NISTIR 6888
Technology Adoption Indicators Applied to the ATP Flow-Control Machining Project

4. Case Study of the FCM Technology Applied to the
Lawnmower Manufacturing Industry

Over 15 million gas-powered lawn and garden mowers, trimmers, and other tools are sold each year, about half of which are walk-behind and riding grass mowers. This equipment produces significant amounts of hydrocarbons (HC), including nonmethane hydrocarbons (NMHC),⁽²⁵⁾ which lead to ozone, the principal component of smog; oxides of nitrogen (NOx), which contribute to the production of acid rain; and carbon monoxide (CO), a colorless, odorless, and poisonous gas which affects infants and people with respiratory and heart problems.

Since 1990, the EPA has been attempting to decrease emissions from lawnmowers and other equipment that use small spark-ignition engines (SSIEs). Phase 1 regulations were implemented in 1997. The Phase 2 emissions limits are shown in Table 3 . (Phase 1 emissions limits are not directly comparable to Phase 2 limits due to a change in testing methodology.)

The Extrude Hone Corporation identified lawnmower engines as an application of the FCM technology. The company conducted a series of tests of FCM technology on a stock OHV engine from a major manufacturer of lawn and garden equipment to assess whether FCM technology would bring a conventional engine into compliance with the EPA requirements for 2007. This engine has a 24 mm carburetor and is marketed as an 8.2 kW (11 horsepower, HP) lawn and garden engine. Three-way comparisons were made between the original engine, an engine that applied FCM to the carburetor (to enhance surface attributes, not to increase the size), and to an engine that applied FCM to the carburetor, intake pipe, and cylinder head. Extrude Hone's engineering tests confirmed that the FCM technology can meet Phase 2 emissions requirements. Extrude Hone engineers also provided detailed data on the costs of applying the FCM technology to the full range of lawnmower engines. These tests show FCM could reduce emissions competitively with the conventional technologies evaluated by the EPA.

In this section we investigate the economic feasibility of lawnmower engine manufacturers using the FCM technology to meet the new EPA regulations. We did this by computing and comparing cost data. Then we present the results of a comparative economic impact analysis of this new technology versus the conventional technologies evaluated by EPA, by using the cost data in a dynamic macroeconomic model of the U.S. economy.

4.1 Fixed and Variable Costs of Meeting Phase 2 Regulations Using Conventional Technology Comparied to FCM Technology

The FCM technology is a newly available option for decreasing emissions to Phase 2 levels. To assess its feasibility and potential benefit over other options, we compare the cost of using FCM to the cost of using conventional technology. The EPA's analysis of costs of bringing conventional equipment in compliance, using incremental improvements in existing technology, are reported in Phase 2: Emissions Standards for New Nonroad Nonhandheld Spark-Ignition Engines At or Below 19 Kilowatts (EPA 1999). Cost analyses from this report are then compared with estimates prepared by Extrude Hone engineers of the cost of implementing the new FCM technology in existing conventional equipment.

The lawnmower engine industry consists of four market segments, each of which we subjected to a separate comparative analysis. The market segments are defined by two engine sizes and two engine technologies. Engine size is measured by cylinder displacement volume measured in cubic centimeters (cc).⁽²⁶⁾  Small engines, those below 225 cc of displacement, are called "Class I." Larger engines, those with displacement greater than or equal to 225 cc, are called "Class II." The two engine technologies are side-valve (SV), and overhead-valve (OHV). Side valve engines are defined in the Code of Federal Regulations (GPO 2000) as a ". . . four-stroke engine in which the intake and exhaust valves are located to the side of the cylinder, not within the cylinder head . . ." Overhead-valve engines are defined in the Code of Federal Regulations as a ". . . four-stroke engine in which the intake and exhaust valves are located above the combustion chamber within the cylinder head. . . ."

The EPA report indicated that engine manufacturers would likely meet the Phase 2 emissions standards largely by changing their engine technology in one of two ways. First, Class I and II SV engines would be replaced by improved OHV engines.⁽²⁷⁾  Second, existing Class I and II OHV engines would be improved through better piston rings, intake, and combustion. The EPA analysis provided cost estimates of SV and OHV changes and the numbers of engines and engine families to which they would be applied.

