, with
the lowest-selling engines (e.g., numbers 60 through SO) at the right. Sales shares decline
very regularly; in fact, the assumption that each additional engine family sells about six
percent less than the one before it seems reasonable. This pattern is illustrated by the
regression line superimposed on the bars.
The point that can be made with the bar chart is as follows: firms can ensure that they
have sales great enough to pay for their low-mile tests and calibration costs if they
concentrate largely on the high-volume engine families to the left, and decline to test kits to fit
the majority of the low-volume families to the right.
tCF has made some estimates of the costs per conversion that kit makers would have
to pass along to cover the costs of low-mile tests. It was assumed that
A low-mile test costs $10,000;
Calibration costs (that is, the development costs to ensure that the kit/engine
combination will work and will meet emissions standards) will cost an additional
$20.000 per kit;36 and
Both costs could be amortized over five years at a 10 percent discount rate; a
total of $30,000 spread over five years at a 10 percent discount rate equals about
$8,000 per year.
If sales for a particular kit maker's kit for a particular engine family are too low, it will
become impossible to pass on the full costs of the calibration and testing. For this analysis,
we are assuming that this threshold will come at the point where the per-krt cost of the test
and the development costs is about $20.
To cover a total cost of $8,000 per year without exceeding $20 per unit would require
sales of 400 units per year. This sales volume will be easily exceeded by the larger
manufacturers for the best-selling engine families, assuming fairly large total numbers of
conversions. For less popular engine families, and for small manufacturers whose conversion
kits will have more limited market penetration, sales of an individual kit could easily drop
below 400 units per year.
35 Gaseous-fueled versions of the best-selling engine families will probably be offered by OEMs,
and so do not represent an attractive market for converters in the long run. Even though it is
believed that OEMs will offer dedicated CNQ vehicles for some of the higher sales engine
families, there will still be many engine families for medium to high sales volume for which kits
will be offered.
30 Conversation with Christopher Weaver, EF&EE.
Final Report * * * September 28,1992 39
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4%
Exhibit 6-1
DISTRIBUTION OF SALES BY ENGINE FAMILY
Ranked in Order of Sales, Not Including Top Sellers
'
3%
I
"8 2%
8
1%
?t
"i » »
"i» N
» » »
IE!
>»
I,
Hi!
iiil
iiif!
0%
.«
4 ?« « ," .«
' ? 4 4 ," '
i ;< ;v|< |< («
,",1.«,«;««..»:»;»;»; >;»;»; -j »jj
»»»»»>>
9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78
Engine Families, Ranked by Sales
Curve fit to data
-------
There is no way to make solid predictions at this time as to how many kits could be
offered that would sell more than 400 units per year. ICF has developed a simple
methodology, however, based on plausible assumptions, that generates estimates of the
number of kits with sales of at least 400 units as a function of total sales of conversion kits.
The methodology makes the following assumptions about the distribution of sales:
* Sales of conversion kits are limited to the 70 most popular fleet engine families,
not counting a handful of the top selling families, for which less expensive factory
versions will be available (this assumption has only a small effect on the results);
Sales of conversion kits are roughly proportional to sales of the engines
themselves, meaning that popular engines wilJ offer the greatest conversion kit
sales potential;
Sales of conversion kits (by ail kit makers and engineered converters) across
engine families are distributed so that sales of kits for any given engine family will
be about six percent more than the sales for the next highest-selling engine family
(estimated from Exhibit 6-1). In other words, if the total demand for all conversion
kits for the best selling engine family equals 3,000, then the demand for the
second-best selling family will equal six percent less or 2,820; demand for the
third-best seller will be about 2,650, and so on.
For any given engine family, sales will be divided as follows: a third of sales will
go to the largest firms; just under half will go to relatively small firms; and the
remainder (about a fifth) will go to the smallest firms.
There are a total of 23 kit makers and engineered conveners: three large; ten
relatively small; and ten very small firms (based on the current size distribution of
firms).
Each firm will offer at most one kit for a given engine family; thus, there will be no
more than 23 kits certified for each engine family.
