The IC Engine Could Outlast 21st Century

There are 14 or so states with zero-emission-vehicle mandates setting stringent requirements to sell more battery-electric vehicles. But, except for California, they’re not installing chargers fast enough to keep pace with BEV sales. That’s starting to change, however. The U.S. is now adding 1,000 public chargers a week. But in order to move even faster, automakers need to engage with utility regulators to change permitting codes. It takes forever to get permits, and that’s one of the biggest roadblocks to getting more chargers installed.

Despite all the hand-wringing over the number of public chargers available, 30% of all BEVs sold in the U.S. go to people living in apartments and condos, meaning they’re bought by people who rely on public charging.

Automakers got something of a reprieve earlier this year when the EPA revised its original emissions requirements for 2032. Original rules required BEVs to account for 67% of U.S. new-vehicle sales, which the industry saw as all but impossible. The new rules require a mix of 35% BEVs, 36% plug-in hybrid-electric vehicles and 13% hybrid-electric vehicles. That’s still tough, but maybe more doable. Also, the California ARB rule that bans internal-combustion engines after 2035 now counts PHEVs as BEVs, so there’s a bit more breathing room there, too.

The U.S. will probably adopt a carbon tax, as dozens of other countries, including members of the European Union, have already done. And that will make owning an ICE more expensive.

ICE sales were expected to decline by 6%-8% a year. Instead, they’re declining at half that rate, and the thinking is that the ICE will be around for a long time to come. In some developing countries, especially for certain segments such as long-haul trucking, the ICE likely will be around for the rest of the 21^st Century.

BEV battery costs have fallen 90% over the past 15 years and will continue to decline. Chinese OEMs enjoy 30% lower battery costs than most other global automakers, while Tesla enjoys 15% lower cost. BEV propulsion systems for legacy automakers cost about $13,500 on average, compared to $7,100 for ICE powertrains, so there’s still a lot of work to do.

As “foreign entity of concern” regulations get tighter on the sourcing of materials that go into traction batteries, it’s possible no BEVs will qualify for U.S. subsidies at the start of 2025.

Chinese OEMs spend one-third to one-quarter less money on R&D and capital expenditures than foreign automakers, yet they come out with new products faster. One way they move fast and save money is by using common commodity parts. By choosing one spec for a part, it gets validated once, and then everyone can start using it. Legacy automakers have too many processes for sourcing parts and it takes too long. While legacy OEMs can take up to four months to evaluate a supplier’s component or system, Chinese automakers take one week.

Legacy OEMs will lose 10 percentage points of EBIT (earnings before interest and taxes) by 2030 — essentially wiping out all their profit — if they don’t start taking drastic action to cut their operating costs.

Suppliers need to have tough discussions with OEMs on the promised volume levels for a program before they make any investments. Suppliers need guarantees in writing that if an OEM misses its volume projections,  they’ll get reimbursed for their stranded investments.

Suppliers are going to have to merge with or acquire competitors, and they’re going to get a lot bigger as a result. By 2035 the largest global suppliers will have $50 billion to $70 billion in annual sales, up from about $30 billion to $40 billion today.

SPAC-mania — whereby a private company aligns with a Special Purpose Acquisition Company to launch an initial public offering to raise capital — is over and done with, and there’s a capital flight away from the auto industry. There’s just too much uncertainty about what will happen, and investors don’t like uncertainty. Automakers and suppliers will increasingly have to turn to private equity, rather than traditional banks, to get the capital they need. And the industry will have to be really smart on how it allocates that capital. What does private equity look at to decide whether a company is worth investment? EBITDA (earnings before interest, taxes, depreciation and amortization) and cash flow. 

Global warming is real. Temperatures continue to rise, and some parts of the world are starting to become uninhabitable, especially around the equator. If action isn’t taken now, by the end of the century the uninhabitable regions will include the rim of the Gulf of Mexico, including parts of Florida, Alabama, Mississippi, Louisiana and Texas. So, the auto industry doesn’t have a choice; it has to do its part to slash greenhouse-gas emissions.