Emissions Targets To Facilitate Industry Integration

BMI View : We expect to see more JVs between auto manufacturers and suppliers to achieve lower emissions from driving. Furthermore, as autos companies seek to integrate their supply chains, we expect to see further M&A deals with suppliers focusing on fuel efficiency and emissions-reduction technology.

Carbon dioxide emission rates for passenger cars in the European Union (EU-27) declined to 127 grams of CO2 per kilometre (g/km) in 2013, according to provisional data from the European Environment Agency (EEA). The primary drivers of efficiency have been technological improvements from autos manufacturers and increased sales volumes of diesel cars, which typically have lower emissions levels than petrol equivalents.

Industry Outlook- Increasingly Integrated

Lower Emissions, But Regional Disparities Emerging
Average CO2 emissions (g CO2/km) from new passenger cars by region

Emissions Targets To Facilitate Industry Integration

BMI View : We expect to see more JVs between auto manufacturers and suppliers to achieve lower emissions from driving. Furthermore, as autos companies seek to integrate their supply chains, we expect to see further M&A deals with suppliers focusing on fuel efficiency and emissions-reduction technology.

Carbon dioxide emission rates for passenger cars in the European Union (EU-27) declined to 127 grams of CO2 per kilometre (g/km) in 2013, according to provisional data from the European Environment Agency (EEA). The primary drivers of efficiency have been technological improvements from autos manufacturers and increased sales volumes of diesel cars, which typically have lower emissions levels than petrol equivalents.

Industry Outlook- Increasingly Integrated

Ongoing reductions in emissions levels have come largely from improvements in the fuel efficiency of traditional engines. BMI believes that fuel efficiency will become increasingly important across all markets in the region, especially as fuel costs rise.

BMI believes that further reductions in emissions levels will require ever-higher levels of investment as the technology becomes ever more complex. BMI has long maintained that automotive manufacturers and suppliers will increasingly form joint ventures in the field of alternative fuels and emissions reduction, as this will help create economies of scale and thereby reduce costs. For example, German autos manufacturer Daimler is to jointly develop a new EV model for the Chinese market with domestic manufacturer BYD, allowing the two companies to share R&D and development costs.

Moreover, auto parts manufacturers may be seen as potential merger and acquisition targets as carmakers seek to acquire specialised technology and integrate their supply chain. In the coming years, as the industry increasingly moves towards lowering emissions further to meet more stringent standards, we expect to see further collaboration and integration across the autos industry.

Ambitious European Targets

EU Member States have a collective target to average 130g/km of CO2 for new cars sold by 2015. The average figure for the EU-28 region is already below this, although there is some variation amongst individual countries ( see graph).

In 2013, the most efficient cars were bought in the Netherlands (109g CO2/km), Greece (111g) and Portugal (112g) while the country selling the least efficient cars was Latvia (147g) followed by Estonia (147g) and Bulgaria (142g). BMI attributes this to varying preferences, as consumers in the latter countries generally prefer cheaper, less fuel-efficient cars with higher CO2 emission levels.

Manufacturers will have to keep reducing emissions levels to meet the target of 95g CO2/km by 2021. BMI believes that further reductions in emissions will require ever-higher levels of investment as the technology becomes ever more complex.

Lower Emissions, But Regional Disparities Emerging
Average CO2 emissions (g CO2/km) from new passenger cars by region

Diesel Penetration Improving Emissions

A key driver of improvements in emissions levels has been the rising prevalence of diesel-powered cars across Europe. In the EU-15 bloc of countries, diesel cars accounted for some 53.8% of new cars sold in 2013, at 11.1mn units. This is up from a penetration rate of 32.8%, some 14.3mn units, in 2000.

Typically, diesel cars have lower emissions levels than petrol equivalents, although the efficiency gap between new petrol and diesel vehicles has been decreasing in recent years. As the technology improves, this convergence is likely to continue. Accordingly, we expect the popularity of diesel cars in Europe to wane as the emission rates, and running costs, converge.

Moreover, petrol cars are better suited to the ever-increasing use of cars in congested urban areas (with low average driving speeds and lower-rev use), as opposed to rural areas or long-distance commuting, where diesel-powered cars can achieve better fuel economy.

Shrinking Market Size Accretive To Lower Emissions

The European autos market is far below its 2007 peak of 15.5mn new car sales. Following a period of sustained declines in sales volumes, 11.8mn new cars were registered in 2013. BMI believes that price-conscious consumers have become increasingly concerned over fuel efficiency and driving costs, prompting automakers to shift their line-ups towards lower-emission cars. Although we expect to see an increase in regional sales volumes in 2014, volumes will remain below their pre-crisis peak for some time and we expect sales of cheaper, more efficient, vehicles to remain robust as the recovery in private consumption is still nascent.

EVs Unlikely To Gain Ground

Some of the reduction in emissions has come from a rise in sales of alternatively-fuelled vehicles. In 2013, some 24,000 pure electric vehicles (EVs) were registered across the EU. This represents a substantial gain in sales in recent years, but the EV market is still very small in volume terms.

BMI has long maintained that there are a number of barriers to broader adoption of the technology, including the relatively high purchasing price and several usability issues. Indeed, for many of the EVs currently available in Europe, charging can take time and they often have a fairly limited range. This has led to range anxiety amongst consumers and also raised concerns over practicality (particularly outside of urban areas where the majority of charging infrastructure has been installed).

A number of companies, including Nissan Motor, have attempted to overcome this with the installation of rapid charging networks. In Estonia, for example, the government has invested heavily in installing EV charging points across the country, but this has yet to significantly boost sales of alternatively-fuelled cars ( see 'Nationwide EV Charging Infrastructure And Generous Incentives Yet To Boost EV Sales', June 22 2012).

We expect EV sales volumes to remain low for some time, as barriers to growth in the segment are still pertinent. Over the longer term, however, we expect to see sustained growth in this segment as some of these issues are addressed and technological improvements facilitate expansion of the market.

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