European Automakers Face Tougher Emissions Rules

By Gilles Guillaume and Alessandro Parodi

PARIS/GDANSK (Reuters) – European automakers are raising prices of petrol cars and preparing discounts on electric vehicles as they prepare for another challenge: tougher emissions rules that threaten to further shrink profits across the struggling industry.

The European Union will drastically lower its cap on automotive carbon dioxide emissions from January 1. This means at least one-fifth of all sales by most car companies must be electric vehicles (EVs) to avoid heavy fines.

However, so far this year, only 13% of all vehicles sold in the region have been electric, according to the European Automobile Manufacturers' Association (ACEA).

"The gap is really big," said Marc Mortureux, director of French car lobby PFA.

The stricter rules come as the sector is already dealing with excess capacity due to lackluster sales and growing Chinese competition, prompting profit warnings from companies like Volkswagen and Stellantis in recent months.

Companies will now need to sell more EVs, which are costlier to manufacture than traditional vehicles, at a time when political and economic uncertainties, along with declining EV subsidies, are deterring consumption, Mortureux added.

In a sign of growing concern over the regulations, Stellantis CEO Carlos Tavares unexpectedly resigned this month, partly due to disagreements with the board over handling these issues.

Steering Demand

With just weeks to go, Europe's politicians are urging Brussels to reconsider the targets. However, car manufacturers are taking action to avoid fines that could reach up to €15 billion based on current sales, according to ACEA chairman Luca de Meo.

VW, Stellantis, and Renault have raised the prices of petrol engine models by several hundred euros in the last two months, which analysts say is an attempt to curb demand for heavier emitters and make EVs more appealing.

"Carmakers have started with their pricing strategy to steer demand towards battery EVs in order to reach the CO2 targets and avoid potential fines," explained Beatrix Keim of the Center for Automotive Research.

Last month, Stellantis's Peugeot hiked prices in France of all models except fully electric ones by up to €500. Renault Group also raised prices on some petrol models, while keeping hybrid prices unchanged.

Peugeot described the new pricing as an "economic rise," while Renault stated that a rise is "normal" over a car's lifetime.

This strategy could backfire. Increasing petrol car prices should help narrow the gap with more expensive EVs, but due to weak market growth, it may not generate sufficient EV sales, according to a source close to a major European automaker. Currently, sales in the region are around 20% lower than pre-COVID levels.

"In reality, increasing the price of thermal engine cars means cutting production (…) and all the value chain and suppliers will suffer from this," the source added.

Discounts and Pooling

The price increases will help fund future discounts on EVs, acting as “an indirect subsidy” for electric car buyers through combustion engine buyers, though it is likely to hurt margins.

VW, which is expected to be impacted most by the new targets due to high sales volumes, has already reduced prices for its ID3 electric compact car in several markets, bringing it below €30,000 in Germany.

"This is probably what will happen next year," remarked Alastair Bedwell, head of powertrain forecasting at GlobalData, who predicts that EV sales in Europe will jump 41% from this year to 3.1 million units by 2025.

However, discounting to boost sales carries a cost. The UK sector has warned that EV targets will cost automakers £6 billion this year, including about £4 billion in discounts.

“Pooling” emissions, or buying credits from manufacturers with a large number of EVs to reduce emission averages, may be less costly, according to analysts at Barclays. Japan's Suzuki has agreed to pool with Geely-owned Volvo in 2025 to largely eliminate any threat of fines.

Enough is Enough

All these options will strain the industry's slim profits, and companies are still hoping Bruxelles will ease the targets.

“At some point, enough is enough,” expressed PFA president Luc Chatel ahead of the Paris auto show. “I can't sell enough electric vehicles and I'm going to be penalized on my thermal vehicles. What do they want me to make, horse-drawn carriages?”

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