Europe Finalizes 2035 Death Date for ICE-Powered New Cars

The days of internal combustion engines in Europe are officially numbered, Volkswagen and Volvo are licking their wounds, and used car dealers are reminiscing about happier times — as in, 2021. All that and more in this “We’re Headed for a Recession” edition of The Morning Shift for October 28, 2022. Hey — at least it’s Friday!

1st Gear: A Date Has Been Set

It’s official: new internal-combustion engine cars will be effectively banned from sale in the European Union in 2035. On Thursday, member countries, Parliament and the European Commission agreed to terms that stipulate a 100 percent reduction in CO2 emissions for new vehicles sold at that time. By 2030, emissions are targeted to fall by 55 percent of what they were last year.

Technically, automakers will be able to keep offering gas-powered cars, but they’ll have to pay a hefty fine for any CO2 their new vehicles release into the atmosphere in a year. From the European Council, emphasis theirs:

Manufacturers can continue to place vehicles with combustion engines on the market but if they exceed their emissions target in a given year, they must pay a premium of €95 per gram CO2/km above the target per vehicle registered.

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Some automakers had already announced intentions to stop offering gas-powered vehicles by the middle of the next decade or earlier. Others were clinging to internal combustion. There will be a provision for the extremely low-volume laggards: they get a year. From Bloomberg via Automotive News:

The agreement has global ramifications. As the world’s largest trade bloc, the EU has a reputation for setting standards globally and is home to many some of the biggest car manufacturers.

Volkswagen, Stellantis, Ford, Bentley and Jaguar are among automakers that have said they will stop selling gasoline and diesel cars in Europe by 2035 or before.

There are few exceptions to the new rules. Both the council and parliament agreed that niche manufacturers — including Lamborghini — which produce a small number of vehicles will receive a 1-year delay on the emissions targets.

A non-binding element favored by member states that calls on the commission to propose registering vehicles running exclusively on carbon-neutral fuels after 2035 was included in the final deal.

That last point about carbon-neutral fuels is actually worth expanding. See, some EU members, like Germany, clung to synthetic “e-fuels” as a viable alternative to electrification in some contexts, or for low-volume enthusiast cars. An exemption for e-fuels is accounted for in this law, but critically not for passenger cars or light commercial vehicles. As Electrive explains:

“Outside the scope of the fleet standards” actually clarifies that a possible backdoor for e-fuels will not apply to new passenger cars and light commercial vehicles – because those fall under the fleet limits. For example, trucks, emergency vehicles and tractors are not part of the fleet limits system. If cars and LCVs with e-fuels powered by internal combustion engines were also to run outside the scope, further exemptions would have to be created for them.

In the past, however, within the German ruling government coalition alone, the Green party and the liberal party FDP had already interpreted such passages differently – for example, whether such an exemption also applies to passenger cars or only to vehicles that are already not covered by the fleet limits. It is currently not clear what the views are on this throughout Europe and how this request to the Commission will be interpreted.

Ultimately, it’s unlikely e-fuels will be the savior that Porsche and others have hoisted them up as. Though, there’s still a review period and all of this could change in three years’ time, if the EU deems the plan should be adjusted. As the council’s release reads:

The agreement includes a review clause that will ensure that in 2026, the Commission thoroughly assess the progress made towards achieving the 100% emission reduction targets and the need to review these targets taking into account technological developments, including with regard to plug-in hybrid technologies and the importance of a viable and socially equitable transition towards zero emissions.

2nd Gear: This Is Just How Things Are Now

All those reports of daylight beginning to break on supply chain bottlenecks and the silicon crunch were apparently just wishful thinking, according to Volkswagen CEO Oliver Blume. The German auto giant sees now that it will not meet its end-of-year production goal to better last year’s volume, and this is apparently telling that auto manufacturing will never get any better than it is right now, in this moment. From Financial Times:

Europe’s largest carmaker on Friday said it would deliver as many cars this year as last, backtracking from a target of 5 to 10 per cent growth that it had announced in the summer.

“Challenges to our supply chains will become the rule, not the exception,” said chief executive Oliver Blume in his first earnings call since taking over nearly two months ago.

Since early in the pandemic, the automotive industry has been plagued by an undersupply of chips, which are used for vital vehicle control, sensing and safety features.

