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AB 2000 studies

Alain Boublil Blog


Car industry : the crisis is taking shape

Frankfurt Show will close its doors at the end of the week. It is organized every two years alternately with the Paris one and it will have been impacted by three events which testify about the crisis which is announcing in this key sector of the German economy and which will not stay confined in this country. The chairman of the German carmakers Association, VDA, has announced his resignation the day after the inauguration by Angela Merkel. Most of the foreign carmakers, to the exception of Honda and Ford, have decided not to participate to the Show, which is unprecedented. At last, several demonstrations happened outside the Show to denounce the consequences regarding environment of the vehicles which are emitting more and more CO2 like SUVs and which are presented there.

Regarding major markets, we observe a fall of registrations. In China, where the rise had been spectacular between 2013 and 2017, increasing from 18 to near 25 million units, market is coming into a consolidation period. It has fallen by 4% in 2018 and by about 12% since the beginning of the year. The end of public subventions and a restrictive policy affecting the delivery of registration permits in some major cities affected by big pollution problems are partly explaining this drop. European (-3%) and American (-2.5%) markets during the last eight months endure also a significant slowing.

The global economic situation is especially unfavorable to the German industry even if its local market is resisting better than elsewhere in Europe. It has had to cope with the consequences of the “dieselgate” which has generated very heavy provisions in the carmakers accounts. Daimler (-15%) and BMW (-20%) share values have fell for a year. Growing international trade tensions constitute a threat for exports toward the U.S. where the American president has threat to tax them. To that must be added the Chinese economy slowing and its consequences on the car sector. If BMW with sales increasing by 18% during the seven first months of the year is very well resisting to it, Daimler (-8%) and especially Volkswagen (-16%) are hardly affected which will not be without consequences on their financial results since the contribution of the Chinese market to their profits before taxes is above 30%.

Such is the context in which European carmakers are at the eve of the introduction by Brussels in 2020 of the objectives regarding CO2 emissions by sold vehicle, i.e. 95 g. per km with heavy penalties if they don’t respect them. With the exception of Toyota, which has a high proportion of hybrid vehicles, all carmakers were last year above 105 g. per km and German ones around 120 g. per km. The provisioned penalties which will have to be paid in case of failure to keep within these limits are evaluated for 2021 year a little less than five billion euros. The mechanism raises several problems. First, it concerns only sold vehicles. But nothing seems to have been envisioned regarding leased vehicles with a long duration, which are still the property of the carmaker and constitute an important factor of their commercial strategy.     

Then, the compliance about these standards will depend from consumer choices. The carmaker masters the vehicle range proposed to clients and the Frankfurt Show, at least by German and Chinese ones, has revealed their efforts to offer electric vehicles to their clients. The important investments achieved to increase the attractiveness of this kind of motorization are another component of their strategy. But the last word will be the customer one. The mechanism put in place by Brussels consists in taxing carmakers, not on the basis of their failure to offer appropriate vehicles, but on customer decisions they are not responsible for. So, until now, they are definitely going on the opposite direction to what is searched. Electric vehicles are representing rarely more than 2% of the registrations because their characteristic (cost, autonomy, access to recharging equipments) are not addressing users needs and that has no chance to change quickly. To the opposite, they prefer more powerful vehicles like SUVs which are emitting more CO2 and they are more and more getting away from diesel which emits less.

We are, there, in presence of one of the major contradictions of the environment European policy which doesn’t know how to make the difference between local attacks like diesel motors particles emissions which generate breathing sicknesses and global ones which generate climate warming. Ruling authorities are most of the time local ones and they have imposed in large cities growing restrictions to the use of diesel engines. So it is not surprising that  consumers have adapted their demand to this new context through a coming back to petrol engines which are emitting more CO2. The paradox is that it will result growing difficulties to carmakers to comply with the imposed rules imposed by Brussels when they have definitely no responsibility in that situation.    

The solution imagined to cope with this contradiction is to secure, as soon as possible, the conditions for the development of electric motorization. Above the research and investments efforts of the car industry, including equipments manufacturers, that supposes huge investments to put at car drivers disposal a large network of recharging stations. It will also be necessary, which is rarely put forward, to adapt the power distribution network to that new demand which it is not able today to address due to the peaks which will appear, around the highways for instance.

Regarding environment, the progressive electrification of the number of cars needs also to take into account the conditions of power production. In countries like Germany or Poland, coal share in the power mix is still very high, and it will remain, if we hear Angela Merkel declarations which mention coal-power plants closing only at the “2038 horizon” or Greenpeace militants who support Polish coal miners. Vehicle electrification in these two countries will generate an increase of the emissions from power plants among the most polluting in Europe. To the opposite, in France, it will not have these consequences, to the condition however that the State renounces to reduce the share of nuclear power plants as strongly as it is forecast in the present legislation. But consumption peaks generated by vehicles recharging during week-ends or holiday travels will need to keep, during still a long period, thermal power plants.

Measures decided by Brussels will provide profit to European institutions which will receive several billion each year. But it is not sure that it will manifest itself by a significant reduction of CO2 emissions. The supplementary power production will generate an increase of emissions which will offset by the same amount the reduction of fossil fuels consumption by vehicles. The only real loser will be the European car industry with hundreds of thousands jobs threatened and to the profit of its great competitor, the Chinese industry. That one will take advantage of the technologies it has developed to satisfy its local market to get success on its foreign markets. It will also take advantage of the financial difficulties of its European rivals. But the ecological global assessment will be disputable because the production of batteries in China will necessitate also there electricity produced by coal power plants.


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