The European automotive industry has a problem with emissions

The automotive companies operating in Europe are in trouble. The decline in the sales of diesel cars indicates that manufacturers may not be able to meet the targets for CO2 emissions.

According to the latest data from the Eurostat, in 2017 carbon dioxide emissions from fossil fuel combustion increased by 1.8 per cent in the European Union (EU). The European Commission (EC) has announced that it would propose a long-term strategy for greenhouse gas emissions reduction.

According to the European Environment Agency (EEA) and the research firm JATO Dynamics, the average CO2 emissions of a new car sold in the EU rose for the first time since records began.

The data of the EEA relate to 28 member states of the EU, while the data presented by JATO relate to 23 countries, including 21 EU member states, as well as Norway and Switzerland. These two datasets differ slightly as to the magnitude of the increase in CO2 emissions. The agency claims that emissions increased by 0.4 g/km to 118.5g/km, while the research company says that they increased by 0.3 g/km to 118.1 g/km. There are also differences in the data regarding the individual countries. According to the EEA, in Poland the average emissions of newly registered passenger cars amounted to 127.7 g/km, while JATO claims that they only reached 126.4 g/km.

The increase in CO2 emissions is bad news for the automotive industry. In accordance with the targets set by the European Union, by 2021 the average CO2 exhaust emissions of newly registered vehicles are not supposed to exceed 95 g/km. Additionally, the EC has launched a debate concerning a further reduction in emissions and is currently aiming at a 30 per cent reduction by 2030. The chances that all the manufacturers will manage to achieve the average CO2 emissions planned in Brussels appear to be slim right now.

If the car makers — including German, French and Italian companies producing cars in Poland — fail to meet the EU target set for 2021, they will have to pay hundreds of millions, if not billions of EUR in penalties. This in turn could have a negative impact on their financial condition and — as a consequence — on their share prices.

According to data from JATA, among the companies selling the largest numbers of passenger cars in Europe, the companies that are the closest to reaching the 2021 target include Toyota, Peugeot, Citroen and Renault, while the companies that are the furthest from the target include Mazda, Mercedes, Volvo and Audi. Importantly, out of these eight manufacturers, only Toyota and Audi reduced their average CO2 emissions last year. In the case of Volkswagen, which is the largest European manufacturer of passenger cars, the average CO2 emissions reached 119.6 g/km in 2017 after an increase of 2 g/km.

Three reasons

The increase in average CO2 emissions recorded last year — which is likely to be repeated this year as well — is due to several factors. The main reason is the lower sales of cars with a diesel engine. After three years of growth in demand for such cars, which resulted from a general upswing in the European car market, a sharp drop in sales occurred last year. This was a delayed reaction to Volkswagen’s fraud revealed in 2015 (the company had installed special software in cars with a diesel engine which enabled the falsification of the results of exhaust tests).

Consumers started buying cars with petrol engines rather than diesel cars. The only problem is that petrol vehicles have higher CO2 emissions than cars with diesel engines. According to the EEA data for 2017, petrol vehicles emit 121.6 g/km while diesel vehicles emit 117.9 g/km of CO2 on average. Some consumers are eschewing diesel cars in order to limit the pollution of the environment with nitrogen oxides, while others are changing their purchasing choices because they are afraid that local authorities could ban diesel vehicles from entering cities, which is becoming increasingly likely.

According to JATA data, 6.77 million diesel cars were sold in Europe in the past year, which is 7.9 per cent less than a year earlier. Their share in the total number of cars registered for the first time fell to 43.8 per cent, which is the lowest level since 2003. Customers in Germany bought the largest number of diesel powered vehicles (1.34 million units). The highest share of diesel engines among new car registrations was recorded in Ireland (65.2 per cent), and the lowest share was recorded in the Netherlands (19 per cent). In Poland, where this share has been lower than the European average for years, it amounted to 28 per cent, which was one of the lowest levels in Europe.

The second reason for the increase in the average emissions of carbon dioxide is the greater demand for SUVs and vehicles with more powerful engines, that is, cars with higher CO2 emissions. JATO reports that SUVs registered for the first time emitted 133 g/km on average, which is 1.9 g/km less than the year before. The decrease is due to the launch of sales of smaller cars from this class and the introduction of new SUV models with hybrid engines.

