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A court decision in Germany on Thursday on an environmental group’s lawsuit could signal the end for diesels in Europe, meaning catastrophe for the German automotive industry’s profits and the residual value of millions of cars and SUVs.
The environmental group Deutsche Umwelthilfe (DUH) has sued Stuttgart and Duesseldorf because it wants to allow municipalities to ban diesel cars from city centers and make sure clean air regulations are enforced. The verdict from Germany’s federal administrative court would be final and follow various local court decisions across the country.
If Germany banned diesels, other big European cities would likely fall into line.
There are more than 15 million diesel vehicles in Germany, and environmental groups say levels of nitrogen oxide (NOx) endanger the health of citizens.
The previous German government agreed to new regulations with the auto industry, but green groups felt they weren’t tough enough. It seemed the auto industry had won the argument, but environmentalists reckoned they could bypass this agreement by seeking legal bans in city centers. If they win, the city center ban would effectively stop many commuters from driving to work.
Evercore ISI estimates that the cost of retrofitting the entire German diesel fleet to clean up emissions could be between 15 billion and 29 billion euros ($19 billion to $36 billion).
According to IHS Markit, last year across BMW’s fleet including Mini, 64% were diesel powered. For Mercedes the figure was 62%. For Indian-owned and British-based JLR, diesel power accounts for over 90% of their engines.
If these manufacturers find they can’t sell diesels, they will face existential problems because by 2021, the European Union (E.U.) has mandated a massive increase in fuel efficiency. Diesels were meant to lead this fuel economy drive. Failure to comply means bottom-line busting fines.
In 2011 more than half – 55.7% - of all new cars sold in Europe were diesel. This slid slowly to 50% by the end of 2016, and since then the fall has quickened to 45.7% in 2017, according to IHS Markit, which projects a steady fall to 42.0% this year, 40.0% in 2019, and on down to about 32% in 2025. Other surveys project an even faster fall – to perhaps 15% by 2025.
And the fall is quickening. In Germany, Europe’s biggest market, last month diesel sales dived to 33.3% of the market, from 45.1% in January 2017.
Andrew Fulbrook, executive director of global powertrain and compliance forecasting at IHS Markit, said in a recent interview that the fall of diesel gathered pace from the summer of 2017.
“We began to see an increasing intensity of diesel demonization, predicated largely by misunderstandings from the media and political circles, in reaction to the VW (dieselgate) situation, which in turn has led to confusion across the customer base, resulting in concerns over residual values, the prospect of potential city restrictions and I think to a lesser degree, genuine worries about the environment,” Fulbrook said.
Brussels-based lobby group Transport & Environment (T&E) says the industry can meet the tough targets set for 2020/2021, as long as they increase sales of electric cars.
Evercore ISI said it is difficult to estimate the cost of refitting diesel engines but quoted a Technical University of Munich study which said removing 90% of NOx emissions would cost 1,300 euros ($1,600) per vehicle. It said VW reckoned it would cost almost twice that to reach a standard one notch below the current mandated one.
Evercore ISI is worried about the court case implications.
“Following the debate in the German press, one has to conclude that diesel might get its final kiss of death from a court ruling concerning city driving bans this Thursday. The risk is that the court could open Pandora’s Box. The consequence could be the allocation of several billion euros to an old fleet and a legacy technology through retrofits, all at a time when the industry needs to utilize resources to stay relevant in a digital world, shape the next generation of global propulsion, and map out the Autonomous future,” Evercore ISI analyst Arndt Ellinghorst said.
