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Global Auto Makers at Crossroads of BioFuels World

Executive Summary

Car makers scramble to provide greater fuel efficiency as politicians rush into place tax incentives and governments begin mandating fuel formulations.

Oil prices may have retreated from recent record highs, but that has not stalled a sudden consumer shift away from gas-guzzlers and toward smaller, more fuel-efficient vehicles.

The panic at the pump, along with growing alarm over the role vehicles play in global climate changes, has prompted major auto makers and government policy makers in 2006 to turn their mutual attention to a variety of alternatives to crude oil.

From pickup trucks in Thailand to SUVs in Australia to luxury cars in Europe, car companies and their army of suppliers are scrambling to provide greater fuel efficiency while politicians rush into place tax incentives and governments begin mandating new fuel formulations.

Automotive engineers worldwide are turning to varied solutions to serve the needs of their individual regions. These include vehicles powered by hybrid-electric, biodiesel, hydrogen-internal-combustion, liquified-petroleum and compressed-natural gas and bioethanol-fuel technologies.

Despite a growing consensus that hydrogen fuel cell-powered vehicles should be the global industry’s ultimate goal – both to wean the world from its dependence on petroleum and to stave off further environmental damage to the planet – the loudest clamor in 2006 has been for flex-fuel vehicles (FFVs) that run on a combination of gasoline, or diesel, and ethanol made from corn, sugarcane and other natural plant materials.

China announced in August plans to build 90 new ethanol plants, with the first to come on line in October. The government is allocating $200 billion for biofuels production over the next four years, with a target of achieving 5% fuel self-sufficiency by 2010.

India plans to mandate a mix of 20% jatropha ethanol with diesel and gasoline by 2013. The government is investing $329 million for 988,400 acres (400,000 ha) of jatropha tree plantations to be developed within five years, and up to 27 million acres (11 million ha) by 2013. The oil derived from the nut of the small tree is used to produce the ethanol blend.

The U.S. government announced in October plans to replace 30% of the country’s transportation fuels with biofuels by 2030. The U.S. Department of Energy will spend $250 million over the next five years to set up two bioenergy centers to develop new crops and processes for the next generation of ethanol fueled by biomass, such as switchgrass or wood chips.

The Departments of Energy and Agriculture will spend an additional $4 million for bio-based fuels research that will accelerate the development of alternative fuels. The departments will issue a solicitation for proposals for new plant feedstock genomics research projects.

"It’s possible to get this cellulosic ethanol industry within the next five years,” Department of Energy Under Secretary for Science Ray Orbach says.

Experts say biomass fuels offer the most attractive midterm solution for many global markets, including the U.S., primarily because they are an energy source that is readily accessible.

Biofuels typically can be used much the same way as conventional fossil fuels, minimizing the need to adapt end-use technologies and lessen the need for imported oil while increasing security of supply and reducing emissions, they say.

Plus, converting vehicles to run on biofuels is the cheapest way for the industry to begin to address alternative fuels. Most automobiles can run on a 15% ethanol/gasoline blend, while purpose-built FFVs adapt automatically to fuels ranging from pure gasoline or diesel to an E85 (85% ethanol) blend.

General Motors Corp. says the cost per vehicle to incorporate flex-fuel capability ranges from $100 to $300, not including engineering or emission-certification costs.

But there remains the problem of the chicken and the egg. As ethanol demand grows, experts say the volatility of oil prices and the cost of production makes it difficult to quantify the cost to society in achieving an adequate supply.

“There are a lot of uncertainties, a lot of risks,” says Gil Rogers, senior director of Global Insight’s international forum on global climate change and head of the forecasting group’s new study on biofuels that kicked off in October to examine these questions on a worldwide basis.

“The economic viability is so dependent on where gas and diesel prices go,” he says. “There’s a lot of impetus right now to look at biofuels, but oil prices change and that affects interest.”

Commercial interest influences government subsidies, which make ethanol blends competitive at the pump. In turn, demand motivates farmers to grow the necessary crops and industry to build the infrastructure necessary to manufacture the fuels, he says.

Since 2000, worldwide production of ethanol reportedly has doubled and use of biodiesel has grown four times. Yet critics continue to argue it takes too much energy to create ethanol and that it has markedly less energy content than gasoline. Additionally, they say accelerated production of both ethanol and biodiesel will impact food supplies.

Advocates say major advances in technology address these issues, including a new fuel called “butanol,” made from various biomass materials, and cellulosic ethanol, which is produced from a number of plant materials other than corn.

Butanol at 85% strength reportedly can be used in cars without any change to the engine or fueling system. It contains more power than ethanol and almost as much as gasoline. It can be made from a great variety of plant materials, pulp waste from paper mills and whey, a waste product from the cheese-making process.

Butonol reportedly was developed by David Ramey, whose Environmental Energy Inc. plant in Blacklick, OH, makes the fuel through a special fermentation process. Hydrogen also is produced as a byproduct of butanol and can be used to create electricity to power the production process.

The beauty of cellulosic ethanol is that it’s a non-food source that can be made from plant materials as well as wood and forest residues. Corn stalks and other crop wastes also can be used. Even micro-algae is under review.

