The challenge for the global auto industry

Oct 21, 2014

The traditional internal combustion engine made economic sense when oil was cheap and plentiful and the effects of burning fossil fuels and pollution were not understood. Although electric vehicles were popular at the start of the 20th century, they declined given their low top speed, and the discovery of large oil reserves. One hundred years later, oil now accounts for about 95 per cent of the global transportation sector fuel and 13 per cent of global greenhouse gas emissions.

The environmental damage from the internal combustion engine is further compounded by the problem of air pollution. As well as carbon dioxide emissions, cars also produce dangerous chemicals such as nitrogen oxides (NOx), sulphur oxide (SOx) and carbon monoxide emissions. While the industry has been able to produce technologies to try to limit these dangerous chemicals, transport using fossil fuels cannot completely eliminate these emissions.

Emissions Targets and Regulation

Regulators around the world have been setting emissions targets to curb what they call regulated emissions, which are hydrocarbons, nitrogen oxides (NOx), sulphur oxide (SOx), carbon monoxide and particle matter (PM). Whilst different regions of the world are setting different regulations, at different times, the overall message and targets are clear, and the automobile industry needs to drastically curb the amount of emissions it produces. Europe has been the most progressive to date. It has set a target for 2020 which will mean no car can emit more than 95 grams of CO2 per km. This is a 27 per cent reduction from the 2015 target, and a 50 per cent reduction from the level in 2010. Targets for NOx and SOx have also been agreed as part of the Gothenberg protocol, and target reductions from 2002 levels in 2020, and aim to reduce NOx by 42 per cent, SOx by 59 per cent, as well as reductions in other harmful pollutants.

In the US the target for carbon emissions is 109 grams CO2 per km by 2025, and that is close to half the 2010 level. Whist the rate of change is impressive, it still means the US has one of the least ambitious targets globally, as illustrated in graph 1 below. In Asia; China, Japan and India all have set targets which resemble the European efforts, rather than the US. The family car in the US accounts for more than half of the total household's carbon emissions, according to the US department of energy.
 

Graph 1: Carbon Emissions targets across the world

 

These targets present a tough challenge for the auto industry and for investors alike. The pace of change in terms of curbing emissions needs to accelerate as new technologies need to be adopted. Technologies which will be important are those that address the key problem with the internal combustion engine, the loss of energy.

One of the main problems scientifically for the internal combustion engine is its lack of energy conversion. Only about 14 to 30% of the energy from the fuel in your car is converted to moving the car. As the image below illustrates, energy is lost across various areas of the car. So whilst the engine is producing all these pollutants and poisonous gases, most of is in fact not even being used to power the car. 

Sources of energy loss in the Internal Combustion Engine

Source: US Department of Energy

The problem of lost energy, as well as the need to reduce carbon emissions and reduce dangerous pollutants, has spawned the industry to attempt to meet these challenges, whilst sticking to the traditional petrol and diesel run engine. Indeed a lot of these technologies, whether it be turbo chargers to improve fuel efficiency, catalytic converters that can remove dangerous gases or drivetrain technologies that address problems of wasted energy. These technologies have directly contributed to huge improvements being made in the last 20 years, however, over the next 5 to 10 years the industry needs to accelerate this improvement.

Projection of Global Vehicle Sales

Source: Bank of America

The problem for the global auto industry is that it is one of the few sectors where emissions continue to rise. The source of this is its dependence on oil, and the lack of substitution with the sector. Whilst the energy sector has embraced technologies around Renewable Energy, the transportation sector's share of global oil consumption is actually rising, as the chart below illustrates. The number of cars on the road is also set to grow strongly (as shown above), as the growth in large emerging markets in Asia and Latin America lead to more cars on the road. So more cars on the road, an increase in the number of miles driven and aggressive targets to reduce emissions, all adds up to a huge challenge for the industry.
 

