Shifting Gears: The auto industry prepares for price war over E-cars due To EU rules

April 20, 2020

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2 min read

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What's going on here?

Carmakers are preparing for a “price war” due to increasing fear regarding the impact of new EU regulations on carbon emissions.

What does this mean?

The regulations, which entered into force on 1 January 2020, require all manufacturers to pay a fine of €95 (£79) for every gram over the target of 95g of dioxide  per kilometre, multiplied by the total number of cars they sell. As a result, the companies are slashing the prices of hybrid and electric models in order to shift consumers away from their less eco-friendly models. 

Two further points need to be kept in mind. First of all, although the move is aimed at making  electric vehicles (EVs) more popular, it will not be enough to avoid the high burden imposed by the new rules. It is estimated that around  €8.4bn (£7.1bn) will be lost by carmakers over the next two years as they try to comply with the regulations. To put this into perspective, Daimler, the owner of the luxury brand Mercedes, is projected to lose around €1 bn.

Secondly, these losses will significantly hit the auto industry which is already in a bleak situation. It represented 20% of 2018’s slowdown in GDP and roughly 30% of the slowdown in global trade, according to the IMF’s latest World Economic Outlook. There is still lower demand for cars as a result of the surge in ride hailing apps, coupled with the  “wait-and-see attitude” adopted by the consumers due to technology advancements. It is thus likely that the auto-industry will probably shrink even further, with a drop of 2% in demand being expected in 2020.

What's the big picture effect?

Despite the hit the auto-industry is going to take,  there are some positive effects of the new regulations.  They have helped increase demand in the short term. As December drew to a close, the number of registrations of heavy off-road vehicles, like a BMW X5, surged 40% or more in Germany in each of the past two months while sports cars jumped 67%. 

The new regulations also kick-started a general overhaul of the auto industry, by forcing the carmakers to exponentially increase the number of hybrids and EVs. It is expected that from less than 175 available EV models on the market, the offer will soar to more than 330 models in 2020. For an industry that has barely changed its emission level from the 1990s, this can be seen as a welcome change. 

In addition, it seems that the consumers are receptive to the idea of an increase in EVs: Europe’s largest auto market, Germany, saw January fossil fuel vehicle sales drop by over 15% year-on-year, with gasoline vehicles alone down over 17%. Meanwhile, EVs increased their market share to 6.5% from 2.5%. Europe’s big five markets are now at a combined 6.0% EV market share.  Analysts at Deloitte estimate the market will reach a tipping point in 2022, when the cost of ownership of an electric car is on par with its internal combustion engine counterparts.

Overall, it seems that 2020 will be a watershed year for the auto industry, with the “electric revolution” finally kicking into high gear and preparing to take over the old fossil fuel models.

Report written by Bogdan Ciacli

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