Quality Costs of Fuel Efficiency Improvements in the Automobile Industry

Automotive manufacturers are under intense pressure to improve fuel efficiency, or miles per gallon (MPG), of their internal combustion engine (ICE) vehicles as a temporary sustainability solution in the absence of profitable electric vehicle options. While this is arguably an admirable strategy, research that explores the hidden costs of such approaches is sparse. Using fixed effects panel regression modeling, we analyze 321,613 vehicle quality complaints for 368 unique model-years produced and sold by 18 manufacturers over a 10-year period. We find that each additional MPG improvement in an ICE vehicle is associated with an 8 percent increase in quality complaints for that model-year. In support of our theorized mechanism, that manufacturers appear to knowingly or unknowingly sacrifice product quality to hit higher MPG targets for ICE vehicles, we find that this effect is influenced by the type of complaint. While engine complaints experience the greatest increase for each MPG improvement, airbag complaints are unaffected. Further, those manufacturers that are less desperate to squeeze additional MPGs from ICE vehicles—manufacturers that are already committed to the electric vehicle transformation—experience less of a product quality cost to MPG improvements on ICE vehicles. Numerous robustness tests including instrumental variables analysis confirm our results. This study contributes to sustainability and product quality literature streams while offering practical implications for manufacturers and the National Highway Traffic Safety Administration.

Gil Souza is the Haslam Chair in Business and Distinguished Professor of Business Analytics at the Haslam College of Business at the University of Tennessee.  He also holds a part-time professorship appointment at the University of Graz, Austria.  Prior to coming to Haslam in 2022, Gil held appointments at the Kelley School of Business at Indiana University from 2009 to 2022, and at the Smith School of Business at the University of Maryland from 2000 to 2009.  He received a Ph.D. from the University of North Carolina in 2000, an MBA from Clemson University in 1995, and a BS in aeronautical engineering from ITA (Brazil) in 1990. He worked at Volkswagen of Brazil in new product development and product planning.  His research focuses on sustainable operations, in particular carbon footprint reduction, the circular economy, closed-loop supply chain management, and renewable energy. He has over 40 publications in premier refereed academic journals, is a Senior Editor for Production & Operations Management (POM), and a Departmental Editor for Decision Sciences.  He wrote the book “Sustainable Operations and Closed-Loop Supply Chains, Second Edition” (Business Expert Press), and co-edited the book “Closed Loop Supply Chains: New Developments to Improve the Sustainability of Business Practices” (CRC Press).  Gil won the Wickham Skinner Early–Career Research Accomplishments award from the POM Society in 2004. He is the former president of the Sustainable Operations Special Interest Group of the Manufacturing & Service Operations Management Society of INFORMS, and served as the president of the College of Sustainable Operations of POMS.  In his spare time, he enjoys swimming, walking, riding his electric bike, music, and Brazilian soccer.