EU fines and electric future not entirely in the hands of OEMs

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In the face of government and citizens’ rising concern over climate change, vehicle emission regulations around the world are tightening, especially in Europe. In our latest business intelligence report, we forecast that carmakers will face hefty fines under tightening vehicle emission targets, driven largely by factors outside their control.

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In our latest report, “Climate Change vs. Carmakers”, we see the problem as one between balancing the huge costs of fines with the high costs of complying with emissions targets. “If OEMs do nothing to bring down emissions, those OEMs selling into the EU market face crippling fines collectively of as much as €25bn ($27.5bn) per year, which is equivalent to OEMs’ entire Eurozone automotive profits, wiping out their already slim operating margins,” said Daniel Harrison, author of the report and automotive analyst at Automotive from Ultima Media.

“However, to fully meet the emissions targets requires huge compliance costs of around €12bn per year for the OEMs to fit the extra vehicle technology required to bring down emissions. Inevitably the reality is going to be a trade-off between fully paying the fines and full compliance. Ultimately, each OEM will be somewhere on that continuum.”

However, OEMs do not have the power to control where they end up on that continuum.

For example, targets are individual to each OEM and based upon the fleet average weight of vehicles actually sold and registered. A strong sales trend continues towards larger cars such as SUVs and crossovers that tend to emit more CO2. While OEMs can influence model offerings and sales strategies, few will ignore the will of their customers.

Government policy is also likely to play as great a role in consumer decisions over buying electric vehicles as OEM investments in technology. That includes the degree of subsidies and incentives they might offer, tax levels set for petrol and diesel vehicles, or the implementation of low-emission zones. Local government and third party private sector providers also play a bigger role than OEMs in rolling out charging infrastructure.

In view of these and other factors outside of OEMs’ control, we are sceptical of those commentators and automotive executives who confidently state that OEMs will “definitely meet the targets”.

Our analysis looks at the investment in low-emission vehicles and product launches, their emissions trajectory, traction in low-emission vehicles and alliances in battery and powertrain technologies. While we forecast that most of the OEMs will nearly meet the EU targets, many will still face substantial fines, albeit at the low end of some other estimates.

The costs of these fines will have a profound impact upon OEM margins and cash flow. As many executives in the industry rightly complain, this money could be better spent by the OEMs in further developing low-emission technologies to meet targets.