There is also a third factor. The demand for alternative fuel vehicles (AFV), including electric cars, is still weak. While it is growing much faster (38.6 per cent) than the total sales of cars (3.3 per cent), it is still in the single digits in terms of the percentage share in sales.

According to the European Automobile Manufacturers’ Association (ACEA), in the whole of 2017, in the countries of the European Union, as well as Norway and Switzerland, approx. 135,400 battery electric vehicles (BEV), almost 144,000 plug-in hybrid electric vehicles (PHEV) and 460,400 hybrid vehicles were sold. The total sales of alternative fuel vehicles (also including hydrogen fuel cell cars as well as LPG vehicles) amounted to 953.400 units, which corresponds to 6.1 per cent of the total sales of new passenger cars estimated by ACEA at 15.6 million units.

The reasons for the weak demand for electric and hybrid cars include the fact that they are still clearly more expensive than internal combustion vehicles of the same class (in some countries a part of this difference is compensated by state incentives, including tax breaks) and the fact that the infrastructure of publicly available charging stations is still inadequate.

Acceptance and divisions

It seems that automotive companies have accepted the fact that some of them will probably not be able to reduce their average CO2 emissions to 95 g/km in time. They have differing opinions, however, when it comes to the future of diesel vehicles in general.

Some companies — mainly those who have a relatively low share of diesel cars in their sales or who control a small market share — see the possibility of eliminating cars with such engines. Continental, a German supplier of components and parts for the production of cars, as well as a tyre manufacturer, believes that the last new model of the diesel engine will enter production in 2023. The discontinuation of production of passenger cars with diesel engines has been announced by manufacturers such as Volvo and Fiat Chrysler Automobiles.

On the other hand, we have manufacturers, such as the Volkswagen group, who still believe that the news of diesel’s death is premature, and who are planning to further modernize the engine in order to ensure that it fulfils all the emissions standards. This position is also supported by Bosch, which claims that it has developed a solution that drastically reduces the emissions of carbon dioxide and nitrogen oxide by diesel engines.

The automotive manufacturers operating in Europe also cannot agree on whether they should try to lobby the EU to withdraw from the idea of penalties for companies failing to meet the 2021 carbon dioxide emissions targets.

Carlos Tavares, the president of the French PSA Group (the manufacturer of cars sold under the Peugeot, Citroen, Opel and Vauxhall brands), believes that penalties should be suspended until the governments build an adequate network of electric vehicle charging stations.

However, Erik Jonnaert, the head of The European Automobile Manufacturers’ Association (ACEA), claims that the main objective of the association’s members (which also include PSA) is to ensure that governments provide assistance in achieving the 2021 target and that Brussels lowers its targets for the subsequent years. The manufacturers expect that the EC will lower the 2030 target for the reduction in CO2 emissions from 30 to 20 per cent. They also want it to lower or even eliminate the intermediate target — a 15 per cent reduction in emissions until 2025.

This demand of the ACEA is strongly supported by the associations of car manufacturers operating in the countries of the Visegrad Group (V4), i.e. the Czech Republic, Slovakia, Poland and Hungary. According to the Czech Public Radio, a joint address to the EC was announced following a meeting that took place in Prague in April 2018. The associations argue that the current targets — especially for 2025 — constitute a huge challenge for the manufacturers operating in the region, who directly employ about 640,000 people, and indirectly provide employment to 2.3 million people in these four countries.

Erik Jonnaert agrees with Carlos Tavares that governments should create a favorable environment for growth in the sales of electric vehicles. Such an environment would be created by a network of charging stations that is appropriate to the needs — including the range of electric cars — as well as various types of discounts and privileges, which reduce the costs of purchasing the vehicles and their subsequent use. As emphasized by the associations of manufacturers from the Visegrad Group countries, tax breaks have been applied in all countries which have a high share of electric vehicles in the overall sale of cars. Wherever they were withdrawn — as was temporarily the case in Denmark — the sales of electric vehicles immediately plummeted.

According to analysts, as well as companies such as Renault, in Europe the total cost of owning a mid-range battery electric vehicle — which includes the cost of purchase, its subsequent operation and maintenance — will become equal to the cost of owning a car with an internal combustion engine around 2020, which is more or less when European car manufacturers are planning the launch of a large number of electric vehicle models. The key role here will be played by a further decline in the prices of batteries (read more), which today account for approx. half of the cost of manufacturing an electric car.

