New co2 emission regulations in europe: a perfect storm for car manufacturers?

  • The most pressing threat ahead of Europes car industry isnt Brexit or potential U.S. tariffs. Its the EUs own regulations for limiting car- bon dioxide (CO2) emissions: On April 15th 2019, the bloc finalized  its regulatory framework, adding two ambitious targets to reduce  CO2 emissions, due to be met by 2025 and 2030, on top of the exist-  ing target of -20% in just two years.

 

  • The emissions targets could potentially cause an adverse scenario for the car industry by creating a three-pronged challenge: First, an industrial challenge since such targets will require a drastic adjust-  ment in the powertrain mix in favor of alternatively powered vehi-  cles (APVs), notably electric vehicles (EVs). Second, a financial chal-  lenge: Based on 2018 figures, the total amount of the fines would  reach EUR30bn, equivalent to half of the combined net profits reg-  istered by car manufacturers. As for production costs, they could  increase by as much as +7% by the end of 2020 and by +15% by  2025. Last, a commercial challenge: A full pass-through of the extra  costs of production to customers would lead to a decline of -9% in  car sales by the end of 2020, and -18% by 2025. This would cost -0.1  pp of both French and German GDP growth in both 2019 and 2020,  and put 160K jobs at risk. In addition, growing competition by EV  manufacturers would add downside pressure on turnovers and  margins.

 

  • Car makers will do their best to avoid this perfect storm by using accrued financial buffers and reducing costs, tapping into super credits”, entering partnership agreements called poolsand con-  solidating further. This partial adaptation strategy will only enable  them to fulfill 30% of their obligations. As a result, by the end of  2020, we expect a +2.6% increase in average car prices; a -3.1% de-  cline in new car registrations; a loss of EUR2.9bn in car sales; 60K  jobs to be at risk and an almost certainty that car makers will fail to  comply with the CO2 targets. Given the size of the European auto  industry, which accounts for 13% of manufacturing production and  13.3mn direct and indirect jobs, consumers and policymakers will  have to chip in.

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