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Slipping Sales in 2020 Will Mask EU Mandated Profit Threats

Slipping Sales in 2020 Will Mask EU Mandated Profit Threats.

EU’s Von Der Leyen Wants 40% Target Raised To At Least 50%

European Union (EU) fuel economy regulations designed to force its citizens into electric cars, like or lump it, start to bite in 2020, and despite sales of cars and SUVs falling slightly, the impact on profitability could well threaten the solvency of weaker mass market manufacturers.

And the EU has threatened to make the rules even more onerous for the industry by 2030.

Manufacturers will have to curtail sales of their biggest profit makers, which tend to be big, heavy, powerful and sexy, and push battery-only or plug-in hybrid models likely to be sold at a loss with a rosy scenario or a whopping big loss if it’s worst case.

EU rules say manufacturers must achieve a fleet average CO2 emissions the equivalent of 57.4 miles per U.S. gallon by next year and 2021. This increases through to 92 miles per U.S. gallon average by 2030 and another step in 2025. This effectively means that a majority of car sales will need to be all-electric by 2030.

According to a report from investment researcher Jefferies in August, if the auto industry makes no progress in curbing CO2 from 2018 towards meeting the EU’s 2020/21 regulations, it faces fines totalling the equivalent of $36 billion, twice its estimated profits, and be forced to raise prices up to 10%.

And if that’s not bad enough, the new EU Commission leader Ursula von der Leyen announced at the Climate Change summit in Madrid, Spain, current targets for emissions reduction which are 40% below 1990 levels by 2030, should be raised to at least 50%.

The German auto industry association (VDA) is not happy.

“Many companies are already struggling to minimize job losses and manage the impact of several simultaneous challenges, ranging from dropping sales to the shift to electric vehicles. Brussels must not jeopardize the competitiveness of the industrial location of Europe by formulating even stronger climate goals,” VDA chief Bernhard Mates said.

According to the European Auto Manufacturers Association, known by its French acronym ACEA, 2018 CO2 emissions actually rose 1.6%, as sales of diesel-powered vehicles slid, and demand for bigger gas-guzzling SUVs spiked.

The massive improvement required in CO2 emissions means more electric cars, and the big manufacturers, led by Volkswagen, are in the middle of big spending plans to produce enough. VW has said 25% of its global car sales by 2025 will be battery-electric only. Other big manufacturers are pursuing only slightly less adventurous plans. The trouble is, consumers don’t yet seem ready to embrace the concept.

Respected market researcher IHS Markit said by 2025 only 10.2% of global sales will be battery electric, and will only have reached 14.8% by 2030.

This spells financial disaster for the big carmakers if the gap isn’t breached.

Worrying scenario
So the fact that most forecasts for European sales in 2020 show small falls, but close to all-time highs, hides this worrying scenario.

Forecaster LMC Automotive expects slightly lower Western European sales in 2020, but the sting is in the tale of its expectations.

Economic challenges remain, particularly in light of the external trade environment and Brexit uncertainty, and there is a risk that (manufacturers) may have to take action that could have an impact on total market volumes because of forthcoming CO2 targets,” LMC Automotive said in a report.

LMC said currently some manufacturers have brought forward sales of high CO2 emitting, and therefore higher profit making vehicles into 2019. In other words next year, they will have to hold off on sales with juicy profits and push loss-making electric or plug-in hybrid sales which the market doesn’t want, and so will have to be pushed down the throats of unwilling buyers.

Next year, expect sales of less profitable mild and plug-in hybrids to soar. Mild hybrids in internal combustion engines (ICE) use more powerful 48 volt systems to provide additional electrical power to drive an increasing number of electrical components. The higher power can be combined with a belt-starter generator to assist acceleration and can increase fuel efficiency by between 10 and 15%. Plug-in hybrids use powerful batteries offering up to 30 miles of electric-only range, coupled with a regular ICE motor.

LMC Automotive said 2019 Western European sales will hit 14.20 million and slip to 14.06 million in 2020. Western Europe includes the 5 big markets of Germany, France, Britain, Spain and Italy.

Germany’s Center for Automotive Research (CAR) also sees a slightly bigger decline in 2020 for Western Europe to 13.7 million. That includes a 4% fall in Germany to 3.4 million and a 5% dive in a Brexit wracked Britain to 2.2 million.

Balance sheet busting
And as the decade progresses, some big automakers will find they can’t meet the EU rules and will face balance sheet busting fines, according to investment researcher Evercore ISI.

“We remain convinced (CO2 rules breaches) will be a major problem and some manufacturers will not be able to avoid paying fines that can easily reach hundreds of millions, if not billions per company,” Evercore ISI said in a report.


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