Alternative Powertrains: Mobility Solutions for the Future
Alternative Powertrains: Mobility Solutions for the Future Will this time be different?When automobiles were introduced in the 19th century, it was not readily apparent whichengine technology would prevail. Electric and steam-powered cars were actuallydemonstrated before gasoline-powered cars and these technologies co-existed for a periodof time. It is surprising to note that at the end of 19th century, electric cars outsold all theother types of cars.However, the Internal Combustion Engine (ICE) was victorious primarily due to thevirtues of speed, power and range. This was primarily driven by petroleum’sexceptionally high energy density. While gasoline and diesel have energy density of 32 –36 Mega Joules / Liter, natural gas has one-fifth, and hydrogen gas one-seventh of thisenergy density.Today, alternative powertrains, which include vehicles running on CNG / LPG, biofuels,and electricity account for ~4% of the market globally; bio fuels account for 2% of themarket. As per Global Insight estimates, CNG / LPG, fuel cells are expected to accountfor <0.1% of vehicle production by 2018. While CNG vehicles are popular in developingmarkets such as India and Pakistan, further future penetration depends on furtherdiscoveries of gas reserves and a build out of CNG infrastructure. The first-generationbiofuels (derived from edible crops) account for a large market share in certain countries(e.g. ~20% in Brazil and 10% in the US).Brazil now supplies nearly 20% of its transport fuel demand from domestic biofuels andalso exports large quantities of biofuels. It is the second-largest producer of biofuels inthe world (after US) and has the lowest-cost base by a wide margin. Despite thisprogress, Brazilian biofuels are still dependent on consumption subsidies. Brazil’sexperience illustrates how policy must align with the technology lifecycle: early-stagetechnologies require R&D and infrastructure support and some command-and-controlpolicies; late-stage technologies require consumption support through economic policies.In China, alternate fuels such as natural gas, methanol and ethanol are also picking upshare, however these account for only 3% of total fuel consumption. Ethanol is currentlyChinas largest alternative fuel by volume. Domestic ethanol production tripled between2003 and 2009. Six provincial governments have implemented policies which mandatethe use of E10 gasoline, which is 90% gasoline and 10% anhydrous ethanol. Whilegovernment efforts to promote methanol are less impressive than those for ethanol, thecentral government issued standards for M85 (85% methanol and 15% unleadedgasoline) in 2009. There are several challenges for methanol adoption – negative impacton health, corrosion of vehicle and questionable environmental impact. The governmenthas provided strong support to promote natural gas by issuing at least 29 standards relatedto natural gas vehicles, as well as organizing Clean Vehicle demonstration programs thathave now expanded to 20 cities. Provinces have invested in fueling stations, subsidizednatural gas vehicle purchases, as well as issued standards and safety regulations.
However, key barriers to adoption of natural gas as a major vehicle fuel include lack ofinfrastructure, limited natural gas supplies and rising prices.There are at least five drivers today that may shift the balance in favor of alternative fuelsand powertrains. These drivers can be categorized into disruptive forces such as fueltechnology, petroleum supply and demand, power train technology, and regulatoryimperatives such as petroleum security and global climate change. These drivers have thepotential to shift the current gasoline-dominated equilibrium toward cleaner and moreefficient alternatives such as hybrid / electric vehicles (xEVs). Disruptive Forces And Regulatory Imperatives Disruptive Forces Petroleum Regulatory Imperatives Supply & Demand Global Fuel Powertrain Petroleum Climate Technology Technology Security Change Array of Potential Fuel- Current Feasible Powertrain Equilibrium Options Winners Petroleum-fueled ICEs Alternatives dependent Otherwise equivalent Gasoline for US upon emerging fuel and economics swayed by passenger transport powertrain technologies political action Diesel for commercial Comparisons based on Range of states cost of ownership possible dependent on Roughly equal split of economics and well-to- environmental and gasoline and diesel for wheel GHG production political forces European passenger carsSource: Booz & Company analysisHowever, several challenges must be mitigated to enable hybrid / electric mobilitysolutions to take-off. Key barriers to xEV adoption are outlined below:1. Consumer Acceptability – Currently, prices of hybrid / electric vehicle are too high formass adoption. Also, due to currently low price of petrol / diesel, the difference inoperating cost between petrol engine and alternative propulsion is quite low, posing asignificant economic barrier to adoption. Families on a tight budget are less likely to payextra for environmentally sustainable green products.2. Industry Capability – OEMs need to build new capabilities and develop new structures/ partnerships to develop alternative powertrain vehicles. They need to find suppliers fornew technologies, and evaluate whether and how their relationships with new supplierswill be different from those with current suppliers. They also need to evaluate if thesupply chain needs to be restructured to meet the needs of the new suppliers.3. Infrastructure – Inconvenience of battery charging is a key constraint for operation ofelectric vehicles. Most consumers are discouraged from adoption of electric vehicleswhen they learn about the necessity for charging on an almost daily basis, specifically ascurrently there is a lack of public charging network.
