CO₂ Legislation: Threat or Opportunity for the Automotive Industry?

The European Union is drafting new legislation to curb CO₂ emissions from cars. Under the revised guidelines, new vehicles must limit emissions to an average of 120 grams per kilometer by 2012—compared with the current average of approximately 160 grams per kilometer for diesel- and gasoline-powered cars. Closing this gap poses a steep chal lenge for European automakers. To hit that target, companies will need to cut emissions by almost 3 percent annually during the next six years, nearly double the rate of the past decade. ¹

According to a joint study by A.T. Kearney and Credit Suisse, compliance could cost the European automotive industry more than $25 billion per year. Faced with rising costs, orig-inal equipment manufacturers (OEMs) must find a way to turn compliance into a competitive advantage.

Think Creatively

Turning compliance into a competitive advan tage requires innovative thinking. For example, although the legislation imposes new costs for OEMs, it is expected to save consumers approximately $92 billion per year in fuel consumption. This presents OEMs with a unique opportunity to capture some of these benefits by raising prices on new cars.

In addition, brand image and pricing power will be crucial for sustaining higher prices, which means OEMs should stress the total cost of ownership advantages and new features—including environmental friendliness, hybrid technology and an enjoyable driving experience—for people who drive a lot, but want to save the environment and spend less on gas. Usually, these consumers buy cars in the compact- to medium-sized segment, where our research reveals they are less averse to price changes (depending on the brand).

Sharing the Costs and Benefits

Our study identified certain gaps across the industry. In particular, while premium brands can flex their brand image and pricing power, volume automakers will be squeezed between stringent emissions targets (in some cases, 100 grams of CO 2 per kilometer or less) and narrow profit margins (see figure) . In addi tion, because buyers in their markets are more price sensitive, increased costs cannot be passed on to consumers without risking significant sales losses.

To thrive in the new market, volume automakers need to ensure that both the costs and the benefits of new emissions legislation are shared more evenly, which means focusing on a total cost of ownership rationale and consumers who will benefit the most from improved fuel efficiency.

¹ 120 grams per kilometer is the legislation’s overall target. OEMs are responsible for reducing CO₂ emissions to 130 grams per kilometer, while other measures (such as driver education, tire rolling resistance and alternative fuels) will deliver the remainder.