If total sales for an engine family are insufficient to provide all 23 sellers with sales
of 400 per year (taking into account the assumption that each size group's share
of the sales is limited), then some firms will decline to offer kits (that is, drop out
of the sales competition) for that engine family. Enough firms are assumed to
drop out of competition for each engine family to provide sales of at least 400 for
each firm still offering a kit for that family. For example, if total sales for a family
art Maumed to be 2,200, and the smallest firms split 22 percent of the total, then
the total share of the smallest firms will be 484. This will be enough for one very
smaH firm to have sales of 400, but not enough for more than one. It is assumed,
then, that only one very small firm will offer a kit for this engine family. A similar
calculation is made for large and moderately small firms, yielding an estimate of
the total number of kits offered for that family.
Applying this methodology yields a relationship between the total number of conversion
kits sold for which federal low-mile tests are needed and the total number of engine families
Final Report September 28,1992 41
-------
for which kits are offered (and tests are performed). This methodology also yields estimates
of the average number of kits offered (and tests performed) by firms in different size classes.
The exhibits show the result of applying this methodology for varying levels of total
conversion kit sales. The levels of 35,000 and 150,000 highlighted in the exhibit are related to
the sales for the federal CFF program and the total number of conversions (not counting the
California clean fuel fleet program) anticipated for the year 2000.
It is difficult to attribute numbers of tests and total costs to the Federal CFF standards
as opposed to the Gaseous Fuels standards, in pan because kits that have been certified
under the CFF program can presumably be used to certify vehicles under the Gaseous Fuels
program as well. In this report, ICF calculates impacts as though the Federal CFF program is
introduced first, and imputes the costs of the tests generated by the annual CFF sales (about
35,000 per year in 2000) to the Federal CFF program. ICF then attributes to the Gaseous
Fuels program all of the costs of the additional low-mile emission tests that manufacturers
would choose to perform in light of the additional conversions demand due to the state clean
air initiatives and the economically driven demand (an additional 115,000 conversions per
year, for a total of about 150,000 conversions in 2000).
Exhibit 6-2
Low Mile Tests for Light-Duty Vehicles Per Firm as a Function of Total Sales
Total Annual
Sales
35,000
45,000
60,000
90,000
120,000
150,000
Total Number of
Low-Mile Tests
74
101
137
204
267
323
Tests per
Large Firm
8
11
15
21
24
27
Tests per
Small Firm
3
5
6
10
13
16
Tests per
Very Small
Firm
2
2
3
5
6
8
Exhibit 6-2 shows that because the Federal CFF standards will generate conversion
sales of just over 35,000 light-duty vehicles per year in 2000, kit makers and engineered
converters are likely to perform about 74 low-mile tests: eight per large firm, three per small
firm, and two per very small firm. Because the total annual sales of non-California
conversions are projected to total 150,000 (including the Federal CFF demand, non-California
state-driven demand, and economically driven demand), kit makers and engineered
converters are projected to perform a total of 323 low-mile tests: 27 per large firm, 16 per
small firm, and 8 per very small firm. The incremental number of tests attributable to the
Gaseous Fuels program is the difference between the total number of tests and the tests for
Final Report * * September 28,1992
42
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the Federal CFF program: 249 incremental tests in all; 19 per large firm; 13 per small firm;
and 6 per very small firm.
In spite of limited coverage by each seller, choices by consumers will be affected to a
very small degree only. First, even if only a fraction of all engine families are covered by any
one kit maker, most of the total sales volume will be covered because kit makers will
concentrate on the best-selling engines. Second, because there are 15 competing kit makers
(in addition to eight engineered converters), kits for virtually all engine families are likely to be
offered by at least one kit maker as the competitors seek "niches" to exploit.
6.2.2 Estimation of Total Costs for Low-mileage Tests for Heavy-duty Vehicles
Testing costs will be increased somewhat by the need to conduct low-mile tests for
heavy-duty vehicles. The heavy-duty conversion market will be much smaller than the light-
duty market, so the total costs for low-mile testing for this segment will almost certainly be
much smaller. In recognition of the smaller size of this segment, ICF has not developed a
separate methodology for estimating numbers of tests. Rather, ICF has used EPA's estimate
that there will be 10 low-mile tests in all to cover the 1,500 heavy-duty conversions for the
federal CFF program per year by the year 2000.37 These ten tests equal about an eighth of
the 75 tests for light-duty CFF vehicles. For simplicity, ICF is assuming that tests for heavy-
duty vehicles will also represent an eighth of the light-duty tests done for the Gaseous Fuels
regulations. Thus, because there are projected to be 249 tests for light-duty vehicles under
the Gaseous Fuels programs, ICF estimates that there will be roughly 30 tests for heavy-duty
vehicles. Adding these 30 tests to the 10 tests for the CFF program yields an estimated total
of 40 low mile tests for heavy-duty vehicles.
