The global automotive industry is experiencing unprecedented turmoil.
Oil prices peaked in 2008 at $145 per barrel and then hit a three-year low. The credit crunch challenged consumers and vehicle manufacturers, pushing North American vehicle sales down by one-third or more in the fourth quarter of 2008 with a similar decline in the first quarter of 2009. Meanwhile, Congress and the European Union continue to urge building more fuel-efficient and environmentally friendly "green" vehicles. The cumulative effect is an industry undergoing major restructuring in the short term amid a mounting liquidity crisis, while winners quickly adapt and balance economic issues with cutting-edge technologies in the long term.
Vehicle manufacturers have invested in alternative fuel technology for more than a decade, while automotive suppliers have made tremendous strides in parts that improve fuel efficiency. Fuel-efficiency regulations and shifts in consumer demand appear to be leading larger and better-financed suppliers to seek further opportunities as well as paving the way for new entrants. Both financial firms and strategic investors are becoming active as they seek new technologies to meet consumer and regulatory demand.
KPMG LLP analyzed several alternative fuels to provide an assessment of which technologies and segments could become the most active in the coming decade.
While gasoline will most likely continue to be the fuel of choice in the foreseeable future, three alternatives for powering automobiles -- electric, diesel, and biofuels -- appear to be viable near-term options. Their appeal comes from their potential ability to lessen U.S. dependence on foreign oil and reduce harmful effects on the environment. Kevin Cramton, managing director of the investment firm RHJ International SA and former director of corporate business development at Ford Motor Co., said consistent, long-term energy policies supporting alternative vehicle powertrains and fuels will be necessary to attract private equity firms and companies interested in investing in these technologies and could create opportunities throughout the value chain.
Here is the market outlook for the alternative fuels analyzed in the study:
To date, most of the investment in diesel technology has come from strategic buyers trying to consolidate market positions or increase capacity ahead of expected demand. As emerging diesel technologies require changes in engines and their electronic components, new entrants with experience in sensors and controls are likely. Suppliers providing engine seals, thermal and acoustic shielding, turbochargers and engine castings could see increases in demand from a shift to diesel vehicles as well.
As a result, the biofuel sector is going through vertical and horizontal integration. Companies with strong intellectual property, as well as better plant design and fermentation processes, should receive attention from investors. Other biofuel investment opportunities include companies that target bottlenecks in the supply chain, such as those that provide distribution, storage and the next-generation feedstock capabilities.
Other alternate fuel technologies -- natural gas and solar power -- have received some attention, but their commercial viability is currently limited to niche applications. One of the most exciting and promising technologies for future generations of automobiles is fuel cells; however, the plans for mass adoption of this technology are unclear and may require additional government support. A breakthrough in technology, fuel delivery and cost structure of fuel cells could be game-changing and dramatically alter the industry landscape.
Of course, with progress comes new opportunities. The transformation
of the auto industry is expected to attract financial and strategic
investment in technology and spark a new race for the next generation
of personal transportation. Given the plethora of new technologies and
research, it is unclear which fuel should prevail. Moreover, given
government intervention and influence, pure economics alone may not
determine the ultimate winner. It is certain though that the powertrain
of the future would look dramatically different from today, and the
impact of this transition on the industry will be significant.
Gary A. Silberg is a Chicago-based partner with KPMG LLP's transaction services practice, and is the firm's national advisory auto industry leader.