Buyers’ taste the wild card in race for carmakers to clean up their act
• To hit tough emissions targets in Europe, manufacturers must change consumers’ buying habits
When Blas Arambilet tried to buy an electric car in April, something strange happened. Months after ordering a white Kia e-Niro from his Barcelona showroom, he received a call from the dealership. Kia could not deliver the car in 2019, a salesperson explained, because the firm needed to book the sale in 2020 to help meet targets for carbon dioxide emissions.
While not illegal, this incident demonstrates the contortions carmakers are planning to perform to pass Europe’s strict emissions rules, which come into force at the turn of the year and require them to lower average carbon dioxide output to 95g per kilometre. To hit the targets, they must sell many electric cars that most motorists have shown scant interest in.
“There is going to be an imbalance between what consumers want and what manufacturers want to sell them,” says Robert Forrester, CEO of dealership group Vertu.
Few buyers are turning to electric cars, which accounted for less than 3% of the cars sold in Europe in 2018 and are still clustered in countries that offer generous incentives.
Instead, consumers are shunning diesel in favour of petrol and switching to heavier sport utility vehicles (SUVs). The result is that, since 2017, carbon dioxide emissions from cars have been rising across the EU.
“The industry has been slow to accept the magnitude of the challenge,” wrote Max Warburton, an analyst at Bernstein. “It’s just stunning how much is going to have to be achieved in the next 18 to 24 months.”
If the industry sold exactly the same mix of vehicles in 2021 as it did in 2018, carmakers together would face penalties of €25bn, he calculates.
GETTING OUT OF STEP
The effect of the carbon clampdown will be felt at forecourts across the continent, and by a wide body of consumers and businesses that will be encouraged to buy electric cars, whether they want to or not.
“The regulation is not aligned with what is happening in the market,” says the head of compliance at one global carmaker. “To comply, we have to get out of step with the market.”
The effect of the new standards runs deeper than the array of vehicles lined up on a forecourt. For Europe’s carmakers, an industry that supports almost 14-million jobs, the change also has profound business-shifting implications. The higher input costs of electric vehicles (EVs) mean they make less profit than
“traditional” ones — if they make any at all — leaving carmakers with less money to funnel into new models.
“Each time I’m selling an EV I’m making much less money than selling anything else,” says Carlos Tavares, CEO of PSA, the French carmaker behind Peugeot, Opel, Citroën and Vauxhall. “I would therefore like to limit the number of EVs to a certain level.”
Theoretically, carmakers could meet the regulations simply by withdrawing their most polluting models and selling battery cars at exorbitant discounts. But this would mire them in losses, while manufacturers are already trying to cut costs in the region. In Europe alone, Ford plans to axe 7,000 jobs, Daimler 10,000 and Volkswagen (VW) marque Audi 10,000 more.
VOLUME RECESSION
Apart from selling less profitable cars, carmakers are seeing a reduction in their total sales, says Philippe Houchois, an automotive analyst at Jefferies. He forecasts a 4% decline in EU sales in 2020. “Unless there’ sa generalised support to the industry, you will probably have a volume recession because you are forcing consumers to buy cars they are not familiar with.”
Fears over additional electric spending and squeezed margins have already led to consolidation across the industry.
PSA and Fiat Chrysler are merging to pool investments, while Ford and VW have formed an alliance to collaborate on new technologies, including some electric systems.
“For mass market carmakers, electrification looks an existential threat and may require a total redesign of industry structure,” says Warburton.
Each carmaker faces its own carbon dioxide target, based on the weight of its vehicles. A business selling smaller cars such as Peugeot owner PSA has a lower target than a company with a heavier average vehicle, such as Mercedes owner Daimler. The targets for each firm vary from about 91g/km to just more than 100g/km.
Potential fines for missing these are punishing. Every gram over the target incurs a penalty of €95 — multiplied by the number of cars sold in Europe. For leading groups such as VW or PSA, the bill could easily run to 10 figures.
Industry leaders also fear that if they miss targets they will face a public backlash in European societies that take environmentalism seriously.
“Right now, we [the industry] are considered as being crooks,” says Tavares. “I don’t think there is any long-lasting, sustainable position in the society if we just do not care about contributing to fixing the global warming issue.”
He adds: “This is not a tradeoff. This is a precondition to deserve to be in the market.”
The 2020 rules include some concessions, such as the exclusion of 5% of sales from the calculations, and electric cars counting as double.
The rules will tighten in 2021, with all sales counted and battery vehicles losing some of their added weighting.
SINGLE SCORE
Carmakers are also allowed to form “pools” in which weaker and stronger players team up to submit a single score. Fiat Chrysler has pooled with Tesla.
Carmakers have known about the rules since they were set in 2008. But the ground has shifted under the wheels of the industry, leaving manufacturers scrabbling for imaginative ways to meet the targets.
Diesel sales, a longtime pillar for many of the manufacturers because it emits a fifth less carbon dioxide than petrol, have fallen after the exposure in 2015 of VW’s widespread cheating on diesel emissions tests, as well as citywide bans on the fuel.
London has excluded most older diesel cars using a charging zone, while Bristol plans to ban all diesel cars in some central areas. Several German cities, including Hamburg, Berlin and Stuttgart, have imposed limited bans.
Even though many bans still permit the use of the very latest diesel models, many confused motorists are shunning the fuel.
“Three-quarters of searches by fuel type used to be for diesel,” says Ian Plummer, commercial director of UK-based online marketplace Auto Trader. “That has fallen to a quarter within two years, and it’s still falling fast.”
