Automobile
Sector Report - 3rd in a series
This Eurosif sector report has been compiled with research by SAM. It describes the major social
and environmental challenges facing the European automobile industry and the associated
risks and opportunities these pose for long-term returns. Notwithstanding the significant
potential environmental risks and opportunities highlighted in this document, the car industry
has achieved significant improvements in terms of transparency over past years. Although the
auto parts makers are an integrated part of the value chain, specific issues uniquely relevant to
them are not addressed here.
Automobile Features
Production volumes in automobile companies have grown by around 2% per year over the last 20 years;
however, its relative importance in terms of market value compared to other industry sectors has decreased significantly.
Today the automobile industry represents less than 2% of the total European market capitalisation, while 20 years ago
the sector was almost double in relative size.
Only about 1/4 of over 50 car manufacturers who were operating 40 years ago have been able to retain their
economic independence. Despite this consolidation, overcapacity in the industry is a constant issue, keeping pricing
and the return on invested capital under pressure when the cost of capital can often not be covered. A high fixed cost
base ensures that companies follow a growth strategy. However, this does not mean more jobs in the sector, but rather
that fewer employees in lower-cost countries have to produce more.
As a result of tough competition, product cycles have become shorter which creates a crowded market place with
newer and fresher products. This also means that 1) the competitive advantage period of a model, or technology,
decreases, and 2) research & development costs have to be covered more quickly.
Recognising
market movements first, or even creating them, is a key success factor for automobile companies. For
100%
example, early detection of the rising demand for hybrids
Europewas an important marketing move for Toyota, while other
87%
90% 88%
Americas is already quite intense.
companies may be launching their hybrids when competition
80%
50%
40%
30%
60%
72%
50%
0%
58%
53%
34%
21%
20%
10% 8%
4%
8%
10%
4%
2%
Renault SA
Peugeot SA
Renault
SA
15%
10%
13%
2%
21%
15%
24%
13%
9%
13%
9%
33%
24%
13%
13%
8%
Fiat Spa Volkswagen AG BMW AG
Porsche AG DaimlerChrysler AG
Peugeot
SA
Fiat Spa Volkswagen
AG BMW AG
53%
52
Number of independent automotive manufacturers
52
34%
Only one-quarter of all
car manufacturers has
retained its (economic)
independence since
1964
33%
30
30
13%
8%
12
12
1960
Porsche
AG DaimlerChrysler AG
Regional Sales Figures of European Automobile Manufacturers
Automobile Trends
Only one-quarter of all
car manufacturers has
retained its (economic)
independence since
1964
58%
63%
30%
0%
63%
70%
40%
20%
10%
Europe
Americas
Others
Today
1960
Today
Consolidation of European Automobile Manufacturers
since1960’s
The industry is mature, especially in the European and American markets, while some Asian markets (e.g. China and
India) still offer some growth. Overall, demand growth is likely to stay below the nominal GDP (Gross Domestic Product)
expansion rate.
In all consumer markets, whether they are low-priced household goods, food, apparel, or cars, a clear polarisation
exists. On one side there are people who can afford to buy very expensive automobiles, while on the other, demand for
low-cost vehicles is increasing. This trend can be expected to continue and car manufacturers have to ensure that they
are not going to be lost in the middle.
The regulatory focus on greenhouse gas emissions, as well as the increasingly tight regulations on air pollutants, is
creating pressure for automakers to reduce fuel consumption, as well as emissions from internal combustion engines.
The trend is moving towards developing drivetrains based on new technologies such as hybrids and fuel cells.
Branding, technological leadership (especially in fuel efficient propulsion technologies and safety) and consequently
differentiation, as well as good supplier relations will be the key success factors for the automobile company of the
future.
Deutsche Bank, Global Automotive Industry, The Drivers: How to navigate the auto industry, 27 August 2004.
Source: Deutsche Bank
70%
60%
Number of independent automotive manufacturers
70%
87%
90% 88%
80%
Others
72%
70%
Source: Company’s Annual Reports 2004
100%
Key Challenges
SEE Issues
The ability of people and goods to move and to be moved in an efficient way is essential for economies to prosper.