ICF assumes, again for simplicity, that the low-mile tests for heavy-duty vehicles are
distributed across firms in the same proportions as the tests for light-duty vehicles. Tests for
each size of firm are assumed to increase by about one eighth: for the CFF program, the
number of tests is assumed to go up by one for a model large firm, one for a model median
small firm (a slight exaggeration), and none for a model very small firm. Similarly, for the
gaseous fuels program, the number of heavy-duty low miles tests are assumed to be two per
model large firm, one per model median small firm, and one per model very small firm. These
increased tests, and increased costs, are incorporated into the tables that follow.
37 Memorandum from Bryan Manning, QMS, to Barry Qalef, ICF, -Estimates of Gaseous Fuels
OEMs and Conversions.' July 9,1992.
Final Report * * * September 28,1992 43
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Exhibit 6-3
Low Mile Tests Costs, Light and Heavy-duty Vehicles Combined
Program
Federal CFF
Gaseous Fuels
Total
Total Cost of
Low-Mile Tests
$840,000
2,790,000
3,630,000
Costs per
Large Firm
$90,000
210,000
300,000
Costs per
Small Firm
$40,000
140,000
180,000
Costs per
Very Small
Firm
$20,000
70,000
90,000
6.2.3 Low-mile Test Costs Per Vehicle and Per Firm
Costs per conversion average about $6 for the industry as a whole, both for the Federal
CFF vehicles and the Gaseous Fuels vehicles. Costs per conversion are projected to be
somewhat smaller for the largest firms. These costs, which amount to less than half of one
percent of the total cost of a conversion, are too small to affect industry sales significantly.
ICF expects that the cost of the low-mile tests can be largely passed on to the
purchasers of converted vehicles. While in a competitive market a fixed cost is difficult to
pass on to consumers due to the pressure to keep prices low and increase sales volumes,
the aftermarket conversion industry is unlikely to be competitive enough to prevent the pass-
through of testing costs. If only about 85 kits have been certified for light and heavy-duty
CFF conversions, and a total of about 360 kits have been certified for both CFF and gaseous
fuels conversions for the approximately 70 engine families commonly used for fleets, the
choice of kits for most engine families will be sharply limited. Given limited competition
among kit makers and engineered converters for any engine family, it is likely that a per-kit
testing cost on the order of $6 per conversion can be passed on to purchasers.
The cost of low-mileage testing per conversion will vary across engine families, with
higher costs for engine families with lower sales volumes. This tendency will be muted by
market forces: numerous kit makers are likely to offer certified kits for those engine families
that are popular for fleet use, while for many of the less popular engine families there will be
no more than a single certified kit on the market. The reduced competition for the lowest
volume engine families is likely to help kit makers spread their testing costs and reduce the
competitive pressure to avoid passing on the testing costs as price increases.
Costs will not necessarily be spread evenly across firms. Exhibit 6-4 shows the
distribution of costs across firms of different sizes of kit makers in comparison to profits and
assets. Relative costs are expected to be similar for engineered converters as well, given that
they are similar in size to the kit makers.
Final Report * * * September 28,1992
44
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Exhibit 6-4
Low Mile Testing Costa Compared to Model Kit Makers
Number of Low-
Mileage Tests
CFF
Other
Total
Total Cost per Firm
Annualized Cost per
Firm
Cost as a
Percentage of
Assets
Annualized Cost as
a Percentage of
Profits
Cost per Kit Sold
(Average Price
Increase Needed to
Recover Costs)
Median Large Kit
Makers
9
21
30
$300,000
$78,000
1.5%
8.1%
$3.96
Median Small Kit
Makers
4
14
18
$180,000
$47,000
8.2%
22.7%
$5.94
Lower Quartile
Small Kit Makers
2
7
9
$90,000
$24,000
6.4%
17.7%
$5.94
Source: EPA and ICF Analysis
Overall, the comparisons shown in Exhibit 6-4 suggest that while financing the initial
costs of the tests will be slightly less burdensome for the largest firms in the industry than for
the small firms, all sizes of firms are likely to have ample resources for conducting the tests.
