The emissions targets could potentially cause an adverse scenario for the car industry by creating a three-pronged challenge:
First, an industrial challenge since such targets will require a drastic adjustment in the powertrain mix in favor of alternatively powered vehicles (APVs), notably electric vehicles (EVs).
Second, a financial challenge: Based on 2018 figures, the total amount of the fines would reach EUR30bn, equivalent to half of the combined net profits registered by car manufacturers. As for production costs, they could increase by as much as +7% by the end of 2020 and by +15% by 2025.
Last, a commercial challenge: A full pass-through of the extra costs of production to customers would lead to a decline of -9% in car sales by the end of 2020, and -18% by 2025. This would cost -0.1 pp of both French and German GDP growth in both 2019 and 2020, and put 160K jobs at risk. In addition, growing competition by EV manufacturers would add downside pressure on turnovers and margins.
Car makers will do their best to avoid this perfect storm by using accrued financial buffers and reducing costs, tapping into “super credits”, entering partnership agreements called “pools” and consolidating further. This partial adaptation strategy will only enable them to fulfill 30% of their obligations.
As a result, by the end of 2020, we expect a +2.6% increase in average car prices; a -3.1% decline in new car registrations; a loss of EUR2.9bn in car sales; 60K jobs to be at risk and an almost certainty that car makers will fail to comply with the CO2 targets. Given the size of the European auto industry, which accounts for 13% of manufacturing production and 13.3mn direct and indirect jobs, consumers and policymakers will have to chip in.