Powertrain market analysis for revised EU fleet emissions scenarios

As part of the European Green Deal initiative, tomorrow (14
July) the European Commission will unveil its ‘Fit for 55’ package
of legislation aimed at slashing greenhouse gas emissions across
the European Union by 55% by 2030, which will have potentially
massive implications for Europe’s automotive industry.

Outlook: The component that will govern the future passenger car
emissions regulations is expected to increase from the proposed
current fleet CO2 reduction of 37.5% by 2030, to 50% or even a
stretch goal of 65%. This will of course mean a significant
acceleration of the pace of light-vehicle electrification across
the bloc.

The European Commission is set to unveil its ‘Fit for 55’
legislative agenda tomorrow (14 July), which is aimed at reducing
European Union-wide greenhouse gas emissions by 55% from 1990
levels by 2030. This will include a component called ‘Amendment of
the Regulation setting CO2 emission standards for cars and vans’
which will have potentially huge implications for the European
automotive industry. IHS Markit expects that the announcement
regarding the future emissions framework for light vehicles will go
a lot further than the existing proposal, which was to target a
37.5% reduction in passenger car carbon dioxide (CO2) emissions
from 2021 target levels. Now, IHS Markit expects that target will
be raised by anything from between 50% to as much as 65%. The
higher target is now more likely given the fact that the European
Commission is expected to set out a proposal for a 100% CO2
reduction for the passenger car and LCV fleet by 2035.

This will have massive implications for the electrification
strategies of the major OEMs operating in the EU market. It is
clear that if these stretch goals are implemented as solid
proposals to be voted into legislation, that OEMs that have been
bolder and invested heavily earlier on in electrification will have
a significant advantage. Below, we present data on what each
scenario could mean for passenger car powertrain type market share
in EU by 2030.

The data highlight the far greater emphasis on battery electric
vehicles (BEVs) under these two scenarios. A 39.4% BEV share was
forecast to be required to meet the 37.5% reduction in CO2 by 2030
in the EU; under a 50% reduction scenario this share is expected to
reach 51.5%, while in a 65% reduction scenario, BEVs would need to
reach a 62.9% share. This will be to the detriment of other
powertrain types that have been more commonplace up to now,
including plug-in hybrid (PHEV), which has been seen as a
transitioning technology for some customers towards BEVs.

This acceleration of electrification across the EU will not only
affect OEMs. The market for lithium-ion batteries in the EU (for
passenger cars) would evolve, as the demand in 2030 would be pushed
from 354 GWh for the current 37.5% reduction target to 438 GWh for
the 50% reduction target and 528 GWh for the 65% reduction
target.

Such scenarios will also have a marked impact on some Tier 1
supplier business strategies as the demand for components for
traditional internal combustion engine (ICE) powertrains will of
course drop off at faster rate than anticipated under the original
37.5% reduction target. Indeed, rather than 60.3% of passenger car
registrations in the EU still using ICE by 2030, only 48% would use
them under the 50% reduction scenario and 36.6% under the 65%
reduction.

Outlook and implications

There has been fair warning of the plans for more aggressive
emissions targets, after the European Commission put forward its ‘Sustainable and Smart Mobility late last year. This proposal
included an aim to have 30 million zero-emission light vehicles on
EU roads by 2030, as well as provide “a clear pathway from 2025
onwards towards zero-emission mobility.”

More recently, as this shift became unavoidable, there has been
a clear indication that OEMs are hoping to be well prepared for
this shift, as they unveiled accelerated long-term plans for
electrification transition. Almost all light-vehicle manufacturers
in the region disclosed revised strategies during the last six
months, notably including the three largest volume makers
Renault-Nissan, Stellantis and the Volkswagen (VW) Group, which is
making an announcement later today. These plans include the launch
of vehicles to meet these new targets, as well as revised brand
strategies, with some of them even becoming BEV-only such as Volvo,
Ford, Mini, Jaguar, and Opel. In addition, they have also announced
investments in technology and relationships to secure enough
components to meet the expected demand. Although there may be some
rumblings of discontent about the severity of these new targets, it
seems unlikely that it will present any shocks or knee-jerk
responses, given that this has been the broad direction of travel
for the industry for some time.

It should also be noted that these will not be the final targets
released on Wednesday and there is likely to be plenty of
discussion as it is passed between the European Parliament and
European Council in the months to come, as part of the process of
it becoming EU law. This certainly was the case before the 2025 and
2030 targets were agreed in April 2019. However, there appears to
be more and more political momentum from the environmental lobby
and from politicians of a progressive nature, recognizing that
previously imposed targets have not gone far enough and that there
needs to be a far more aggressive target in place if the automotive
industry is going to meet the ‘Fit for 55’ targets.

This announcement is also likely to have a profound effect on
BEV charging infrastructure. Any further shift away from ICE
passenger cars will require a corresponding massive increase in
investment in public charging infrastructure. Individual countries
within the bloc have made separate announcements about charging
infrastructure investment and last year the European Commission
published the ‘Sustainable and Smart Mobility Strategy’, which
pledged to have 1 million recharging points completed by 2025, and
3 million forecast at that point to be required by 2030. However, a
pan-EU push towards BEV by 2035 is likely to mean this plan will
need to be revisited and draft documents seen by Bloomberg indicate
that that the accelerated reduction in CO2 emissions for light
vehicles will be supported by regulations that will require EU
member states to ensure that public charging points are installed
every 60km along major highways.

IHS Markit will continue to track the announcement and will
provide additional analysis as it becomes available.

Source: http://ihsmarkit.com/research-analysis/powertrain-market-analysis-for-revised-eu-fleet-emissions.html