Recession ahead – road sign warning concept
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The era of the electric car will kick off at the Frankfurt Auto Show next month after many false dawns, but the European industry in general and the German one in particular face a wide ranging assault on profits from an imminent recession, tariff wars, Brexit, spending on new technology, and the existential threat of massive EU fines for infractions of CO2 regulations.
And the threat from penalties is so huge, unconfirmed reports suggest the EU is considering diverting the money from fines into a special fund to bail out the most seriously wounded carmakers, and help the whole industry interest finance electric cars.
Manufacturers of the first electric cars hoped to be able to earn fat profits from early adopters. But the likes Volkswagen with its new ID.3 could be forced to sell them at a loss because these sales will be crucial in lowering the average fleet CO2 level to the demanded level of the equivalent of 57.4 miles per U.S. gallon. This increases by a step through 2025 to unlikely 92 miles per U.S. gallon average by 2030.
Manufacturers will also be forced to stop selling high profit margin gas guzzling performance cars in order to bring down the average fleet fuel consumption, small cars with little or no profit margin will be unloaded on to the market.
Car buyers will soon figure out that they have an unprecedented whip hand over manufacturers and will be relentlessly bidding prices down across the board.
And the deteriorating economy won’t help.
According to BNP Paribas Bank, Germany is already in a recession and the Eurozone is on the brink of one. The International Monetary Fund cut its global growth forecast in July for the 3rd time this year.
Professor Ferdinand Dudenhoeffer’s Center of Automotive Research (CAR) expects German car sales to fall 3.3% to 3.33 million in 2019. German vehicle production at 4.7 million in 2019 will be the lowest in 21 years.
“(world) Demand for new cars will fall by more than 4 million in 2019, worse than in the global financial crisis of 2008 and 2009. Donald Trump wants to break up the EU agricultural market and car tariffs are his weapon. There will be further profit warnings and bankruptcies. At the same time billions have to be invested in electromobility, and when electric cars come into the market you have to continue to expect poor margins,” Dudenhoeffer said.
The Center of Automotive Management (CAM) shares in the gloomy outlook.
“A rapid turnaround in (global) car sales is unlikely in the context of unresolved trade conflicts and the impending Brexit. In particular, in the world’s largest car market China, significant market declines are still probable. CAM sticks to the full-year forecast, which assumes a 5% decline in the global car market,” CAM ‘s Professor Stefan Bratzel said.
Britain is expected to leave the EU on October 31, but the terms of its exit remain to be established, and the industry worries that production from U.K. factories might be interrupted, while car sales there might also be slashed because of political uncertainty.
Moody’s Investors Service says car sales in Western Europe will slide.
“We expect Western European light vehicle sales to fall 2% in 2019 and 3% in 2020, which represents a shift away from our previous forecast of about 0.5% growth both this year and next,” Moody’s said in a report.
Western Europe includes all the big markets like Germany, France, Britain, Spain and Italy.
Moody’s points out that although the market is weakening, it is still at historically high levels,
“Despite falling demand, Western European unit sales volumes remain near historically high levels, with 2019 likely to represent the third consecutive year of almost stable volumes. Consumer confidence has recently fallen from historical highs, while economic growth continues to slow. We expect euro area GDP growth of 1.3% this year and 1.4% in 2020, down from 1.8% growth in 2018. Nonetheless, we still do not anticipate a cyclical downturn in 2020 but the modest 3% decline in European demand will still be at a plateau reached in 2017,” Moody’s said.
Western European new car sales sank 3.1% during the first six months of the year to 8.2 million, with all major markets declining modestly, except Germany, which eked out a 0.5% increase, according to the European Automobile Manufacturers Association.
But the elephant in the room is the EU’s CO2 regulations.
According to a recent report from investment researcher Jefferies, if the auto industry makes no progress from 2018 towards meeting the EU’s 2020/21 regulations, it faces fines totalling 32 billion euros ($36 billion), twice its estimated profits, and will be forced to raise prices up to 10%.
The European Car Manufacturers Association, known by its French acronym ACEA, has said 2018 carbon dioxide (CO2) emissions actually rose 1.6%, as sales of diesel-powered vehicles slid, and demand for bigger gas-guzzling SUVs spiked.
Evercore ISI, estimated the penalty potential very close to Jefferies’ estimate, at 32.7 billion euros, and pointed to BMW and Mercedes as being slow to bring electric cars to market.
These predictions of EU CO2 rule-induced financial calamity have led to some surprising suggestions. One rumor circulating in automotive markets says that the EU is mindful of the damage its rules are likely to cause, but because of the bureaucratic nature of the EU’s legislation procedures it is impossible to reverse the rules in a timely fashion. Because of this, the EU is planning to retain the massive fines prised from the industry and set up a damage limitation fund, along the lines of the Marshall Aid funding after World War II, under which it will bail out the damaged manufacturers and fund the research needed to make the European industry all-electric.
It does seem a mad world that sets up legislation to force the auto industry to clean up, but when the authors realise it may have the unintended consequence of actually bankrupting part of Europe’s most successful industries, it is powerless to change it, and has to resort to this unlikely sounding arrangement which hands over control to politicians. Not a recipe for success.
EU bureaucrats are not at their posts currently due to the long summer vacation.
The ACEA reacted to this report by saying, among other things, that the EU should encourage member states to subsidize charging points for electric vehicles, and vehicle sales to consumers. It didn’t respond to the Marshall Plan report.
Here is the response from an ACEA spokesperson.
“All car makers remain fully committed to further reducing CO2 from their vehicles and to striving to meet the 2021 emissions targets. However, these CO2 targets are demanding, and unfortunately there are a number of obstacles in the way of meeting them. These include declining sales in diesel-fuelled cars, which are largely offset by sales of petrol cars, as well as a low albeit growing market share of electric cars.
Consequently, the prospect of fines is, to a varying degree, a concern for some manufacturers. Obviously, failure to meet the 2021 targets would also put manufacturers at a major disadvantage for reaching the recently-set 2025 and 2030 CO2 targets.
To overcome this negative cycle, ACEA is urging the 28 EU member states to step up investments in charging points for electrically-chargeable vehicles and refuelling stations for other alternatively-powered cars, and to put in place meaningful and sustainable incentive schemes to encourage more consumers to buy them.
Manufacturers will from their side continue to invest massively in all low- and zero-emission technologies – including full battery electric cars, plug-in hybrids and hybrid electric vehicles, as well as those fuelled by natural gas or hydrogen.”
