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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.1 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
             example, early detection of the rising demand for hybrids was an important marketing move for Toyota, while other
                  90% 88%      87%
             companies may be launching their hybrids when competition is already quite intense.
                       80%                                                                                                                         Others
                                                                72%                                                                                                                                       Number of independent automotive manufacturers
                100%                                                          70%
                 90% 88%            87%
                                                                                   Europe      63%                                                                                                                              Only one-quarter of all
                       60%                                                         Americas                             58%                                                                                                     car manufacturers has
                                                                                                               Source: Company’s Annual Reports 2004

                 80%                                                               Others
                                                                                                                                                                     53%                                        52              retained its (economic)
                                                          70%                                                                                           Number of independent automotive manufacturers
                 70%   50%                                                                                                                                                                                                      independence since
                                                                      63%                                                                                                     Only one-quarter of all                           1964
                 60%                                                              58%                                                                                         car manufacturers has
                       40%                                                                     53%                                                         52                 retained its (economic)
                 50%                                                                                                                                   34%      33%           independence since
                                                                                                                                                                              1964                                        30
                 40%   30%
                                                                                   21%       33%   24%                                                                  30                                                                                 Source: Deutsche Bank
                       20%                                           15%
                                                             21%                                         13%                                                                 13%
                 20%                                               13%                                                                                                                                                                  12
                                                                            13%         9%         13%
                       10% 8%         8%
                                       10%       13%
                                                                                                                                                        8%                            12
                 10%                4%                                                  8%
                          4%          2%             2%
                  0%   0%
                       Renault SA Peugeot SA    Fiat Spa Volkswagen AG BMW AG Porsche AG DaimlerChrysler AG          1960                                                                        Today
                               Renault SA      Peugeot SA         Fiat Spa Volkswagen AG BMW AG                Porsche AG DaimlerChrysler AG                                                             1960                                      Today

             Regional Sales Figures of European Automobile Manufacturers                                                                                                           Consolidation of European Automobile Manufacturers
     Automobile Trends
                 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

                   Deutsche Bank, Global Automotive Industry, The Drivers: How to navigate the auto industry, 27 August 2004.
                                                                                                                                                       Key Challenges

SEE Issues                                                                                                                                                                                                                                                        SEE Risks & Opportunities

                                                                                                                                                                             In the context of climate protection the western industrial nations would have to lower their GHG emissions by 60% to 80% by
    The ability of people and goods to move and to be moved in an efficient way is essential for economies to prosper.                                                   2050 in order to limit global temperature increases to no more than 2°C of pre-industrial levels.4 This means that GHG emissions
However, if current trends continue, the growth in transport activity will lead to an increase of greenhouse gas (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
to a level that is not sustainable. There will be a substantial negative impact not only on social and environmental values, but also                                    have to increase by around 4%-5%, which is significantly higher than the commitment from the European automotive industry of
on economic growth.2
    The automotive sector is a major source of CO2 emissions, representing approximately one quarter of global anthropogenic
                                                                                                                                                       Fuel Efficiency   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
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
                                                                                                                                                             &           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
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.
                                                                                                                                                       Climate Change    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
    In the European Union, a dialogue between regulators and the automotive industry trade association (ACEA) inspired a voluntary                                       efficient measures, such as incremental technologies, alternative fuels, hybrid vehicles, and, in the more distant future, fuel cell
commitment from the industry to reduce CO2 emissions from passenger cars to a level of 140 g CO2/km by 2008. Depending on                                                technology. With rising oil prices, bio and synthetic fuels, which produce less GHGs than petroleum fuels, are becoming a viable
progress, ACEA may extend the target to 120g CO2/km by 2012.                                                                                                             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.

