2008

Vehicle Fuel Efficiency and Investment Opportunities

The opportunity is in improving fuel use efficiencies
Fossil fuels are a viable source of energy for vehicles till as long as a cost-effective alternative in electrical engines is found. Higher fuel efficiency is possible with lower energy losses in fuel burning enabled by new technologies. Diesel engines already burn fuels with greater efficiency that is also possible with gasoline engines and natural gas engines. New IT technologies for monitoring fuel use also help to increase fuel efficiency.

Kishore Jethanandani Wells Fargo Wealth Management Division 11/11/2008

Table of Contents
INTRODUCTION.........................................................................................................3 THE FUEL EFFICIENCY IMPERATIVE................................................................4 FUEL CONSUMPTION: THE IMPORTANCE OF LIGHT VEHICLES.............5 FUEL EFFICIENCY FROM EXISTING TECHNOLOGY.....................................6 Measurement and Fuel Efficiency................................................................................7 Engine Efficiencies.........................................................................................................9 Variable Valve Timing and Lift: fuel to match vehicle speed.................................10 Multiple Valve Cylinders: more juice from fuel......................................................10 Cylinder Deactivation: winding down at lower loads..............................................10 Direct Fuel Injection: getting the mix right..............................................................10 Integrated Starter and Generator: shutting power to an idle engine....................10 Turbo charging: packing in more power...................................................................11 Hybrid Cars..................................................................................................................11 Transmission Efficiencies: synchronizing engines with vehicle motion.................11 Alternative Internal Combustion Engines.................................................................12 Diesel Engines...............................................................................................................12 Natural Gas Engines....................................................................................................12 DIFFUSION OF FUEL EFFICIENT TECHNOLOGIES.......................................13 Monitoring and Tracking Information Technologies..............................................13 Automotive Electronics Enabled Fuel Efficiencies...................................................14 Diesel Engines...............................................................................................................16 Natural Gas Engines....................................................................................................17 Hybrid Cars..................................................................................................................19 PROFILES OF INNOVATING COMPANIES........................................................20 BorgWarner.................................................................................................................20 Overview.......................................................................................................................20 Financial Performance................................................................................................20 Westport Innovations Inc............................................................................................20 Overview.......................................................................................................................20 Financial Performance................................................................................................21 Clean Diesel Technologies Inc....................................................................................21 Overview.......................................................................................................................21 Financial Performance................................................................................................21 Remy International......................................................................................................22 Overview.......................................................................................................................22 Financial Performance................................................................................................22 Xata Corporation.........................................................................................................22 Overview.......................................................................................................................22 Financial Performance................................................................................................22 CONCLUSIONS..........................................................................................................23

INTRODUCTION
Oil independence is the clarion call of the day in the USA. Lately, concerns about the price of oil, security risks and climate change have coalesced to galvanize support for energy alternatives. The transportation sector accounts for 69% of all petroleum consumed in the USA and will be at the center of efforts to lower fuel costs. Strategically, the transportation industry faces two major choices. The first is improving operating efficiencies of existing technologies and the other is a paradigm change in the vehicle technology using new sources of fuel1. In the first category, operating efficiencies can be increased with the adoption of maturing information technologies including broadband wireless and global positioning technologies for optimization of vehicle movements. In addition, operational efficiencies can be realized from automotive electronics technologies by optimizing energy use in engines and transmission in vehicles. Information technologies and automotive electronics can complement each other and compound the benefits from any one of them. Operational efficiency can also be improved by using alternative fuels such as diesel, which scores on combustion efficiency, and natural gas which is a cleaner fuel and can absorb the costs of development of a fuel efficient engine. Hybrid cars are an intermediate option in that they use both the internal combustion engine and a battery to drive the vehicle. Alternatively, three major technologies are available to take the place of the internal combustion engine--hybrid-electric vehicles, plug-in electric vehicles, and hydrogen fuel cell vehicles. Hybrid electric cars are a transitional technology while the latter two make a complete break by discontinuing the use of oil. The internal combustion engine still operates well below its potential and incremental improvements in its operation entail much lower risks compared to new technologies. New vehicle technologies are at an early stage of development and the infrastructure required for the recharging batteries or supplying hydrogen is virtually non-existent. In the near term future, the best bet for raising fuel efficiencies in a short enough time is to optimize the existing designs of vehicles. New concepts of vehicles, such as the electrical car, have yet to be tested in a commercial context2 and will inevitably incur unanticipated costs of development of an uncertain Estimates show that 50% of efficiency gains can be realized by upgrading existing light vehicle technologies, see, Transportation Efficiency, National Petroleum Council, NPC Global Oil and Gas Company, July 2007. 2 A Government study Analysis of the Transition to Hydrogen Fuel Cell Vehicles and the Potential Hydrogen Energy Infrastructure Requirements, US Department of Energy, March 2008, concludes, There is broad consensus that industry will need to demonstrate in the laboratory the capability to cost effectively manufacture fuel cell vehicle systems in quantity (i.e., at $45/kW by 2010 and $30/kW by 2015, with a 51

year time lag between lab-demonstrated capabilities and implementation in a mass-produced

magnitude. Under the most optimistic assumptions, fuel cell vehicles, for example, are not expected to be commercially viable till 2030.