Experts say cellulosic ethanol, currently in the laboratory research stage, can be produced more cheaply than ethanol made from corn, because the source materials cost less.

Plus, it holds the potential for significant reductions in greenhouse gases – from 67% to 89%, according to a recent study by the U.S.-based Argonne National Laboratory – compared with a 10% blend of corn-based ethanol that reduces greenhouse emissions 1%, rising to 20% for E85.

A July study by the National Academy of Sciences finds ethanol made from corn today yields 25% more energy than the fossil energy invested in its production – better than gasoline. Biodiesel yields 93% more energy than the fossil energy used to make it.

And if cellulosic ethanol becomes feasible, the result would be more dramatic, requiring 70% less energy to produce E85, the Argonne study finds.

Honda Motor Co. Ltd., partnering with Japan’s Institute of Innovative Technology for the Earth, claims to have established a breakthrough basic technology to produce cellulosic ethanol from “soft biomass” such as the leaves and stalks of plants, including rice straw.

The process substantially reduces the harmful influence of fermentation inhibitors, resulting in a significant increase in production of ethanol and expansion of biomass, which it says holds enormous potential as a major step toward an energy-sustainable society.

Against these changing dynamics, the green wave washed up on many foreign shores this year. In Europe, where member countries last year failed to achieve a mandated 2% ethanol substitution rate for gasoline and diesel fuels, the European Union now is raising the bar to 25% for the region by 2025.

France reportedly is aiming for biofuels to represent 5.75% of its transportation fuels by 2008 and 7% by 2010, as opposed to 1% this year and 3.5% in 2007. The country’s E85 ethanol/gas mix is derived from sugarbeets or grain, and the government believes enough can be grown to satisfy the 7% target.

Currently, France’s biofuels production is mainly biodiesel, largely made from rapeseed oil, a plant cultivated by growers and then blended with traditional diesel. Some 75% of French cars run on diesel. Germany, the European leader in the production of biodiesel, also uses rapeseed oil.

However, French Finance Minister Thierry Breton says in a media report five auto makers plan to supply ethanol FFVs to France by 2007, including PSA Peugeot Citroen, Renault SA, Ford Motor Co., Saab Automobile and Volvo Car Corp.

Biomass also can be fermented to produce methane, and Fiat Auto SpA has found its niche as the current leader in sales of methane-fueled cars, with more than 24,000 units delivered in 2005. Fiat recently unveiled its Multipla Multi-Eco and Panda concept cars in Paris that will join the Doblo and Punto in the Italian auto maker’s stable of alternative-fuel vehicles.

But not every European auto maker is onboard the ethanol train.

Last month, German auto makers BMW AG, DaimlerChrysler AG, Ford of Europe, General Motors of Europe, Volkswagen AG and truck maker MAN Nutzfahrzeuge AG announced a pilot hydrogen fuel-cell vehicle project in anticipation of the technology’s commercial application.

Many global auto makers insist new-generation “clean” diesels are the medium-term solution to improved fuel efficiency and cleaner air, despite admissions diesel sales appear to be peaking as new stringent emissions laws and exhaust-aftertreatment measures add to its premium price tag.

“The environment is a very complex issue,” says Phil Martens, former Ford chief of product creation and recently named to head the Light Vehicle Systems division at ArvinMeritor Inc. “I was on a taskforce at Ford, and it took us a year to comprehend the issue of sustainability,” he says.

“The challenge is to level out the production of CO2 (carbon dioxide). It’s a 25-30 year project. Unless the government mandates it, it won’t happen on a voluntary basis.”

That is the case in Gent, Belgium, which now has five ongoing projects that will accommodate the production of biofuels. Total value of the investment exceeds $507 million.

Sweden also is taking a major role in promoting renewable fuels. Carl-Peter Forster, president-GM Europe, credits the growth of FFVs to the government, which is creating demand with tax exemptions and free residential parking for “clean” vehicles. Sweden’s biofuels service stations are expected to grow to 2,400 by 2009.

The government’s efforts have sent sales of clean cars soaring. Western auto makers, such as GM, are trying to capitalize on the movement to E85 as a way to compete with hybrid-electric vehicles from Japanese rivals Toyota Motor Corp. and Honda.

Sweden’s new registration of clean cars reportedly jumped fivefold in July compared with year-ago, with 21,000 registered through September. Top-sellers include the Saab 9-5 BioPower, Ford Focus Flexi-Fuel, Volvo V50 Flexi-Fuel, Volvo V70 Bi-Fuel and Toyota Prius HEV.

While Sweden currently imports the bulk of its ethanol from Brazil, the world’s largest producer, it reportedly is stepping up efforts to develop domestic production from forested parts of the country.

Brazil’s vehicles have run on some form of subsidized ethanol for the last 30 years. The country’s major meatpacking plants earlier this year began producing biodiesel from animal fat, as certain heavy-duty trucks can run on the fuel. It also is looking at making biodiesel from coffee beans.