The four market segments are referred to in this report as segments A, B, C, and D. Market segment A consists of Class I SV engines. In the EPA analysis, to meet Phase 2 using conventional technology, the SV engine would be converted to an OHV engine.⁽²⁸⁾ Market segment B consists of Class I OHV engines. In the EPA analysis, to meet Phase 2 using conventional technology, the OHV engine would be improved. While there are many conventional technologies that may be used to improve the OHV engine, the EPA report bases its analysis on "piston and piston ring improvements," and "improved combustion and intake system." Market segment C consists of Class II SV engines. In the EPA analysis, to meet Phase 2 using conventional technology, the SV engine would be converted to an OHV engine. Market segment D consists of Class II OHV engines. To meet Phase 2 using conventional technology, the EPA assumes that the combustion and intake system, pistons, and piston rings would be incrementally improved. For our analysis, the FCM technology is compared with the conventional technology.

The EPA report assumes that, within a market segment, there is no variation in the application of technology to meet the EPA Phase 2 regulation across the segment. In other words, all affected SV engines adopt the same conventional technology (conversion to OHV). Similarly, all affected OHV engines adopt the same conventional technology (piston and piston ring improvements, and improved combustion and intake system). Our report similarly assumes that there will not be a mix of conventional and new (FCM) technology applied within a market segment, but rather full adoption of FCM or full adoption of conventional technology.

The fixed and variable costs of each scenario-the use of the EPA-assumed conventional technology, and the adoption of the FCM technology-are shown in Tables 4 and 5 .

The variable and fixed costs of using FCM technology on the same quantity of lawnmower engines, based on data provided by Extrude Hone engineers, are shown in Table 5 . Extrude Hone provided cost estimates for meeting the EPA regulations on both OHV and SV engines.

Source: Extrude Hone.

The basis for the Extrude Hone cost estimates is a single production cell, consisting of a single FCM machine and its associated equipment (such as electrical connections and mounts for lawnmower engines), operating on the cylinder head of a lawnmower engine. The base price of a single FCM machine is $300,000. Estimates of installation cost ranged from $8,000 to $10,000. For this report, the midpoint value of $9,000 was used. The total fixed cost per FCM machine, set up for OHV engines, is estimated to be $309,000. Fixed cost for an FCM machine set up for SV engines requires a more complex clamp estimated to cost an additional $1,000. The fixed cost for the FCM machine set up for SV engines is $310,000.

The fixed cost per FCM machine for each type of engine is summarized in column (1) of Table 5 . Each FCM machine can process 37,406 SV engines or 49,875 OHV engines per year. These yearly production capacities are shown in column (2). Fixed cost in column (3) is derived by dividing the fixed cost per machine (column 1) by the number of engines that can be processed per machine (column 2). Extrude Hone also estimates that variable costs incorporated expected efficiency improvements in material handling, quality control, cleaners, supervisors, operators, and infrastructure. Variable costs are summarized in column (4) of Table 5 .

4.2 Total Cost Per Year of Using Conventional Technology Compared to FCM Technology

In this section we show the total costs to the industry of the Extrude Hone FCM process when compared with the conventional costs of meeting the EPA Phase 2 regulations, as estimated by the EPA. The total industry cost estimates are phased in according to the timing of the phased-in compliance with the regulations. The EPA Phase 2 regulation holds Class I and Class II engines to different standards, implemented in different years. Class I engines are analyzed over the years 2007 to 2009, and Class II engines are analyzed over the years 2002 to 2007.

Using the EPA market assumptions regarding the number of affected engines and the number of affected engine families, year-by-year cost estimates (shown in Tables 6 and 7) were developed.⁽²⁹⁾  These total industry costs were derived by summing two components, the total industry variable cost and the total industry fixed cost. The unit variable cost is multiplied by the total production of compliant engines manufactured, by year. Fixed costs are incurred only in the year in which an engine family needs to be modified to meet Phase 2 requirements. The fixed cost per family (column 1 Table 4 ) is multiplied by the total number of engine families that are converted to meet the Phase 2 emissions requirements, by year.