In addition, coati per kit are small in comparison to the total cost of the typical conversion,
and are relatively constant across firm sizes. Given that the small and relatively uniform costs
of testing can pmtoabty be passed through to purchases in the prices of the conversions, the
low-mile test* are unlikely to have a permanent impact on the financial strength of the firms in
the industry.
6.3 Tailpipe Teals for CFF VeWdee
Tail-pipe tests to ensure that a certified kit was installed correctly are likely to be an
important element of the industry's marketing and quality assurance strategy, even if they are
not required by law. Costs are estimated to fall between $5 and $25 per vehicle at an I&M
Final Report * * * September 28,1992
45
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test station. Where test stations are available, this cost will not have a significant impact on
the market for several reasons. First, the tests add value to the conversion in most cases
(that is, where the vehicle can be certified as a clean-fuel vehicle after it has been tested).
Second, the costs appear to be minor-less than one percent of the total cost of the
conversion. Given that ICF estimates the demand elasticity for gaseous conversions to be
moderately low (between -1 and -2), there will an impact on sales of less than two percent,
which will be insignificant in a growing market.
x
For the small segment of the industry that is devoted to CFF kit installations but is
outside of the non-attainment areas where test stations are generally available, however, it is
somewhat more difficult to estimate the impacts of the testing requirement. On one hand, it
seems likely that vehicles to be converted to meet the clean fuel fleet standards will be used
in areas with I&M stations available, even if these stations are not available where the
conversion is performed. Thus, the purchasers would be able to have these tests performed
in their city as a final condition of delivery, and the need to have the tests performed at an
l&M station would not have a greater impact on small entities without access to sophisticated
testing equipment. In addition, because kit suppliers are likely to have a strong interest in the
correct installation of their kits (to preserve their reputation for quality), they are likely to
require their installers to have available the equipment needed to ensure that the conversions
have been performed correctly. As described in Chapter 5, this means that installers have to
have available a dynamometer and equipment to analyze exhaust gases.
On the other hand, to the extent that converters will need to test and possibly adjust
the vehicles they have converted before releasing them to the fleet owners, small converters
would be at a disadvantage if they could not afford testing equipment equivalent to that
provided by a high-technology I&M station. For a volume of 1,000 vehicles per year, high-
technology transient tests have been estimated to cost a total of $57.05 per vehicle for
equipment alone; for smaller volumes (e.g., 300 clean-fuel vehicles) this cost would become
prohibitive (an added $200 or more). These smaller converters might be limited to serving the
market for non-clean fuel fleet vehicles. EPA does not expect, however, that tail-pipe testing
will demand equipment that is more sophisticated than the installers will already have
available.
6.4 Summary of Estimated Regulatory Costa
This section summarizes the regulatory costs presented in the previous sections in two
ways. First, it presents per-vehicle regulatory costs for the model firm kit makers. Second, it
presents estimates of annual program costs in the year 2000 for the proposed Clean Fuel
Fleet and Gaseous Fuels regulations.
Exhibit 6-5 summarizes the per-vehide regulatory costs for kit makers. The
methodology used in developing these estimates was presented earlier in this chapter and,
therefore, will not be stated in detail here. As shown in this exhibit, per-vehicle costs for the
CFF program are approximately $20 for all three model firms, including tailpipe test costs. As
explained earlier, we have assumed that only larger kit makers will undertake emissions tests
to prove a technology, that each large firm will, on average, conduct two emissions tests, and
that these costs will be spread evenly over both CFF and Gaseous Fuels kit sales. This
Final Report September 28,1992 46
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Exhibit 6-5
Summary of Per-Vehlcle Compliance Costs for Kit Makers
($ per Vehicle)
Emission Test
Low-Mile Test
Tailpipe Test*
Total
Clean Fuel Fleet Program
Large Co.
2.11
4.75
15.00
21.86
Median
Small Co.
0
5.28
15.00
20.28
Lower Quartlle
Small Co.
0
5.28
15.00
20.28
Qai
Large Co.
2.11
3.69
0
5.80
MOM Fueta Program
Maotan
Small Co.
0
6.16
0
6.16
Lower QuarMa
SmaHCo.
0
6.16
0
6.16
If required.