THE FUEL EFFICIENCY IMPERATIVE

The worldwide demand and supply imbalance in petroleum is likely to persist when the world economy grows at the trend rate. Measures of oil reserves are typically a function of exploration technology and do often eventually exceed their initial estimates. Continuing improvements in seismology, for pinpointing the location of reserves, are likely to improve the probability of finding new sources of oil. Regardless, petroleum production will inevitably lag behind the rapidly rising consumption in emerging markets. Growth in oil production is hobbled by the predominance of state-owned producers overseas3. The political passions that protect the national monopolies in natural resources are not likely to change any time soon. In June 2008, the United States consumed 20.8 MMbd, of which 13.15 MMbd were net imports. By contrast, China, a country with five times the population of the U.S., consumes 6.93 MMbd, of which 3.19 MMbd were net imports. Chinas economy is growing at 10% per year and its oil production has peaked. Growth in China can be sustained only by importing much more than the current 3.19 MMbd of oil. Figure1

product). Meeting these targets is deemed a key condition for proceeding with government policy and industry investment in the deployment of hydrogen vehicles and infrastructure Without any government policy incentives in the years between 2010 and 2025 (Figure ES-5), the automotive industry would need to invest tens of billions of dollars and sustain billions in annual losses over more than a decade, with profitability delayed until 2022 or beyond. With policy intervention, affordable cars, in the price range of $25,000, will not be available till 2030 and presume a penetration rate of 9 million cars.
3

Alan Greenspan observes that the global oil market has on the one hand countries with most of the oil reserves with production monopolized by state-owned companies and on the other countries where reserves have been exhausted and have oil companies with most of the modern exploration and other technologies. The state-owned companies are experiencing declining production as they neglect technical improvements, Age of Turbulence, by Alan Greenspan, Penguin Press, 2007.

Figure 1 shows that per capita oil consumption in the U.S. is approximately 26 barrels per person on an annual basis. The European Union and Japan, have a per capita consumption of around 15 barrels per person. By contrast, per capita consumption in China is only about 2 barrels per person. As its per capita consumption catches up with the Western world, the world supply can only tighten. According to the China Association of Automobile Manufacturers (CAAM), China has become the second largest market for new cars; sales of 7.22 million cars were registered in 2006, up 25% from 2005. In 2007, China produced 8.8 million vehicles, up about 22% from 2006.

FUEL CONSUMPTION: THE IMPORTANCE OF LIGHT VEHICLES

The automotive sector accounts for much of the fuel consumption in the transportation sector. Within the automotive sector, the light vehicles sector is the largest consumer of petroleum. We will see later that the light vehicles sector has also been slow in adoption fuel efficiency technologies. Highway Transportation Petroleum Consumption by Mode, 19702006a (thousand barrels per day) Light Light vehicles MotorHeavy Highway c Total Autos trucks subtotal cycles Buses trucks subtotal Transportation b 4,766 3,453 8,219 14 98 2,298 10,630 12,792 4,798 3,491 8,290 13 93 2,295 10,690 12,672 4,923 3,602 8,525 12 91 2,401 11,029 12,939 4,866 3,963 8,829 12 90 2,334 11,265 13,108 4,919 4,137 9,055 13 92 2,162 11,323 13,344 5,050 3,840 8,890 12 93 2,426 11,422 13,537 4,891 3,957 8,848 14 93 2,473 11,429 13,592 Average annual percentage change 0.3% 4.5% 1.5% 3.5% 1.1% 3.4% 1.8% 1.7% 0.8% 2.5% 1.5% 0.7% 0.6% 2.5% 1.7% 1.6%

Year 2000 2001 2002 2003 2004 2005 2006 19702006 19702006

Source: Transportation Energy Data Book 2008 See Appendix A for Highway Energy Use. a Each gallon of petroleum product was assumed to equal one gallon of crude oil. b Total transportation figures do not include military and off-highway energy use and may not include all possible uses of fuel for transportation c Highway refers to vehicles.

FUEL EFFICIENCY FROM EXISTING TECHNOLOGY

Fuel efficiency can be increased by lowering energy losses with the use of electronic control systems that match the mechanical power generated by the engine and the power needs to move vehicles. Traditional engines had limited capability to adapt to the fluctuating demands of vehicles as they accelerate and decelerate. Increasing use of electronics enables real time variations in energy consumption proportionate to the needs of vehicles. Automotive electronics technologies, typically an array of sensors, are embedded in the engine and other assemblies of vehicles and enable data collection to help match power requirements of vehicles with fuel use. In addition, automotive electronics monitor driver behavior and vehicle health and help to correlate the data with fuel consumption4. The data on the speed of the vehicle and its acceleration rates are correlated with fuel consumption to ensure optimal driving practices. Vehicle health is electronically monitored to lower idle time and compliance requirements met without stopping for an inspection. Maintenance needs are tracked to ensure that energy is not lost due to erosion in components. vehicles. Fuel efficiency can also be increased with the use of wireless and location tracking information technologies5. Broadband wireless technologies, together with Global Positioning Systems, help
4

The full benefits of automotive electronics often goes with

related changes in automotive design which means that vehicle owners need to replace their

A typical example of use of data is the North American trucking company Bison Transportation. In a case study conducted by Canada's Office of Energy Efficiency, Bison detailed how it uses a system developed by Sigurdson to provide a monthly summary of total fuel use by vehicle, including fuel economy, total fuel consumed, fuel consumed while idling, cost of fuel consumed while idling, and average vehicle speed. Using historical fuel economy data, Bison established a fuel efficiency benchmark for each of the five tractor types in its fleet. If drivers exceed the target for a three-month period, they receive a financial bonus; and the more they exceed the target, the bigger the bonus. Having that data is important because there is a difference of up to 12 liters per 100 kilometers [23.5 mpg] in the mileage achieved by the most fuel efficient and least fuel efficient drivers. Having data helps identify the amount of time a driver spends at combinations of vehicle speed and engine rpm levels. [This enables us to] quickly identify idle time and whether a driver is revving the engine too high for the vehicle speed, thus adversely affecting fuel economy, Sigurdson notes, cited from Fuel Economy: Sipping Strategies, by Sean Kilcarr, June 1, 2006, Fleetowner
5