Using this method, we developed time paths of industry costs, shown in Tables 6 and 7 . In market segments A and B (Class I), the time path is from 2007 to 2009. All Class I engines were assumed to be converted in 2007, incurring both fixed costs and variable costs. Two additional years (2008 to 2009) of variable costs were included to show the ongoing costs of production. In market segments C and D (Class II), the time path is from 2002 to 2007. All Class II engines were converted over the period between 2002 to 2005, according to the phase-in requirements of the regulation. Two additional years (2006 to 2007) of variable costs were included to show the ongoing costs of production. These schedules of yearly industry costs were used as inputs in a macroeconomic model.

Table 6. Total Industry Cost of Meeting Phase 2 Standards Using Conventional Technology
Compared to FCM Technology in Class I, in Thousands of 2002 Dollars

Table 7. Total Industry Cost of Meeting Phase 2 Standards Using Conventional Technology
Compared to FCM Tecnnology in Class II, in Thousands of 2002 Dollars

The schedules of yearly industry costs for the conventional and FCM technology applied to the four market segments are shown graphically in Figures 12 to 15 .

In market segment A (Class I SV), the FCM technology is significantly less expensive than the conventional technology in 2007. As shown in Tables 4 and 5 , fixed costs are concentrated in that year, and the FCM technology has lower fixed costs. However, the FCM technology has slightly higher variable cost on an ongoing basis. It is possible that the lower cost in 2007 might make FCM attractive to lawnmower manufacturers.

In market segment B (Class I OHV), the FCM technology is always more expensive than the conventional technology.

In market segment C (Class II SV) the FCM technology is always the lower cost option compared to the conventional technology. This is because, as we have already shown in Tables 4 and 5 , both the fixed costs and the ongoing variable costs of the FCM technology are lower compared to the conventional technology.

Lastly, in market segment D (Class II OHV) the FCM technology is always more expensive than the conventional technology.

The biggest cost savings from the FCM technology comes when it is applied to SV engines (in market segments A and C) that would otherwise have to be converted to OHV engines (other things being equal). Market segment C will definitely benefit from meeting Phase 2 regulations with the FCM technology. Additionally, market segment A might benefit from meeting Phase 2 regulations with the FCM technology, given its lower fixed costs in 2007. We conducted a macroeconomic impact analysis for these two market segments: A (Class I SV) and C (Class II SV) to quantify the economic impact to the nation of using the FCM technology on lawnmower engines rather than the conventional technology assumed by the EPA to meet Phase 2 regulations.

Figure 12 . Market A: Class I SV Costs

Figure 13 . Market B: Class II OHV Costs

Figure 14 . Market C: Class II SV Costs

Figure 15 . Market D: Class II OHV Costs

4.3 Introduction to the REMI Policy Insight Macroeconomic Impact Model

Several macroeconomic models are available for simulating the total national economic impact of changes to specific industries (in our case, the lawnmower engine industry).⁽³⁰⁾  We used the REMI Policy Insight model of the U.S. economy because of its ability to handle a series of nonuniform economic shocks.⁽³¹⁾

The REMI model was developed for analysts who need to estimate the impact of economic changes in the U.S. economy. In general, the model computes the total effect over time on all sectors of the U.S. economy resulting from a change to one or more sectors of the U.S. economy. The model is based on economic theory, input-output (I/O) accounting, and econometrically-estimated, time-dependent relationships between components of the economy.

As summarized in Figures 12-15, fixed and variable costs of production will increase for all four market segments (A through D). Use of either the conventional technology or the FCM technology to meet the emissions requirements of the Phase 2 EPA regulations will increase the production costs of lawnmower engine manufacturers. In market segments A and C, use of the FCM technology will increase costs less than the conventional technologies (SV-to-OHV conversions and OHV improvements) and therefore can be considered economically viable for adoption by these segments, but not segments B and D.⁽³²⁾  We therefore focused our REMI analysis on market segments A and C. We estimated the total industry production cost increase from each technology for market segments A and C, used REMI to estimate the direct and indirect impacts of each segment on the national economy, and compared the impacts.

The simulation performed with REMI indicates that an increase in production costs in the lawnmower industry will cause an increase in the selling price of lawnmowers. This will cause a decrease in the number of units sold. As production costs rise, firms that seek to maintain current profit levels must increase their selling prices and/or reduce other production costs, including the costs of labor and capital (machinery). Decreased sales and cost cutting reduces employment in the industry and in industries that supply parts and services to it, thereby reducing aggregate income and the broad set of purchases this income supports (such as for purchasing cars, homes, services, and travel).

