OEMs’ profit strategies today could hurt them tomorrow

Although carmakers in the EU are set to be hit with significant fines for failing to meet CO2 targets, some are pursuing strategies that will actually hurt their chances of reducing penalties in the interest of higher profits and maintaining other requirements, as outlined in our new report “Climate Change vs. Carmakers”.

Daniel Harrison, author of the report and automotive analyst at Automotive from Ultima Media, commented: “You would imagine that automotive OEMs would be doing everything that they possibly can to meet emissions target and avoid the fines, however, this is actually not the case.”

Bigger will not always pay
The trend towards growing sales of SUVs and crossovers is in part consumer led, but OEMs are also encouraging this trend. SUVs and crossovers are usually more profitable for OEMs; in a climate of stagnant or falling sales volumes, it is understandable why they would pursue sales of higher margin vehicles to maintain operating margins.

However, SUVs emit more CO2 as they are taller, heavier and less aerodynamic. The increasing proportion of SUVs in the product mix is pushing up the overall CO2 fleet average for OEMs, which will lead to a reckoning as the new targets come into effect.

Safer, heavier – more polluting
The SUV trend aside, safety regulations and features now seen as standard have contributed to heavier, higher-emitting vehicles. The average weight of new cars in the EU increased by 124kg from 2000 to 2016, with higher average emissions of an estimated 10g per km.

This extra weight is due to features such as air conditioning and electric windows, and increased crash protection to achieve higher European New Car Assessment Programme (Euro NCAP) safety ratings. But these additions have again increased average CO2 emissions.

Diesel in decline
Early gains in CO2 emissions reductions were achieved by government-backed shifts across the EU to diesel as the basis that it produces fewer CO2 emissions than petrol engines. That policy has since been reversed due to ‘dieselgate’ and growing public concern over the health implications arising from diesel particulate emissions.

Within the EU, diesel vehicle sales have fallen from a peak of 56% in 2011 to 36% in 2018, and were just 31.3% of sales in the second quarter this year. This fall has led to a parallel increase in CO2 emissions because of a higher share of petrol vehicles.

No longer business as usual?
These three factors have had the unintended consequence of pushing up average emissions even as OEMs are required to reduce emissions further to meet EU targets. They have all made business sense in many ways. For example, it is unsurprising that the OEMs are pursuing a policy of short-term profitability in SUVs for as long as they can, before reigning in vehicle emissions next year. Their shareholders would expect no less. However, the impact of leaving it all to the last moment is that the OEMs are perhaps less prepared to meet the targets than they should be at this late stage, with the implicit risk of missing the tightening targets starting in 2020.

Ultima Media’s full report is available for download here.