It’s too soon to say goodbye to internal combustion

Oliver Wyman experts argue that ICE vehicles are the cash cows funding the industry’s transition into an electrified, software-dominated future

Major automotive markets are witnessing a rapid adoption of electric vehicles (EVs). In Europe, battery EVs accounted for 9.1% of car registrations in 2021, and regulations are in place to allow only sales of zero-emission vehicles beginning in 2035. But that leaves more than a decade when automakers will still look for a significant chunk of their annual sales to come from internal combustion engine (ICE) vehicles. This includes more environmentally acceptable hybrid cars, which rely on ICE alongside EV batteries for power.

Special report: Light vehicle ICE innovation

Car companies recognise this and have no plans to abandon internal combustion powertrain production soon. Yet, some want to cut off their investment in ICE and vehicle platform R&D and focus all their resources on EV advancement. This would represent a missed opportunity to improve the efficiency and reduce the environmental impact of those ICE vehicles still to be manufactured, sold, and driven for many years to come. These automotive sales—which at this point are more profitable to manufacturers than EVs—are the cash cows funding the industry’s transition into an electrified, software-dominated future. Automakers can’t afford for that revenue stream to decline.

Where should automakers focus

Further technological innovations are, in fact, necessary to allow internal combustion automobiles to remain a part of the sales mix. Consequently, rather than run away from ICE innovation, carmakers must develop strategies to achieve it efficiently without further stretching already thinly spread resources (and suppliers) or looking to customers to make up the difference.

A review of state-of-the-art research shows various technologies could be leveraged to achieve efficiency improvements. These could lead to potential reductions of CO2 emissions from ICEs of between 10% and 15%, depending on the vehicle class, our calculations show.

Mazda Skyactiv
Mazda has been clear that it plans to continue on its “ceaseless quest to develop the ideal combustion engine”

Among the ways some of the new technologies achieve these gains is through improvements in exhaust gas recirculation, waste heat recovery, and exhaust gas thermal management. Additional emissions reductions can be realised by incorporating into modern engine design the advantages of low-friction coatings, advanced turbocharging and turbo compounding, electric intake cam phasers, water injection, and pre-chamber ignition. By leveraging the advantages of longer strokes, variable compression ratios, leaner combustion, or modern variants of the Miller or Atkinson cycles to a greater extent, emissions could potentially be decreased even further.

By implementing such ICE innovations, we estimate that about 16 grams of CO2 per kilometer (gCO2/km) of emissions could be reduced in comparison to the current engine technology generation in a typical ICE-powered C-segment car. This is prior to any further drivetrain electrification. In other words, this translates into a saving of over 1,800 kilograms of CO2 over a ten-year usage period if the significant potential of currently available technologies is leveraged to improve upon the current Euro 6-TEMP standard.

This would imply that in Europe alone, a total of almost 60 million tons of CO2 emissions could be eliminated through ICE innovation alone. This is roughly what all cars in Spain emit in a whole year, or the equivalent of taking more than four million internal combustion cars off the road. These technologies could prove vital, given that carmakers must reduce CO2 emissions 55% by 2030 compared with 2021 levels.

Rather than run away from ICE innovation, carmakers must develop strategies to achieve it efficiently without further stretching already thinly spread resources

Getting on the same page

That said, there are varying views on the development and economic feasibility of these innovations. Some industry experts, including The International Council on Clean Transportation (ICCT), believe that the required technologies are largely available and feasible, while others argue that the cost of implementation would be too high for many vehicle segments. But given the potential savings, further investment to resolve the disagreement seems warranted.

In parallel, more advanced technologies are also currently being investigated. This includes using synthetic or e-fuels in ICEs. Current estimates suggest that the switch would result in fewer emissions compared with a corresponding Euro 6 ICE vehicle today.

Some players are also investigating the use of hydrogen as a fuel for combustion engines, which would be a zero-emission option. While this alternative is still quite expensive, there could be potential  with specific use cases and niche applications.

