Technological Surprises: PACE and PNGV at 20

I've test driven a number of cars the past week, and what I've seen is a cautionary tale on mapping technological trajectories. Two decades ago Automotive News launched the PACE Award to recognize innovation by suppliers. At the same time, the Partnership for a New Generation Vehicle (PNGV) set out to develop, well, the next generation of vehicles. What would be needed? Exotic materials, new propulsion systems, on and on. Yes, the steel industry came up with a light steel frame project, but the sense of the time was that aluminum, magnesium and fiber-reinforced materials would be central. On the drivetrain side, the future would lie with all-electric vehicles running on hydrogen fuel cells. Transmissions – well, electric motors wouldn't need one. For legacy combustion engines, however, the direction was CVTs (continuously variable transmissions).

Instead what we have are "standard" gasoline ICEs (internal combustion engines) that deliver 40+ mpg in a mid-sized car, with additional gains come each full model change. Turbos, direct injection, improved valve timing, all drawing upon sensor and computing power, have improved the combustion end. New bearings and friction materials complement that, alongside lots of little energy-saving steps – electric fans and eSteer that lessen parasitic losses are one example – cumulate to real savings. On the transmission side we will soon see 9- and 10-speed transmissions that use tried-and-true architectures and gear systems to deliver gains comparable to CVTs, enhanced by electronically-controlled shifts. Meanwhile metallurgy continues to advance, with hot stamping of "soft" steels into high-strength steel finessing the formability challenges to enable using lighter, stronger but still inexpensive steel. Finally, while not prominent in the US, at least for passenger cars, CNG and diesel (pervasive in Europe) and biofuels (ethanol in Brazil) provide greater flexibility and lower emissions alongside higher efficiency.

[Diesel, as a heavier product that needs less refining, should cost less than gasoline ... and in engines the new low-sulfur product can now run cleaner than gasoline. Sigh...]

Not all of this was wrong. What we see today is a greater palette of techniques and materials. The Ford F-150 will retain a steel frame, but shift to an aluminum body. Electrification of vehicles continues, as with eSteer. Start-stop systems bring much of the gains of hybrids at lower cost and complexity. Some companies have chosen CVTs over dual-clutch multi-gear automatic transmissions; they don't dominate, but haven't vanished. The one piece that seems wide of the mark is the (hydrogen) fuel cell, which with hindsight flies in the face of the economies of scale of electricity generation, while still requiring batteries: better just to use more batteries. At the same time, a totally new angle are connected vehicle and autonomous technologies that (as with adaptive cruise control) can perhaps improve traffic flow and save energy that way. Meanwhile, policies to lessen emissions and improve safety have gone much further than anyone imagined in 1993, when PNGV was launched. Both "cost" fuel efficiency, making the gains achieved to date surprising – in my Cruze I've peaked at 50.9 mpg over 25 miles.

Now in the long run I think battery electric vehicles will dominate. There has however been no breakthrough in battery technologies, only gradual improvements in power-per-weight and gradual reductions in cost. So as fossil fuel prices continue to rise – global growth dynamics are strong over the medium run, so higher demand will dominate improvements in extractive technologies – BEVs will gain traction. It will not however occur quickly. Meanwhile, as a perusal of PACE Award recipients demonstrates, lots of little steps continue that continue improving legacy ICE technologies.

Lights Turned Off at Bright Automotive

...new technology can't target the mass market...

The long-run goal for electric vehicles is the mass market. The expense of new technology means that is not the place to start. Instead, there are two alternatives. One is to target the high end of the luxury segment; that is Tesla's strategy. It's not clear, however, that that market is sufficiently large for two firms to survive, and the second – Fisker – is late to market. Others, such as Aptera, wanted to turn out a (very) small vehicle and charge a (super) premium price for it. The vehicle itself would certainly have attracted attention. But the very rich insist on luxury as part of the package, and a tiny car can't deliver that.

The other option is to target a market that is particularly sensitive to fuel efficiency: commercial fleets. That was the strategy of Bright Automotive. Vehicles for (say) UPS in an urban area are on the road all day, with fuel a significant operating cost. But they're not on the road at night, and they may not travel long distances, only long hours. The space and weight of batteries is less of a constraint; there's no chicken-and-egg issue of whether there are enough recharging stations, because they are only needed at the corporate garage. And it's possible to create a value proposition, that the gains in efficiency will offset the higher up-front capital costs. Car purchasers aren't particularly good at that sort of calculation, focusing on "first cost" (purchase price) and not life-of-vehicle costs.

Bright in fact was able to attract purchase commitments from customers on the basis of actual vehicle cost and performance specs. What they needed was capital, in order to fund the nitty-gritty up-front costs of engineering and testing / regulatory approval, and to provide operating capital to let them produce vehicles – they would have to pay workers and capital equipment suppliers and (depending on their bargaining skills) suppliers of parts and components before they were able to deliver their first vehicle and build their revenue stream. And unlike the "supercar" entrants they were looking at production at a relatively high volume; they couldn't accomplish that on a shoe-string, taking the money from the first vehicle they shipped to pay for the parts for the second one. In other words, they intended to be a viable, volume operation, in it to earn a tidy profit on an ongoing basis. But to be a real company in the auto industry takes a lot of resources.

Reuben Munger, the founder, is a W&L econ grad, but that alone isn't enough to impress me, except that he was an exceptionally good student. Reuben is also a former investment banker, and had "skin in the game." Another notch in his favor. We were able to bring him to campus; he met with some of us faculty privately, and gave presentations to our students. What he said made sense, and I'm a hard sell, as I've sat through a lot of presentations of the business case for innovations in the automotive sector.

From the beginning those involved with Bright understood the venture to be risky. However, they were able to raise initial capital for the R&D part of the venture – including from General Motors – because there would be money available for working capital from the Department of Energy loan program.

Unfortunately, that loan program seems to have unofficially closed its doors. The undercurrent in media reports is that it is a victim of the election campaign, where the loans are being tarred by the failure of Solyndra. (See stories in the Washington Post and in Automotive News.) I also wonder if those involved at the Department of Energy were fixated on passenger vehicles; unless you know something of the industry, selling trucks to Snap-On doesn't sound sexy or central to US energy policy.

I've encountered that mindset, even among people with some real grounding in the auto industry, who ought to know better. But then I've benefited from serving as a judge for the Automotive News PACE supplier innovation competition [link], where I've heard the business case for innovations with target markets across the industry, from machine tool and test equipment suppliers, to suppliers of (not-so-generic) materials, to suppliers of components specific to the long-haul "semi" market, to suppliers to the aftermarket (replacement parts), and suppliers to dealers, as well as the "traditional" Tier I suppliers of parts that go into high-volume passenger cars.

One of the hurdles for a firm to win a PACE award is that they show a credible customer has purchased their innovation and has it in use, on the road. And often one customer isn't enough. So when I learned that a number of hard-nosed customers had signed up (I know a bit about one of them, Snap-On), well, I thought Bright should be a slam-dunk. Too bad, because the US needs firms like Bright.

Mike Smitka, Prof of Economics
Washington and Lee University