Widespread use of satellite tracking and communication technology in the Class 8 (truck) market will continue to migrate to the Class 3-7 market. Fleets are using telematics to capture and report key data related to the trucks diagnostics, idling, drive time, and fuel

to gather data needed to find the shortest travel routes, increase the load factors of trucks and circumvent congested routes6. Vehicle owners dont need to replace their existing vehicles in order to benefit from such technologies. They can purchase inexpensive plug-in electronic devices and subscribe to mobile services to lower their fuel costs from their existing vehicles. Automotive electronics and mobile information technology play a complementary role when data gathered from sensors is transmitted wirelessly to a remote destination where it is analyzed and the intelligence is used to control performance in real time. The performance can be managed not only for individual vehicles but also for entire fleets. Internal combustion engines also realize higher operational efficiencies when they use alternative fuels such as especially diesel as well as natural gas which enable higher levels of combustion efficiency than is possible with gasoline.

Measurement and Fuel Efficiency

Studies of fuel consumption have observed a great deal of variance in fuel efficiency realized in the laboratory and in actual field conditions. The table below shows that the variance is an average of 20%.

Fuel Efficiency in the Laboratory and the Field

Period Field Actual Difference % Difference 1975-1980 16.35 19.22 2.87 15 1981-1985 22.22 26.06 3.84 15 1986-1990 23.72 28.10 4.38 16 1991-1995 23.34 28.02 4.68 17 1996-2000 23.20 28.34 5.14 18 2001-2005 23.18 28.86 5.68 20 2006-2008 23.83 29.93 6.10 20 Source: Light Duty Automotive Technology and Fuel Economy Trends 1975 through 2008, EPA

economy. In addition, companies are using telematics to enhance driver productivity and route management. In the coming years, telematics will play a larger role in maximizing cargo space for increased delivery capacity, fuel savings, and productivity, quoted from Forecast of Fleet Management Trends: 2008-2010, by Mike Antich, Work Truck Online., Feb 2008 In the United States alone, traffic congestion leads to 4.2 billion hours in extra travel time and an extra 2.9 billion gallons of fuel burned, for a total cost of $78 billion, according to a 2007 report from the Texas Transportation Institute, Wireless and Mobile News, February 8th 2008
6

The variance is due to a variety of factors such as driver behavior, the pace of acceleration and speed, tire pressure7 and the quality of maintenance of the vehicle 8 and choice of routes among others. When drivers have access to real-time information of performance, they are empowered to control the variables that affect their fuel costs; the influence of each of them is indicated in the table below. Fuel consumption can be reduced by up to 45% simply by lowering vehicle speeds and by even acceleration. Simple maintenance procedures such as wheel alignment and tire pressure can help to lower fuel consumption by 16%. By circumventing congested and poorly maintained roads, drivers can reduce consumption by 65%. Fleets can increase their load factor in order to minimize the miles they travel when they are able to receive data on customer orders in real time. By synchronizing the movement of vehicles in the entire fleet, the sum total of miles traveled can be lowered9. Only 43.6 percent of all tires are inflated within five PSI of proper air pressure, according to a study by The Technology & Maintenance Council (TMC) of American Trucking AssociationsBy some calculations, a tire that is under inflated can cut usable life by 25 percent or more and consume as much as 10 percent of a vehicles fuel efficiency..Dana Corp.s Commercial Vehicle Systems group recently launched SmartWave TPMS (Tire Pressure Monitoring System). SmartWave TPMS provides realtime tire pressure monitoring by sending pressure and temperature data to off-board communication systems. The system also features a record-keeping function and has a temperature-monitoring function to automatically compensate for fluctuations and ensure proper inflation regardless of tire temperature, in Fuel economy: Onboard tire monitoring and inflation systems, by Seth Skydel, Fleet Equipment, December 2006.
7

Dossier Online tracks maintenance-related information from the FleetOutlook computer, including things such as mileage and fuel consumption. In the case of a serious problem, such as low oil pressure or overheating, the driver is notified through the radio speakers in the cabThe next step beyond diagnostics is called prognostics - catching breakdowns before they occur. Sophisticated electronics could alert you that a starter is going to go out soon. quoted from Diagnostics Today and Tomorrow, by Deborah Lockridge., Heavy Duty Trucking, March 2005.
8

"Two-way mobile communications ushered in a new era allowing for the integration of both communications with the drivers and position location tracking.Using these systems, dispatchers can reliably gather data on the location of shipments en-route to customers via automatic shipment positioning. Customer data is provided that includes status information, estimated time of arrival for on-time deliveries and the ability to modify shipments en-route and real-time.Many companies using these systems report improved driver productivity, increased fuel efficiency and decreased administrative costs." . Dispatchers can re-route drivers based on real-time data to minimize unproductive backhauling without cargo. These systems even allow companies to track operational data, vehicle utilization information, and maintenance guidelines, as well as to meet regulatory requirements. This information is easily integrated into back-end systems, reducing administrative paperwork and providing aggregated reports of operational performance, quoted from Wireless Evolution, by Fleet Equipment, September 2003.
9

VARIANCE IN FUEL CONSUMPTION

Effect Head Wind Hills/Mountains Poor road conditions* Traffic Congestion Highway speed Acceleration Rate Wheel Alignment Tire Type Tire Pressure* Air Conditioning 20 mph 7% road grade Gravel, curves, slush, snow, etc. 20 vs 27 mph average speed 70 vs 55 mph "Hard" vs "Easy" 1/2 inch non-radial vs radial 15 psi vs 26 psi Extreme Heat Conditions Average Fuel Economy Reduction 2.3% 1.9% 4.3% 10.6% N/A 11.8% <1% <1% 3.3% 21% Maximum Fuel Reduction 6% 25% 50% 15% 25% 20% 10% 4% 6% N/A

