Battle Royal: Diesel Challenges Gasoline

FUTURE FUELSBattle Royal: Diesel Challenges Gasoline CHICAGO (Feb. 21, 2006) - Automobile manufacturing is a bit like playing poker. Each automaker has a hand of cards - skilled labor, in-house technologies, a current and pending vehicle lineup and such. Likewise, each operates within a similar environment of regulatory measures, consumer expectations and innovations by others that, like the turn of a card, change fortune and fate.  Decisions made today by automakers as to what goes into their vehicles that enter the market within a few years will determine their degree of success. And like poker, the risks of just anteing up or knowing when to fold a hand, let alone betting to stay in the game before knowing the outcome, determines continual survival as a player.  Frost & Sullivan (F&S) in a recent study of the European market titled "Strategic Analysis of European Advanced Automotive Gasoline Engine Technologies," said that the primary determinants for market success were maximizing reliability while minimizing cost, complexity and weight. But as history has shown us before, success is more than just managing those cards. Timing and plain old fashioned luck are also factors that can change the playing field. Rock and a hard place Automakers, in making decisions today as to what will be in their vehicles tomorrow, are caught in a squeeze - caught between the regulatory current and pending standards of today, and the unknown judgment by consumers in the future. Complying with both present and anticipated future regulatory agency emissions standards, while also meeting vehicle buyers' ever-increasing desire for improved performance, enhanced fuel economy, higher reliability and limited maintenance costs involves critical decisions to be made by the automakers. Strategizing in part becomes like walking a tightrope - trying to comply with edicts while optimizing the desire for improved performance with minimal costs - but also hoping you are walking on the right rope. Decisions made by an automaker have a longer timeline, with associated interim costs, to realization. Consumers, on the other hand, decide in the now and have little regard for the risks and expenditures of others made prior to their personal buying decision. It's like a game of "Texas Hold 'Em" that is rigged in the consumers' favor. Automakers play the entire hand, accepting the costs of each turn of the cards. Consumers in this case simply enter the game when the last card is turned and without having to spend a dollar, and make their yes or no decision. But if that is the game, the rewards of playing must be there; otherwise, why would automakers stay involved?Place your bets - diesel or gasoline? Consider the competition for market share between diesel and gasoline powertrains. Because the achievement of environmental and consumer targets will involve increased cost, complexity and weight, automakers in Europe have to determine optimal mix of technology to deploy in both areas in order to balance these conflicting demands. With the European Union (EU) accounting for nearly a quarter of the world's manmade emissions of greenhouse gases, pursuant to the Kyoto Protocol, the EU and its automotive industry signed a voluntary agreement in 1998 to reduce CO2 emissions from passenger cars by 25 percent by 2008.  F&S reports that, "Advanced engine technologies can help manufacturers meet these targets. For instance, certain valvetrain technologies can reduce emissions and fuel consumption even while boosting performance. Meanwhile, turbochargers and superchargers can increase or maintain power output while decreasing fuel use through downsized engines."  "Electronic engine management technologies control engine parameters for best emissions control, fuel consumption, and performance, while air/fuel systems optimize an engine's breathing," said F&S Research Manager Veerender Kaul. "Gasoline-electric hybrid technologies can save fuel in urban driving cycles, making gasoline engine-powered vehicles more competitive than diesel-powered vehicles in terms of efficiency."  Historically, diesel engines for light vehicles have held a much higher market share in Europe compared to the United States. F&S reported that while gasoline engines accounted for more than 53 percent of European new passenger car sales in 2004, it forecasts that market share will fall to 37 percent by 2015. F&S cited two reasons for this: the better fuel economy of diesel versus gasoline engines and EU tax policies that keep diesel prices less expensive than gasoline.  In 2005, almost half of the light vehicles sold in Europe in 2005 ran on diesel fuel. In addition, the increasing diesel engine market share has limited interest in gasoline-hybrids, since the diesels already provide the benefit of a gasoline-hybrid, but without the hybrid cost. Managing fate In addition to Kyoto, pending Euro V regulations that will take effect in 2009 require the reduction of other emissions - notably nitrous oxide (NO_X) and particulates. Whereas diesel engines can lower CO₂ emissions adequately, managing NO_X and particulate emissions is an advantage held by advanced gasoline engines. If firmer limits are placed into effect by Euro V, the 2009 deadline could obscure the outlook for diesels and spark consideration for advanced gasoline powertrains. With the emissions watershed just three years away, automakers have to make major decisions now to arrive on time. Kaul commented, "To date, it has been cheaper for most automakers to increase sale of diesel engines than to offer more fuel-efficient gasoline engines. However, if diesel engines become more expensive due to emissions equipment, gasoline engines may become more competitive, especially in smaller vehicles." As a result, some EU automakers are employing more advanced technologies to help gasoline engines meet the challenge of diesel engines.  The tradeoffs in choosing technology to satisfy consumers and regulators, while minimizing costs and maximizing reliability, is critical. As the stakes are raised, automakers today are facing decisions that will impact their success or lack of, in a few years time. The F&S report said it succinctly, "Vehicle makers are trying to evaluate the most effective and market-attractive technologies in terms of their benefit/cost trade-offs." F&S noted that currently BMW and Mercedes-Benz have been leading the implementation of advanced gasoline engine technologies in Europe followed by the Japanese automakers that also have been active in incorporating advanced technologies in production gasoline engines. In contrast, with a few exceptions, the Big Three have trailed and been slow in adopting advanced engine technologies. Leading, following, or not even participating is a choice - like betting, calling or folding. Success and survival requires one to be right enough and lucky enough over time.Innovation upsets the applecart Also clouding choices made by automakers today is the possibility of advanced diesel technology being developed and introduced by 2009 that addresses the NO_X and particulate emission concerns. Successful innovation could put a whole new dynamic into the mix; innovative new diesel engines could submarine the future success for automakers who undertake advanced gasoline technology development costs today.  In a market that has held a traditional affinity for diesel, the consequences for automakers who opt for gas in whole or large part could be a huge jackpot whichever way it goes - both in dollars and sustainability. For example, given General Motor's (GM) financial woes in the North American market, what impact would a wrong decision in Europe have?  To illustrate the threat of emerging innovation within a known regulatory timeline, consider that Mercedes-Benz had begun deploying its BLUETEC technology in diesels in the EU and will introduce similarly equipped vehicles here in America later this year. BLUETEC specifically addresses the NO_X and particulate matter concerns regarding diesel engine emissions.  At the recent 2006 North American International Auto Show, Chrysler Group CEO Dieter Zetsche said BLUETEC met the Euro V emissions standard. Furthermore, he added that BLUETEC would be made available to the entire DaimlerChrysler lineup throughout the world.  Zetsche said this with confidence - after having spent time in the United States and learning the market - and he stated it with an understanding of both. With a positioning that diesel will prevail, and in the light of his firm's leadership in advanced gasoline engine technology, he sounded prepared and ready, whichever way regulators, consumers and the market went. In the manufacture of automobiles, one certainty remains clear. Like poker, the playing field is rarely level and never certain.(Sources: Mercedes-Benz, Frost & Sullivan)