From a Myffler to a Mobile Chemical Factory

Exhaust After-Treatment Systems for Diesel

Driving a diesel will be expensive—as will building it—as exhaust after-treatment systems become obligatory in accordance with new global emission regulations. Product costs are expected to increase tenfold within the next five years. While the “new rules” will cause major challenges for engine manufacturers and automakers, it will open up new opportunities for suppliers—especially those that are innovative enough to tap into this emerging $38 billion market.

When Rudolf Diesel invented the engine that was named after him in 1892, he could hardly have imagined the extent to which the complexity of his discovery would have reached. The machine still spewing smoke and rattling in his day had one clear advantage over the internal combustion engine crafted by his inventor colleague, Nikolaus August Otto. The diesel engine was much thriftier and only needed low-cost fuel. Since then the motto has been: Driving diesel helps save costs.

However, the days of the all-around cheap diesel package are over. Today, building a diesel is becoming more expensive as exhaust aftertreatment systems, which will be obligatory between 2009 and 2012 pursuant to global emission regulations, could drive product costs up tenfold. On the one hand, this poses a major challenge for manufacturers, but on the other, it is an opportunity for innovative suppliers to harness a profit from a newly emerging $38 billion market.

A Technological Microcosm
Global environmental authorities have one objective in mind in devising regulations for diesel emissions: a nearly pollutant-free diesel vehicle. Within the next three years, the emission of pollutants from diesel vehicles should be reduced by more than 90 percent in accordance with guidelines in the United States, Japan and Europe. In particular, nitrogen oxides (NOx) and sooty particles that harm both the environment and people should be reduced substantially (see figure 1).

For manufacturers of diesel engines this means they must deliver outstanding results—measured against today’s standards. The trouble is, it is still not clear what technology will help achieve these drastic reductions. But we do know that diesel exhaust after-treatment systems will require more than just one piece of equipment. As a mobile chemical factory, they will virtually form their own technological microcosm within the overall vehicle concept. While a simple muffler suffices today, the technical complexity, volume and weight for future diesel particulate filter and DeNOx systems will increase significantly. In the future, an exhaust after-treatment system will be made up of an array of components from particle filters and multi-staged oxidation catalysts to nitrogen oxide converters and sensors that will monitor and steer the complex processes.

Costs Are Exploding
Of course, a complex technology like this will not be free. In fact, it is just the opposite: exhaust after-treatment systems will drive costs up drastically. In contrast to current systems, total costs for engines and emission filters will double and a surcharge of up to 10 percent will be included for lifecycle costs (see figure 2). Overall, costs for exhaust after-treatment systems will make up around 6 to 8 percent of total vehicle costs compared to .05 percent in 2003. Next to electronics and security technology, this segment in the automotive industry is destined to become a most important one.

How will the after-treatment regulations affect the larger automotive industry? Costs for research and development will skyrocket. Already, companies are investing an estimated $25 to $50 million in the next few years for systems that meet the EURO IV vehicular emissions standards. 1 But there is another reason for increasing the R&D budget: In terms of technology—as already mentioned—a lot of questions have yet to be answered. For example, there are questions about the materials to be used, the specific technological feasibility of certain components and the sustainability of the entire system.

Just as uncertain is how much technological importance will be placed on engines and exhaust systems. Matters are further complicated by the inability to accurately assess what tomorrow’s supplier landscape might look like. And in part, we can only speculate about the future legislation, especially the details of EURO IV.

Strategic Uncertainty
In addition to technological and cost challenges, manufacturers are confronted with far-reaching strategic questions: Will the diesel engine still be attractive in the future? Which markets should be targeted? What is the outlook for alternative power train technologies? A few manufacturers have already signaled their intentions—announcing they will no longer offer a future series of diesel models in the United States. While some players are exiting the market, opportunities are opening up for others. All manufacturers will have to evaluate their global diesel offering in detail and craft appropriate strategies.

Essentially, carmakers are more or less getting caught in a price trap: Besides a tenfold increase in production costs for the exhaust after-treatment system, fuel consumption—so important for the sale of diesel cars—will swing up around 10 percent. On the consumer side, manufacturers must deal with customer expectations for maximum performance and acceptable purchase and maintenance costs. Therefore, the larger question is about the diesel engine’s future and, in turn, manufacturers’ overall strategic alignment.

Good Times for Innovative Supplier
Today’s highly consolidated market will not exist in the same form tomorrow. In light of the stricter global threshold and the accompanying technological innovations, new regional markets and product segments will emerge, and new players will enter the game. The entire after-treatment market will be reshaped with far-reaching consequences. On one hand, this trend could lead to severe difficulties for a few established companies. On the other, companies that devise better positions, and new entrants that can fulfill the new requirements, have a chance to grow and make a profit.

In the future, companies that profit from the new landscape will be those with the right strategy and certain characteristics: Is it a newcomer or an established enterprise? Is the business highly specialized or does it have a diversified, systematically integrated portfolio? Is the focus regional or global? Answers to these questions will define the cornerstones for a successful strategy. Although we can’t say for sure what the industry will look like, or which scenarios will prove to be the most relevant, we do know that the preparations made today will determine who the actual players are tomorrow.

The fact is: All after-treatment segments will promise tremendous growth, especially in the areas of substrate/particle filters, coatings and electronics/dosing systems (see figure 3). Besides a total volume of $38 billion and average growth of 11 percent, margins will also level off at around 9 percent on average—these are thoroughly attractive prospects for companies that know how to reap advantages from this situation. And apart from all the general statements and lofty predictions, what really counts here is the ability to analyze the exhaust after-treatment industry to ensure precise forecasts and perspectives with regard to growth and profitability.

Market Structures Are Changing
Expectations are high across the entire industry that innovative, well positioned companies can seize a large share of the exhaust after-treatment market. The prerequisite, of course, is that companies must master both the technological challenge as well as the tight squeeze on costs by crafting and leveraging the right strategies. Clearly, we are in the midst of nothing less than a technological revolution—a revolution whose objective must be to create mobile chemical factories for exhaust after-treatment systems and to produce them at a reasonable cost. This will entail a drastic change in market structures for the industry and numerous new suppliers that will play a major role in reshaping future market activities. Although we can only speculate about how these “new rules” will be defined in the future, there is no doubt that companies will have to do more today to sustain their positions for tomorrow.