Car makers forced to accelerate green plans

For car makers gathering this week at the Paris Motor Show, the road ahead is cluttered.

Slowing sales, the rising costs of meeting new regulations, trade risks and the need to invest in new technologies are putting their global operations under increasing strain.

While some of the most immediate challenges have in part evaporated, others loom larger.

Peruse the cars lining the stands at the auto show, which expects to welcome more than a million visitors during the fortnight, and the industry's focus is clear.

A coterie of new electric vehicles is on display from brands including Jaguar, Mercedes and BMW — and even the normally trade fair shy Tesla will display its vehicles at the show.

These battery models are the great hope for the European industry to overcome its most pressing challenge: hitting the ever-tightening CO2 targets over the coming decade.

The European Parliament on Wednesday voted to introduce rules that would force car makers to lower their 2020 CO2 emissions targets by 40% by 2030 — an unprecedented demand on the sector. The binding rules will be finalized likely by the end of the year with input from the 28 countries. Car makers that miss the targets will face penalties.

“No industry in history has been asked to bring in reductions of this scale,” said Didier Leroy, Toyota's European president.

All of the major manufacturers will launch a variety of electric and hybrid cars in the coming years, in part to hit the EU's CO2 rules in 2020, which require a fleet average of 95 grams of CO2 per kilometer — down from 130g/km in 2015.

But the 2030 requirements are far more stringent, requiring widespread sale of electric cars by manufacturers, threatening their existing engine-based supply chains and past investments into technologies frowned up by regulators, such as diesel.

“Such aggressive emission targets will fundamentally transform the industry away from fossil fuels to electric power,” said Arndt Ellinghorst, lead auto analyst at Evercore ISI.

“Without any shadow of a doubt, existing and potentially even more stringent targets will force car makers to accelerate plans around electrification.”

The push is compounded by the spiralling decline for engines that run on diesel, a technology that was once embraced across Europe because it emits a fifth less CO2 than petrol.

“The challenge is as everything is calculated on CO2, now the diesel demand goes down, then the CO2 goes up and causes an impact,” said Luca de Meo, chief executive of Volkswagen's Seat brand.

Even if car makers have battery vehicles on the market, ramping up output of them is challenging because the parts that go into them — batteries containing lithium, cobalt and other rare materials — are in high demand.

Carlos Ghosn, who leads the global alliance between Renault, Nissan and Mitsubishi — together the world's largest electric car seller — said the group cannot meet the increased demand because of its supply chain.

“It's no question that we have the capacity to assemble the cars, but there are not enough batteries, not enough motors,” he said. “We are already in the situation where we cannot fulfil demand.”

The car makers he runs have begun reducing their diesel portfolio. Nissan will drop the fuel from all passenger cars in Europe, while Renault has cut the number of vehicles available with the fuel in half.

Mr. Ghosn said before the show that the technology had been “condemned” by regulators, leaving consumers worried they may be “trapped” with cars they cannot sell in the future.

Despite this, car makers do not face heavy costs from lost investment.

“If there are any write downs it will be relatively immaterial,”

he told an audience on the fringes of the show.

Unlike the US or Japan, Europe backed diesel technology as a way of lowering CO2 output, leaving many of its key players over-exposed to the fuel as a tide of political opinion turns against it.

German car makers BMW, VW and Mercedes, and Jaguar Land Rover in Britain all have high diesel exposure.

JLR has shed 1,000 workers from its largest plant because of falling diesel demand.

Dieter Zetsche, the outgoing chief executive of Daimler, owner of Mercedes-Benz, previously warned the company may miss its 2020 CO2 target because of falling diesel sales.

But speaking at the Paris show, he said he was less concerned because the drop in diesel demand has slowed.

With new diesel engines emitting comparable levels of harmful NOx gases to petrol, he said the choice for consumers was no longer “moral” but financial.

However, the technology is losing the edge that appeals to consumers, he cautioned.