However, if current trends continue, the growth in transport activity will lead to an increase of greenhouse gas (GHG) emissions
to a level that is not sustainable. There will be a substantial negative impact not only on social and environmental values, but also
on economic growth.2
The automotive sector is a major source of CO2 emissions, representing approximately one quarter of global anthropogenic
GHG emissions. In order to follow the Kyoto protocol, several of the world’s major automotive markets have adopted policies to
reduce vehicle-related CO2 emissions. In the typical life cycle of an automobile 75% of automotive-related emissions occur during
vehicle use (19% during fuel production, 4% during the production of materials/components, and 2% during assembly work).3
Thus, fuel economy and CO2 emission standards offer the best prospect for reducing vehicles’ contribution to climate change.
In the European Union, a dialogue between regulators and the automotive industry trade association (ACEA) inspired a voluntary
commitment from the industry to reduce CO2 emissions from passenger cars to a level of 140 g CO2/km by 2008. Depending on
progress, ACEA may extend the target to 120g CO2/km by 2012.
According to the Clean Air for Europe (CAFE) programme the pollutants of most concern for human health from road transport
are airborne particulate matter (PMs) which are precursors of smog and other poor air quality problems, as well as the ozone that
is formed by the reaction between hydrocarbon (HC) and nitrogen oxide (NOx).
While the ACEA voluntary agreement (see key challenge “Fuel Efficiency & Climate Change”) targets the reduction of CO2
levels, Euro 4 and Euro 5 aim to regulate the vehicular emission of PMs, HC and NOx.
The Euro 4 standard came into effect in 2005. Euro 5, which could be introduced by mid-2008, has been submitted by the
European Commission, although its final form is still unclear. The main priorities are to further reduce emissions of PM and NOx
with the introduction of a limit value of 5 milligrams per kilometre for PM (-80%) and a NOx limit value of 200mg (-20%) for
diesel cars. The commission is also considering proposing reductions in the emission limits for petrol cars (a 25% reduction in NOx
as well as in hydrocarbons).
In 2000, approximately 1.2 million people worldwide died as a result of road traffic injuries, and another 7.8 million were
seriously injured.5 In Europe, every year road traffic accidents kill more young people aged 5 to 29 than any other cause of
death.6
The number of road deaths by inhabitant sharply rises in the early stages of motorization when people can afford to buy
motorcycles first, and then cars as is happening in India and China.
The World Health Organisation in Europe considers speed as the single most important determinant for safety in road transport
systems. They call for new road safety thinking that builds safety into the transport system, and improving implementation
mechanisms and tools to achieve this.
Automobile companies are very large employers. Some major companies in Europe have over 300,000 employees worldwide.
A strong workforce provides the basis for a successful company. In order to foster their commitment, automobile companies must
continually invest in training and development of their employees.
Labour costs represent on average only about 10% of the sales price of a car while material costs are responsible for around
50%. R&D expenses will rise with increasing technical complexity of the product as well as with tougher safety and environmental
regulations. Additionally, marketing costs are likely to go up as the need for differentiation will persist. Pressure to make cost
elements, like labour, more flexible and to continuously restructure or even outsource part of operations is likely to increase.
As car manufacturers are becoming assemblers, instead of manufacturers, the integration of suppliers into vehicle development and
production is increasingly essential and a decisive factor in competition.
A potential issue for car manufacturers is their rising dependence on their suppliers for innovation and quality. It is therefore necessary for
the car company to integrate these criteria into the selection process.
2 Mobility 2030 : Meeting the challenges to sustainability (World Business Council for Sustainable Development – WBCSD).
3 Source : WRI & SAM.
4 K.Blok, N.Höhne, A. Torvanger, R. Janzic: Towards a Post-2012 Climate Change Regime - Final Report; European Commission, DG Environment, Directorate C - Air Quality, Climate Change, Chemicals and Biotechnology http://unfccc.int/cop4/misc01aw.htm.
SEE Risks & Opportunities
Fuel Efficiency
&
Climate Change
Air Quality and
Public Health
In the context of climate protection the western industrial nations would have to lower their GHG emissions by 60% to 80% by
2050 in order to limit global temperature increases to no more than 2°C of pre-industrial levels.4 This means that GHG emissions
would have to be reduced by 2%-3.5% per year. On the assumption that car traffic increases by 2% per year, efficiency would
have to increase by around 4%-5%, which is significantly higher than the commitment from the European automotive industry of
140 g CO2/km by 2008.
