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Europe Tightens Fuel Economy Rules, Car Market Goes Nuts

Europe Tightens Fuel Economy Rules, Car Market Goes Nuts.

“This clearly shows exceptional and temporary pre-registration activity associated with the moves (to tighten fuel consumption rules)”

Europe’s car sales soared in August, but will fall back again by at least as much in coming months as the industry grapples with new and tighter rules on fuel economy which threaten existential damage to their finances.

Car sales in Western Europe spiked almost 27% in August to an all-time annual rate high of 18.4 million, from 14.7 million in July, according to LMC Automotive, as manufacturers sought to offload vehicles that would not be able to make the tight fuel consumption rules which started September 1.

According to IHS Markit analyst Ian Fletcher the new rules have temporarily skewed the market for cars.

“”This (the latest data) clearly shows exceptional and temporary pre-registration activity associated with the moves (to tighten fuel consumption rules),” Fletcher said.

LMC Automotive agrees.

“We should not read too much into this due to the unique circumstances affecting Western European sales currently. From  September 1, the new, stricter (rules) must be used for all new cars in the E.U., and only a limited number of cars tested under the old rules can be sold after this date. Therefore, in August there was a strong incentive for self-registration of vehicles and heavy discounting on the part of retailers, while savvy buyers may have made purchases before higher taxes were applied where these are linked to CO2 emissions,” LMC analyst Jonathan Poskitt said.

Margins squeezed
The forced nature of these sales also suggests profit margins were squeezed to the bone.

The new rules – Worldwide Harmonized Light Vehicle Test Procedure or WLTP – were intended to force automakers to be more honest about the fuel consumption of their vehicles. Under the previous set of rules, manufacturers were allowed to figure out fuel consumption with test beds which used all kinds of tactics to keep fuel consumption down, like never switching the air conditioning or lights on, always assuming a light person was at the controls who never drove up hill, while manipulating tire pressures to ensure maximum frugality.

The result of this, manufacturers said, was perfect for consumers to compare the relative fuel economy ability of competing vehicles. Trouble is, it also exaggerated fuel economy by often 30% and up to 40%. This enabled manufacturers to appear to meet ever-tightening E.U. fuel economy rules and avoid fines. It also allowed government tax regimes, which also sought to encourage better fuel economy, to appear to be met. The new rules blast a hole in both those scenarios.

The manufacturers face another dilemma. E.U. rules, which tighten again in 2021, require frugal diesels to meet them. But diesels are under threat as politicians point out the health risks of even comparatively new diesels. More and more cities across Europe are banning diesels from city centres.

Diesel dying
The Center for Automotive Research (CAR) at the University of Duisberg-Essen in Germany, in a report, said in the first half of 2018 diesel market share across Europe fell 8.4 percentage points 36.8%. In Germany, Europe’s biggest market, the fall was 9.2 points. In 2016, diesel share in Europe was close to 50%.

As consumers spurn diesels, they are still flocking to buy SUVs, which are bigger and thirstier than regular sedans, and this has forced what was an improving trend in fuel consumption into reverse. CAR said the average fuel consumption across manufacturers fleets will rise to 150 grams per kilometer (g/kms) of CO2 this month after a relentless fall to 118.5 in 2017. The target in 2021 is 95 g/kms.

150 g/km is the equivalent of 36.4 miles per U.S. gallon and 95 g/km is 57.4 mpg.

In the short-term, sales will return to normal, according to LMC.

“We expect that the exceptionally high WLTP-related sales volumes recorded in July and August will be cancelled out by lower sales as we move into the fall, such that the net effect on the year as a whole will be fairly neutral. However, we have recently revised down our forecast, which sees the overall Western European 2018 sales forecast growth nudge down to 1.5%, from 1.6% last month,” Poskitt said.

Western Europe includes all the big markets like Germany, Britain, France, Italy and Spain.

That would bring sales for 2018 in Western Europe to 14.51 million.

IHS Markit has the same forecast for 2018.

In the longer term though, manufacturers face a harsh squeeze.

48 volt mild-hybrids
If they can’t sell diesels, they will face existential problems because by 2021, the E.U. has mandated that massive increase in fuel efficiency. Failure to comply means bottom-line busting fines. Investors hope a switch to battery-only and plug-in hybrid will close the gap, but so far the public hasn’t shown much interest in either because of a combination of expense, and range-anxiety for the electric option. Luckily for them, a new cheaper option may well save the day – the advent of 48 volt mild-hybrids could provide an affordable bridge to 2021 and beyond.


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