“Diesels have been getting more expensive, and the reduction in fuel consumption altogether means the absolute difference in cost of ownership [against petrol] is also reduced,” he said.

The only option for car makers is to ramp up electric output and temper sales of more polluting vehicles.

Yet even the new EU's stretched targets will not spell the death of the internal combustion engine.

Toyota, whose hybrid vehicles account for about half of its sales in Europe, would still most likely sell cars with traditional engines by 2030, Mr. Leroy said.

“It's challenging, we have been developing our hybrid strategy for many, many years, but I do not think we will be 100% hybrid even by 2030,” he said.

The company will also push fully electric cars, and hybrid vehicles, as part of its strategy to lower emissions.

With electric cars less profitable than traditional vehicles, car makers are also cautious about trimming their squeezed margins further.

“Do not imagine that car makers will absorb 100% of the cost,” said Toyota's Mr. Leroy.

Many are holding off pushing the technology until they believe they can make the money they need to carry on investing in the fiercely competitive industry.

Linda Jackson, who is chief executive of PSA's Citroën brand and also leads the wider company's new group focusing on the development of low-emission vehicles, also sees affordability for customers as a key issue.

“We are committed to complying with the CO2 rules,” she said. “We are not going to pay the penalties. But are we all going to be able to afford these cars?”

Even with the running costs of electric vehicles brought down by low energy and servicing costs, consumers still balk at the prospect of a much higher sticker price, she said.

About half of the company's sales in Europe are diesel, and the business has pledged that every new model after 2020 will offer full electric and hybrid technology options.

But unlike other rivals, it is not killing off diesel from its model line-up, on the basis that many of its buyers rely on the fuel's economy to lower their running costs.

“Many of these rules are made by people who live in cities, but there are a large part of the population that live rurally,” she said.

Consumers are also unlikely to buy electric cars unless they can recharge them.

Erik Jonnaert, secretarygeneral of European car makers' association ACEA, said the onus was now on governments to provide charging points.

“There are 200,000 charging points across Europe,” he told the FT at the show. “We need 2.5m by 2025. This requires commitment from both governments and industry. Governments need to deliver, you cannot have manufacturers only asked to contribute.”

Carlos Tavares, who is chief executive of Peugeot, Citroën and Opel owner PSA and also chairman of ACEA, warned that industry executives were viewed as “crooks” following diesel scandal at VW, where the German car company fooled regulators about the pollution from its cars.

This made it harder whenever the sector portrays the benefits of technologies such as newer diesel engines.

Punishing the industry, he warned, would undermine the 13m car making jobs across the continent.

The CO2 vote, he said, was driven by politicians from nations without car industries.

“There have been extreme positions coming from countries which don't have an automobile industry,” he warned. “These are people who do not know the consequences of their actions.”

EUROPE AT RISK OF LOSING BATTERY BATTLE

Europe's car makers need a battery “champion” to stop the region falling behind Asia and the US in the race to dominate the technology of the future, two of the industry's leading executives have warned.

Carlos Ghosn at RenaultNissan-Mitsubishi and Carlos Tavares at Peugeot-owner PSA both stressed that the continent needs to build its own capacity to remain competitive.

While car makers today buy in many of their parts, almost all of them still make engines — the area where they add specialization.

With electric cars, Europe risks losing its competitive edge unless it builds battery sites, they said.

Mr. Ghosn said the industry “cannot continue to prosper” unless it builds its own capacity.

“Right now there is a shortfall in batteries. We need more capacity.”

Asia is building more than a dozen “gigafactories,” while the US already has Tesla's battery plant.

Plans are afoot in the European Commission to develop a region-wide champion, akin to Airbus, the aerospace group that formed out of a joint effort to rival Boeing.

But as the demand for electric cars increases in the continent, its car makers will continue to “transfer 40% of value to Asia” every time they sell an electric model, Mr. Tavares said.

“This is a question for society and political leadership.”