Source: US Environmental Protection Agency

Engine Efficiencies
Vehicles powered by internal combustion engines operate at far below their optimal levels nearly a hundred years after their invention. Only about 15% of the fuel consumed by vehicles is actually utilized to power a vehicle or its accessories while the rest is lost to engine or transmission inefficiencies10. Engines convert only 18.2% of the chemical energy of the fuel into mechanical power for driving vehicles. Of the total loss of 81.8%, as much as 62.4% is accounted for by engine losses, 17.2% by standby / idling losses and 2.2% to accessories such as air-conditioning. Another 5.6% of the energy is lost in transmission of mechanical power from the engine to the wheels of a vehicle. Finally, energy lost in braking is 5.8%. Only about 6.8% is used in overcoming the resistance to the movement of the vehicle. Increasing adoption of automotive electronics enables the regulation of the variables of performance, such as air and fuel supply to engine cylinders, with increasing precision which helps to minimize wastage in fuel consumption. Sensors embedded in the engine ensure that fuel is consumed when it is needed or the engine cylinder is shut down. When the engine is working, the rate of fuel consumption is proportionate to the speed and acceleration rate of the vehicle.
10

Advanced Technologies and Energy Efficiency, www.fueleconomy.gov

Variable Valve Timing and Lift: fuel to match vehicle speed Traditional engine cylinders consume fuel at a steady pace regardless of the actual need of vehicles for acceleration and thrust. The flow of fuel into engine cylinders is governed by valves which open at fixed intervals and for an invariable period of time. Variable Valve Timing and Lift, on the other hand, has embedded sensors that regulate the flow of fuel and air proportionate to the varying needs of the vehicle. This technology improves fuel efficiency by 5%, a vehicle lifetime benefit of $1,40011. Multiple Valve Cylinders: more juice from fuel Multiple valve cylinders have more than two valves to evenly spread the fuel and a proportionate supply of air around the area of the cylinder. A traditional engine has two valves; one for intake and another for the exhaust. The fuel spray is, therefore, concentrated at the point of the intake valve at some distance from the center of the cylinder where the ignition happens. Multiple valves help to spread the fuel around the cylinder as well as the air to maximize combustion efficiency to achieve higher fuel efficiency. Cylinder Deactivation: winding down at lower loads Similarly, cylinder deactivation temporarily shuts down some of the engine cylinders when a vehicle operates at relatively low loads. At lighter loads, traditional engines continue to suck air (pumping losses) and draw unneeded fuel. This technology is particularly useful for vehicles with more than four cylinders and is estimated to lower fuel consumption by 7.5% and realizes vehicle lifetime benefit of $2000. Direct Fuel Injection: getting the mix right Direct fuel injection is a means to maximize fuel efficiency by maintaining the recommended optimal air-to-fuel ratio of 14.7:1 inside the engine cylinder. The modern versions of fuel injection technologies concentrate the fuel and the air in closer proximity of the spark plug for improved combustion efficiency. A combination of sensors monitors the air-to-fuel ratio and the corresponding inflows of air and fuel for optimizing combustion efficiency. This is in contrast to the traditional carburetor which pre-mixed air and fuel before they entered the cylinder. Direct fuel injection technologies realize fuel efficiencies of 12% with vehicle lifetime benefit of $3,200. Integrated Starter and Generator: shutting power to an idle engine

11

Fuel cost savings are estimated assuming an average vehicle lifetime of 185,000 miles, a fuel price of $3.07, and an average fuel economy of 21 MPG. All estimates are rounded to the nearest hundred dollars

Integrated starter and generator is a means to minimize the energy lost when the engine is intermittently idle at stop signs or otherwise. The engine is shut down when its power is not needed and restarts it instantaneously when a vehicle resumes its run. More advanced versions of this technology also use the heat from braking to charge an electrical battery just like a hybrid car does. Integrated starter and generator increases fuel efficiency by 8% with a vehicle lifetime benefit of $2,200. As a result of idling of vehicles, additional losses are incurred when accessories such as airconditioning continue to function and account for 2.2% of the losses. The losses are higher in trucks which have TVs, computers, refrigerators and other accessories installed for drivers traveling long distances12. The losses are minimized when accessories are operated by auxiliary power units instead of engine power. Turbo charging: packing in more power Turbo charging is another kind of technology that extracts greater power for every unit of the size of the engine cylinder. It compresses the air going into the engine cylinder, effectively pumping more air without any change in the size of the cylinder, and burns proportionately more fuel and generates more power for each explosion. The air is compressed by taking advantage of the force generated by exhaust gases to power the pump that compresses the air. Turbo charging and supercharging yields efficiency benefits of 7.5% and vehicle lifetime benefits of $2,000. Hybrid Cars Hybrid cars combine an internal combustion engine and an electrically driven engine. Fuel efficiency is improved by optimizing the internal combustion engine with the use of control systems as discussed above. It has also a way to stop the engine when it is either idle or cruising and does not need power to accelerate. Finally, a hybrid vehicle re-uses the heat generated by braking to generate the electricity that drives the vehicle. City driving with hybrid car generates more electricity to drive the vehicle without gasoline.