Although REMI models the impacts for dozens of national economic impact variables, we selected three of the most comprehensive measures for this report: GDP, change in national employment, and change in personal income. GDP measures the value produced by labor and capital (such as machinery), and is computed as the sum of all sales of goods and services produced in the country minus material costs.⁽³³⁾  For example, the GDP of just the lawnmower engine industry would be the sum of all lawnmower engine sales minus the cost of the parts used to produce the engines. What remains is the cost of the labor and capital used to produce the engines; these "returns" to labor and capital are the measure of the contribution of the lawnmower engine industry to GDP. Change in national employment is the change in the total number of people employed in the country, and change in personal income is the change in income received by the employed.

4.4 Macroeconomic Impact of the Costs of Conventional Technology Compared to FCM Technology, in Market Segments A and C

In this subsection we compare the macroeconomic impacts of using conventional technology versus the FCM technology, and present the impacts on GDP, national employment, and personal income.⁽³⁴⁾  Detailed year-by-year graphs are in Appendix D.

As a result of the EPA regulation, GDP, employment, and personal income will fall. In each market segment, we estimated the economic impact of using the FCM technology, and the impact of using conventional technology. For two market segments, A and C, the decrease in GDP is smaller with FCM technology than with conventional technology. For ease of interpretation, we illustrate the difference in the reductions in GDP or personal income from using the FCM technology instead of the conventional technology in markets A and C as a savings in GDP or personal income.

Figure 16 shows that, in market segment A over the analysis period 2007 to 2009, the FCM technology saved $262 million in GDP. In market segment C, over the analysis period 2003 to 2007, the FCM technology saved $982 million in GDP.

Figure 17 shows that, in market segment A over the analysis period 2007 to 2009, the FCM technology saved $243 million in personal income. In market segment C, over the analysis period 2003 to 2007, the FCM technology saved $879 million in personal income.

Figure 16. Savings in GDP from Using the FCM Technology Instead of the EPA-assumed
Conventional Technology to Meet Phase 2 Regulations, in Market Segments A and C

Figure 17. Savings in Personal Income from Using the FCM Technology Instead of the
EPA-assumed Conventional Technology to Meet Phase 2 Regulations,
in Market Segments A and C

_____________________
25. Small spark-ignition engines produce about 10% of U.S. mobile source HC emissions.

26. Throughout this report, the abbreviation “cc” is used to denote cubic centimeters (cm3). The use of “cc” is
standard industry practice when measuring the displacement of engines, and is therefore followed in this report.

27. Vaporizing carburetion could be used to improve side-valve engine technology, but it has found limited use.

28. The SV engine is converted to an OHV engine, which incorporates necessary improvements to meet Phase 2. It is
identical to the “improved OHV” in market segments B and D.

29. The EPA used estimates provided by Jack Faucett Associates in Small Nonroad Engine and Equipment Industry
Study (December 1992).

30. These include the REMI Policy Insight (Regional Economic Modeling, Inc., Amherst, MA), the DRI*WEFA
Macroeconomic Model (Global Insight, Waltham, MA), and IMPLAN (Minnesota IMPLAN Group, Stillwater,
MN).

31. Using REMI, we were able to use discrete production cost increases in specific years within a single forecast.

32. If the EPA were to implement a “Phase 3” regulation on small nonroad, nonhandheld engines, this conclusion
could change.

33. The Bureau of Economic Analysis (BEA) defines GDP as “the output of goods and services produced by labor
and property located in the United States” (www.bea.gov). Sales, in contrast to GDP, is not a measure of everything
actually created in this country.

34. It is important to note that although we are considering only costs of the EPA Phase 2 regulation by two
approaches, our analysis represents a full benefit-cost analysis. Both the conventional and the FCM technologies
perform similarly regarding reductions in pollution and fuel consumption. In this case study, we are comparing the
impact of the two technologies that meet the same objectives. Therefore, we do not offset the economic costs by the
benefits (pollution reduction and fuel savings). The negative economic impacts on GDP, employment, and personal
income of the conventional and the FCM technologies are estimated and compared in this study. We provide an
estimate of the impact of each and net impact of one choice versus the other, represented as cost savings.

Go to Section 5 or return to Table of Contents.

Date created: June 11, 2003
Last updated: August 3, 2005

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