Policy & politics

Pete Kelly, Managing Director

30 May 2019

automotive policy

At our Global Automotive Conference in Frankfurt earlier this month, there was a persistent theme in explaining the uncertainties evident in our forecasts: distortions caused by policy. The most commonly occurring type of policy influence relates to environment legislation when applied to new vehicles, though other issues are also creating big risks.

In Europe, the tail end of WLTP is still evident for a few uncertified models, though the total-market impact has now passed. But it is easy to forget how the market spiked and then plummeted around the 1 September deadline. Another target now looms large in EU markets: the 2021 CO2 fleet reduction mandate. As recent CO2 measurements have been going in the wrong direction, this target looks like it will be difficult, for some, to hit. How might OEMs respond? They could electrify faster (difficult and costly), or remove high-CO2 models (distorting). Or they could choose to partly comply and accept a financial, and reputational, hit from early non-compliance. But more market distortion looks inevitable.

“A 1 July deadline for State VI in many locations is causing a profound mismatch in available vehicles and what the market will soon require”

In China, the shift from the model of subsidies for NEV uptake to a credit system with serious penalties for non-compliance – from carrot to stick – is driving rapid electrification. It is probably an exaggeration to say that it is going exactly to plan for policymakers, but there can be no doubting that it is broadly working as intended. Right now, we also have the hurried introduction of new emissions standards – at different levels in different places – which has taken the industry off guard. A 1 July deadline for State VI in many locations is causing a profound mismatch in available vehicles and what the market will soon require. Inventories and pre- and post-deadline compliant vehicles are out of sync. Add to this the still strong expectation among consumers that there are imminent government incentives to support overall volume, and you can see why the month-to-month numbers appear so volatile. Demand is clearly being suppressed by chaotic policy and perhaps only later in the year will the market rebound.

The final consideration is the politics of trade conflict, with autos likely to feature strongly as targeted goods between the US and China, and possibly the US and the EU and Japan. And there is yet more scope for choppy waters, not least for Europe’s Premium OEMs, which may get caught in the crossfire if trade frictions escalate further.

The global Light Vehicle market looks likely to be flat this year, at around 94 million units, but it would be a mistake to expect the month-to-month numbers in many markets to level out.