Transmission Efficiencies: synchronizing engines with vehicle motion

Continuously Variable Transmission (CVT)
13

is a means to match the engine power or RPM with

the speed of the vehicle; when the two are proportionate, fuel consumption is minimized. A car normally uses a great deal more power when it resumes its run after a stop sign than it really needs. Traditional manual cars are unable to adjust the speed to the engine power of a vehicle because they allow only a fixed number of changes in the gear ratio. By contrast, CVT change The estimated cost of idling of trucks is $77 per hour according to Vivek Khosla, Director, Product management for PHH Arval quoted in Forecast of Fleet Management Trends: 2008-2010, op cit. 13 How Continuously Variable Transmission Works, by Jeff Kar
12

the gear ratio with infinitesimal changes in speed of the vehicle so that fuel consumed for any level of engine power matches the exact acceleration requirements of the vehicle. CVTs reduce fuel consumption by 6% with a vehicle lifecycle benefit of $1,600. Automatic transmission has increased the number of gears from three to four in the past to seven to eight in recent years for the same reason. Another variation of the CVT is the automated manual transmission (AMT) which shifts gears electronically without the need for a clutch. The estimated fuel economy from AMTs is 7% and vehicle lifetime benefit of $1,900.

Alternative Internal Combustion Engines

Diesel Engines Diesel engines have much of the efficiencies desired by builders of gasoline engines already built into them. They have higher combustion efficiency than gasoline engines because they compress the air in the engine cylinder much like a turbo charged gasoline engine does. A diesel engine burns fuel with much greater efficiency because its compression ratio is a high of sixteen to twenty four compared to the maximum of ten possible with traditional gasoline engines. The air is compressed before the fuel is injected; the quantity of fuel can, therefore, be regulated to meet varying needs of the engine14. The compression levels of the air can also be adjusted to meet the needs of a vehicle. Unlike traditional gasoline engines which burn fuel at a single point where the spark plug is located, the heat generated by compressed air in a diesel engine is spread throughout the cylinder and burns the fuel with greater efficiency. Newer gasoline engines seek to achieve similar levels of combustion efficiency with multiple valves. Altogether, diesel engines realize fuel efficiency 30-35% higher than gasoline engines15. Diesel also has naturally higher energy content, 10-20% more, per gallon than gasoline. Natural Gas Engines Traditional natural gas engines are spark ignited and have the same limitations as gasoline engines if they are not optimized16. When vehicle loads fluctuate, as they inevitably do in urban driving conditions, fuel consumption by natural gas engines does not adjust in tandem and consumes far more fuel than diesel engines. Unlike gasoline engines, natural gas engines cost more because the storage tank for the fuel is much larger.

14 15

Move over, Prius, Economist, 24th October 27, 2008 A Vision for Americas energy future, Business Roundtable, 2007. 16 Natural Gas Vehicle Research Roadmap, California Institute for Energy and the Environment, May 2008

On the other hand, natural gas is clean at the well-head and saves the costs of reducing pollutants and engine development to limit emissions. By contrast, diesel engines emit NO x and other particulates that raise the cost of compliance with environmental standards. Refineries also incur added costs of reducing the sulfur content of diesel before vehicles can meet emission standards. More efficient natural gas engines optimize the internal combustion engine just as gasoline engines do. The higher fuel efficiency is achieved by burning a rich mixture of air and fuel and their flow is closely controlled with electronics. The higher volumes of air ensure that fuel is burnt fully and is less likely to emit pollutants. When costs of production of natural gas, the development of corresponding engines and compliance with environmental standards are added, the cumulative cost is competitive with diesel engines at scales of production that are expected in 201017.

DIFFUSION OF FUEL EFFICIENT TECHNOLOGIES

The adoption of fuel efficiency technologies is delayed by several factors including the long product life cycle of automotive companies. Consumers also weigh the cost of replacement of the vehicles they own against the benefits of buying new technologies. The macro economic environment is an important factor including the effects of fuel prices, environmental standards and the incremental cost of more fuel efficient options. The technologies that can be plugged-in have a better chance of acceptance compared to those which require higher levels of investment in new vehicles.

Monitoring and Tracking Information Technologies

Telematics, or the combination of telecommunication and Global Positioning Systems (GPS), for monitoring vehicle movement and performance, have gained widespread acceptance in larger vehicles traversing the country. They use the more expensive satellite technologies that have the ability to send signals in sparsely or densely populated areas18. Increasing use of inexpensive broadband 3 G wireless technologies has extended the use of telematics to delivery trucks in metropolitan areas. The mass use of telematics is expected with the spread of radio wireless technologies like WiMAX which expand the periphery of the coverage area and are free from the
17

Comparative costs of 2010 Heavy Duty Diesel and Natural Gas Engines, California Natural Gas Vehicle Partnership, July 2005.
18

In the late 1980s, Schneider National, Inc. decided it was time that someone developed a "scientific approach" to fleet management. The company turned to QUALCOMM, which had recently developed the industry's first satellite-based, two-way mobile communications system - called OmniTRACS. By 1989, Schneider was using the first 5,000 OmniTRACS units on the market, quoted from Wireless Evolution, by Carol Birkland, Fleet Equipment, September 2003.

signal drops common with current cellular wireless technologies. An industry survey conducted by PHH FirstFleet19 in 2005 found that 60% of the fleet managers reported that they were adopting telematics to track equipment status and driver activities. Thirty-nine percent (39%) of the respondents indicated they wanted to optimize routes and fuel management, and 38% thought their drivers would perform better and drive more responsibly if they knew they were being monitored. Fifty-seven percent (57%) reported a satisfactory return on their financial investment in Telematics. The experience has been satisfactory enough for 50-54% of them to say that they would probably install or expand a Telematics program in their fleets in 2006.