The tougher ACEA objectives will be substantially more difficult and costly to meet since it might require the hybridisation of
the drivetrain and more dramatic shifts in the product portfolio. To meet the target by 2008, carmakers need an annual rate of
improvement of 3.3%, suggesting that they may have to accelerate the introduction of expensive new technologies to boost fuel
efficiency. Carmakers recognise that this will be challenging.
To meet current imposed carbon constraints, Original Equipment Manufacturers (OEMs) can turn to a wide range of carbon
efficient measures, such as incremental technologies, alternative fuels, hybrid vehicles, and, in the more distant future, fuel cell
technology. With rising oil prices, bio and synthetic fuels, which produce less GHGs than petroleum fuels, are becoming a viable
alternative to gasoline and diesel. Leaders in these areas will gain competitive advantage and brand differentiation in the industry
in the coming years.
Hybrid drivetrains are likely to provide an interim solution, although they do not significantly reduce emissions when driving
long distances. Hydrogen-related technologies may represent a revolutionary but long-term answer as they are currently still too
expensive and the infrastructure is not available yet.
Due to the characteristics of combustion engines (for petrol and diesel), it is not possible to reduce all emissions through improved
engine efficiency alone. While diesel engines have advantages in terms of CO2 emissions compared to its petrol counterparts, they
produce much higher emissions of PMs, HC and NOx. Thus, this can result in a trade-off between public health impacts and climate
change.
Transforming a diesel engine into a cleaner powertrain requires sophisticated technology. The average cost of compliance for
Euro 5 is estimated by the VDA (Verband Deutscher Automobilhersteller) at €800 per vehicle. Volkswagen puts the additional costs
required at roughly €1 000 per vehicle. This is comparable to the higher material costs experienced in 2005 in terms of magnitude.
Some auto sector analysts, however, consider these costs to have been overestimated by the automobile lobby, and quote much
more manageable figures closer to €140 per vehicle.
Companies that have market-ready, new technologies enabling compliance with tougher standards should be able to improve
their short-term competitiveness.
Safety
In the developed and developing worlds, strategies should aim at achieving significant reductions of road traffic injuries from
current levels and curbing the growth rate in deaths and injuries. Either through regulation or by market forces, car manufacturers
are already facing pressure to make cars less dangerous, not only for the drivers and occupants of the vehicle but also for those on
the street (e.g. pedestrians, bicyclists).
The following measures can be taken by car manufacturers to meet the EU regulations :7 1) creating more space between the
front grill and the so-called hard points (such as the engine) to absorb the energy from a collision ; 2) redesigning the car’s hood to
make it a better energy absorber and fitting the car with active safety systems such as airbags ; and 3) equipping the car with active
safety systems such as night vision, adaptive lighting, active braking systems and run-flat tires to prevent accidents.
Human Resources
Management
The automobile industry has one of the highest numbers of temporary workers as a percentage of the total workforce of any
sector (often 10% of the workforce in a given year but representing up to 30% during peak production periods).8 Temporary work
might in some cases be less stable and as such, this category of employee cannot afford to alienate automobile manufacturers and
their subcontractors, which are often the sole local employers. The abusive use of temporary employment is now taken more into
account by industrial tribunals, which do not hesitate to rule against companies that overstep the mark and impose fines.
The high number of temporary workers at automaker companies may also affect the quality and production of cars due to
increased turnover of employees and lack of skills transfer.
To attract well qualified employees and maintain a high level of motivation, automobile manufacturers should offer a positive
and safe working environment including: efficient work structures with flexible working hours, measures to promote young
employees, part-time employment and child care.
Supplier
Relations
The evaluation of the suppliers should not only be based on technical skills, quality of work and pricing, but also on environmental
and social standards.
Suppliers have to be managed in the same way as subsidiaries in order to make work sequences and the interface between the
supplier and the assembler as efficient as possible. In this respect, it is essential for the car company to set incentives for suppliers
to guarantee not only a high level of quality but also access to innovation and state of the art technology. The car manufacturer
has to make sure that the suppliers manage their people and talents in an appropriate way.
5 6 7 8 Source : WBCSD, Mobility 2030: Meeting the challenges to sustainability.
Source : World Health Organisation - www.who.int.
Source : Supplement to Automotive News Europe, October 31, 2005.
European industrial relations observatory on-line. www.eiro.eurofound.eu.int.
