The most serious challenge facing the European automotive industry is not the global trade war, the decline in car sales or the Brexit, but carbon dioxide emissions.
The latest and strict carbon dioxide emission reduction targets will be implemented gradually within the EU next year, and those that fail to meet emission requirements will face punitive fines. However, the European automotive industry is not currently ready for this. According to the latest regulations, by 2021, automakers must reduce the average CO2 emissions per vehicle to less than 95 grams per kilometer. Exceeding the target's carbon dioxide emissions per gram will require a fine of 95 euros and will also need to be multiplied by the number of cars sold that year.
Carlos Tavares, CEO of Peugeot Citroé¾™n Group (PSA), said last month, “This will be a daunting task, but we need to meet the rules at all costs.â€
However, the current status quo in Europe is that carbon dioxide emissions are not decreasing. Carbon dioxide emissions are rising as consumers give up buying diesel cars instead of buying alternatives such as petrol cars; coupled with the growing preference for sport utility vehicles, this further exacerbates pollution levels.
According to data from 2018, the average carbon dioxide emissions rose to a four-year high of 121 grams per kilometer. According to IHS Markit, suv sales have increased by three-quarters since 2015. SUVs are heavier than traditional cars and therefore produce more carbon dioxide.
Another complicating factor is the sharp decline in sales of diesel vehicles. Since the exposure of the Volkswagen Group's diesel emissions scandal in 2015, consumers lost confidence in the environmental qualifications of diesel vehicles. At that time, it was reported that the harmful nitrogen oxides produced by diesel vehicles were much higher than their propaganda levels.
The scandal is a big blow to diesel cars and automakers who rely on diesel to cut carbon dioxide emissions, because diesel cars typically emit one-fifth less carbon than gasoline. As early as 2011, diesel vehicles accounted for 56% of EU vehicle sales, but last year it fell to 37%. All of the above factors have caused the European automotive industry to be in trouble.
Arndt Ellinghorst, chief automotive analyst at Evercore ISI, said the CO2 emissions challenge is the biggest structural headwind facing the industry, potentially more destructive than the trade war between China and the United States, US tariffs, diesel bans and Brexit. Ellinghorst estimates that the European automotive industry will spend 15.5 billion euros just to make the car meet emission standards.
The new emission regulations will come into effect next year and will apply to more than 95% of the car brands. The middle transition period is to give automakers some room to maneuver, so that they can better cope with the new regulations.
Many automakers have turned to electrification and want to replace heavy-duty vehicles with electric vehicles. But the high cost of electric vehicles means that their profit margins are lower than that of traditional cars, and some car manufacturers are even losing money in the electrification process. When talking about the challenges facing auto industry executives, PSA Group CEO Tavares said, “Automakers either increase the price of electric vehicles or sell cars at a loss, so the company needs to restructure to save losses.â€
UBS’s Patrick Hummel said, “This is a poisonous cocktail for automakers. First, the car’s sales cycle has peaked. The new carbon dioxide emissions are another disadvantage, and they’re spending on technology. Increasing."
UBS expects total European car sales to fall by 7.4 billion euros in 2021 due to the cost of meeting CO2 reduction targets, a decline of about 14% compared to 2018.
For some automakers, the impact on their profits may be even greater. PSA predicts that in order to meet emission regulations, its earnings per share will be reduced by 25% in 2021. UBS expects profits from Volkswagen, Renault, Daimler and BMW to fall by 13%, 10%, 9% and 7% respectively.
Volkswagen sold 4.4 million vehicles in Europe last year, and its average carbon dioxide emissions are 123 grams per kilometer. Although it is closer to the new carbon dioxide emission reduction target than many of its peers, the gap is still difficult to bridge.
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