Analysts at Barclays Capital have calculated that the sale price of a middle-class battery electric vehicle will be equal to the average price of an analogous car with an internal combustion engine when the cost of the battery reaches USD100 for 1 kWh of capacity. They estimate that such price levels will be reached around 2021. Similar estimates were presented at the end of 2017 by Mary Barra, who is the president of GM.

Industry representatives agree that any possible penalties would strongly affect the financial condition of the industry. European companies are heavily involved in multi-billion EUR investments associated with the launch of mass scale production of many BEV models.

The deterioration of the financial situation of companies will negatively impact the valuation of their shares. This in turn could prompt foreign competitors — and especially companies from China — to attempt to take over European companies. As a result of such acquisitions they could not only obtain access to European technologies, but also control the size of production and employment in the factories located in Europe.

The fact that such fears are not unfounded is confirmed by the example of the German automaker Daimler. In February 2018, a 10 per cent stake in Daimler was acquired by the Chinese company Geely, which has owned a controlling stake in Volvo since 2010. The Chinese investment saved Volvo from bankruptcy, but at the same time it enabled the new owner to transfer technology to its native market.

So far, the arguments of the European automotive industry have not included the estimates of the negative impact that the penalties could have on the GDP of the countries in which the automakers operate.

The German government is signaling support for the automotive industry — although it is not yet known whether it will meet the expectations. In an interview for Bild, the German Minister of the Economy, Peter Altmaier criticized the local companies for delaying investments in the production of electric cars. He also pointed out that the coalition agreement of the parties forming the German government provides for a reduction of the tax burdens for the owners of electric cars and for the construction of at least 100,000 public electric vehicle charging stations.

The effects are already noticeable

Regardless of the future decisions regarding the possible discontinuation of diesel engines, in light of the decrease in the sales of diesel cars, car manufacturers are already deciding to limit their production. This in turn will result in layoffs. In recent weeks, the Jaguar Land Rover group and Nissan announced reductions in employment in their British factories.

The production of diesel engines is also decreasing in Poland. Toyota is starting to phase out the production of hybrid cars at the Jelcz-Laskowice plant. Instead, petrol engines will be produced there, including those designed for use in hybrid vehicles.

After the ownership change, Opel stopped the production of diesel engines in Poland and announced the launch of production of petrol engines. Diesel engines are also manufactured by Volkswagen at the Polkowice plant. The company has announced that in 2019 the factory will start producing the latest generation of engines. Another German company — Daimler — is set to start the production of engines for passenger cars in the Jawor factory. The value of that investment is EUR500m. The construction of the plant is supposed to be completed in 2019 and it should reach its full production capacity in 2020. According to last year’s announcements, the factory will manufacture petrol and diesel engines.

The situation in Poland

The automotive industry is an important part of the Polish economy and exports. According to last year’s report entitled “How Polish is the automotive industry in Poland?” prepared by the Ministry of Development together with the bank PKO BP and the Industrial Development Agency, the automotive industry in Poland is responsible for approx. 8 per cent of the national GDP and 10 per cent of jobs in industry. Two-thirds of the production in the sector takes place in only five Polish voivodships: Śląskie, Wielkopolskie, Mazowieckie, Dolnośląskie and Małopolskie.

Approximately 178,000 workers were employed in the production of cars, components and parts, which puts Poland in the third place in Europe after France (224,000) and Germany (850,000). Around 3.3 million people are employed in the production of cars and car parts in Europe as a whole (i.e. almost 11 per cent of all those employed in factories in Europe), while the automotive industry provides a total of 12.6 million jobs overall.

The decline in European diesel demand is already affecting Polish automotive exports. According to Eurostat, in 2017 the value of such exports increased by 9.75 per cent, to a record level of EUR25.2bn (12.5 per cent of overall Polish exports). These figures led analysts at AutomotiveSuppliers.pl to publish a forecast in March 2018, in which they predicted that in 2018 Polish automotive exports would amount to EUR27bn. One month later, the forecast was lowered to EUR26.5bn. The reduction was justified by the declines in the export of cars (by almost 16 per cent), as well as diesel engines (by almost 11 per cent) and buses (by nearly 30 per cent).

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