Industry Market Trends

Automakers Focus on Improving Traditional Fuel Engines

Jan 30, 2013

According to the latest industry projections, there isn't going to be an appreciable increase in R&D funding for alternative energy engines in the foreseeable future. However, automakers are investing heavily in improving the efficiency of traditional fuel engines.

Electric car engines, solar-powered cars, and hybrid vehicles are unlikely to see major gains in investment in the short-term future. Instead, global automakers are planning to invest in improving the existing internal combustion engine, with the aim of reducing its size, making it more efficient, and cutting down on its CO2 emissions.

The latest annual Global Automotive Executive Survey, from tax advisory firm KPMG, polled 200 C-level executives in the global automotive industry. The consensus was that electric cars won't account for more than 15 percent of sales over the next decade, and that research and development money will primarily be spent on enhancing internal combustion engine technology.

The majority (71 percent) of automotive executives said optimizing the combustion engine "will continue to offer more efficiency and CO2 reduction potential than any electric vehicle technology for at least the next six to 10 years." About 36 percent said most of their current R&D funding goes to combustion engines, and one in four said their companies "will direct the most investment over the next five years toward downsizing and optimizing internal combustion engines."

Although electric, solar, and hybrid cars remain important prospects, automakers consider traditional engines to be best positioned for positive returns under current market conditions. Much of that is because 66 percent of executives don't expect electrified vehicles (ranging from full hybrids to full cell electric vehicles) to exceed 15 percent of global annual auto sales before 2025.

Not that investment in alternative fuel source engines is going away. Gary Silberg, National Automotive Industry leader for KPMG, was careful to note that OEMs and suppliers "are not investing in combustion engines at the expense of alternative drive trains. They will also intensify investment in electric technology, fully appreciating what is at stake in a very competitive industry."

Generally, hybrids are better positioned than electric cars within the green market. According to KPMG, hybrid systems are "the clear favorite right now over electric." Survey respondents said that over the next five years, 26 percent of auto companies will invest most in plug-in hybrid fuel systems, 17 percent will invest in hybrid fuel systems, 13 percent will invest in battery electrified vehicles with range extenders, and 11 percent will focus on fuel cell electric vehicles. Only 8 percent said their investment priority would be pure battery electrified vehicles.

Jeff Siegel, co-founder and managing editor of Green Chip Stocks, an independent investment research service focusing on alternative energy, said electric car development is off to a strong start, but the market "has a long way to go before it gets to that next level."

"I realize many of my fellow EV [electric vehicle] supporters don't like it when my analysis never shows EV market penetration moving beyond 1.5 percent by 2020," Siegal added. "[But] to go from practically zero to 1 percent or 1.5 percent penetration inside of 10 years is actually quite impressive - and should be used not to trivialize growth estimates, but instead to celebrate the fact that a major game-changing transportation technology is actually unfolding right before our eyes."

Despite gains in electric vehicle development over the past decade, automotive manufacturers are focused on innovation, especially for the combustion engine, with 88 percent of respondents claiming that the key to growth over the next five years is to develop new products and technologies, closely followed by entering new markets.

Establishing corporate partnerships, particularly between OEMs and suppliers, is considered the best strategy for expanding automakers' value chains and diversifying their businesses. Only 13 percent of respondents feel that manufacturers will be the main player in mobility - half as many as in the previous year's survey.

Automotive firms are clearly focused on revamping and building new technologies for traditional engines for now. While that may seem like a shift away from green markets, auto manufacturers are actively seeking ways to improve combustion engines and make them more eco-friendly, signaling continued commitment to energy efficiency.