Oil is becoming more important for the transportation sector

Electric Vehicles and alternative technologies

A long-term solution to the problem of emissions and the internal combustion engine may well be the electric vehicle (EV). EVs have a number of important advantages over traditional combustion engines. Firstly, much less energy is wasted, EVs convert between 59 to 62 per cent of energy to the wheels, which is around three times more efficient than traditional engines. In addition, EVs have no direct exhaust fumes, or dangerous pollutants such as NOx and SOx. It is the source of electricity used to recharge EVs that is the main swing factor; when renewable energy e.g. wind or solar is used EVs are very clean indeed, with emissions really only stemming from the manufacturing process. However, when electricity is generated from energy sources such as coal or gas, there may be little or no improvement at all. The benefit therefore differs across from country to country, but from an environmental point of view, there is little doubt that EVs do provide an important opportunity from an environmental perspective, and widespread adoption along with increasing generation of renewable energy would go a long way to achieving the emissions targets being set across the world.

EVs have other important advantages over petrol and diesel cars. They are quiet, reduce fuel costs dramatically (as shown below), and luxury EV's such as the Tesla provide a superior driving experience. They also tend to require less maintenance, so can be more cost effective.

Electric Vehicles cut fuel costs dramatically

The key issues for widespread EV adoption are the lack of range and the lack of refuelling infrastructure. Most EVs have a range of about 100 miles, with some as low as 48 before they need recharging. When you do recharge, they inevitably take much longer to charge than it does to fill your car with fuel. This presents an important impediment to the widespread adoption of electric vehicles, if consumers have to sacrifice convenience. Until widespread adoption occurs, companies are unwilling to invest in infrastructure to ensure it's easier to recharge your car, and until you can conveniently refuel, consumers are unlikely to adopt EVs on a wide scale. The long-term solution to this conundrum lies in the battery technology, with the need to lengthen the range of the battery and shorten the refuelling time. Technology leaders such as Tesla have increased the vehicle range beyond 250 miles, and can shorten recharging times to around 30 minutes.

Hybrid Electric Vehicles (HEVs) also present a more environmentally friendly option, but do still rely on refuelling and the internal combustion engine. They do of course cut emissions and improve fuel efficiency, but not to the same extent as fully electric vehicles. Gas fuelled vehicles, both Compressed Natural Gas (CNG) and Liquified Natural Gas (LNG) are also a technology which allows the industry to move away from the problems of petrol and diesel powered cars. The benefits environmentally do not stack up to those of full EVs, and problems with infrastructure and fuel storage mean the technology tends to be deployed for bus and taxi fleets, particularly in large Emerging Markets such as China and Brazil.

Hydrogen Fuel Cells are another alternative that has garnered a lot of attention recently. They work by reforming fuel sources such as natural gas or biomass into pure hydrogen which is used to power the vehicle. They have some important advantages, as they do not themselves emit carbon (although the energy used during the process does). They also enjoy strong political support in large economies, such as the US and Japan. The key problem with them is both cost, and the fact that so much energy is required to produce them, negating some of their environmental benefits. They are also very expensive to produce, much more than EVs, and their refuelling infrastructure is currently much more sparse than that of EVs.

Conclusion

The global auto industry faces some huge challenges over the next 15 years, as it aims to address the inherent drawbacks of the internal combustion engine, and the list of problems that it causes from an environmental point of view. Some ambitious targets have been set, and in order to achieve these, a lot of technological change and innovation needs to occur. In reality this is likely to resemble an evolution, rather than a revolution, given that the bulk of global infrastructure continues to support petrol and diesel fuelled cars. The winners will be those companies that can provide solutions which make the combustion engine more efficient. Much of the Sustainable Future funds exposure in the auto space is targeted at these companies. Some of these include technologies to improve fuel efficiency through turbo chargers and drive-train technology (Borg Warner), catalytic converters to remove NOx and SOx (Johnson Matthey) and technology to reduce energy lost of tyre friction (Continental).

Electric Vehicles do provide some very attractive options, both to consumers, regulators and to investors. As technology improves, and with it the infrastructure necessary to support widespread adoption, they will become a much more important part of the solution for the global auto industry. From BM's plug in electric to the Tesla Model S, there are products on the market which are making Electric Vehicles a much more appealing prospect to the average consumer. We feel this trend is set to accelerate. For the global auto industry, it will become the long-term solution to the problems associated with the traditional internal combustion engine.

Source: BusinessGreen