Into the chaos

In a special double-length article, Andrew posits that internal combustion engine mayhem lies ahead

Published:  30 June, 2022

Last year, I asked a professor who had previously worked with the World Economic Forum if the movement towards battery electric vehicles (BEVs), the intentional abandonment of the internal combustion engine, might lead to critical skills shortages. Could this lead to gradual problems supporting the parts supply for the majority of land-based transportation which uses internal combustion engines?

Given this professor championed the historic car restoration business, he should have understood the question. He did not.
    
The USA, Canada, Europe (including the UK, Norway and more), Japan and select other countries have moved policy so fast that emission regulations intended for reduction of tailpipe emissions are now overtaken by the desire to concentrate fuel pollution in electricity generation only, which means exclusively BEV power. This takes no account that the rest of the plant has no choice but to continue to use hydrocarbon-fuelled internal combustion engines because electricity power generation cannot keep up with either industrial or domestic demand. It also takes no account of the fact that many of the countries posturing to do this have also neglected their electric power generation systems.

Investors, buoyed by the promise of making a killing in a new forced market have ridden the narrative that BEV is the only show in town, and everything else is worthless legacy. For this reason, we have start-ups such as Rivian appearing to be worth more than the entire Volkswagen Group, having assembled less than 100 vehicles, and been less than clear if any have been sold for cash. Let that sink in; Less than 100 vehicles, compared to 9.2 million new Volkswagen Group vehicles sold in 2020, and this was under the worst trading conditions for decades, down from 11 million in 2019.

Rivian is part of a gaggle of disruptors, which is Silicon Valley Bank-speak for share price inflation opportunity. Quite simply, ‘the narrative’, investor-speak for the tale of the day, is ensuring established business in almost every sector is penalised with little or no cash, unless they join in with the same story. The executives in the boardroom, looking over their shoulders and needing large bonuses, are happy more often than not to do ‘what is necessary’.

There are two compound effects. Firstly, manufacture of key components for internal combustion engines long ago resided with suppliers to vehicle manufacturers, and along with that came expertise. Making sure a valve spring, for example, would work for 200,000 plus miles is something that would have taken a very long time to develop. In the age of the legacy narrative, this has limited shareholder value.

Secondly, investments to develop new vehicles through to new components requires investment. If the return on investment is less than 20% per year, then the cost of accessing those loans increases, thereby further reducing opportunity for the vehicle manufacturer as well as their suppliers.

Lift and shift
The solution is to move manufacturing along with engineering from established centres of excellence into countries still undergoing immense economic growth. Frequently there is a vast pool of highly qualified talent available at far lower pay rates than in ‘established’ markets, except the academic ability needs extensive guidance. So, key staff who are effectively not part of the future in North America, Europe or some parts of the Far East are sent off. The hand-over of expertise lasts as long as those individuals are present, and then decay sets in if this process is not supported when they leave. There are clear examples of the automotive sector operating in countries where running a manufacturing plant is possible, but understanding what happens in the whole process from creation to mass production is weak. BMW Group understood from the outset what strengths each new manufacturing region had, and their weaknesses too. Investments were made cautiously, so that the satellite plant skill could be developed properly. In contrast Volkswagen Group partnered with a domestic company, sold the tooling and tried to build a vehicle which had a good reputation in Europe. Lack of control over the quality of locally sourced parts mean the vehicles broke, and sometimes even before the end of the assembly line. Volkswagen Group soon understood what BMW Group already knew, altered their processes and enjoyed success.

The engine
Tellingly, the bit most satellite production gets to do last is the engine and transmission manufacture. Firstly, a container can take many vehicles worth of powertrains, and they represent one of the most valuable assemblies out of the whole vehicle. Secondly, not only is considerable expertise required, frequently suppliers who may not be present in the country need to set up operations.
Then there is the specialist knowledge that is not fully documented because it is ‘known’. Remarkably in an age where so much engineering, tool making and production layout can be achieved with off-the-peg programmes, most technology development requires the application of pre-existing knowledge to drive the whole process forward.

Here’s the danger
The automotive sector has understood the internal combustion development, which runs up to five years ahead of new legislation, especially for tail pipe emissions, has been stopped. This is because the direction of travel from Europe and North America means companies are forced to go green to survive, and off-load internal combustion engines to places that still want them. Those places include China and India, for example.

If the manufacturing is simply shipped out to partners with little or no support, the products may well look fine but may not work. Rather than an orderly ramp-down in Europe, North America and selected Far East markets, the result will be incomplete BEV roll out due to costs, lack of power generation and difficulties around the power distribution network
Effectively this incentivizes those unable to buy a BEV to hang on to their ‘legacy’ vehicle.

Taking this one step further, who is going to support this fleet of circa 33 million vehicles in the UK alone, if there is not a robust supply of quality parts?

Accelerating into the unknown
The message is clear. Established component and assembly suppliers in Europe have stopped internal combustion engine development right across Europe, trying to make this intermediate strategy of ‘lift and shift’ cover the inevitable shortfall. Where there is no support, component quality will nosedive. Currently we know which suppliers made parts for vehicle manufacturers, which ones may not have supplied those parts for a given vehicle but have a great depth of expertise, which ones bought parts to reverse engineer them, and those who frankly produced nicely packaged scrap. That’s about to get a whole lot more exciting.
Everyone, from vehicle manufacturers to suppliers of suppliers, is trying to do a great job. However, the risk is that much knowledge has already and will continue to be lost as the age of the internal combustion engine is politically engineered, followed by destruction of much good manufacturing capability before the great future hope of transport can really deliver, at the right price for the public.
Capitalism has not delivered this half-baked cake; Mainstream politics and earnest lobbyists have.     Meanwhile the last man standing with the expertise to save the day is the automotive aftermarket. How on earth could this sector ever be seen as boring?


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