EU regulations a failure; but industry likely to pay the price
■ Emission regulations to be rebuilt, OEMs could bear cost: VW's scandal
was a wake-up call for regulators and politicians, and is likely to be the
catalyst for sweeping changes to the EU regulatory framework. Arguably, the
entire framework has failed by allowing a company to manipulate its
emissions figures. In particular, the ineffectual testing for NOx emissions now
needs to be rectified to use real-world conditions. However, this could mean
the EC needs to rethink CO2 targets too, as real-world conditions
demonstrate that the NOx/CO2 trade-off appears unviable. While the ultimate
outcome is unclear, we expect the bulk of tightening to focus on NOx.
■ NOx/CO2 trade-off material negative for diesel: The argument that diesel
cars can be both efficient and clean appears to have suffered a significant
setback. While NOx can be reduced through increasing content of
aftertreatment components, this could reduce fuel efficiency by c.20% if Euro
6 limits were to be applied to real-world driving. The value of purchasing a
diesel vehicle becomes increasingly unattractive as fuel economy is thus
sacrificed. We estimate the total cost of ownership advantage of diesel cars
would be reduced from 4% to a 6% disadvantage due to lower fuel efficiency
and residual values.
■ Why the current rules will fail: Assuming no changes to CO2 targets, the
drop in fleet fuel economy due to tighter NOx limits would lead to a widening
gap to the 2020 CO2 target, and could result in penalties to OEMs. In
addition, the cost of increased emissions control content would add further
burden to companies' profits. In this scenario, we estimate that the impact on
earnings would be more than 30%, with potential to critically damage the
industry. Clearly this will be unpalatable for national governments.
■ Politicians to decide fate of industry: Given the magnitude of knock-on
effects on the entire automotive industry, it will be in the hands of politicians
to weigh the impact on public health with the future of the industry. While the
worst-case outcome looks unlikely, we expect the pressure to increase on
the whole industry. VW's infringements put the entire industry in a weak
bargaining position. While we don't expect governments to enforce a 30%
earnings cut, profits will likely still be materially impacted.