Case studies
PSA Peugeot Citroën’s diesel engine
In its approach to eco-design,
the PSA Peugeot Citroën Group aims
to take environmental requirements
into account at each phase in the
vehicle life cycle, from design to use
and finally to end of life. PSA Peugeot
Citroën’s 1.4-litre diesel common rail
engine complies with Euro 4 standards
by managing fuel consumption
more efficiently, in particular with
second-generation common rail
systems, vertically positioned valves
and valve drive with roller-type
rockers, and by integrating emissions
control technology.
CO2 emissions of cars equipped
with these engines range from 90 to
120 grams per kilometre, depending
on the model, compared with average
CO2 emissions of 160 grams per
kilometre in 2004 in Europe. Wider
use of this type of small diesel engine
is therefore an effective means of
reducing automobile greenhouse
gas emissions. This will help achieve
the ambitious targets European
carmakers have set for reducing CO2
emissions.
Sources : www.psa-peugeot-citroen.com
and www.developpement-durable.psa.fr/en
Toyota’s hybrids
Toyota is leading the way in
lowering emissions and improving fuel
economy in gasoline powered vehicles.
They have created the world’s first
mass-produced gas/electric hybrid
car, and are also at the forefront
of developing tomorrow’s fuel cell
vehicles.
Toyota’s Hybrid Synergy Drive®
vehicle is nearly 80% cleaner in terms
of smog-forming emissions than
Ultra Low Emission Vehicles (ULEV).
Even though the gasoline engine
employed with Hybrid Synergy Drive®
is a very efficient clean-burning
engine, the less it is operated, the
fewer emissions it will produce. Hybrid
Synergy Drive® shuts the gasoline
engine off and relies on the electric
motor alone quite frequently: at a stop,
in reverse, during initial acceleration,
low-speed driving, coasting and
normal braking. The gasoline engine
is only used when necessary, thus
saving fuel and substantially reducing
emission output. In addition, thanks to
the special attention Toyota has paid
to the design of the system, Hybrid
Synergy Drive® vehicles emit zero
evaporative emissions. According to
Toyota, driving a Prius from Glasgow,
Scotland to Athens, Greece and back
again produces fewer smog-forming
emissions than using one can of insect
repellent.
Source : www.toyota.com
DaimlerChrysler’s fuel cells
The DaimlerChrysler Group is
making mobility sustainable through
a number of initiatives based on
alternative drive systems and
renewable fuels.
In the past six years, the fuel cell
drive system has been shrunk to such
an extent that it presently requires no
more space than a conventional drive
system. The fuel cell uses the energy
in the fuel almost twice as efficiently
as a gasoline engine. The hydrogen
carrier methanol – a liquid that can
be sold in a manner similar to gasoline
through the existing filling station
network – is the first fuel in the
115-year history of the automobile in
Europe that isn’t derived from a fossil
source and can be produced from
renewable sources.
of a fleet of 36 buses DaimlerChrysler
now has in operation in Europe,
Australia and Asia in order to gain
real world experience in day-to-day
operation in its pursuit of viable
emission-free mobility solutions.
In
November
2005
three
hydrogen-powered
Mercedes-Benz
Citaro fuel cell buses were delivered
by DaimlerChrysler to the City
of Beijing at the opening of the
4th International Clean Vehicle
Technology
Conference
and
Exhibition. These buses are part
Fuel cells release energy from the
reaction of hydrogen with oxygen.
The hydrogen-powered fuel cells emit
only pure water vapour. Fuel cells
are currently the only technology
that can achieve zero emissions in
vehicles.
Source : www.daimlerchrysler.com
Eurosif wishes to acknowledge the support and direction provided by the Automobile Sector Report Steering Committee:
BNP Paribas Asset Management
Crédit Agricole Asset Management
Dexia Asset Management
UBS Global Asset Management
This sector report, created with the support of the European Commission, has been compiled by :
11 avenue de l’Opéra • Boîte 16 • 75001 Paris, France
Tel/Fax : +33 1 40 20 43 38
[email protected] • www.eurosif.org
Seefeldstrasse 215 • CH-8008 Zurich, Switzerland
Tel : +41 (0)44 397 10 45 • Fax : +41 (0)44 397 10 50
[email protected] • www.sam-group.com
January 2006