Rivals Ford and Volvo also highlighted ongoing semiconductor shortages in results this week, with the former trimming its profit forecast and the latter its delivery target.

“There are worrying geopolitical developments, particularly the rise of nationalism and protectionism. This includes growing barriers to technology transfer between the east and west,” said Blume, in reference to recent US sanctions on chip exports to China.

There are lots of things that suck in the world right now, and some of those things have hampered people’s ability to buy things, but I can’t help but feel Blume is projecting his most mopey, defeated thoughts onto everything and everyone at large because 2022 didn’t go precisely how he wanted it to. Relax buddy, we’ve all been there.

3rd Gear: The Used Car Market Is Changing

Experts and dealership owners at Automotive News’ Retail Forum in Chicago ruminated on the shifting landscape of used car sales heading into 2023. The upshot is that cratered consumer confidence has made buyers more cautious and discerning, which has spurred depreciation. Dealers have to factor this into their decisions about how much and what stock to keep.

As general inflation and higher interest rates continue to take a toll on consumer confidence, vehicle buyers are now more selective than they were one year ago. For dealers who have invested money and time in ramping up used-vehicle acquisitions and sales strategies, a change in demand dynamics is cause for caution.

That’s the insight and advice of two dealership group leaders and an industry executive who spoke during a panel discussion Thursday on used vehicles at the Automotive News Retail Forum in Chicago.

That slowing demand also means that being a used car mogul isn’t as “fun” as it was a year ago:

There is no market more efficient than the used-car market, said Tom Moore, COO of Tampa, Fla.-based Morgan Automotive Group. But it was “a hell of a lot more fun” managing a larger level of investment into used vehicles when those cars were appreciating in value, he said.

In the last two years, many dealers found success zeroing in on acquiring and selling more used cars as fewer new vehicles were produced because of supply shortages, panelists said. Some dealers bolstered their involvement in inventory channels they hadn’t explored in-depth before — buying vehicles directly from consumers, for example. Another channel — securing inventory by way of trade-ins — was more familiar but still crucial.

Not far from me there’s a 101,000-mile 2013 Beetle Turbo in mediocre condition up for sale for $16,000. It’s just sat there for what’s seemed like a full year, and I wonder if the dealer will ever take that as a hint.

4th Gear: Porsche’s Doing Swell, Thanks for Asking

Volkswagen’s pain is Porsche’s gain. From Reuters:

Porsche reported a 40.6% leap in operating profit to more than 5 billion euros ($4.99 billion) on revenue up 15.7% in the luxury carmaker’s first results since its stock market listing in late September.

The company reported an 18.9% return on sales and confirmed its full-year guidance for a 17-18% return, with a mid-term target of 17-19% and long-term target of 20%.

Deliveries were up only 2% to a little more than 221,500 vehicles, with exchange rate effects helping to boost profitability per car.

“The third quarter of 2022 was quite volatile and challenging from a political, economic and social perspective. Nevertheless, we were able to successfully list Porsche and get off to a flying start,” said finance chief Lutz Meschke.

You know, Porsche seems to have the momentum of a runaway freight train. I wonder why it’s so popular.

5th Gear: Volvo Says COVID-19 Lockdowns Did It In

Like VW, Volvo doesn’t expect to hit its delivery estimates for 2022 either. The Swedish luxury brand is laying the blame at plants in China being temporarily shut down for COVID-19 outbreaks. Courtesy Financial Times:

The Swedish carmaker, backed by China’s Geely, had expected wholesale deliveries would remain flat this year compared with 2021.

But on Thursday it said it was now forecasting “slightly lower wholesale volumes than 2021, assuming no further major supply chain disturbances”.

Closures in China were the “biggest issue by far” for the business, said chief executive Jim Rowan, with some suppliers shut for up to 70 days at a time.

The “sporadic” nature of the closures, which hit Volvo’s suppliers in China and affected the supply of parts to the carmaker’s plants in Europe and the US, make it “difficult for us to predict the end of” the impact from Chinese lockdowns, he said.

Interestingly, CEO Jim Rowan doesn’t peg semiconductor shortages behind most of his headaches. He also added that Volvo’s tendency to purchase chips through the “spot market” — where they’re bought for immediate delivery at an increased price, rather than scheduled for production later — has been receding.

Reverse: That Thing That Ruined the Internet Happened

Well, the first one, anyway.