-------
results in per-vehicle emission test costs of $2.11 for large firms and zero for other firms. CFF
low-mile tests will result in roughly comparable per-vehicle costs for small and large kit
makers ($4.75 versus $5.28); small firms have lower sales over which to spread test costs,
but may choose to minimize testing costs by performing fewer low-mile tests. Per-vehicle
tailpipe costs are approximately $1S.38 It should be noted that kit makers may not pay for
the tailpipe test if the kit is installed by another company or if the customer pays for it directly.
Nevertheless, we have included it because it is a per-vehicle regulatory cost.
Per-vehicle costs from the Gaseous Fuels regulations are approximately one-quarter the
costs of the Clean Fuel Fleet program. This difference is primarily due to the fact that the
Gaseous Fuels regulations do not require tailpipe tests, although many companies may opt to
conduct them anyway to verify the quality of their work. Per-vehicle emissions costs are
assumed to be the same as for the Clean Fuel Fleet program ($2.11 for the large model firm).
Low-mile test costs per-vehicle for the model firms are similar for both programs. While sales
will be higher under the Gaseous Fuels program than the CFF program, all model firms are
projected to incur more low-mile testing costs under the Gaseous Fuels program in an effort
to secure a larger share of this market.
Exhibit 6-6 presents estimated total program costs for the year 2000. To calculate
these estimates, we multiplied the test cost annualized over a 5-year period by the number of
each test required under the two regulations. As shown in this exhibit, annualized program
costs for each regulation are approximately $830,000. However, the portion of costs
attributable to each test vary significantly between the two programs. If tailpipe tests are
required, their costs will fall only on the CFF program. The larger sales of the Gaseous Fuels
program will result in larger total costs for the emissions and low-mile tests.
Exhibit 6-6
Summary of Estimated Total Program Costa
(Annual Cost for the Year 2000)
Emissions Test
Low-Mile Test
Tailpipe Test*
Cost per Test
$80,000
$10,000
$15
Total
Clean Fuel Fleet
P »*«_
rogram
$31,400
$221,600
$577,500
$830,500
Gaseous Fuels
Program
$95,200
$736,000
$0
$831,200
If required.
38 Tailpipe costs are estimated to be between $5 and $25; we have used $15 for simplicity.
Final Report * * * September 28, 1992 48
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6.5 Cut-off Points
EPA has considered proposing a requirement for all Clean Fuel Fleet conversions to be
tested, and has also considered providing entities performing 300 or fewer conversions per
calendar year (and who do not have access to an I/M facility) with an exemption from these
testing requirements. ICF's judgment is that the proposed 300 conversion cut-off is not
unreasonable for the following reasons.
First, the proposed cut-off is at a level where it will help the smallest installers but will
not be a blanket exemption for the majority of the industry (see Exhibit 3-4). Second, the
proposed cut point is financially plausible. Installation and emissions testing equipment costs
are approximately $50,000.39 If amortized over five years, at a 10 percent discount rate,
equipment costs amount to about $13,000 per year. If a company performs 300 conversions
per year, costs would amount to approximately $45 per conversion - a relatively small fraction
of the total cost for a conversion. If the exemption were placed considerably lower (e.g., 50
conversions per year), however, the cost of testing equipment becomes prohibitive ($300 per
conversion).
Moreover, the number of companies using the exemption is not expected to be very
sensitive to the cut-off for the following reasons:
The more prominent kit makers require emissions testing to assure the quality of
the installation. Thus, many installers will perform CO emissions tests regardless
of the federal exemption.
The fact that installation of kits in accordance with the Gaseous Fuels NPRM
necessitates the use of certain equipment (e.g., a dynamometer) means that
almost all installation companies will have adequate test equipment to perform
CO emissions tests.
Even if the cut point were set too high, many companies would opt not to use the
exemption because it is a good selling point to show the customer that a vehicle
has been fully tested and meets the required standards.
Setting the cut-off much lower than 300 conversions (e.g., fewer than 100) would
make the exemption irrelevant, because companies with very low volumes are
unlikely to be competitive in this industry.
TtMf* are expected to be relatively few installation companies outside non-
atWnment areas.
38 Section 5.2 of our report
Final Report * * September 28,1992 49
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Appendix A
Glossary of Terms
Alternative fuel vehicle.
Advanced fuel metering control in which, through the use of an
oxygen sensor and microchip processor, the air/fuel ratio of a vehicle
is constantly and dynamically controlled to give optimal performance.
