Diesel Crisis Threatens Financial Hit For BMW, Mercedes, Audi.
“Due to high diesel sales to company cars we see a strong threat for leasing companies and car makers’ banks. There is a strong threat that they will have to write off millions of euros due to worsening residual values.”
Diesel sales in Europe are crumbling, as environmental activists ignite health fears and politicians promise to curb diesel access to cities with high taxes and outright bans.
Diesels, once lauded as the planet’s saviour because of their miserly use of fuel, are now loathed by some because of their emissions of noxious gases and particulates. No matter that government “experts” were aware of diesel’s health drawbacks when they were being recommended at the turn of the century when it was seen as a price worth paying. Car companies and buyers are now paying it.
Car buyers face the prospect of their trade-in values being trashed as diesels are demonised. Manufacturers’ lease financing schemes and banks would also be torpedoed by falling second-hand prices, while ever-tightening European Union fuel consumption regulations, requiring much help from efficient diesels, could be missed, triggering bottom-line wrecking fines, but also the need to spend big on technology to replace oil burners with battery-electric, plug-in hybrids or even fuel cells.
And the biggest sufferers from this trend will be the premium manufacturers in Germany like BMW, Mercedes and Audi. Tata Motors’ Jaguar Land Rover and Chinese controlled Volvo are also threatened. They all have diesel sales comprising from 65 per cent to almost 100 per cent of their sales in Western Europe.
Sales of diesel powered cars and SUVs were as high as 55.7 per cent of Western European vehicle sales in 2011, have been around 50 per cent since then, but are now showing signs of great fragility, with some experts saying by 2025 market share could collapse to about 15 per cent.
Spurred by governments
This surge in European diesel sales was spurred by governments, seeking ways to meet climate change aspirations by curbing fuel use and meet tough carbon dioxide (CO2) emissions rules. Across Europe, incentives to persuade people to buy diesels included less tax at the pump, and attractive tax regimes for company cars.
Wall Street Journal columnist Holman W. Jenkins said this whole policy was a futile chase for curbs in CO2 to prevent climate change, which he says will only achieve a miniscule cut in global warming.
“Virtually everyone agrees Europe’s “dash for diesel” was a monstrous policy error, not to mention the proximate cause of the emissions-cheating scandal that has engulfed Volkswagen and other auto makers. Yet the overarching imperative today is to vilify the car companies and insist they do better at achieving meaningless reductions in CO2 emissions, now by forcing them to build electric cars that customers must be bribed and pressured into buying. Not to be questioned, though, is the green agenda or the competence of Europe’s political class,” Jenkins said in a recent column.
The burgeoning bad publicity about diesels is freaking out the public.
“There is a kind of panic spreading among buyers concerning diesel technology and whether they could get a good price if they sell later,” said Professor Stefan Bratzel, from the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany.
Politicians across Europe, including London, Paris and Berlin, have been talking about banning all diesels from city centres and withdrawing tax incentives. This has irritated manufacturers because the latest diesel technology is said to be cleaner than earlier versions, and much money has been invested to achieve this. Any ban should be selective, they say.
Bratzel said in Germany there is political pressure to curb diesel access to cities, and various legal decisions are awaited which could aggravate the panic even more. He said diesel market share in Germany could sink to less than 40 per cent this year and slide to maybe 30 per cent in the next few years.
Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, agrees diesel market share in Germany could slip below 40 per cent this year, from close to 47 per cent in 2016, drop to close to 20 per cent by 2020, and on down to 15 per cent in 2025. In Western Europe, Dudenhoeffer reckons diesel share will be a little better, possibly hitting 30 per cent in 2020 but also hitting about 15 per cent in 2025.
This change in tastes presents a big financial threat to manufacturers.
“Due to high diesel sales to company cars we see a strong threat for leasing companies and car makers’ banks. There is a strong threat that they will have to write off millions of euros due to worsening residual values. What we saw in 2010 in the U.S. with big losses of banks and leasing companies will be repeated in Europe, due to diesel,” Dudenhoeffer said.
Diesel’s image needs to be improved, but that looks unlikely.
“Up till now, nearly all car makers did cheat with diesels. Now it is too late to tell the story that diesel will save the world. So we see after 2020 big threats for penalty payments to the E.U. due to CO2 problems, and in the next 3 years bigger losses at the car maker’s bank divisions due to the deterioration of residual values,” Dudenhoeffer said.
This will be a particular problem for the upmarket manufacturers who have the biggest percentage of diesels in their fleets.
“Yes the premium manufacturers’ profits will be threatened and they need a certain market share for diesels to meet CO2 emissions targets. This will involve price cuts and rebates,” said CAM’s Bratzel.
“They will also have to turn to new technology, with plug-in hybrids the first strategy, but their costs are still quite high. And they will have to work intensely on battery electric vehicles, but that will take another few years,” Bratzel said.
Dudenhoeffer agrees that the future lies with battery electric vehicles rather than plug-in hybrids or fuel cells, the latter being a lost cause. But he thinks premium profits may be propped up by continuing success in China.
“I don’t think plug-in hybrids will help much. They must go straight to battery electric vehicles with a 600 kilometre (372 mile) range and 20 to 15 minute charging times. They’ll have to do what Tesla does,” Dudenhoeffer said.
Not all diesel sales forecasts are as apocalyptic as Dudenhoeffer’s. Al Bedwell, analyst with LMC-Auto, reckons diesel share in Western Europe will slip to 45.8 per cent in 2017, 40.3 per cent in 2020 and 33.6 per cent in 2024.
“We see the diesel decline continuing, but I’m not as pessimistic as some. The manufacturers don’t have a full replacement for diesel as far as CO2 is concerned although I think mild hybrid gasoline will be a part-substitute. The overall solution to emissions – both noxious and none-noxious – will be a mix of technologies, and diesel still has a big part to play, especially for brands like Mercedes,” Bedwell said.
Nick Oliver, Professor of Management at University of Edinburgh Business School, said some politicians have been making political capital out of the diesel controversy, with some questionable pledges. But all is not lost.
“The auto industry has proved quite resilient in responding to similar challenges in the past – think lead in petrol, catalytic convertors etc – although the VW scandal has eroded public trust in the industry, which means the public may be more sceptical about genuine improvements than in the past,” Oliver said.
Investment bank Morgan Stanley sees a big financial threat, particularly to the premium manufacturers.
“Lower diesel penetration will cause average CO2 emissions to rise sharply raising the potential cost of E.U fines for 2020 emissions standards non-compliance. With up to 1 million annual sales and potential emissions up to 15-20 g/km above the 2020 standards (about 20%) luxury (manufacturers) annual CO2 penalties could rise towards 2 billion euros ($2.1 billion) a year,” Morgan Stanley said in a recent report.