*4.2. Technological Growth*

Technological progress is captured by the year fixed effect τ*t*. To make technological progress more intuitive, we define it as follows:

$$T\_{\text{progress}} = 1 - \varepsilon^{\tau\_l}.\tag{3}$$

The results of the technological progress estimation are shown in Table 2. The results of these four models show that the technological progress of the joint venture is greater than that of local brands. In Model 1, the joint venture shows an 18.4% improvement from 2009 to 2016, which is faster than local brands, with an improvement of 14.9% from 2009 to 2016. The results are consistent with the penetration of fuel-efficient technologies by brands from 2009 to 2016 in China [12].

**Table 2.** Technological progress estimates for passenger vehicles in China from 2009 to 2016 (percent).


When holding other variables constant at the base year, the mathematical expression of FCR potential (*FCpotential*) is:

$$FC\_{potential} = FC\_{base} \cdot \mathbf{e}^{\tau\_l} \tag{4}$$

In this paper, we set 2009 as the base year, and the *FCbase* is the actual FCR in 2009. *FCpotential* is regarded as the FCR reduction potential for the target year. τ*<sup>t</sup>* is the year fixed effect.

Figure 6 shows the actual FCR and expected FCR of different models shown in Table 2 by Equation (4). The solid and dotted lines with different colors in Figure 6 indicate the results of local brands and joint venture brands, respectively. The blue lines indicate the actual FCR of new passenger vehicles. The green lines show the FCR estimates if curb weight, power, and the share of vehicle types had remained at the 2009 level (Model 1 in Table 2). The black lines represent the FCR estimates if the curb weight, vehicle acceleration performance, and the share of different vehicle types remained at the 2009 levels (Model 2 in Table 2). The red lines represent the FCR estimates if the weight, power, drive type, powertrain features (turbocharging, GDI, transmission, etc.) and the share of vehicle types remained at the 2009 levels (Model 3 in Table 2).

From Figure 6, we find that, for local and joint venture brands, 1) the actual FCR was reduced by 5.4% and 16.1%, respectively. 2) Holding weight, power, and the share of vehicle types constant at the 2009 levels, the FCR could have been reduced by 14.9% and 18.4%, respectively. 3) If weight, acceleration time, and the share of vehicle types remain unchanged, the FCR could have been reduced by 15.9% and 18.5%, respectively. 4) If weight, power, 4WD, powertrain features, and the share of vehicle types remained constant at 2009 levels, the FCR could have been reduced by 10.5% and 12.7%, respectively.

**Figure 6.** Actual FCR of average new passenger vehicles, and potential FCR if various attributes had remained at 2009 levels for local and joint venture brands.

Table 3 summarizes some results of the analogous studies that focused on the technological progress of U.S. and EU passenger vehicle markets and shows a comparison with the technological progress of passenger vehicles in China. China implemented its first passenger vehicle FCR standard in 2004, and then updated the standard in 2008, 2011 and 2014, respectively. China also set its passenger vehicle FCR target at 5.0 L/100 km by 2020. The compliance pressure from the FCR standard forces carmakers to accelerate the adoption of fuel-efficient technologies in the Chinese market. The technological progress is more rapid than those of the EU and U.S., as shown in Table 3. If we hold weight and power constant, the U.S. and Europe show a 1.7% (from 1975 to 2015) and 1.2% (from 1975 to 2009) annual technological progress, which is lower than the 2.3% and 2.9% for local and joint venture brands from 2009 to 2015. Even if we control more variables, such as powertrain features, the annual technological progress could still reach 1.7% and 1.9% for local and joint venture brands, respectively. It is important to note that technological progress is not distributed evenly over time. The results of MacKenzie show that the U.S. would have reached an annual technological progress of 5% between 1975 and 1990, and 2.1% between 1990 and 2009, if not for changes in acceleration, features, and functionality. The results of Hu and Chen show that the EU had a solid improvement in fuel-efficient technology with an annual technological progress rate of 2.8% from 2005 to 2015. However, there was no noticeable improvement in potential FCR reduction from 1975 to 2005 in the EU.



#### *4.3. Comparison of Tradeo*ff*s Between FCR and Other Attributes*

Banddivadekar [24] introduced an index to quantify the trade-offs among vehicle fuel consumption, performance, and size, which is called Emphasis on Reducing Fuel Consumption (ERFC). We modified the ERFC equation by converting fuel economy (commonly expressed as miles per gallon) to FCR (expressed as liters per 100 km) in Equation (5):

$$ERFC = \frac{FC\_{base} - FC\_{cal}}{FC\_{base} - FC\_{potential}} \tag{5}$$

where *FCbase* is the actual FCR in the base year, *FCcal* is the actual fuel consumption in the target year, and *FCpotential* is the evaluated fuel consumption, as shown in Table 2, holding the other variables constant. *ERFC* is the index quantifying how much technological progress is used for improving fuel efficiency during the base year and the target year.

Figure 7 shows the comparisons of ERFC between the U.S., EU, and China (based on the results of Model 1) during the various periods. The ERFC of the U.S. is from the results of MacKenzie and Heywood, and the ERFC of Europe was calculated from the estimation results of Hu and Chen. The ERFC values of the U.S. are highly correlated with the Corporate Average Fuel Economy (CAFE) standard and fuel price. It varied between 130%, when the U.S. was facing an oil crisis at the beginning of CAFE standard implementation during 1975–1980, and −25%, during the unchanged stringency of the CAFE standard during 1995–2000. Europe also had a high ERFC value (ranging from 74% to 145% during 2000–2015) after the European Commission adopted a Community Strategy based on three pillars for reducing CO2 emissions from cars in 1995. China released its first FCR limits standard in 2004 and updated the standard in 2008. Passenger vehicles that do not meet the FCR limit standard were not allowed to be produced and sold. Therefore, the ERFC values of local and joint venture brands in 2009–2012 showed a relatively high value of more than 60%. To achieve the target of 6.9 L/100 km in 2015, China introduced Corporate Average Fuel Consumption (CAFC) management by releasing the Phase III FCR standard for passenger vehicles in 2011, but there were no effective non-compliance penalties until China introduced CAFC and New Energy Vehicle Credits Regulation in 2017 [25]. Local brands showed much lower ERFC than the joint venture brands, especially during 2012–2016 (9% versus 81%).

**Figure 7.** Comparisons of Emphasis on Reducing Fuel Consumption (ERFC) between the U.S., EU, and China.
