Fuel economy drive seen powering turbo boom

DETROIT, Sept 18 - Underpowered and unprofitable, a generation of small cars from Detroit has sputtered in the marketplace.

"Among other pejorative terms, dealers have sometimes referred to subcompacts as beer cans -- meaning it's a bunch of metal and not much more," veteran auto investor and executive Jerry York told the Reuters Autos Summit in Detroit this week.

But as General Motors Corp and Ford Motor Co, work to roll out revamped, fuel-efficient cars starting in 2010, they also are trying to strike a balance between the need for economy and the American craving for horsepower.

The result appears to be a boom-in-the-making for turbo suppliers led by Honeywell International Inc and BorgWarner Inc, which together control 80 percent of the global market, executives and analysts say.

A turbocharger is an engine add-on that coaxes greater power out of smaller engines. Essentially, a car equipped with a turbocharged engine can get the fuel economy of a smaller four-cylinder engine combined with the power of a six-cylinder.

While the auto industry's high-profile rush to develop new electric vehicles grab headlines, high battery costs mean the mass-market adoption of those alternatives is years away.

In the meantime, turbochargers, which improve the efficiency of standard engines by up to 20 percent, could emerge as a standout area of growth in a slumping industry.

"There's so much opportunity to improve the fuel efficiency and C02 reduction by turbocharging the engines," Ford Chief Executive Alan Mulally told Reuters.

"The foundation right now of sustainability and fuel efficiency improvement and reduction of CO2 is going to be based on the internal combustion engine as we know it today, but with some tremendous improvements," he said.

Lehman Brothers analyst Brian Johnson estimates that the share of turbocharged gasoline engines in the U.S market -- now just 3 percent -- could grow more than sixfold to near 20 percent by 2013.

Including diesel engines, just 6 percent of vehicles on U.S. roads are turbocharged, compared to nearly 50 percent in Europe, according to Honeywell.

That skew has reflected the American preference for bigger engines. The average engine size is about 3.4 liters in the United States, compared to 1.5 liters in Asia and 1.7 liters in Europe, according to industry statistics.

But the American auto market has been roiled by record fuel prices this year, and consumers have pulled away from once-popular SUVs and pickup trucks at a record rate.

Overall auto sales are down 11 percent through August. But truck sales have fallen 19 percent, while sales of passenger cars are off just 2 percent.

Honeywell is in talks with GM about providing turbochargers for gas engines, the head of the diversified manufacturer's transportation systems unit, Adriane Brown, told Reuters.

Shares of BorgWarner and Honeywell have outperformed other suppliers at a time when the U.S. auto market has slumped to 15-year lows.

Shares of BorgWarner and Honeywell are off 25 percent and 30 percent, respectively so far this year. By contrast. Tenneco has fallen 42 percent, Lear Corp has lost 53 percent and American Axle & Manufacturing Holdings is off 60 percent so far this year.

BRIDGING THE GAP

Automakers are racing to roll out new fuel-saving technology to meet customer and regulatory demands.

GM plans to bring to market its heavily-touted plug-in Chevrolet Volt in late 2010 and Toyota Motor Corp is working on its own plug-in hybrid. But analysts see a slow take-off of those vehicles, partly due to the high cost of batteries needed to power the vehicles.

Turbochargers add about $700-850 to the price of a vehicle, while batteries for traditional hybrids add between $3,000 to $5,000. The rechargeable battery for a plug-in adds up to $10,000 to the cost of the vehicle, analysts say.

A turbocharged, 1.4-liter engine will power GM's new small car, the Chevy Cruze, due for launch in 2010.

Ford also has reached agreements with Honeywell and BorgWarner to provide turbochargers for the automaker's next-generation of "EcoBoost" engines.

"We are looking at four-cylinder turbos for a lot of products, especially entry-level products, smaller cars," said Ed Peper, who heads GM's flagship Chevrolet brand.

"I think it's very important because we need to get the fuel economy and performance at the same time," Peper said.

Jerry York was formerly Chrysler's chief financial officer during the company's last financial crisis in the early 1990s and is currently advising billionaire investor Kirk Kerkorian on his $1 billion investment in Ford.