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Regulations and their impact on the Automotive Industry

Research Paper (undergraduate) 2011 48 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

List of Abbreviations

List of Tables

List of Figures

List of Appendixes

1 Introduction

2 Structure of the Paper

3 The Oil Crisis 1973
3.1 Politics and Regulations That Caused the Crisis
3.2 The Impact on the Automotive Industry
3.2.1 Western Europe and Germany
3.2.2 U.S.A
3.2.3 Japan
3.3 Learnings From the Past and Their Utilization

4 Euro Norms
4.1 History and Contents
4.1.1 Origins
4.1.2 Different Norms
4.1.3 Measures and Regulations
4.2 Effects on the Development of Automobiles

5 Fleet Consumption
5.1 Definition of Fleet Consumption
5.1.1 Business Cars
5.1.2 Cars within a Country
5.1.3 Manufacturer’s Fleet Consumption
5.2 Fleet Consumption Improvement on a Manufacturer’s Level
5.2.1 BMW Group
5.2.2 Porsche

6 Subsidies for Electric Vehicles
6.1 Growing Importance of Electric Vehicles
6.2 Status Quo
6.2.1 Europe
6.2.2 U.S.A
6.2.3 China
6.3 Implications for the Automotive Industry

7 Global Economic Crisis 2008 - China as an Example for Emerging Economies
7.1 The Effect of the Financial Crisis on the Automotive Industry
7.2 Politics and Regulations Caused by the Crisis in 2009 and 2010
7.2.1 Subsidies to Eco-Cars
7.2.2 Tax Advantages for Automobile Buyers and Manufacturers
7.2.3 Car Substitution Incentive
7.3 The Impact on the Automotive Industry
7.3.1 HEVs Market Growth in China
7.3.2 Smaller Size Car Market Growth in China
7.3.3 Chinese Automotive Industry Structure Moves to R&D Part
7.4 Learnings From the Past and Future Outlook
7.4.1 New Politics and Regulations in 2011
7.4.2 Future Prospects for HEVs

Reference List

Appendix

List of Abbreviations

illustration not visible in this excerpt

List of Tables

Table 1 Passenger Car Tax For OEMs

Table 2 Passenger Car Tax For Customers

List of Figures

Figure 1 VW and Porsche

Figure 2 Amount of Small Car in 2007~2010

List of Appendixes

Appendix 1 Federal States Tax Incentives

1 Introduction

Over the last decades there have been numerous regulations and political decisions that influenced the car industry. To these belong simple regulations for emissions, subsidies for specific car forms but not at last also political decisions and developments all over the world. This paper describes some of the important developments over the last decades and their influence on the automotive industry. Furthermore, it is tried to identify learnings from these past developments and future potentials for improvement.

2 Structure of the Paper

The paper starts in chapter 3 with the analysis of the oil crisis in the 1970s and 2008. After this view on political influence on the automobile sector, chapter 4 presents and analyses regulations, namely the EURO norms and fleet consumption, and their influence. Chapter 5 then deals with the subject of electrification and government subsidies which represents a very recent topic of Government regulations. Finally, in chapter 6 the paper addresses China and its automotive regulations, being another recent subject in discussion. This way a timeline from the oil crisis until recent developments in the old industrial countries and China is created.

3 The Oil Crisis 1973

3.1 Politics and Regulations That Caused the Crisis

The oil crisis of 1973 was caused by political decisions of the so called Organization of Arab Petroleum Exporting Countries (OAPEC). They initiated an oil embargo containing an initial price increase of 70% per barrel and continuous decrease in production. The embargo aimed to achieve political objectives that arose from the Yom Kippur War between Israel, Egypt and Syria. After a surprise attack by Egypt and Syria, Israel was able to fight back the attackers. The USA were continuously supplying the Israeli forces during that time. The OAPEC countries wanted to make the US persuade Israel to withdraw from its occupied areas and to create a stable peace in the region. For that aim they wanted to strengthen the embargo over time until the political aims were reached. Other car manufacturing nations, such as Japan and Germany were strongly hit by the embargo and the rapidly increasing oil price. The embargo was lifted in March 1974 after the Washington Oil Summit, but the effects of the oil crisis lingered on throughout the 1970s until the beginning of the 1980s when the OPEC countries gave in to individual interests as Saudi Arabia, which tried to gain more market share. Also, in neither of the cases of countries on which embargos were set, there was a dramatic change in policy making as the Arab states envisioned. (Quandt, 2005, p. 104; Licklider, 1988, pp. 214-216; Molavi, 2009)