Compressed natural gas, mainly methane (CH^.
Refers to an engine capable of operating on two separate fuels, one
a traditional fuel such as gasoline or diesel fuel, and the other an
alternative fuel, such as CNG or LPG.
Liquified petroleum gas, mainly propane (C3Hg).
Natural gas vehicle.
Geographic area officially designated as exceeding federal air quality
emissions standards.
Oxides of nitrogen
Original equipment manufacturer.
Carburettor), in which the carburetor is throttle controlled.
AFV
Closed Loop
CNG
Dual-Fueled
LPG
NGV
Non-attainment Area
NOX
OEM
Open Loop
Reformulated gasoline Conventional gasoline with one or more components changed or
modified to reduce emissions levels, typically benzene, aromatics,
lead, detergents, and oxygen content, among other components.
Final Report
* * *
September 28, 1992
50
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Appendix B
Assessment of Demand Elasticity
No direct empirical measures of the sensitivity of demand for conversions to changes in
their cost (i.e., the price elasticity of demand) are available. As a general rule, demand
elasticity for a product is higher if there are more and better substitutes for that product.
Thus, we can expect that demand elasticity for gaseous-fueled vehicles will be higher if they
are in competition with both electric vehicles and with reformulated gasoline fueled vehicles,
than if their competition were limited to electric vehicles. Similarly, demand elasticity is
probably much higher for a single supplier of gaseous vehicle conversions or kits than for the
industry as a whole, because a single supplier has many more competitors offering good
substitutes than does the entire industry.
Though there are no empirical estimates of demand elasticity for the conversion
industry, it is possible to predict an approximate range for the elasticities on the basis of the
underlying economics and by drawing on studies of dosely related industries. This appendix
presents the methodology used to project demand elasticities tor firms in the gaseous fuel
conversions in competition with reformulated gasoline fleet vehicles; with electric vehicles;
and with other gaseous fuel converters. All of these estimates are subject to considerable
uncertainty, and all could be improved with additional data and analysis.
Demand Elasticity for Gaseous Fual in Competition wfth Qaaoline
A rough estimate of the sensitivity of gaseous-fueled vehicle sales to changes in their
prices can be made by estimating the fraction of the potential fleet for which a given price
increase would eliminate the cost-effectiveness of changing fuels. For example, there might
be 100,000 vehicles for which the economic benefits of CNG outweigh the costs, but only
90,000 vehicles for which the benefits outweigh the costs by at least $100. In this case, we
can predict that a $100 increase in price wilt make a CNQ conversion uneconomic for ten
percent of the potential customers-that is, for the 10,000 vehicles for which the net benefits of
a CNG conversion were less than $100 before the price went up.
To inlhuats the percent of vehicles for which a $100 increase in conversion costs
would detsmtilfwhether or not a CNG conversion would be cost effective, ICF used data on
the per-mfle fuel cost advantage of CNG compared to gasoline, and the distribution of miles
traveled per year by cars and vans in fleets. Because of CNG's price advantage of about 50
cents per gaflon equivalent (or two cents per mile for a vehicle that gets 25 miles per gallon),
a CNG conversion is more cost-effective if the vehicle is used intensively. At a savings of two
cents per mite, CNG provides an extra $20 per year for a vehicle that is driven 1,000 miles
more per year. At a real discount rate of 10 percent per year and a vehicle life of eight years,
an extra $20 per year has a present value of just over $100. Thus, increasing the price of a
conversion by $100 will raise the threshold at which CNG becomes cost-effective by 1,000
Final Report * * * September 28,1992 51
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miles traveled per year: if a CNG conversion had been economical for all vehicles used more
than 25.000 miles per year, a price increase of $100 means that CNG will be economical only
for vehicles used more than 26,000 miles per year.
Two question remain: (1) where is the threshold, in terms of miles travelled per year, at
which a CNG conversion become economical at present; and (2) what percentage of fleet
vehicles above that threshold are within 1,000 miles per year of the threshold? By answering
these two questions, it is possible to estimate the percentage of the potential conversion
market that might be eliminated by a $100 price increase.
