ANALYSIS - CO2 Cloud Hangs Over European Carmakers
Date: 02-Feb-07
Country: GERMANY/BELGIUM
Author: Michael Shields and Jeff Mason
The earnings drag from stepped-up spending to curtail greenhouse gases and the sales impact from higher prices for almost all new cars would provide a double whammy that analysts agree has not been priced into the market.
Riven by a dispute over just how tough to be on carmakers, the European Commission is set to unveil its CO2 reduction strategy for autos next week.
Political momentum for binding targets has grown as it becomes clear that European carmakers will miss the voluntary target of reducing the industry-wide average output from new cars to 140 grams per kilometre driven (g/km) by 2008.
"Potential consequences could be large as additional cost estimates are substantial (estimates vary between 600 and 2,500 euros per car in order to meet the 120 g/km level by 2012)," Deutsche Bank analysts said in a note, referring to the goal that has been floated by the European Commission.
Debt ratings could suffer as well.
"The requirement to meet more and more stringent emission standards puts additional strain on the profitability of automakers, which, in the case of volume manufacturers, has been anything but satisfactory in 2006," Standard & Poor's automotive sector debt analyst Maria Bissinger said.
"As a result of profitability and cash flow generation being impacted by cost issues in general, this could lead to pressure on credit ratings."
Car companies and automotive powerhouse Germany have complained that Brussels should not put the environmental burden solely on carmakers' shoulders, warning that thousands of jobs are at stake if the European market for all but small cars dries up.
The Commission says the 120 g/km goal is necessary to meet the EU's commitments to cut greenhouse gas emissions under the Kyoto Protocol. The transport sector is expected to contribute a 10 percent cut in CO2 emissions by 2012 to meet the EU targets.
HIGH PRICE
Manufacturers have cut cars' CO2 emissions by over 12 percent since 1995, but complain there are few tax incentives for small cars at a time European consumers mostly shun "green" vehicles and certainly will not pay extra for them.
Automobile lobby group ACEA, citing a consultant's report, says car prices would increase by 2,450 euros per vehicle if the 120 g/km goal focuses strictly on manufacturers' technology.
"It will kill the European automotive industry," ACEA President Sergio Marchionne, who is chief executive of Fiat, told reporters on Wednesday. The group says that money could be better spent on more effective ways to cut emissions.
The EU provided some relief to car makers on Wednesday by proposing a bigger role for oil companies in curbing CO2 output.
Still, the big, powerful cars and sport utility vehicles that generate the most money for automakers will not be off the hook should Brussels decide to impose CO2 caps for the industry, individual companies or -- Germany's nightmare -- each car.
One question the EU has not yet answered is what penalty would be assessed to carmakers that miss the new goals.
"If there's a new target of 120 g/km without any penalty, it would be useless," said Dresdner Kleinwort analyst Arndt Ellinghorst. He estimated a "worst case" scenario of a 1,000 euro charge per car would cause mass market carmakers' earnings before interest and tax (EBIT) to shrink by nearly two-thirds.
Dresdner Kleinwort estimated premium car brands would have to increase fuel efficiency by roughly 50 percent within the next five years to met the 120 g/km goal.
Ferdinand Dudenhoeffer, director of Gelsenkirchen University's auto research institute, said the best way forward would be adopting a system that caps cars' CO2 output and lets automakers with the most polluting cars buy permits from makers of the more environmentally friendly.
Should manufacturers whose fleets emit under 140 g/km be allowed to sell permits to the rest, price increases could range from 150 euros per
