Why Light Duty Diesels Make Sense in the North American Market Automotive News World Congress January 16, 2007 MARTEC
Agenda The diesel value proposition in the US Policy considerations 50-state emissionized diesel cost assessment Summary and conclusions 2
Europe is different because fuel is so much more expensive. Paris, France Paris, Texas $4.88/ gal. pump price 7,500 miles/yr. $900 annual fuel bill $2.10/gal. pump price 17,500 miles/yr. $2,300 annual fuel bill Source: Martec analysis 3
US consumers have been trained to think about HP, but torque makes a vehicle fun-to-drive. Torque and Hp Output Curves Typical US Gasoline V6 Engine Torque (lb-ft) 300 250 Usable torque is available over a wide range of engine speeds Horsepower 300 250 Torque.... 200 200 150 150 100 50 0 Peak Hp is typically achieved at maximum engine rpm s 0 10 20 30 40 50 60 70 Engine Speed (rpm X 100) 100 50 0 The force that presses you into the seat when you accelerate 4
Diesels now dominate the US heavy-duty pickup truck market. US Fleet Torque vs. Fuel Efficiency HD Pickup Standard Gas Engine 30% Optional Gas Engine 3% Estimated Real World FE - mpg 18 17 16 15 14 13 12 11 10 Diesel Diesel Value Value Proposition Proposition vs. vs. Standard Standard Gas Gas 61% 61% torque torque improvement improvement 28% 28% fuel fuel efficiency efficiency improvement improvement vs. vs. Optional Optional Gas Gas 29% 29% torque torque improvement improvement @ 57% 57% the the engine engine speed speed 54% 54% fuel fuel efficiency efficiency improvement improvement Standard Gas Engine 200 250 300 350 400 450 500 550 600 Engine Torque lb-ft Optional Gas Engine Diesel Engine 67% Diesel Engine Source: Martec analysis 5
The HD pickup customer buys the diesel for low-end torque; fuel efficiency is a bonus. Example HD Pickup Torque Curves 700 650/881 Duramax 6600 949 HD Pickup Truck Market Sales Weighted Metrics Torque (lb-ft) 600 500 400 300 450/610 Vortec 8100 360/488 Vortec 6000 813 678 542 407 Torque (Nm) Base V8 V8 OHV/SOHC gas gas engine 364 364 lb-ft/494 Nm Nm @ 4012 rpm rpm Real world FE FE combined: 13.1 mpg Optional diesel engine 587 587 lb-ft/796 Nm Nm @1849 rpm rpm Real world FE FE combined: 16.8 mpg Option price (with auto trans): $6603 200 271 100 136 10 20 30 40 50 60 Optional V8/V10 gas gas engine 456 456 lb-ft/619 Nm Nm @ 3232 rpm rpm Real world FE FE combined: 10.9 mpg Option price (with auto trans): $2250 Engine Speed (X100) Source: Company websites 6
After 4.5 years, the average diesel owner has saved nearly $4,200 in fuel vs. the alternative high torque option. HD Pickup Trucks Optional Engine Fuel Savings vs. Base Engine (NPV- 3 yr. Fuel) $2,500 $2,000 Cumulative Fuel Savings $1,500 $1,000 $500 $0 -$500 -$1,000 -$1,500 -$2,000 -$2,500 0 New 1 20,000 2 39,000 3 56,000 Diesel Option + 28% mpg -11% CO 2 Gasoline Option -17% mpg +20% CO 2 4 73,000 4.5 85,000 $2,190 ($2,000) Operating Year Mileage Accumulation Source: Martec analysis 7
The diesel customer recovers a $4,700 trade-in premium after 4.5 years. HD Pickup Trucks Optional Engine Residual Value (NPV) $7,000 $6,000 $6,600 Option price Residual Value $5,000 $4,000 $3,000 $2,000 $2,250 $4,679 Diesel Option Residual 71% (NPV $3320) $1,000 $0 0 New 1 20,000 2 39,000 3 56,000 Operating Year Mileage Accumulation 4 73,000 $495 4.5 85,000 Gasoline Option Residual 22% (NPV $351) Source: Martec analysis 8
At trade-in, the effective cost of 4.5 years of premium performance is about $1,100. HD Pickup Trucks $/Unit of Torque Improvement (NPV 3-yr. Fuel) $ Upcharge per unit torque improvement $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $1,093 Effective option price at 54 mos. less: Fuel savings Residual value recovery +$3,899 $0 Diesel Option Gasoline Option Unit torque gain +223/61% 587lb/ft +92/25% 456lb/ft Source: Martec analysis 9
Diesels generate more than $1B in incremental Big 3 profits per year. Base Content Deleted Diesel Content Sales Weighted Variable Diesel content dealer invoice Diesel content OEM cost Apparent profit Deleted content engine material cost + manual trans OEM real profit on diesel option Value $6100 $6025 $75 $2250 $2325 38% 10
HDPU diesels produced from 1994-2006 will save the US 18B gallons of fuel over their useful lives. US HD Pickup Truck Diesel Performance HD Pickup Truck Cumulative Fuel Savings Million Gallons 20,000 16,000 12,000 8,000 4,000 9B Diesel Lifetime Fuel Consumption Savings vs. Gasoline Engines 156M tons CO2 0 1994 1998 2002 2006 2010 2014 2018 Operating Year Based on 1994-2006 HDPU vehicle sales. Assumes diesels did not exist and were replaced by standard (71%) and optional gas engines (29%), US EPA Mobil 6 VMT and 15 year useful life. Martec analysis of real world fuel economy for all engines in this segment. 11
How important is an 18B gallon savings? Energy Security HD Pickup Truck 914M bbls of crude 20 months Venezuelan imports Enough gasoline to support California s demand for 425 days 700M bbls More than $30B in economic savings to vehicle owners 12