3.2 The Impact on the Automotive Industry

3.2.1 Western Europe and Germany

The automotive industry of Western Europe was one of the most affected industries in the region. Despite high fuel taxation in Western European countries, car makers in the late 1960s were increasingly producing less economical, bigger cars. The increasing wealth made it possible for more people to afford these kinds of cars and lead the producers to the respective production decisions. However, the oil crisis demolished this calculation. The market saw a decrease in demand for up market brands and inefficient cars and a transition back to more economic ones. Notably, there was a rising popularity of compact hatchbacks. At the time of the oil crisis only the Peugeot 104, Renault 5 and Fiat 127 were manufactured in Western Europe and represented this car form. At the end of the decade, there was a high number of these car models as the Ford Fiesta, Opel Kadett, which was sold as the Vauxhall Astra in Great Britain, Chrysler Sunbeam and Citroen Visa. From 1973 to 1980 a number of new medium sized hatchbacks was launched in Western Europe: the Chrysler/Simca Horizon, Fiat Ritmo, Ford Escort MK3, Renault 14, Volvo 340 / 360, Opel Kadett and Volkswagen Golf. These cars introduced a new standard of fuel economy. However not only that these cars were more fuel efficient than the sedan cars which they replaced, but also attracted buyers who would have chosen cars from a lower section if the hatchbacks had not existed. (Grumböck, 2008; carsplusplus.com; wapedia.mobi; worldnews, 1973)

In Germany in specific, from September 1973 a sales crisis started. A decrease in domestic demand of 6% made the start. It was due to increased fuel costs but also due to higher insurance costs and higher car prices. In autumn of the same year, the oil crisis started making serious problems by reducing domestic demand for cars by 24% compared to the former year and for the first time also influenced the export. The export sales shrinked by 16% compared to the year before. Short-time work was introduced, layoffs were made and the automobile manufacturers faced increasing numbers of not sold new cars in their car-parks. These effects were characteristic for the whole automobile industry which is representing a key industry of the German economy. Every seventh worker was employed by the industry or had a job that was directly dependent on it. Only the producers which were able to quickly react and adapt to the changes in consumer preferences still had a chance on the market. As in all Western European countries, the trend towards fuel efficient cars could also be observed in the German market. (Boehmer-Christiansen & Weidner, 1995, pp. 44-51)

In November 1973, Volkswagen for instance produced, 29.100 cars. Of these cars, 16.000 were of the type “Käfer”, precisely in the “VW1200” version which was especially economical and cheap with a price of 5.650 DM per car. Also the economic middle class car “VW Passat” was very successful which could be seen by the figure of 50.000 unfinished orders in November 1973. Also Opel and Daimler-Benz recognized a trend of their customers towards fuel efficient cars that consume normal gasoline. Opel constructed an extra fuel efficient version of its Ascona and Manta models with 1,2 liter gasoline engines. The model Kadett was even produced with a 1 liter gasoline engine. Daimler-Benz recognized an increased demand for its 4-cylinder and diesel engines. Also Ford planned to introduce more economical cars due to the trend. Foreign producers of compact cars benefited from the development. Renault increased its sales share of the small cars R4, R5 and R6. Also manufacturers as Chrysler with its Simca 1000 and Fiat with its models 126 and 127 benefited from the crisis. Fiat made as much as 60% of its revenues with these cars. Due to the strongly increased costs for keeping inefficient cars, the car itself in many families lost its importance as a status symbol. New car purchases were postponed by many families which was one of the reasons of the demand shock. (chroniknet.de)

The automobile industry tried to use special advertising campaigns to still sell cars in the crisis. These campaigns mainly aimed for the consumers’ fuel efficiency preference. Audi as an example advertised that its engines use every drop of fuel by a special burning process. Also there were special sales prices for cars, for example the Mercedes 280 was sold for 12.000 DM instead of 16.000 DM. (chroniknet.de)

