Unit cost decreases significantly with large production. However, an OEM has undertaken with us detailed costing to implement the Environmental Engine (including plant modification, parts, tooling, our budgeted royalty etc) into an initial 50,000 annual production for four years. The all-in unit cost at this level is about £250.
The Environmental Engine has higher fuel efficiency, lower emissions and more power. Cost savings and extra income for OEMs and car-drivers are quantified below. As an indication, benefits over three years to a UK company car user are about £3,000.
The OEM development partner has informed us that a 2% increase in fuel economy is worth pursuing while 5% would be compelling. Indeed, they indicated they would be keen to licence EE if it delivers 5% at an acceptable cost. In 10 months we expect to demonstrate a driveable car with a standard production engine modified with EE technology evidencing a 6-8% gain.
A Japanese OEM conducted a detailed evaluation of EE that corroborates our expectations. They conservatively estimated it would deliver a 6-8% net gain. The OEMs have done their sums and fuel economy alone is enough for them to adopt EE technology, as the following calculations illustrate:
a. The UK petrol price is around £0.80/litre. The average male driver covers 9,000 miles annually at about 30mpg. He spends £1,090 (9,000/30 x 0.80 x 4.54 litres/gallon) on fuel. Company car drivers cover 12,000-18,000 miles annually. At the 15,000 average, the fuel spend is £1,800. Fuel cost savings for varying Environmental Engine fuel efficiency improvements are as follows:
|Saving in £/annum||Annual Milage|
If EE delivers 6-8%, the average saving is about £100 per annum. Over just a typical three-year company car lease, the driver saves about £300.
b. We expect the benefit to rise to 10-15% by the time OEMs install in final production, as EE will enable them to make other enhancements to tuning and engine management. This would increase the saving to about £450.
c. Fuel economy can increase OEM income as shown by the premium charged for diesel over petrol engines in cars. That data suggests a 6-15% benefit range justifies an increased price of an EE-car of about £250-500.
d. Homogeneous Charged Compressed Ignition (“HCCI”) is an emerging technology to improve fuel efficiency and emissions. It requires a Variable Compression Ratio (“VCR”) engine so if OEMs want to exploit it, they will first have to adopt a VCR technology. We believe EE is the best VCR technology available so will be the dominant platform for HCCI. We are already in discussion with an OEM conducting R&D in this field.
OEMs face continuing legislative changes obliging them to reduce emissions so they have to adopt new technology to comply. The next European deadline is 2005 under Directive EU IV. EU V is expected to be operative by 2009.
OEMs also face fleet CO2 emissions targets on the average of all cars sold by that OEM. Governments set explicit reducing targets for gm/km so fleet buyers should favour EE-cars. There are also cash benefits from lower emissions using EE:
e. A European OEM estimated that EE would reduce CO2 emissions by 20%. Fleet cars represent about half of all cars sold in the UK and for example a 20% drop in CO2 emissions would take a 5 Series BMW 520i from 219 grams per mile to 175 grams thereby dropping the tax band from 29% to 21%. For a marginal rate tax payer the annual saving is (list price x difference in tax band x 40%) or (£25,850 x 8% x 40%) = £827 [Source: Top Gear magazine April 2004 and the 2004-5 tax bands]. Over a typical three-year company car lease, the driver would save about £2,500.
f. The above £2,500 CO2 emission tax saving to car owners would be a powerful marketing feature or basis to charge a premium price for EE-cars.
g. Catalytic converters (to reduce emissions) typically cost OEMs £125-500 and they contain precious metals such as platinum. EE reduces emissions and can work more efficiently with them. This could further reduce emissions and cost as simpler catalytic converters may satisfy legal requirements. We have started discussions with a leading manufacturer to undertake R&D on the potential benefits. At this stage the order of magnitude of potential unit cost savings is estimated at around £50.
h. Diesel engines are typically 35% more fuel efficient than petrol. But they are more complex, cost about £500 more to build, and have a specific emissions problem of expelling clusters of un-burnt fuel (“particulates”) that are believed to be carcinogenic. As a result, diesel vehicles have lower US market penetration. We are exploring a development program with an OEM specialising in diesel engines, as their initial analysis suggests that EE technology may help to solve their particulates problem.
The EE technology increases engine power so enables OEMs to reduce the size of their engines (“downsizing”) and/or reduce the number of different engine sizes they sell. There are also potential simplifications. In cash terms:
i. Smaller car engines are cheaper to manufacture, by an order of magnitude of about £500. Smaller engines also lead to substantial improvements in fuel efficiency (estimated at up to 40%) and reduced emissions.
j. Reducing the number of different engine sizes manufactured could similarly yield unit cost savings of the order of £100.
k. There are also potential cost savings from mechanical simplifications based on EE’s smoother running. For example, certain OEMs making luxury cars may not have to use balance shafts to reduce vibration, saving about £50.
OEMs want higher fuel efficiency and must achieve lower emissions. For a unit cost of about £250 EE delivers benefits a-k above. The following table illustrates the total potential benefits for corporate buyers of our OEM Partner cars:
|£ per car benefit|
|Higher fuel efficiency:|
|Car buyer saving||250-450|
|Platform for HCCI savings||Strategic benefit|
|Car buyer saving-CO2||2,500|
|More Power-engine savings:|
|Less vibration||Not luxury car|
|Environmentally friendly||Marketing feature|
|Indicative total benefits||£3,000 ++|
The EE technology is environmentally friendly as it substantially reduces emissions. Cost, price, legislative and mechanical benefits aside, it is a marketing feature for OEMs that should allow them to charge a premium for EE-vehicles.
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