Unlike most of Western Europe, diesel fuel is taxed more heavily than gasoline in the US. US Diesel Pump Price Over/Under Regular Gasoline $0.20 $0.15 Diesel Pump Price Premium/gal. $0.10 $0.05 $0.00 -$0.05 -$0.10 $0.066/gal. excise tax premium What s up with diesel pricing? -$0.15 -$0.20 2000 2001 2002 2003 2004 2005 2006 Source: EIA 13
US fuel refining capacity increases have crept along at <0.7% annual rate since 1990. US Refinery Capacity and Utilization Capacity - Thousand Barrels/Day 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 US refinery capacity Clean Air Act Amendments US refinery utilization 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% Capacity Utilization Capacity utilization has consistently exceeded 90% since 1993 1990 1993 1996 1999 2002 2005 US demand for fuel has increased at a much faster rate since 1995: Gasoline demand has increased at 1.7% annual rate.... With distillate demand increasing at 2.1% Source: EIA 14
Europe is exporting excess gasoline to the US, helping to depress pricing relative to diesel. Imports - 000 Barrels/Day 1000 800 600 400 200 0 US gasoline imports have risen dramatically: > 5.5% CAGR 1990 2005 Half of the increased US demand met by imports 60% from Europe Imports - 000 Barrels/Day 1000 800 600 400 200 0 While US distillate imports are essentially flat 1990 2005 EIA 2007-2030 Forecast <6% premium for diesel most of which is tax delta Source: EIA 15
High efficiency NOx aftertreatment will be required to create a 50- state light duty diesel market. 100 SULEV T2B5/ULEV 2 Catalyst Efficiency (%) 80 60 40 20 << 6X Higher >> Euro6 (2014) Euro5 (2009) 0 0.00 0.10 0.20 0.30 0.40 Engine-Out NOx (g/km) 16
Europe is trading NOx for CO2. Fleet Average CO2 vs. Tier 2 and Euro 5 (2009) Tailpipe NOx Light Duty Vehicles 280 260 171 US Light Trucks CO2 Emissions g/km 240 220 200 180 160 SULEV 129 T2B5 US Cars 100 EU Gasoline Fleet 3X 3X higher NOx emissions diesel vs. gas EU Diesel Fleet 116 140 0.00 0.03 0.05 0.08 0.10 0.13 0.15 0.18 0.20 NOx Emissions g/km Illustrative only: vehicles certified under different test cycles. Bubble size represents approximate vehicle mass expressed as index vs. EU gasoline base 17
Aftertreatment technology has entered the cost optimization phase of development. 4.5L DOHC V6 Diesel 2010 Scenario LNT CE ~ 60% $1,400 SCR CE >85% $880 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 LNT + No No customer interface - + 10-12 grams PGM - Lower NOx conversion efficiency - 4-6% fuel fuel consumption penalty SCR + Highest NOx conversion efficiency + No No fuel fuel consumption penalty + Reduced LME exposure - Customer interface at at oil oil change intervals Source: Martec analysis 18
What does a gallon of urea save? Owner: Full Size Pickup Truck Vehicle Manufacturer: CAFE > 300 lbs. Mass 2.5-4.0 gal. fuel >$800 Al $4.60-7.70 VVL >$300 68% H2O CO2 59-89 lbs. 6AT $M Capital Source: Martec analysis 19
Engine architecture drives a range of on-engine diesel costs. Construction of Dieselization Costs vs. V8 OHV 2V Baseline V8 OHV 2V Baseline Potential Diesel Architecture Downsizing credit Cost Delta vs. V8 OHV 2V L6 DOHC 4V ($300) 1 V6 DOHC 4V $100 1 V8 DOHC 4V $600 1 Diesel Content $1100 $1200 $1300 VGT turbo and accessories Advanced diesel FI system Injectors, HP pump, rail (s) and diesel ECM Minor mechanical upgrades Net on-engine variable cost delta $800 $1300 $1900 Net variable cost increase with SCR aftertreatment $1,700 $2,200 $2,800 1 Assumes conversion from Fe to Al block Only variable costs captured. 20
A potential US full size pickup truck diesel value proposition: Key Assumptions Diesel option price 4.5L DOHC V6 Performance increased 30% vs. class average Fuel consumption reduced 30% VMT over 4.5 years Residual value on option = to European typical Customer Value Proposition Option cost/lb-ft performance gain Fuel savings NPV @ EIA 2010 forecast* Saved re-fueling stops/month Residual value recovery - NPV NPV cost for 4.5 years of premium performance Metric $4,000 432 lb-ft torque 22 mpg 79,000 64% Metric $40 ($2,350) 1.2 ($1,820) $---- *Includes urea costs at 2% dosing rate and $1.50/gallon retail. 21
The diesel value proposition, demonstrated in Europe and in the HD pickup segment, will work in the North American light duty market. Summary Why light duty diesels make sense in the North American market. Diesel powered vehicles deliver the kind of performance and durability consumers want... and pay a premium to acquire They are economically viable for both manufacturers and consumers Low operating cost and time savings High residual value at trade-in Real-world FE in line with promise DIESEL PAYS YOU BACK 50-state emissions levels will be achieved through advanced combustion control and aftertreatment systems Diesels can deliver near term benefits to the environment and the economy by reducing demand for imported oil THE MARTEC GROUP, INC. 22