About half of fleet cars (54 percent) are driven an average of 60 or more miles per day,
or more than about 22,000 miles per year according to a report on electric and hybrid
vehicles by William Hamilton (Table 2.3 of Hamilton, p. 30). ICF assumes that the threshold at
which CNG conversions become cost-effective is at that point or higher, given that a
conversion is relatively expensive, and therefore cannot be justified on economic grounds for
vehicles that are used sparingly. The data presented by Hamilton (p. 30) show that the usage
range of 60 to 90 miles per day, or about 22,000 to 33,000 miles per year, encompasses
about 22 percent of all fleet vehicles. A range of 1,000 miles per year (e.g., between 22,000
and 23,000 miles per year, or one-eleventh of the range from 22,000 to 33,000 miles per year)
probably encompasses, therefore, about two percent of all fleet vehicles (one-eleventh of 22
percent). Thus, raising the economical conversion threshold by 1,000 miles per year (through
a $100 price increase) probably reduces the stock of potential conversions by about two
percent of the total population of fleet vehicles.
If half of all fleet vehicles are above the threshold for conversion, a change in demand
of two percent of the all fleet vehicles would equal four percent of all potential conversions.
Similarly, if only a fourth of all fleet vehicles are above the threshold (as would be the case if
the threshold were somewhat above 33,000 miles per year), cutting demand by two per cent
of the fleet would amount to cutting demand for conversions by eight percent.
If a $100 price increase on a $2,500 conversion, which is a four percent price increase,
cuts the quantity demanded by four percent, the demand elasticity is equal to -1. Similarly, if
the four percent price increase leads to an eight percent drop in quantity demanded, the
elasticity equals -2.
Estimating the BMtictty of Demand Facing a Single Supplier
If the price were increased by $100 only one supplier, instead of by all CNG converters,
the elasticity would almost certainly be five to ten times larger, because the substitutes for a
the products of a single supplier are much better and more numerous than the substitutes for
the products of an entire industry. One indirect estimate of the demand elasticity facing a
single truck engine manufacturer found an elasticity of -5, as compared to an empirical
Final Report * * * September 28, 1992 52
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estimate of dose to -0.5 for trucks as a whole.40 A reasonable estimate might be that a
$100 price increase by a single supplier would cut potential sales by between 20 percent and
80 percent, rath«r than by four to eight percent. Estimates of elasticities of demand faced by
individual suppliers, however, are considerably more difficult to predict, due to their
dependence on the perceived differences among the products and services offered by
different suppliers.
Assessment of Elasticity for Gaseous Fueled Vehicles in Comparison to Electric Vehicles
In situations in which gaseous fuel vehicles are in competition with electric vehicles
only, a measure of demand elasticity for gaseous fueled vehicles can be inferred from a
measure of the price sensitivity for electric vehicles because a decline in sales for one would
imply an increase for the other. Figure 2-4 of Hamilton's report on electric and hybrid
vehicles shows the results of a survey analysis of demand for electric vehicles (EVs). It
shows that a reduction of five percent in the life-cycle cost of electric vehicles relative to their
competition would increase their penetration by about 15 percent of its initial value (e.g., from
47 percent to 55 percent, for an EV with a 50 mile range). As the life-cycle costs of an EV are
almost $25,000 a five percent change in costs relative to other vehicle types amounts to
$1,250.41 If a $1,250 change in relative costs causes a 15 percent change in electric
vehicle penetration, and if electric vehicles and gaseous fueled vehicles shared the market
equally at first, a $1,250 change in costs might also cause a 15 percent change in sales for
gaseous fueled vehicles. Because $1,250 is 50 percent of the cost of a gaseous fuel
conversion costing $2,500, the implied price elasticity is -15%/50% or -0.3. This order-of-
magnitude estimate is consistent with the prediction that elasticity will be low if substitutes are
few and imperfect.
40 The Economic Impacts of NO, and Paniculate Matter Emissions Regulations on the Heaw-Outv
Diesel Enolns Industry. Sobotka & Company, Inc., pp. 0-2 and E-3, for U.S. EPA, September
1984.
41 Table 3-2 'Estimated Life-cycle Costs for Electric and QasoHne Cars,' p. 3-9 of Methodology for
Anatvano the Environmental and Economic Effects of Electric Vehicles: An Illustrative Study.
ICF Inc., prepared for E.S. EPA, Office of Mobile Sources, September 1991. Present value of
armuateed costs of $4,882, assessed at a discount rate of 12 percent over eight years, equal
$24.252.
Final Report * * * September 28,1992 53
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