The Fuse

Credit Suisse Analyst: European Automakers to Shift Attention to Hybrids, Plug-Ins

by Timothy McKenna | October 20, 2015

What long-term impact the scandal will have on Volkswagen sales is still difficult to say, but there is good reason to believe that German automakers will shift the emphasis of their marketing and development efforts to hybrids and plug-ins.

In September Volkswagen, the world’s second-largest automaker, admitted that it had falsified emissions tests on diesel-powered cars sold in the U.S. and Europe. What long-term impact the scandal will have on Volkswagen sales is still difficult to say. VW sales did hold up in Europe in September, according to ACEA, the European auto manufacturers association. But there is evidence that the scandal and its political implications could have a material effect on the investment direction of European automakers in the next few years, according to Credit Suisse auto analyst Dan Galves. In fact, there is good reason to believe that German automakers will shift the emphasis of their marketing and development efforts to hybrids and plug-ins, despite recent unfavorable year-over-year sales trends, Galves says.

The scandal is a huge embarrassment to Volkswagen, given that the company has long stressed engineering excellence and efficiency for both its basic VW brand and its luxury Audi line. Volkswagen CEO Martin Winterkorn resigned from his post at the company, and the company’s stock lost 40 percent of its value almost overnight. The company has a long way to go to rebuild its reputation.

In the Credit Suisse report, published in the wake of the emissions scandal, Galves points to the relative cost and investment advantages of EVs and hybrids as global automakers continue to cope with tightening regulatory demands and the demand to market more environmentally friendly vehicles.

The report explores the issue from the European perspective, where diesel engines hold more than 50 percent of the overall vehicle market and represent more than 65 percent of sales of the German luxury car market. The reasons for this deep penetration among diesel cars are obvious. Gasoline in Germany, for example, sells for close to $7 per gallon, while diesel fuel is $6 per gallon or less, and diesel mileage can routinely exceed 30 miles or more per gallon.

A shift in the global market?

Given that the influence of German automakers on the global auto market is outsized, their next moves will be closely watched, so it is likely that trends in Europe will have a strong influence on the direction of new vehicle technology in the U.S.

Despite the report’s European focus, the analysis points out implications for the global market, including the U.S., given that the reputation and prestige of the German manufacturers as innovators and technological leaders. European manufacturers, the report points out, are being required to improve the fuel efficiency of their vehicles by 3.7 percent per year though 2020. The problem for the diesel car makers, including luxury makers, is that regulators are also demanding a substantial reduction in nitrogen oxide emissions. This presents a challenge for diesel-fueled cars, since decreasing emissions worsens fuel consumption. Reducing both emissions and increase fuel economy in a diesel car will be costly. Meeting both emissions and economy standards would add more than $2,000 cost per vehicle three to five years out, Galves calculates.

Faced with this cost, German automakers will “accelerate the move towards Plug-in Hybrids (PHEV) and Battery Electric Vehicles (BEV),” Galves says, pointing out that there are “a slew of PHEV offerings on the way from German luxury makers in the near-term” and that the cost comparisons are favorable. The Audi A3 E-tron, a plug-in hybrid to be introduced in the U.S. this fall, will sell for about $38,000, compared to $31,000 for the standard A3. He views the difference in price as very favorable and expects sales to be strong with continued tax incentives in the U.S.

Diesel cars will not disappear from Europe despite the VW scandal, but as the future unfolds, European manufacturers will be dealing with very different challenges. Given that the influence of German automakers on the global auto market is outsized, their next moves will be closely watched. If Galves’ analysis is correct, it is likely that trends in Europe will have a strong influence on the direction of new vehicle technology in the US.