Automotive Electronics Enabled Fuel Efficiencies

The diffusion of technologies for improvement of fuel efficiencies has progressed unevenly as can be seen in the table below. While multi-valve and variable valve have achieved mass market adoption, other technologies like cylinder deactivation, gasoline direct injection, turbochargers, continuously variable transmission are at an early stage of adoption. The other technologies we will discuss later, hybrid and diesel, are also in early days of customer acceptance.

Rate of Adoption of Engine Optimization Technologies

1975 1987 1998 2008 Adjusted Fuel Economy (mpg) 13.1 22 20.1 20.8 Weight ( lbs ) 4060 3220 3744 4117 Horsepower 137 118 171 222 0 to 60 Time ( Sec ) 14.1 13.1 10.9 9.6 Truck Sales ( % ) 19 28 45 48 Front-Wheel Drive ( % ) 5 58 56 53 Four-Wheel Drive ( % ) 3 10 20 28 Multi-valve ( % ) ---77 Variable Valve Timing ( % ) ---58 Cylinder Deactivation ( % ) ---7 Gasoline Direct Injection ( % ) ---2.3 Turbocharger ( % ) --1.4 2.5 Manual Transmission ( % ) 23 29 13 7 Continuously Variable Transmission ( % ) ---8 Hybrid ( % ) ---2.5 Diesel ( % ) 0.2 0.2 0.1 0.1 Source: Light Duty Automotive Technology and Fuel Economy Trends 1975 through 2008

The incremental costs of engine optimization technologies are low and payback periods short enough to be attractive for customers. A wide variety of estimates of incremental costs and corresponding fuel efficiency benefits are available. We have used the numbers selected by the Department of Transportation after an evaluation of the divergent estimates as well as data provided by manufacturers. The actual benefits to the customer depends on their travel demand
19

Telematics and 'Green' Initiatives Surge in Private Truck Fleets , Business Wire, August 7, 2006.

which could well diverge significantly from the averages we have used for our estimates. In addition, the benefits will vary depending on how the technologies are combined. Gasoline Direct Engine, for example, appears to yield marginal benefits but is far more when it is combined with turbo charging technologies.

An examination of the data on the product plans of manufactures reveal that the adoption of the remaining engine optimization technologies is expected to accelerate for the period ending 2015. Direct Injection, in particular, is expected to rise more than seven times and turbo charging is expected to more than double.

Expected Diffusion of Engine Optimization Technologies till 2015 Technology Cars Trucks Type Percentage Automated Manual Transmission 10 10 Spark Ignited Direct Injection 12 23 Turbo charging 5 9 Source: Extracted from Federal Register, Volume 73, No 86, May 2nd 2008
Diesel Engines Diesel engines were used by 50% of passenger cars in Europe in 2006 rising from 22% in 199620. In the USA, the adoption rate has been lower with a 3.6% penetration rate, for all types of vehicles, in 2006 (with a lower rate for light vehicles as indicated above)21. In part, the low rate of adoption of diesel cars in the USA is due to lingering negative perceptions about diesel cars etched in the minds of people at the time of their introduction in the late 1970s and early 1980s. A recent survey found that only 41% of potential 1,023 adult customers would consider buying a diesel car (58% will not).22 An equal number of customers perceived diesel cars to be environmentally friendly while a larger proportion of 64% believe that they are fuel efficient. Diesel in the past was considered to be smellier and noisier than gasoline and 61% and 67% still consider that to be the case even now. The reality is that clean diesel engines today have 90% lower emissions, 60% lower noise and 30% lower fuel consumption compared to 1988 23. Among the owners of diesel cars, the only significant negative perception of diesel cars is their higher price while overall they have positive feelings about their cars24.

20

Transport Technologies and Policy Scenarios to 2050, World Energy Council, Quoted in Bring on the Diesels cars, trucks and SUVs, Diesel Technology Forum Diesel Technology Forum, op cit Quoted in Future Potential of Hybrid and Diesel Power trains in the US Light Duty Market, by David L Greene, Oak Ridge National Laboratory, August 20th, 2004 Oak Ridge National Laboratory, op cit

2007, page 35.

21 22 23

24

Compliance with emission standards for diesel imposes penalties in the form of higher costs of vehicles using them25. EPA requires diesel cars to meet the same emission standards as a gasoline engine which implies a 77-percent reduction in nitrogen-oxide emissions and an 88percent drop in particulate emissions26. Meeting these standards is difficult unless sulfur content, which interferes with exhaust treatment and particulate filters, is lowered. New regulations require refineries to reduce their sulfur content from 500 ppm down to 15 ppm beginning from October of 200627. Light vehicles are highly price sensitive with estimated price elasticity of demand as high as 8.6% for diesel cars versus gasoline28. The higher costs of engines compliant with environmental standards discourage the use of diesel engines. In addition, refining capacity for diesel has not kept pace will rising demand. Diesel is generally priced at a lower level than gasoline. In times of rising fuel prices, however, diesel prices have exceeded gasoline as shown in the chart below.

