Car makers near CO2 cliff edge in a race for rapid electrification

September 11, 2019

Time is running out for European car makers, who have waited until the last minute to try to meet ambitious European Union (EU) emissions targets and face billions in fines if they fail to comply.

Manufacturers from PSA Group to Volkswagen will use this week’s Frankfurt auto show to reveal the new models and strategies they hope can slash carbon dioxide (CO2) emissions within months.

Michael Lohscheller, Chairman of the Opel Automotive and board member of the PSA Group, and former German football player and head coach of FC Liverpool Juergen Klopp posed next to an Opel Corsa-e car as they open Opel’s booth at the International Auto Show (IAA) in Frankfurt, Germany, on Tuesday. Frankfurt’s biennial International Auto Show (IAA) opens its doors to the public on September 12, 2019. Major foreign carmakers are staying away while climate demonstrators march outside - forming a microcosm of the under-pressure industry’s woes.

But it is a challenge fraught with danger, as the cost of pushing pricey technology on unconvinced consumers could hammer profits in an industry already suffering a downturn in sales.

“You have cars that cost an extra 10,000 euros to build, fleet-emissions targets requiring a certain sales volume and consumers who may or may not want them,” said one PSA executive.

“All the ingredients are there for a powerful explosive.”

By next year, CO2 must be cut to 95 grammes per kilometre for 95% of cars from the current 120.5g average - a figure that has risen of late as consumers spurn fuel-efficient diesels and embrace SUVs. All new cars in the EU must be compliant in 2021.

Another 37.5% cut in carbon dioxide fumes is required between 2021 and 2030 in addition to the 40% cut in emissions between 2007 and 2021.

The timing could hardly be worse, with the world’s main auto markets in decline and the sector braced for a chaotic British exit from the European Union as well as a protracted US-China trade war.

The industry has long since given up pushing for the goals to be relaxed - a political impossibility underlined by a resurgent climate protest movement that has added the Frankfurt show to its target list. Volkswagen’s chief executive, Herbert Diess, said the regulatory crunch and growing support for green causes proves that his company’s 80 billion euros ($88 billion) bet on becoming the world’s largest manufacturer of electric cars is right.

“Even Toyota and some other competitors, which were slow to bring EV’s, they are now also betting on electric. So we are right,” Diess said.

New electric cars wheeled out at the show on Tuesday include PSA Group’s Opel Corsa-e mini and the ID.3 compact from Volkswagen. The German car maker is also making hybrid power standard-issue in its Golf bestseller.

The show is also seized upon by activist groups. Greenpeace on Tuesday inflated a 1,400 cubic metre black balloon emblazoned with the word CO2 from the outsize exhaust pipes of a monster truck to protest the car industry’s reliance on combustion engines.

Fiat Chrysler, which lacks adequate green technology, has agreed to pay Tesla hundreds of millions of euros to pool emissions scores with its electric cars and escape penalties.

For years, image-conscious mass automakers have placed electrified models at the centre of their show stands but near the margins of their commercial offerings. Only now will they be forced to sell them in large numbers, challenging profitability.

To meet the targets, sales of electric cars would need to triple to 6% of the market by 2021, and rechargeable hybrids surge fivefold to a 5% market share, German engineering firm FEV Consulting estimates.

Fines of 95 euros ($105) per car, per excess gramme of CO2 quickly add up to hundreds of millions of euros.

“Market acceptance of a lot of this tech and exactly what people are willing to pay remains very, very unclear,” said Max Warburton, an analyst at brokerage Sanford C. Bernstein, who predicts that car makers will lean on heavily discounted sales to fleet customers and even their own employees.

Rather than incur fines that could total 25 billion euros in 2021 if current lineups were left unchanged, car makers are engaged in a huge product overhaul likely to wipe more than half that amount from combined profits, Bernstein projects. Many electrified offerings are arriving just in time — or in many cases too late — for deliveries to begin in January, when less efficient models will also become more scarce.

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