     According to the Clean Air for Europe (CAFE) programme the pollutants of most concern for human health from road transport                                              Due to the characteristics of combustion engines (for petrol and diesel), it is not possible to reduce all emissions through improved
are airborne particulate matter (PMs) which are precursors of smog and other poor air quality problems, as well as the ozone that                                        engine efficiency alone. While diesel engines have advantages in terms of CO2 emissions compared to its petrol counterparts, they
is formed by the reaction between hydrocarbon (HC) and nitrogen oxide (NOx).                                                                                             produce much higher emissions of PMs, HC and NOx. Thus, this can result in a trade-off between public health impacts and climate
     While the ACEA voluntary agreement (see key challenge “Fuel Efficiency & Climate Change”) targets the reduction of CO2                            Air Quality and   change.
levels, Euro 4 and Euro 5 aim to regulate the vehicular emission of PMs, HC and NOx.                                                                                         Transforming a diesel engine into a cleaner powertrain requires sophisticated technology. The average cost of compliance for
     The Euro 4 standard came into effect in 2005. Euro 5, which could be introduced by mid-2008, has been submitted by the                             Public Health    Euro 5 is estimated by the VDA (Verband Deutscher Automobilhersteller) at €800 per vehicle. Volkswagen puts the additional costs
European Commission, although its final form is still unclear. The main priorities are to further reduce emissions of PM and NOx                                         required at roughly €1 000 per vehicle. This is comparable to the higher material costs experienced in 2005 in terms of magnitude.
with the introduction of a limit value of 5 milligrams per kilometre for PM (-80%) and a NOx limit value of 200mg (-20%) for                                             Some auto sector analysts, however, consider these costs to have been overestimated by the automobile lobby, and quote much
diesel cars. The commission is also considering proposing reductions in the emission limits for petrol cars (a 25% reduction in NOx                                      more manageable figures closer to €140 per vehicle.
as well as in hydrocarbons).                                                                                                                                                 Companies that have market-ready, new technologies enabling compliance with tougher standards should be able to improve
                                                                                                                                                                         their short-term competitiveness.

                                                                                                                                                                             In the developed and developing worlds, strategies should aim at achieving significant reductions of road traffic injuries from
    In 2000, approximately 1.2 million people worldwide died as a result of road traffic injuries, and another 7.8 million were                                          current levels and curbing the growth rate in deaths and injuries. Either through regulation or by market forces, car manufacturers
seriously injured.5 In Europe, every year road traffic accidents kill more young people aged 5 to 29 than any other cause of                                             are already facing pressure to make cars less dangerous, not only for the drivers and occupants of the vehicle but also for those on
death.6                                                                                                                                                                  the street (e.g. pedestrians, bicyclists).
    The number of road deaths by inhabitant sharply rises in the early stages of motorization when people can afford to buy                                Safety            The following measures can be taken by car manufacturers to meet the EU regulations :7 1) creating more space between the
motorcycles first, and then cars as is happening in India and China.                                                                                                     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
    The World Health Organisation in Europe considers speed as the single most important determinant for safety in road transport                                        make it a better energy absorber and fitting the car with active safety systems such as airbags ; and 3) equipping the car with active
systems. They call for new road safety thinking that builds safety into the transport system, and improving implementation                                               safety systems such as night vision, adaptive lighting, active braking systems and run-flat tires to prevent accidents.
mechanisms and tools to achieve this.
                                                                                                                                                                             The automobile industry has one of the highest numbers of temporary workers as a percentage of the total workforce of any
    Automobile companies are very large employers. Some major companies in Europe have over 300,000 employees worldwide.                                                 sector (often 10% of the workforce in a given year but representing up to 30% during peak production periods).8 Temporary work
A strong workforce provides the basis for a successful company. In order to foster their commitment, automobile companies must                                           might in some cases be less stable and as such, this category of employee cannot afford to alienate automobile manufacturers and
continually invest in training and development of their employees.                                                                                                       their subcontractors, which are often the sole local employers. The abusive use of temporary employment is now taken more into
    Labour costs represent on average only about 10% of the sales price of a car while material costs are responsible for around                      Human Resources    account by industrial tribunals, which do not hesitate to rule against companies that overstep the mark and impose fines.
50%. R&D expenses will rise with increasing technical complexity of the product as well as with tougher safety and environmental                                             The high number of temporary workers at automaker companies may also affect the quality and production of cars due to
regulations. Additionally, marketing costs are likely to go up as the need for differentiation will persist. Pressure to make cost                      Management       increased turnover of employees and lack of skills transfer.
elements, like labour, more flexible and to continuously restructure or even outsource part of operations is likely to increase.                                             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.

                                                                                                                                                                             The evaluation of the suppliers should not only be based on technical skills, quality of work and pricing, but also on environmental
    As car manufacturers are becoming assemblers, instead of manufacturers, the integration of suppliers into vehicle development and                     Supplier       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
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       Relations      supplier and the assembler as efficient as possible. In this respect, it is essential for the car company to set incentives for suppliers
the car company to integrate these criteria into the selection process.                                                                                                  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.