McDonald’s Corp. reportedly is joining a similar effort, collaborating with Brazilian researchers looking to power vehicles with recycled vegetable oil from its restaurants, a technology currently led by Germany.

Brazil’s dedicated FFVs, capable of running on any mix of gasoline and/or ethanol, formally were launched in 2003, and sales continue their steady climb.

The industry set a monthly record this July, with FFV sales spiking 71% to 121,001 units. Success is such that the government has cut its mandate of 25% ethanol content in regular gasoline to 20% in an effort to ease both demand for and the price of ethanol.

Global auto makers in the country have reaped the benefits of FFV technologies that now are being applied to their home markets. They include GM, Ford, DC, VW, Fiat, Renault, PSA and Toyota.

GM and Ford are pushing to bring their Brazilian-inspired FFVs to the Australian market, as well. At Sydney’s annual auto show last month, GM showed a Saab Aero X twin-turbocharged 2.8L V-6 adapted to run on 100% ethanol.

With the country’s ethanol market currently too small to offer ethanol capability greater than E10, most Australians have turned to LPG as an alternative fuel. Demand has grown as a result of federal government grants for buyers of LPG cars or for owners wishing to retrofit their vehicles.

Ford’s Australian subsidiary recently announced plans to increase production of its LPG-fueled cars and SUVs from 90 to 120 units per day beginning in January. Of 3,700 Falcons sold in August, 826 were LPG models.

Nevertheless, the Australian government is spending $42 million in production grants to offset the excise tax on ethanol production in order to help oil companies achieve a target of at least 92.4 million gallons (350 million L) in the next several years.

It also is providing $13.1 million over three years to retailers installing new pumps or converting existing pumps for biofuel blends.

Meanwhile, the National Party uses its federal conference in Canberra for a vote to call on its senior government-coalition partner, the Liberal Party, to remove or phase out the 10% cap on ethanol-blended fuels and promote the wider use of ethanol through motor sport events. It also wants to set up an independent fuel-testing agency.

Queensland National Party Sen. Barnaby Joyce says the big oil companies clearly are failing to meet their voluntary target.

“The Australian people want it, and if (oil refiners are) not going to come to the game with the voluntary target, we should be mandating it,” he says. “I don't know how much longer we have to play this game of herding the elephant with a feather. We have to actually get serious about it.”

The Australian Bureau of Agriculture and Resource Economics says in its 2006-2007 “Economic Overview” that 72 million tons (65 million t) of corn will be processed into bioethanol worldwide in the period.

The U.S. is the largest producer of corn-based ethanol, followed by China. Brazil ranks first in ethanol output overall, producing slightly less than half the world’s total in 2004.

China began promoting ethanol in 2002 on a pilot basis in five cities in the Central and Northeastern regions. The trial was extended to nine provinces in 2004, with service stations in the pilot areas required to switch fully to E10 by the end of 2005.

In addition to plans to build 90 new ethanol plants, the Chinese government presently offers a number of incentives for biofuels production. It also covers losses incurred from the sale of E10 by service stations, as well as transport costs.

While most Chinese vehicles currently run on gasoline and diesel, Beijing’s aggressive renewable-fuels plan comes as welcome news to many industry observers. Worldwide vehicle output is expected to grow 5% this year, with China contributing 3.6 million units, says OICA, the international auto makers’ association.

In its recent global outlook report, PricewaterhouseCoopers predicts worldwide vehicle production will rise by more than 8.5 million vehicles in the next four years, for a 13.7% increase. More than half of all new capacity will be added in China, Russia, India and Brazil.

The report underlines the size of the problem governments face in their efforts to reduce CO2 emissions and global warming. But industry players say saving the world is only part of the pitch. Tax incentives are another.

“There's not much chance that customers are ready to pay more for a better environment,” says Remi Deconinck, vice-president-product planning at Renault. “Consumers are willing to pay more only because at the end there is an economic interest.”

Tim Manganello, president of BorgWarner Inc., agrees. “I think deep down most car companies are interested in the environment,” he says. But “they have competitive pressures and economic pressures that cause them to make compromises. I think if you build the ultimate environmentally friendly vehicle, you may have a hard time selling it.”

Jim Muir, president of Mazda Europe, says geopolitical considerations also play a role, noting Europe is getting tough on CO2 because transportation energy is becoming politically, as well as economically, important. The political clout that can be wielded through the supply or denial of energy threatens to change the global balance of power, he says.

All the more reason for sustainable, renewable fuels, ethanol advocates say, emphasizing there is a pressing need for governments to link the taxation of vehicles and alternative fuels more vigorously to CO2 emissions.

But Muir warns there’s a danger some international markets will put off such action in order to maximize profits, a move that could have ominous consequences.

“If we let CO2 emissions keep rising like they are, it’s been calculated the worldwide temperature will increase 5º-6º C (9º-11º F) by 2100,” he says. “You and I certainly won’t be around then, but our children will. They will cook.”

– with William Diem and Alisa Priddle in Paris, Eric Mayne in Belgium, Alan Harman in Australia, Sudhakar Shah in India and Sol Biderman in Brazil


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