Diesel and Gasoline Prices

600 Cents Per Gallon 500 400 300 200 100 0
2/ 5/ 20 4/ 07 5/ 20 6/ 07 5/ 20 8/ 07 5/ 20 10 07 /5 /2 12 00 7 /5 /2 2/ 00 7 5/ 20 4/ 08 5/ 20 6/ 08 5/ 20 8/ 08 5/ 20 10 08 /5 /2 00

Dates

Gasoline Prices

Diesel Prices

Natural Gas Engines

25

The cost of a medium-sized truck, for example, will increase by $4,000 to meet the emission standards in 2010. Trends in Public Sector Fleet Management 2008-2010, by Mike Antich, Government Fleet Magazine
26

Quoted in Diesel, dirty no more, by Tara Baukus Mello, Edmunds ULSD, by Dawn M Geske, Diesel Progress, May 2007. Oak Ridge National Laboratory, op cit, th

27

28

Natural gas vehicles are predominantly in the public sector, 20% of the 80,000 municipality buses use them29. In the trucking industry, less than 1% of the 200,000 trucks have natural gas engines. They have also have found niche applications in refuse trucks (2,500), shuttle buses and delivery trucks (10-20,000), school buses (3,000) and light vehicle fleets (20,000)30. Natural gas engines are expected to gain wider acceptance towards 2010 when their fuel efficiency is expected to be 95% of diesel engines31. The newer engines increase the combustion efficiency by a richer mix of oxygen and fuel and by compressing the mixture before it is burnt. More air in the mix also reduces the NOx emitted after the gas is burnt. Diesel engines will emit 6 times more NOx than natural engines. By 2010, the emission standards for heavy and medium-duty diesel engines are slated to be far more stringent. Fleets are switching to natural gas engines to avoid the higher costs of environmental compliance required of diesel engines. According to Dee Kapur, the President of the International Truck and Engine, the cost of a medium-duty truck will rise by $5,000 to $6,000 to meet the 2007 emission standards and as yet an undetermined figure to comply with the 2010 standards. The cost of heavy-duty trucks will rise by $10,000 32. The ultra low-sulfur that would have to be used is reported to cost an additional 14-16 cents for every gallon. In the USA, the supply of domestically extracted natural gas is increasing and will encourage its use in transportation. According to a recent study of Navigant Consulting, supply of natural gas is increasing as unconventional sources of natural gas, shale gas, coal bed methane and tight gas, rise. Navigants estimates show that unconventional natural gas supply increased by 65% to 8.9 Tcf per year in 2007 from 5.4 Tcf per year in 1998 while its share increased from 28% of total supply to 46% in 200733.

29

Quoted from, The promise of natural gas as a transportation fuel, Investor presentation, Westport Innovations Inc, 2008.

30

The data is cited from The compelling case for natural gas vehicles in public and private fleet applications, by Mark Bentley, NGVAmerica.
31

Comparative costs of 2010 Heavy Duty Diesel and Natural Gas Engines, California Natural Gas Vehicle Partnership, July 2005. 32 The figures were quoted in The Great Discontinuity: Why Historical Studies are not a useful guide in making current and future heavy duty purchase decisions, NGVAmerica, May 2006.
33

North American Natural Gas Supply Assessment, Navigant Consulting, July 4th 2008.

More recently, production has surged especially in Texas and Wyoming34. The production increase is likely to be sustained because it is propelled by successful implementation of new technologies, i.e., horizontal drilling35 which is able to draw on natural gas deposits in shale. These technologies can tap into the large reserves36 of natural gas available in Barnett Shale deposits which were previously inaccessible37. In addition, supplies of liquefied natural gas are increasing dramatically38. The USA is expected to increase its imports from 2.1 Bcf / day in 2007 to 12.8 Bcf / day in 2016 39. While in the past natural gas as a by-product of oil extraction was burnt, it is now stored as liquefied natural gas and increased transported and traded across the world. Hybrid Cars Consumer interest in hybrid cars has steadily increased but this is not matched by the willingness to pay the premiums for these cars. According to the findings of a survey of J D Power and Associates, 72% of the consumers were either definitely or probably interested in acquiring a hybrid for their next car40. When asked whether they would be willing to pay a premium of $5,000, only 48% were still interested. Consumers have a choice of sub-compact cars available in the market which come close to matching the fuel efficiency of hybrid cars. In most cases, the payback period of the additional costs of a hybrid car is far longer than the sub-compacts. The Honda Civic Hybrid, for example, saves $640 each year if it achieves the 42 miles a gallon certified by the EPA and travels 15,000 miles per month as an average household does in the USA. The additional cost over the Honda

34

After 9 years of no net growth through 2006, an upward trend began that generated 3% growth between first-quarter 2006 and first-quarter 2007, followed by an exceptionally large 9% increase between first-quarter 2007 and first-quarter 2008..between the first quarter of 2007 and the first quarter of 2008, supplies ( from Texas ) grew by an exceptionally high 15%. Other contributing regions included Wyoming with growth of 9%, Oklahoma with 6% growth, and Louisiana with 4% growth, quoted from EIA In the late 1990s, about 40 drilling rigs, or 6%, were drilling horizontally. As of May 2008, the number of rigs drilling horizontal wells has grown to 519 rigs, or 28% of the total Natural gas reserves in the USA are now estimated at 211 trillion cubic feet up 27% over the last decade according to the data quoted in Ability of the USA to compete in the Global LNG Marketplace, American Gas Foundation, October 2008 EIA, op cit
Based on the construction of existing facilities for the construction of LNG plants, the worlds production of LNG is expected to double from 22.4 Bcf / day in 2007 to 49.4 Bcf / day in 2016 according to the report prepared by the American Gas Foundation, October 2008. American Gas Foundation, op cit

35

36

37

38

39 40

Most consumers willing to pay for hybrid cars, by Martin LaMonica, CNET, June 24th 2008.

Civic is $4,84041 which suggests a payback period of seven and a half years. On grounds of fuel efficiency alone, a Consumer Reports analysis showed that Honda Fit is a better choice. Hybrid cars will make economic sense when they are used by owners who have high travel demand as would be the case with taxi fleets.

PROFILES OF INNOVATING COMPANIES

In this section, we will review the business and financial performance of some selected companies engaged in supplying products, services and technology for improving the fuel efficiency in the automotive transportation sector.

