Caught in the CO2 trap: German carmakers face billions in losses

Caught in the CO2 trap
German carmakers face billions in losses

By Helmut Becker

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Sales problems in China, cut profit targets, impending layoffs and factory closures: German car manufacturers are in dire straits. But things could get even worse – from 2025.

Firstly, things turn out differently and secondly, not as you think. This insight has never been more true than it is today in the German car industry, especially at industry leader Volkswagen in Wolfsburg. In April 2019, the EU issued so-called CO2 fleet limits for passenger cars and light commercial vehicles, which will come into effect from 2025 and 2030 respectively. These set a limit for the CO2 emissions of cars. Each manufacturer must achieve its own targets, which are based on the type of vehicle fleet.

This limit must not be exceeded on average by all vehicles registered in the EU in a year by a manufacturer. If it is exceeded, the manufacturer will have to pay high fines. The basic principle: the more battery-electric cars (BEVs), the less CO2 emissions, the lower the fines – or even none at all. The EU Commission wanted to promote a transformation of combustion engine technology into electric drives.

In February 2023, these limits were tightened again and are now binding: 95 grams per kilometer (g/km) from 2025; 50 g/km from 2030 and 0 g/km from 2035. From then on, there will be complete freedom from emissions, which would amount to a de facto ban on combustion engines.

Rosy prospects

The German car manufacturers agreed to this gradual abolition of their 100-year-old combustion-based business model without any noticeable resistance. This is because politicians in Brussels and Berlin promised a golden future for all those involved with the transition to BEV electromobility: cleaner air, cheaper cars, technological leadership in electromobility.

High government purchase premiums and tax breaks for consumers when purchasing electric cars, an unexpected rise of the electric pioneer and world market leader Tesla, and rosy sales prospects had their effect: German car manufacturers invested heavily in the new electric technology, always with the public accusing them of having missed the future compared to Tesla.

As a result, factories were completely rebuilt or shut down, model ranges were “electrified” at high speed, industry beacons made public statements that from 2030 onwards they would only build electric cars, and battery factories were to be built from scratch.

In their BEV euphoria, all manufacturers trusted that the fine print in the EU CO2 emission targets would never come into effect: namely, high fines for not meeting the fleet emission limits. A limit of around 95 grams was agreed for 2025; to date, this value has been 115.1 grams of CO2 per kilometer in the EU fleet average. There is a risk of high penalties if the CO2 target is exceeded. For every gram over the target, a fine of 95 euros must be paid per vehicle sold. With sales figures in the millions, it adds up…

E-sales slump

The current situation for all European/German car manufacturers is fatal: All car manufacturers are making high losses in their electric car divisions. But all of them are also facing additional high losses from fines to Brussels because no one can comply with the individual fleet limit of 95 g/km. The market for BEVs in Germany and Europe has collapsed so far this year, while combustion engines are actually increasing their market share. In Germany, BEV sales in August were 68.8 percent below the previous year’s level, and the share of battery-electric cars in the overall market shrank to 12.7 from 18.6 percent within a year. In the EU, BEV registrations fell by 43.9 percent in August compared to the same month last year. The overall market share collapsed to 12.6 from 21 percent.

When it comes to the fines that will be due from 2025, VW is the best German manufacturer: Analysts at Dataforce had calculated that Volkswagen alone would face fines of four to five billion euros at the current level of its BEV and plug-in hybrid sales. Ford also faces hefty fines. The German premium manufacturers are each more or less just under half a billion euros in CO2 fines. For the European car industry as a whole, ACEA President Luca De Meo puts the fines at a total of 15 billion euros.

Courage is required

Helmut Becker writes a monthly column about the car market for n-tv.de. Becker was chief economist at BMW for 24 years and heads the "Institute for Economic Analysis and Communication (IWK)"He advises companies on automotive-specific issues.

And now? The manufacturers have two options, neither of which can avoid losses, only mitigate them – if at all. Firstly: drastically limiting combustion engine production in the mass segment and significantly increasing prices in the less price-sensitive upscale model ranges.

And secondly: drastic reduction in the price of BEVs to boost sales. Result: price war certain, increase in sales uncertain, rather negative, as consumers have so far spurned even cheap or small BEVs such as the Fiat 500e, Dacia Spring, Mini, Tesla Model 3 or individual Chinese models despite high discounts.

As a result, car manufacturers are caught in the CO2 trap. Given the foreseeable weakness of the market, the strategy of reducing the number of combustion engines and increasing their prices leads to the conclusion that the losses in total sales volume are greater than the profits as a whole. The BEV reduction strategy may lead to an increase in sales in individual cases, but the market as a whole is hardly growing as a result. The only thing that is certain is that everyone’s losses will grow in the end, in other words, the pie will not get any bigger.

Losses will remain either way. The safest way to minimize losses would be to postpone CO2 limits into the future, withdraw the absolute ban on combustion engines and replace them with climate neutrality. This would be possible without losing face, because the business basis of the electric market has changed completely in the meantime: the mass market cannot do anything with battery-electric cars.

This change of course requires courage. The courage to admit that the stricter emission limits for 2019 and 2023 were wrongly set, both in Brussels and Berlin: It is foreseeable that the CO2 problem of combustion engine fleets cannot be solved from a social point of view through the steering function of higher prices alone.

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