Sales vs. emissions The Diesel Dilemma

An increasing number of proposed diesel vehicle bans in European cities is worrying German automakers who are already struggling to lower emissions from their cars.
A source of emissions... and major headaches for carmakers.

The fog is thickening in Munich. For years the city has been trying to lower levels of poisonous nitrogen oxide (NOx) in the air, mainly emitted from car exhausts. But so far, authorities in the Bavarian capital have met with little success. Now, their hand is being forced.

A Bavarian court has given the city a deadline to meet air-quality standards. If no solution is found to the problem in the coming months, a complete ban of diesel vehicles from the city must be implemented at the start of 2018, said the court.

The threat of a diesel ban in Munich and Stuttgart is a nightmare scenario for the German automotive industry. Diesel sales are already falling drastically in Europe, as a recent analysis from analysts at Roland Berger, Europe’s biggest management consultancy, shows. Only in Germany are diesel sales stable.

A driving ban in Daimler and BMW’s home town will probably not change this situation. This is mainly because the auto industry believes that without diesels – which use about a fifth less fuel than gasoline engines do – it has no chance of meeting emissions targets set by the EU for 2021.

“We are not in favor of short-term driving bans,” said Bodo Uebber, Daimler’s head of Finance & Controlling.

If the carmakers miss the 95 grams threshold stipulated by the EU for 2021 by just five grams, they will have to pay a fine of up to €500 million per year.

At Daimler, the alarms have been ringing for weeks now. At a teleconference about the company’s quarterly statement on Wednesday, Mr. Uebber said that the company is currently talking to the Bavarian state government about how to avoid the diesel ban in Stuttgart. There has been no drop in demand for Mercedes diesel cars, and the resale value of used diesels has not shown “any volatility,” Mr. Uebber said.

Behind the scenes, however, people are getting nervous. How air-quality targets will be achieved without a driving ban is not known. Carmakers have so far depended on a technology from the AdBlue company that uses urea to filter out NOx in engines. But because the system used in most cars was designed too small, NOx leaks sometimes completely unfiltered into the air.

This explains the bad results from exhaust measurements taken by the German Federal Office for the Environment, which were published at the start of this week. According to its report, NOx emissions even from engines that meet the EU’s Euro 6 emissions standards are an average of six times over the allowable limit.

All this is unsettling to consumers, which is not only affecting the sales of new vehicles, but the resale value of used diesels as well. More than half of all the cars sold in Europe are diesel powered. About 70 percent of Daimler and BMW sales are diesels, which is much higher than the average. The risks for them from leased diesels that will be returned is also a problem, since carmakers add every second car to their own books via their financial arms.

“Since mid-2016 we see diesel vehicles remaining on sale a lot longer than similar gasoline cars. This trend continued at the start of 2017,” reports market research firm DAT.

DAT confirmed in its Diesel Barometer report that prices remained stable on the German used-car market during the first quarter, but added: “At the same time, the mood among consumers has changed. A quarter of car buyers questioned postponed their purchase because of the current discussions about diesels.”

The rating agency Fitch warned Wednesday that the situation could get even worse. “Driving bans in Europe could put pressure on used car prices,” it said. Fitch pointed out that besides impending driving bans in Germany, the cities of Paris, Madrid and Athens want to ban diesels by 2025.

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Evercore ISI, an investment banking advisory firm, has conducted some careful calculations, concluding that a drop of 5 percent in average resale values would cost the biggest eight European carmakers about €1.6 billion ($1.74 billion). Volkswagen, with losses of €539 million, would be hardest hit, followed by BMW with €310 million and then Daimler with €289 million. In light of billions in profits recently, this is something they can cope with.

Carmakers are keen to reassure investors that they can quickly lower the number of diesels they sell. BMW would only need a quarter of a year to compensate for a drop of 10 percent in diesel sales with gas or hybrid cars, said BMW’s head of finance recently. Daimler’s Mr. Uebber pointed out the “high flexibility” of Mercedes plants.

But this apparent flexibility simply ignores the problems at hand. Like the poor take-up of electric and hybrid cars and their low supply volume. Changing to producing more gasoline engines is also not without its problems. It will automatically increase CO2 emissions from cars.

That’s very bad news. In 2016, the CO2 emissions per kilometer for sold Mercedes cars was on average 123 grams, the same as it was 2015. With BMW vehicles, it was one gram more. If the carmakers miss the 95 grams threshold stipulated by the EU for 2021 by just five grams, they will have to pay a fine of up to €500 million per year, according to the corporate consulting firm PA Consult.

 

Markus Fasse specializes in aviation and automobile industry news. Stefan Menzel writes about the auto industry, focusing on Volkswagen. Martin Murphy covers the steel, car and defense industries for Handelsblatt. To contact the authors: [email protected], [email protected], [email protected]