Europe's automakers face no-win choices
It's a combination of "Mission: Impossible" and a vicious circle.
Europe's auto manufacturers need to increase the electrification of their fleets to meet new fuel efficiency rules by 2020. The trouble is, current battery technology simply isn't good enough to persuade anyone other than trendy, rich, first adopters to buy electric cars.
And here's the vicious circle part. If automakers do make the technical breakthrough that will halve the price, double the range of battery-only cars and inspire a buying stampede, unaccountable politicians in Brussels will then say, "Thanks for that. We knew you could do it. Here are your new, tougher targets."
Mainstream forecasters are certain that by 2025, battery-only cars will still only earn a pitifully small global market share, with plug-in hybrids and regular hybrids doing a bit better. Internal combustion engines (ICE) will retain an overwhelming majority.
In the middle of 2014, the IHS Automotive consultancy predicted that by 2020, battery-only vehicles will have a global market share of less than one percent, with regular hybrids and plug-ins accounting for almost five percent. By 2025, battery-only will progress to close to 1.5 percent and hybrids move just past 6 percent.
Earlier this month, BMW board member Ian Robertson said 2015 was potentially a breakthrough year for battery technology. Robertson has made numerous bullish statements about batteries. Last year he said batteries soon will have twice the current power and double the range. "In the next three to four years there will be more progress in battery development than in the previous 100 years," Robertson said then.
Meanwhile BMW has launched the i3 battery-electric city car, which has a range-extender gasoline engine option, and the i8 plug-in hybrid sports car, and plans a range of mainly plug-in hybrid versions of its cars and SUVs through the sub-brand labeled "i." Most mainstream manufacturers have similar plans.
So are forecasters scrambling to revise their electric car and hybrid forecasts to account for this new paradigm? Nope.
IHS Automotive's latest forecasts for battery-electric vehicles in 2020 and 2025 remained virtually unchanged. Hybrid estimates have advanced microscopically to 5.1 percent in 2020 and 6.6 percent by 2025. Fuel cell market penetration will remain almost invisible, even by 2025.
IHS Automotive analyst Pavan Potluri is wary of claims by manufacturers that a technology breakthrough is imminent.
"Most of these claims tend to fizzle out a bit. Having said that, there has been some much needed progress, especially in terms of cost, which would increase the performance and affordability of battery-powered vehicles. Also, automakers who have been dabbling with FC (fuel cell) technology – GM, Hyundai, Daimler, etc. – are hedging their bets and investing in FC, electric vehicles, hybrids, to cover their portfolio to meet the targets. As it currently stands, there is no silver bullet technology yet," Potluri said.
Huge amounts of capital
All the major manufacturers are spending huge amounts of capital trying to produce more fuel-efficient engines, driven by looming new regulations in Europe and the U.S.
Europe demands average vehicle emissions of carbon dioxide that require the equivalent of 43 miles per U.S. gallon by 2015. This will tighten to 57.4 mpg by 2021. The U.S. requires a slightly less aggressive 54.5 mpg by 2025. The European industry reckons it already has the 2015 regulations beaten, but it faces a huge amount of spending to meet the 2020 target, and is starting to get rebellious about the possibility of an even tighter target soon afterward.
Potluri said solid state batteries have the most potential for increasing battery performance, but he hasn't changed his long-term forecasts much.
Al Bedwell, analyst with LMC Automotive, sees progress for a cheaper hybrid version that uses 48-volt electrical technology to wring some new fuel efficiency improvements out of internal combustion engines. By 2020, Bedwell thinks this could command 5 to 10 percent of the European market.
"If we are really entering a period of low fossil fuel costs," Bedwell said, "I think BEVs (battery-electric vehicles) will be hardest hit. I still see plug-in hybrids as a better bet for Europe than BEVs in the next 10 years. Fuel cells still face many headwinds in Europe, but look more likely in California and in Japan, where they may receive fiscal support from government."
This drive to meet CO2 regulations is worrying investors who see costs rising and damaged balance sheets being fatally undermined.
"We estimate it will now cost the industry 13 billion euros ($15.8 billion) to comply, up from 12 billion euros last year," said Evercore ISI analyst Arndt Ellinghorst. "Whilst (manufacturers) have made improvements over the last 12 months, recent conversations with (them) suggest the cost to reduce CO2 emissions has increased from 30 euros to 40 euros a gram as engineers chase diminishing returns.
"In an industry where (manufacturers) generate roughly 200-300 euros ($243-$365) in profit per vehicle, with the majority of E.U. car sales still loss making, incremental costs in excess of 1,000 euros ($1,220) per car will prove challenging to absorb," Ellinghorst said.
Ellinghorst said European carmakers have made great progress in improving fuel consumption. But they might turn out to be victims of their own success.
"Manufacturers may be in a lose/lose situation, with the pace of improvement giving politicians a mandate to push forward with even more stringent regulation," Ellinghorst said.
The vicious circle indeed.
Ellinghorst said Volkswagen, Europe's biggest manufacturer, faces the most expensive cost burden, with an estimated 3.7 billion euros ($4.5 billion) needed to be spent by 2022. Peugeot, Renault and Fiat are also under the gun. Premium makers like BMW and Mercedes will be able to meet targets comfortably. Hyundai has yet to meet its 2015 target, and seems to face the greatest headwinds in Europe, Ellinghorst said.
Europe's biggest market, Germany, is falling behind even the tiny demand for electric cars seen in the rest of the continent. One way to stimulate demand for electric vehicles would be some kind of subsidy, which already exists in France and Britain. Germany has a target of 1 million electric cars on its roads by 2020, and under current conditions this won't come close to being achieved.
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research at the University of Duisberg-Essen said the government should raise two billion euros ($2.4 billion) by adding 1 cent to the price of gasoline and diesel for three years. This would fund 80,000 electric charging stations in 60 cities, as well as subsidizing new electric vehicle purchase and car-sharing schemes. Currently Germany has only 21,000 electric cars with 3,000 charging stations. In the U.S. there are already 223,600 electric cars and 15,200 charging stations, he said.
Dudenhoeffer doesn't buy the speculation by some that CO2 rules will add up to 2,000 euros ($2,425) to the cost of a car.
"All lies. The cars become cheaper as fuel-saving technology can use scale effects. I believe the same will happen after 2020," he said.
Dudenhoeffer said battery technology will improve one day, but manufacturers are reluctant to invest because sales of electric cars have been terrible so far and the financial returns negative, with one notable exception. At a recent conference hosted by CAR, Daimler CEO Dieter Zetsche had this to say: "Daimler earned a lot of money by investing in electric vehicles just one time. When we sold our Tesla stake."
In the fall, Daimler sold its 4 percent stake in Tesla Motors, and pocketed a $780 million profit. That looks like a rare positive in a saga that will cost the industry billions.
Neil Winton, European columnist for Autos Insider, is based in Sussex, England. Email him at email@example.com