* Cost set to increase by tighter regulation. As part of the Credit Suisse Connection Series, we outline increasing costs for the automotive industry driven by tighter regulation (Drive Train to Supply Chain). Costs for the OEMs are set to increase meaningfully over the next few years in order to achieve the emission targets. From 2014 to 2020/21 we estimate that the European OEMs have to reduce the CO2 targets on average by 27 grams with the German OEMs as well as FCA having the biggest gap to reach the target while Peugeot and Renault look somewhat better positioned. Assuming average cost to reduce one gram of CO2 at €40 (fine is €95/gram from 2019 onwards), the cost increase ranges from €760 to €1,280 per car for companies under coverage.
* Tightening NOx targets put further pressure on OEMs: In addition to meaningful reduction in CO2 levels, costs for diesel engines will also increase given higher required content per vehicle. NOx regulation was already tightened with Euro 6 implementation, which sets a limit of 80mg/km (180mg/km for Euro 5). However, according to the European Commission currently produced Euro 6 diesel cars exceed the NOx limit 4-5 times on average in real driving conditions (RDE) versus laboratory testing (360mg/km taking the mid-point). Under Euro 6c, tests will be carried out under real driving conditions, which will start from September 2017. In a first step, car manufacturers will have to bring down the discrepancy to a conformity factor of maximum 2.1 (110%) for new models.
Assuming 2.1x on 80mg/km, this would imply c.168mg/km under real mdriving conditions or -53% versus current levels (360mg/km – taking the mid-point of 4-5 times indicated by the Commission). Cost for SCR technology is around €450.
* Schaeffler (OP) well positioned. Among the suppliers, we see Schaeffler well positioned to benefit from ongoing downsizing and efficiency gains for the gasoline engine versus the diesel engine. We estimate that the content for Schaeffler in a gasoline engine is 2x higher versus diesel. This stands in contrast to Conti, which has a disproportional high content in diesel engines versus gasoline (delta of +60% in diesel).