Engine selection is obviously a complex issue that could fill a book or two so isn’t going to be addressed very thoroughly in these one page epistles. I’ve been studying engine options since before I got my kit and haven’t decided yet; but will have to pretty soon. It’s been an interesting study. You’ve probably seen my writings here before about the Subaru and Dyna-Cam. So I'll risk adding my two cents worth in an area where there are strong and differing opinions. As Dave points out; engine selection has to match the individual.
First of all, if density altitude is the issue, the first thing that comes to mind is turbo charging. I think you’ll find that at 12,000 or 13,000 ft or so, you’ll get more power to your prop from turbo charging 360 cu. in. than you’ll get from normally aspirating the extra 180 cu. in. you add going to a 540. And that extra 180 cubes is going to be burning fuel and adding weight even when you’re flying at sea level. Of course, turbo charging has its own set of issues.
On the other hand, my impression is that a 173FG is under powered with that 200 hp, four cylinder wherever you fly. So, if you like a standard Lycoming, the lighter weight versions of the 540, or the less standard Franklin would seem good choices. I’m looking for more than 200 hp for my standard RGE. I'm also willing to do a little of my own "engineering".
There is no doubt that the Lycomings have accumulated impressive amounts of experience in aircraft applications; and should have the bugs worked out. Yet it amazes me that after 50 years of working with the same basic, rather inefficient engine, there are still failures, still AD’s being issued, and my good friend was forced down in his Lancair when the CRANKSHAFT BROKE! When was the last time you heard of a crankshaft breaking in an automotive engine? Convince me about reliability.
Meanwhile, the Subaru, and other auto based engines, are certainly more evolved technically, and have built far more units and amassed more operating hours than Lycoming could ever dream about. You can’t call these engines "developmental". BUT; it’s a different application. In an airplane, the specific application is developmental; not the engine. For aircraft operation you have to choose the right basic engine, make some appropriate mods, and properly engineer the installation. The problem so far with auto engine conversions is, 1) there are too many different kinds being used (Buicks, Fords, Chevys, Subarus, Mazdas, etc.) so there is no significant experience being accumulated on any one (particularly in the over 200hp regime); and, 2) with the objective of saving money, the engineering of many of these installations have been marginal to poor; naturally leading to poor results.
A properly modified and installed auto engine and its associated systems is not likely to save you much, if any, $ over an aircraft engine, particularly a Franklin.
What about weight? With the possible exception of turbo charged high output engines, including Subaru (see Crossflow Aero, Air-Ryder, others), or the Mazda based rotary (see Atkins Aviation, Alturdyne, others), the current, full-up auto based installation of comparable power is probably going to weigh as much or more than the aircraft engine. This may change with some of the exciting new, all aluminum, multivalve engines, but these haven't been tried in airplanes yet.
So what advantages are left? Fuel efficiency, reduced maintenance costs, and probably less vibration. And I think there is sufficient evidence that you can have a very reliable engine.
The ideal engine for your 173 FG is the Zoche 300 hp, 8-cylinder, radial, 2-cycle Diesel. Unfortunately, it’s not available yet, and when/if it is; be ready to write a very big check. It, and even more so, the Delta Hawk, fall into the developmental engine category.
The Franklin seems to be rapidly evolving into a "standard" installation on a Velocity. There are auto conversions operating and planned for Velocities. I have some opinions on specific choices that may also offer power to weight advantages, but rather than make this any longer, it may be better, if anyone is interested, E-mail me directly and I’ll give you a call. Notice I said "opinions". I don't claim to be an expert. I’ve had a lifelong familiarity with engines, engineering and manufacturing background, and, well, I’ve investigated a little.