 

Oliver Wyman ICE
Figure 1: Examples of ICE innovations and their tailpipe emission reduction potential

Nitrogen oxide efforts

Apart from CO2 emission reductions, regulatory focus is also on nitrogen oxide (NOx) emissions, with the next undisclosed iteration of Euro 7 targets expected to be much more stringent. The new regulations are likely to come into effect in the second half of this decade, which leaves automakers to guess what to aim for in the meantime.

Current emission control systems already convert NOx emissions with over 99% efficiency in highway driving conditions, but further work is needed to cover higher emissions in urban driving conditions. Technologies, such as larger catalyst volumes, continued powertrain hybridisation, and advanced aftertreatment, are being developed to this end.

Industry experts estimate that such innovations can be implemented without too many costs. As an example, the ICCT estimates that an entry-level, gasoline-powered car can achieve better cold-start emissions using a small electric catalyst heater costing an additional €150 (US$160), while adoption of 48V systems at around €600 can help diesel light vehicles achieve Euro 7 compliance.

Achieving the right R&D balance

While there is a clear case for continuing to invest in ICE innovations based on regulatory compliance alone, carmakers and their suppliers are severely resource-constrained and must concurrently focus on developing future EV technology and architectures. As a result, industry players are going to have to consolidate efforts around those options that offer the best chance to extend the lifetime of this sunsetting technology.  There is no competitive or strategic advantage in developing ICE platforms in-house or in silos. Against this backdrop, we see three strategic directions emerging.

In Europe alone, a total of almost 60 million tons of CO2 emissions could be eliminated through ICE innovation alone

Firstly, carmakers need to seek industry partnerships, even with rivals, so that they can consolidate volumes and spread costs, through shared engine platforms. Offering ICE platforms to other players can help carmakers generate scale through third-party business. This can also be adopted for the ICEs used in hybrid vehicles with drastically lower numbers of ‘hardware variants’ — referring to powertrain options from which customers can choose.

Eventually, this can lead to ‘last man standing’ business models, with a single player taking responsibility for innovations and development of the engines and becoming the preferred supplier for multiple carmakers. One global engine manufacturer is already adopting such an approach in the commercial vehicle sector. Specialised investment funds could potentially be enticed to finance such business models.

Secondly, carmakers can shift the locus of innovation with countries like China or India becoming the new epicentre of ICE innovation. Several major carmakers already have extensive R&D presence in these countries to leverage their abundant engineering talent base.

Emerging markets and new entrants

Markets outside Europe and North America account for about two-thirds of annual global automotive sales but may need longer times to transition fully to zero-emission vehicles. Although China has been aggressive on EV adoption, carmakers there are also developing new ICE platforms.

Limited or delayed emissions regulation in parts of Asia and Africa—with Thailand and South Africa two examples—necessitates considering new plant locations there, while the South American market could potentially focus more on biofuels. Shifting the epicentre of ICE innovation would help carmakers address this demand over the long term.

Audi e-fuels
Audi has been developing a range of alternative fuels for use in ICEs

Finally, a shift is already evident in the powertrain strategies of several carmakers. While new entrants are focusing primarily on pure electric or hybrid vehicles, some of the smaller carmakers in Europe with modest sales volumes have taken bold decisions to fully electrify their portfolio much earlier. A potential, albeit risky, alternative for others could be to switch to more nascent technologies like e-fuels or hydrogen-powered ICEs

While waiting for the future

While it is increasingly evident that battery-powered EVs will be the dominant powertrain technology for light vehicle segment in the future, that future has not yet arrived. Automobile manufacturing is currently in a transition period in which ICE and EV must coexist.

Given that there is little chance we can skip this step, a forced and premature stop in ICE R&D could undermine what the global economy is trying to achieve through a switch to electrification. To help the industry make it through the transition, more clarity and stability in regulation is needed, with  clear, reliable, and realistic timelines on ICE phaseout and emission reduction.  A good case in point would be the Euro 7 targets and timeline.

This will allow automakers to leverage as much new technology as possible to make internal combustion less of a burden on the environment and more of a plus for the auto industry and its customers.


About the authors: Simon Schnurrer is a partner and automotive expert at Oliver Wyman, based in Frankfurt.  Srinath Rengarajan and Thomas Schiel are automotive experts at Oliver Wyman, based in Munich.

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