This year could be a watershed moment for Europe’s automakers. Strict carbon dioxide emission targets are being phased in just at a time when the sector is at a crossroads as it continues on its bumpy ride away from polluting diesel and petrol engines towards electric.
The new CO2 rules will make the transition all the trickier. Never before has the industry faced the very real possibility of flunking its mandated European fleet emission target, risking enormous fines that could run into the hundreds of millions of euros.
It's also muddying the outlook. Automakers typically set production and sales goals against all kinds of trend data and consumption patterns. Plus, they look at macro factors such as employment and wage growth, which in Europe is anything but certain with the euro area expected to grow a meager 1.2 percent in 2020. Add to it looming CO2 compliance standards and there's only one thing anyone can agree upon—carmakers are going to be longing for the good ol’ days of 2019.
“Selling a Mercedes AMG, or a 12-cylinder car is going to be punished starting from January so carmakers are getting them number plates now in order not to wreck their CO2 in 2020. Expect a crazy December,” Christoph Stürmer, Global Lead Analyst at PwC Autofacts, told Fortune. “It could be one of the strongest Porsche months ever in Europe,” he said of December.
Registrations of heavy off-road vehicles like a BMW X5 have already surged 40 percent or more in Germany in each of the past two months while sports cars jumped 67 percent in last October, as automakers rushed to ensure the worst of its gas guzzlers are registered before December 31st. A similar trend can be seen across Europe. There has been a surge in new vehicle registrations across Europe in the past three months, the European Automobile Manufacturers Association reported on December 17.
A reckoning could be just around the corner, however. By pulling forward demand to clear out inventories of their biggest polluters, automakers could be sewing the seeds of a sales slump come January.
“The CO2 regulations are casting their shadow on 2020,” said Bernhard Mattes, head of the country’s auto industry association VDA. It is forecasting a drop in vehicle sales of 2 percent in Europe this year due to the expected hangover.
Brussels is cracking down hard on carbon emissions from cars, vans and trucks, since road transport accounts for one-fifth of all greenhouse gases in the EU. Worse, it remains the one sector of the economy that has consistently failed to lower its carbon footprint over benchmark 1990 levels.
Carmakers will therefore be required to reduce their fleet’s CO2 footprint to an average of 95 grams per kilometer by 2021 from 120.4 g/km recorded for 2018, even though this affects only a small portion of vehicles on the road. Electric and hybrid-electric vehicles are still a tiny sliver of the overall European car market, and, despite generous subsidies available in certain countries and healthy demand, are unlikely to help automakers meet their emissions goals any time soon.
Since compliance falls heavily on the manufacturers (rather than consumers) many automakers have had to take some drastic measures. “We’ve been hearing that some carmakers have assigned their dealers their own specific CO2 fleet emissions target and changed the incentive structure accordingly,” a senior industry lobbyist told Fortune.
This is only the beginning: Brussels has mandated a further limit of roughly 60 g/km for 2030 and even that might be tightened. New Commission President Ursula von der Leyen revealed last week plans to propose to the EU Parliament and member states an upward revision by June 2021 of this additional 37.5 percent reduction.
The outlook isn’t looking good, either. It took six full years to lower CO2 by 22 g/km on average. Now they have just one-third of that time to achieve a similar reduction. Unfortunately the trend has reversed, and fleet emissions have been on the rise for the past two years. Daimler now expects it will incur costs of over 1 billion euros next year alone on CO2 compliance.
Anecdotal evidence suggest manufacturers are therefore attempting to delay delivery of low emitting vehicles to customers by several weeks to ensure their registration is counted towards next year’s targets.
The first Porsche Taycan electric sports cars will be delivered for U.S. customers on last December, but Europeans won’t get them until January. That way each is guaranteed to count towards the CO2 fleet target of parent company Volkswagen.
“We are already starting to see seasonal distortion coming into play as a result of impending regulatory hurdles,” wrote industry research firm LMC Automotive in a research note.
It estimates the western European market will be 7.5 percentage points stronger in the fourth quarter than it otherwise would have been; for 2020, volumes could slide a “rather disappointing” 1 percent.
...And yet positive road signs
Economic fundamentals for the euro area actually support solid demand next year. Consumer confidence is above its historical average, wage growth adjusted for inflation continued at a brisk pace in the third quarter and unemployment reached 7.5 percent in October, a low not seen since July, 2008. Overall Joblessness throughout the entire EU remained beneath the January 2000 level when records began.
And yet, dealers in Germany expect volumes from private retail customers to be particularly affected next year—at least compared with corporate car buyers. They forecast a hefty 18 percent decline for this retail segment of the market as carmakers may artificially limit availability of their popular SUV models to ensure compliance with EU caps.
“Usually the two limiting factors for car sales are unemployment and interest rates. And looking at those, there’s no reason for people not to buy cars next year,” said Stürmer. “The only thing that could actually keep people from doing so is that they can’t get what they want, either because the OEMs cannot, or will not supply them.”
In other words, Porsche dealers in 2020 will be putting the hard sell on customers to forget Porsche 911s and instead give the Taycan a test-drive.