Industry executives privately fume that green groups that espoused diesel for its climate impact now reject the fuel over air quality concerns. They also criticise governments and local authorities for being slow to install the electric charging stations needed to convince consumers to take the plunge and switch to battery vehicles.
Yet the fuel mix is only part of the problem. The increasing popularity of American-style SUVs has led to family saloons being replaced by high-riding gas guzzlers. They now account for 40% of the market.
“Since 2013, SUVs’ sales impact on carbon dioxide emissions is 10 times that of the decline in diesel,” says Julia Poliscanova, director of campaign group Transport & Environment. She argues that carmakers push SUVs because they make more profit than from traditional vehicles — while consumers have become used to their elevated seating positions and practicality.
All this leads carmakers to consider how they can negotiate the targets while keeping a profitable sales line-up intact. The first mainstream battery-powered vehicles from Audi, Jaguar, Mercedes and Ford are all SUV models, while they also aim to improve the efficiency of petroldriven cars.
Two years ago, Tavares told PSA technicians to consider diesel — at the time the centrepiece of the company’s engineering arsenal — as “dead”.
Sitting in his office at the carmaker’s headquarters on the outskirts of Paris, Tavares clasps his hands around his neck and emits a high-pitched squeak followed by a strangled choking noise, in an attempt to illustrate their reaction.
“These are the most expert diesel powertrain engineers of the world — they would have hit me if they could.”
In its worst-case scenario, PSA expects diesel sales to fall to 10% of its mix, from about a third now. Electric and plug-in hybrid cars will be at most 7%. It therefore needs large efficiency gains in its petrol engines.
The Opel Astra has reduced its CO2 output by 21% by switching to a new three-cylinder PSA engine. PSA has reorganised its dealer bonus scheme from the number of cars sold to one based on the carbon impact of those vehicles. The result of these changes is that the group, once regarded as a laggard, is now expected to clear the emissions hurdle without much fuss.
Other carmakers are planning to revamp dealer incentives. For years, Nissan dealers were incentivised not to sell its Leaf electric car — the model was the only car in the line-up that did not feed into their bonus targets. That deterrent is set to be dropped in 2020, according to several retailers.
For some manufacturers, the targets are still painfully stretching and cannot be met even by a big rise in electric sales or by gerrymandering dealer targets.
In November, Daimler revealed a gulf between its current emissions of 138g/km and its target of about 100g/km. “What we can’t control is buyer behaviour, but we have the technologies within our portfolio to get within target range,” CEO Ola Kallenius has said.
AMG RANGE
The German group is expected by many dealers to cut production of its most polluting models. In its crosshairs is the Mercedes AMG range, its highest-specification models with supercar acceleration. A reduction of 75% in the availability of some models in the AMG range is expected by several retailing executives, who spoke on the condition of anonymity.
This poses a serious profit risk. AMG is believed by analysts to be a significant contributor to the bottom line.
“If they kill off AMG it’ sa catastrophe for profitability,” says Bernstein’s Warburton.
Even among its mainstream line-up, the company is expected to restrict sales of 3l engines in its smaller and medium-sized vehicles, pushing consumers towards less powerful models. It has also delayed the US launch of its new electric SUV, the EQC, to help focus on European sales in 2020.
This still may not be enough. Several analysts do not rule out Daimler paying another manufacturer to join its pool, such as Toyota, the Japanese group that is on track to outperform its targets because of its high quota of hybrid cars.
Mazda, which is already pooled with Toyota, plans to axe some versions of its MX-5 sports car, while telling retailers to expect a 20% reduction in sales in 2020, according to several dealers.
Another group playing catchup is Ford, which is not due to begin selling any fully electric models in Europe until the end of 2020. Instead, it is installing small 48V batteries in its cars to turn them into “mild hybrid” vehicles that can make fuel savings of about 10%, for significantly less cost than turning them into fully fledged electric vehicles, says Stuart Rowley, Ford’s European president.
But advocates of electric cars maintain that the market is nearing an inflection point, where demand for battery cars explodes. Every carmaker plans to launch a fully electric vehicle within the next 12 months.
“Most people tend to go with one brand,” says Poliscanova. “Once they see the company they trust selling electric cars, they will buy them.”
ONEROUS RULE
The head of compliance at another carmaker agrees that consumers will dictate the direction of the market. “Manufacturers can invest in all the technology they like,” he says. “At the end of the day, the wild card is always the customer.”
While the new European rules on carbon dioxide emissions are onerous, regulators have granted some concessions to ease the industry into the new regime. During 2020, only 95% of sales are included, giving a window for carmakers to keep selling their most polluting — and often most profitable — models. This window closes the next year, when all sales will count.
In terms of a “supercredit” scheme, electric vehicles will count twice towards the fleet’s average emissions during 2020, with their value falling to 1.67 in 2021, then 1.33 in 2022, and back to one in 2023.
Many carmakers are expected to use as many credits as they can during 2020, when they count for most.
Manufacturers can also only use up to 7.5g/km of total benefit from the EV credits.
Unlike the US, carmakers cannot sell credits to rivals or bank them for the following year, though they can team up in “pools” that allow them to trade credits within the pool. /©
THE EFFECT OF THE NEW STANDARDS RUNS DEEPER THAN THE ARRAY OF VEHICLES LINED UP ON A FORECOURT
FOR SOME MANUFACTURERS, THE TARGETS CANNOT BE MET EVEN BY A BIG RISE IN ELECTRIC SALES