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European Boom in Diesels Creates Gas Engine Glut

just-auto.com European demand for diesels continues to grow—from one-third of the market in 2000, diesels are now projected to have half of the market in 2005. As a result, automakers are scrambling to build sufficient diesel engines to meet the demand, and scratching their heads to figure out what to do with the excess capacity for manufacturing gasoline engines. The growth in diesels translates into a loss of 3.6 million gasoline engines over the 5 years.

Unused petrol engine capacity cannot be converted quickly or cheaply to diesel production, said John Lawson, managing director of the automotive sector for Citigroup Smith Barney in London. “There’s no cheap, easy solution available.”

Supplier sources said retooling a 150,000-unit a year engine line from petrol to diesel costs €150 million and takes two years.

Engine-oriented suppliers such as Robert Bosch and Siemens VDO have expanded production and added shifts as diesel car sales jumped two million units since 2000 to a projected 6.7 million this year.

But automakers have reacted slowly to idled petrol engine production. Fiat-GM Powertrain has been the only engine maker to actually close petrol engine plants.

The Italian arm of the General Motors-Fiat joint venture said last month it will close two Italian petrol engine plants: Mirafiori and the Alfa Romeo V6 line in Arese, axing 400 jobs in total. Fiat-GM also laid off 300 workers at Termoli, which makes the FIRE small petrol engine family. The GM side of Fiat-GM Powertrain will halt petrol engine production at Kaiserlautern, Germany, as part of GM Europe’s sweeping cost-cutting moves announced last week, supplier sources say.

There is a fuel component to this swing as well. More diesels on the road in Europe mean higher demand for diesel fuel, less for gasoline from the European refineries. The US has benefitted from that imbalance during the past few years—and especially the past six months—by importing gasoline from Europe.

The European refineries are increasingly out of synch with what their home market needs, and they are investing to adjust the production mix (more diesel, less gas), and investing to produce the Ultra Low-Sulfur Diesel (ULSD) mandated. As those modification begin to phase in, and as the refinery production mix swings more toward the diesel, there will be even greater long-term pressure on gasoline prices in the US.

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