Canadian Underwriter

Diminishing Diesel

May 1, 2017   by Peter Hatges, Managing Director, KPMG Corporate Finance Inc. and National Sector Leader, KPMG in Canada

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As the auto industry continues to innovate drivetrains, various questions arise regarding the future of both diesel and gasoline engines. While electric and hybrid cars are the current alternative to these fossil fuels, even battery-powered cars may have a questionable future.

In a recent survey of automotive executives, some respondents expressed reservations around the application of battery technology.

Limitations on battery charging infrastructure, the improvement of the combustion engine and the application of turbocharging have prolonged the life of the combustion engine. More than three in four respondents in KPMG’s 2017 Global Automotive Executive survey reported they believe fuel cell electric vehicles will be the golden bullet of electric mobility.

Peter Hatges, Managing Director, KPMG Corporate Finance Inc. and National Sector Leader, KPMG in Canada

Fuel cells, or FCEVs, are expected to solve the problem of recharging and infrastructure. Fuel cells are recharged quickly at a traditional gas station-type facility, making recharging times of 25 to 45 minutes for batteries unreasonable. However, the technology is still in its infancy.


Fuel cell vehicle technology is not new. In 1966, General Motors launched the first fuel cell vehicle, the Electrovan, which generated electricity that powered the battery and motor with a combination of hydrogen and oxygen. The vehicle was able to travel about 240 kilometres before it needed to be refuelled because it contained two large tanks – one for hydrogen and the other for oxygen – in the back. Fast-forward to today where engineers are able to fit batteries, fuel cell stacks and hydrogen storage inside the smallest vehicles because of advancements in technology.

Original equipment manufacturers (OEMs) such as Honda, General Motors and Daimler have fleets of fuel cell-powered cars today, some of which are used as testers for consumers. Authorities in the United States are trying to promote fuel cell cars in the marketplace in large cities such as Los Angeles and New York City, while they roll out fuel cell cars and hydrogen fuelling stations concurrently.

However, it is predicted there will be a limit to the sale of fuel cell vehicles – despite their lower costs – until more fuelling stations are created.

As alternative engine technology gains momentum and attracts research dollars, the future of the diesel engine is in question. The rising price of diesel fuel has lessened the overall benefits of the diesel engine. More popular in Europe than in North America, the diesel engine has been plagued by rising fuel costs and the impact of the Volkswagen (VW) emissions scandal.

Tougher emissions standards and testing methods will increase costs to the point where diesel may be forced out of the market. Given the development costs to maintain engine competitiveness and ensure customer loyalty, few OEMs can afford to invest in a technology that has a dubious future. It is not just the added costs; consumers now cast a questioning eye at diesel technology, worried that resale values will plummet and that they may not be able to resell diesel-powered cars.


Despite the VW diesel emissions testing scandal, sales of diesel engines had already been on the decline because they are expensive and the added cost often outweighed the potential savings on fuel. Furthermore, the VW issues also drew attention to the main problem areas for diesel engines, which are nitrogen oxide

emissions and the inconsistency between emissions recorded on the road and in regulatory tests.

Diesel cars are commonly found to emit five times more nitrogen oxide than the legal limits in some areas. This has contributed to environmental issues like smog and acid rain, along with a number of health issues such as decreased lung function and respiratory illnesses like asthma, bronchitis and pneumonia.

However, in 2019, vehicle approvals will be based on emissions performance during real driving, which will force manufacturers to install costlier emissions treatment systems.

In the meantime, the sales of diesel engines continues to fall. In fact, with electric and hybrid car batteries becoming cheaper and more powerful, many industry experts are now predicting that manufacturers may stop producing diesel engines after 2025 because electric batteries will become much more affordable.

This is causing manufacturers to withdraw from the diesel engine, making economies of scale, technological advancement and practical applications in various models difficult, if not impossible to maintain. As a result, AlixPartners predicts that diesel car sales are expected to drop to 9% of the European market in 2030 from 52% today.

It would be premature to count diesel out. It is the drivetrain of choice in many trucks given that diesel engines are more efficient than gasoline engines, and based on the number of kilometres driven in commercial trucks, this becomes a critical consideration.

The alternative for heavy trucks is liquefied natural gas (LNG) and several major trucking companies are testing LNG-equipped trucks and considering the switch. Truck drivers and trucking company owners seem to be divided on the issue. Some believe that making the switch to LNG will decrease fuel bills, while others think that the price will increase steadily as the demand increases.

Market analysts have noted that LNG will stay below $40 per barrel for years, and Shell representatives seem convinced that LNG is the fuel of the future.

The main argument against LNG as a fuel for large trucks is that there are not many fuelling stations capable of dispensing LNG to vehicles.

The fuel has its challenges. South of the border, the American Trucking Association has questioned the current viability of long-haul operations as it does not believe LNG is currently a viable option. Higher maintenance costs, additional driver training and the weight of LNG tanks versus the weight of diesel tanks are a few reasons they argue it is not viable.

As the industry moves forward and the infrastructure becomes more common, it is possible that LNG will become nearly as common as diesel as a fuel for local hauling, but will still face challenges for long hauling.

Also in the United States, the large manufacturers are expected to make gasoline-powered vehicles with better fuel economy, meaning gas-powered engines could be around a lot longer than some industry watchers may be predicting.

More than 40 years after the debut of the GM Electrovan, electric-powered vehicles still face serious competition from those powered by fossil fuels.

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