    2  Mobility 2030 : Meeting the challenges to sustainability (World Business Council for Sustainable Development – WBCSD).                                                5    Source : WBCSD, Mobility 2030: Meeting the challenges to sustainability.
    3  Source : WRI & SAM.                                                                                                                                                   6    Source : World Health Organisation - 
    4  K.Blok, N.Höhne, A. Torvanger, R. Janzic: Towards a Post-202 Climate Change Regime - Final Report; European Commission, DG Environment,                              7    Source : Supplement to Automotive News Europe, October 3, 2005.
           Directorate C - Air Quality, Climate Change, Chemicals and Biotechnology                                                     8    European industrial relations observatory on-line.
Case studies

                                             PSA Peugeot Citroën’s diesel engine
          In its approach to eco-design,                second-generation common rail                 kilometre in 2004 in Europe. Wider
      the PSA Peugeot Citroën Group aims                systems, vertically positioned valves         use of this type of small diesel engine
      to take environmental requirements                and valve drive with roller-type              is therefore an effective means of
      into account at each phase in the                 rockers, and by integrating emissions         reducing automobile greenhouse
      vehicle life cycle, from design to use            control technology.                           gas emissions. This will help achieve
      and finally to end of life. PSA Peugeot               CO2 emissions of cars equipped            the ambitious targets European
      Citroën’s 1.4-litre diesel common rail            with these engines range from 90 to           carmakers have set for reducing CO2
      engine complies with Euro 4 standards             120 grams per kilometre, depending            emissions.
      by managing fuel consumption                      on the model, compared with average               Sources : 
      more efficiently, in particular with                                                              and
                                                        CO2 emissions of 160 grams per

                                                                Toyota’s hybrids
          Toyota is leading the way in                  Even though the gasoline engine               saving fuel and substantially reducing
      lowering emissions and improving fuel             employed with Hybrid Synergy Drive®           emission output. In addition, thanks to
      economy in gasoline powered vehicles.             is a very efficient clean-burning             the special attention Toyota has paid
      They have created the world’s first               engine, the less it is operated, the          to the design of the system, Hybrid
      mass-produced gas/electric hybrid                 fewer emissions it will produce. Hybrid       Synergy Drive® vehicles emit zero
      car, and are also at the forefront                Synergy Drive® shuts the gasoline             evaporative emissions. According to
      of developing tomorrow’s fuel cell                engine off and relies on the electric         Toyota, driving a Prius from Glasgow,
      vehicles.                                         motor alone quite frequently: at a stop,      Scotland to Athens, Greece and back
          Toyota’s Hybrid Synergy Drive®                in reverse, during initial acceleration,      again produces fewer smog-forming
      vehicle is nearly 80% cleaner in terms            low-speed driving, coasting and               emissions than using one can of insect
      of smog-forming emissions than                    normal braking. The gasoline engine           repellent.
      Ultra Low Emission Vehicles (ULEV).               is only used when necessary, thus                                 Source : 

                                                        DaimlerChrysler’s fuel cells
          The DaimlerChrysler Group is                  through the existing filling station          of a fleet of 36 buses DaimlerChrysler
      making mobility sustainable through               network – is the first fuel in the            now has in operation in Europe,
      a number of initiatives based on                  115-year history of the automobile in         Australia and Asia in order to gain
      alternative drive systems and                     Europe that isn’t derived from a fossil       real world experience in day-to-day
      renewable fuels.                                  source and can be produced from               operation in its pursuit of viable
          In the past six years, the fuel cell          renewable sources.                            emission-free mobility solutions.
      drive system has been shrunk to such                  In   November       2005    three             Fuel cells release energy from the
      an extent that it presently requires no           hydrogen-powered       Mercedes-Benz          reaction of hydrogen with oxygen.
      more space than a conventional drive              Citaro fuel cell buses were delivered         The hydrogen-powered fuel cells emit
      system. The fuel cell uses the energy             by DaimlerChrysler to the City                only pure water vapour. Fuel cells
      in the fuel almost twice as efficiently           of Beijing at the opening of the              are currently the only technology
      as a gasoline engine. The hydrogen                4th International Clean Vehicle               that can achieve zero emissions in
      carrier methanol – a liquid that can              Technology        Conference      and         vehicles.
      be sold in a manner similar to gasoline           Exhibition. These buses are part                         Source :

                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 :

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                                                                                                                                      January 2006