The potential solutions for catalyzing the xEV revolution can involve a three-prongedapproach comprised of technological innovations, business model innovations, andregulatory interventions, which have been described below. 3 Dimensions of the New Eco-system Regulatory Innovation Frontier (Government) § New policies (including subsidy policy) to support the commercialization of green transportation technologies Technical Innovation Frontier Business Innovation Frontier (Auto Industry) (Cross Industry/Value Chain) § Partnerships among key § Partnerships between other players to deliver deep, industries and auto scalable solutions for future makers/suppliers to develop green transportation new business model for future green carsSource: Booz & Company analysis1. Regulatory Innovation FrontierGlobally, governments have been pushing the hybrid / electric mobility agenda byleveraging policy levers such as demand incentives, R&D investments, cash and taxincentives to OEMs and component manufacturers (supply incentives) and infrastructureinvestments. While China has initiated massive investments across all levers with totalinvestment in this area exceeding $15 Billion, other economies such as the US, Franceand Japan have been making more focused investments, with particular emphasis onestablishment of charging infrastructure.2. Technical Innovation FrontierTo build consumer acceptability of hybrid / electric vehicles, OEMs and componentmanufacturers need to come together to enable technological innovations which canbridge the price-performance gap of these solutions. OEMs would need to redeploy theirresearch, product design and development, as well as manufacturing assets. They wouldneed to acquire new capabilities in key components of hybrid / electric vehicles –batteries, electric motors, power electronics and integration of these components into thedrivetrain. New suppliers which have traditionally not played a significant role inautomotive industry (e.g., battery manufacturers, motor manufacturers) need to gear upand play a significant role in improving technologies for hybrid / electric vehicles.3. Business Innovation Frontier
In addition, alternative powertrains would require an ecosystem of collaborativepartnerships across the automotive value chain, between OEMs, componentmanufacturers and R&D labs on one hand, and after-service network of charginginfrastructure operators, government and OEMs on the other hand. OEMs would need toevaluate and re-design their supply chains for new powertrain technologies to meet theneeds of the new supplier landscape. Also, effective change management will be requiredfor building the capabilities required in functions such as engineering, manufacturing andsales.It is quite certain that the road to the new world order of alternative powertrains willrequire many changes in the industry – new suppliers are expected to acquire front seats,OEMs will need to build new capabilities / restructure their supply chain, and thegovernment will need to support the industry through appropriate policies andinvestments. However, this time, alternative powertrains are appearing as a real solution,and time is ripe for the automobile industry to step up and start preparing.— Suvojoy Sengupta, Bill Russo, Prashant Vishnupad and Srishti ChaudhryContact InformationSuvojoy SenguptaPartner and Managing DirectorGurgaon, Indiaemail@example.comBill RussoSenior AdvisorBeijing, China+86-10-6563 firstname.lastname@example.orgPrashant VishnupadSenior AssociateGurgaon, Indiaemail@example.comSrishti ChaudhryAssociateGurgaon, Indiafirstname.lastname@example.org