BorgWarner
Overview BorgWarner (Ticker: BWA) is a global company focused on automotive engine and drive train products for improvement of fuel efficiency. New business for the period 2008 to 2010 is $1.98 billion; turbochargers account for 37% of the business and dual clutch transmission 16%. Europe accounts for 50% of the business, Asia 30% and Americas 20% Financial Performance Compounded Annualized Growth Rate of 12.8% compared to global industry average of 3.8% Return on invested capital increased from 13.9% in 2006 to 15.2% in 2007 and is estimated to be in the range of 14-15% in 2008. Operating margins increased from 7.8% in 2006 to 8% in 2007 and estimated to be 88.5% in 2008. Earnings per share increased from $2.04 in 2006 to $2.44 in 2007 and are estimated to rise to $2.80-$2.95 with cash on hand of $226 million.

Westport Innovations Inc

Overview Still waiting for hybrids to be the smartest buy, by Joseph B White, Wall Street Journal, July 17th 2008
41

Westport Innovations Inc (Ticker: WPRT ), a Vancouver, Canada, based company builds natural gas versions of diesel engines, for trucks and buses, and uses their base design available with Original Equipment Manufacturers (OEMs). Their solutions include fuel supply and storage components.

A joint venture, Cummins Westport Inc with 50% equity participation from Cummins, allows Westport to use a worldwide network for distribution and after-sales services.

Financial Performance Compounded Annualized Growth Rate of 30% since 2004, YOY growth for the quarter ending June 30th was 62.4% in value terms and 102.3% in unit terms (the difference is due to the appreciation of the Canadian dollar). The unit sales growth in the previous year was 56.3% in the previous year. The YOY growth of gross profit was 32.7% for the quarter ending June 30th 2008 and 33.9% for the previous year. The company incurred losses in net profit of $3.5 million or -0.13 per share at the end of June 30th 2008 compared to $4.5 million or -0.22 per share in the previous year.

Clean Diesel Technologies Inc

Overview Clean Diesel Technologies (Ticker: CDTI) develops intellectual property for clean diesel technology, for reducing emissions and lowering fuel costs, and develops commercially viable products. Clean Diesel Technologies has in its portfolio 27 US patents and corresponding 121 foreign patents and another 119 US and foreign patents pending. The key licensing agreements are with Robert Bosch and Tenneco

Financial Performance Revenues increased from $1.1 million in 2006 to $4.9 million in 2007. Revenues at the end of the quarter for Q22008 were $2.62 million compared to $0.13 million in Q22007.

Net loss was $2.1 million in Q22008 or $0.26 per share compared to $519,000 for Q22007 or $0.08 per share.

Remy International
Overview A $1.2 billion global company with a focus on automotive electrical components like starters, alternators, engines, turbo chargers, locomotive power assemblies and fuel systems for OEMs and the aftermarket. Growth strategy involves catering to the needs of hybrid car components. Has a joint venture with Continental for Integrated Starters and Alternators Damper ( ISAD) Financial Performance Net sales for financial year ending 2008 increased by 7.9% to $1.22 billion Earnings before Interest, Tax, Depreciation, Amortization and Rent (EBITDAR) increased by 78% in 2008 to $95.9 million.

Xata Corporation
Overview Xata Corporation provides web based fleet management solutions for fuel cost reduction, route optimization, vehicle health diagnosis, optimal utilization of fleet vehicles and idle time reduction. The company has a market share of 16% in the private fleet and for-hire fleet market compared to the 57% of the industry leader Qualcomm. Financial Performance Sales were $16.17 million in 3Q2008 up from $6.76 million in 3Q2007. The company reduced its net losses from $7.8 million in 3Q2007 to $0.7 million 3Q2008 and increased its Earnings per Share before Interest Tax Depreciation and Amortization to 0.12 from minus 0.16.

CONCLUSIONS
Gasoline, diesel and natural engines are close competitors in the market for fuel efficient vehicles. Currently, diesel engines have an edge in fuel efficiency with their in-built efficiencies that gasoline engines and natural gas engines will have in the future. When they are optimized, gasoline engines and natural gas engines would match the fuel efficiencies of diesel engines. In the end, the economics of fuel choice and consumer preferences will be the key determinants of the adoption of each of these technologies. In the USA, abundant supplies of natural gas and consumer enthusiasm for natural gas a clean fuel is likely to prevail over a diesel engine which is still perceived to be smelly and dirty. Gasoline engines will trail even if they match the efficiency of diesel engines as oil is not considered to be as clean and is imported from countries hostile to the USA. Natural gas, on the other hand, is currently not widely available at retail outlets as gasoline. Diesel engines already have fuel efficiencies that natural gas engines and gasoline have but their wider adoption is constrained by higher costs of compliance with emission standards. Consumers have pronounced price sensitivity to higher costs of engines and vehicles. Higher diesel prices exacerbate the situation. The cost of replacing a fuel inefficient vehicle by a fuel efficient vehicle is a major barrier to adoption new technologies for lowering energy consumption. Consumers are disinclined to accept long payback periods which are the main reason for the slow market penetration of hybrid cars. Plug-in electronic devices, such as global positioning systems, and similar automotive electronics provide not only quicker payback but also the ability to improve efficiencies from existing vehicles. These devices have gained much wider acceptance. Automotive electronics is another way to increase efficiencies but not necessarily without replacing a vehicle. The incremental costs of using automotive electronics are low but they are often only available in newer vehicles. Increasing competition from diesel cars is likely to drive both the manufacturers of gasoline engines and natural gas engines to incorporate automotive electronics in the future.