3.2.2 U.S.A

In the United States of America, car makers were also strongly influenced by the oil crisis. By the time of the crisis, large, heavy, and powerful cars were most common in the United States. Precisely, in 1971 the standard engine in a car as the Chevrolet Caprice was a 400-cubic inch (6.5 liter) V8. A test of the similar Chevrolet Impala by Motor Trends in 1972 measured a consumption of 15 miles per gallon. As a reaction to the increasing fuel costs, consumers started to exchange big cars with 8 or 6 cylinder engines, by smaller, often imported, ones with 4 cylinder engines. Especially the smaller and more efficient Japanese cars were the winners of this change. Cars such as the Toyota Corona, the Toyota Corolla, the Datsun B210, the Datsun 510, the Honda Civic, the Mitsubishi Galant, the Subaru DL, and later the Honda Accord all had four cylinder engines that were more fuel efficient. The big three American car manufacturers tried to counter this development by building this kind of cars themselves, such as the Ford Pinto, the Ford Maverick, the Chevrolet Vega, the Chevrolet Nova, the Plymouth Valliant, and the Plymouth Volaré. However, the demand slump for luxury oriented sedans was only temporary and demand for cars such as the Lincoln Mark Vs increased again in the mid 1970s. These cars coexisted and still coexist with very fuel efficient imports from mainly Japanese car manufacturers. Full- size models at the lower price level, such as the Chevrolet Impala, and Ford Galaxy 500 saw permanent reduction of demand.

In numbers, the US car production level fell by nearly 22% between 1973 and 1974. That is a decline of nearly two million vehicles. Most of these two million cars were, as indicated above, large and middle sized ones with poor fuel economy. As an example for how U.S. car manufacturers reacted one can look at Chrysler. The company faced an inventory of cars of 120 days. Furthermore, Chrysler closed five of its six assembly plants in the USA. At the end of 1975 there was an unemployment rate in the automotive industry of 15,8% since also in 1975 the production slumped another 24,5% which the car manufacturers reacted to by layoffs.(chroniknet.de; Shepardson, 2008)

Over the next years, since they were unable to directly compete with the technologically advanced Japanese car manufacturers, U.S. car makers tried to address the demand for more economical cars by simply downsizing their old models. Similar to the development in Germany, also in the USA the car’s attribute of a status symbol became less important. From then on, it was seen more as a mode of transportation. After the crisis, the US car-makers faced extensive rebuilding of their construction lines, and restoration of reputation with respect to quality and efficiency.(chroniknet.de; Shepardson, 2008)

3.2.3 Japan

The Japanese were already producing relatively fuel efficient cars at the time of the oil crisis. The effect on their economy was mainly characterized by a shift from oil- intensive industries to electronics. The Japanese invested huge amounts in this sector. However, the Japanese automotive manufacturers, seeing gasoline prices rise in the USA, focused even more on developing and producing fuel efficient cars for the American market. The Japanese home market however was strongly hit by the rising oil prices, especially because it relied to 80% on oil from the respective region. (njkk.com)

In numbers, the crisis lead in Japan to a decrease in domestic passenger car sales by 23,7%. However, the exports of automobiles increased by 26,7%. Nevertheless, the total motor vehicle production dropped by 12,1%. In particular, Honda and Toyo Kogyo stopped due to the effects of the crisis their midget car production. All Japanese car manufacturers faced the crisis by strict cost reduction measures and increased efforts for fuel efficiency. The automobile manufacturers could not rely on decreasing the weight of their cars by downsizing them since they already produced small cars. The measures used by them mainly focused on new ways of decreasing weight and this way improving fuel economics. They adopted front-wheel drive systems and they used lighter parts, as aluminum, plastic and high-tension steel sheeting. To make their cars more than just fuel efficient, the Japanese car manufacturers aimed for better equipment of their cars. They introduced fuel efficient high-performance cars with turbo-chargers, four-wheel drive, convertibles, sunroofs and automatic transmission equipment. (njkk.com)

3.3 Learnings From the Past and Their Utilization

In 2008, world economies were confronted with an oil price shock and a following economic crisis. One could observe similarities with the oil crisis in the 1970s. Especially with regard to the USA, the big car manufacturers built favorably SUVs and large fuel inefficient cars. The reason was a considerably high profit margin. Again the fuel prices were rising rapidly, and despite the absence of strong economic effects as they have been observed after the 1973 crisis, the consequences especially for the automotive industry were immanent. In fact, one could observe that car manufacturers had not learned anything from the previous oil crisis. However, the 2008 oil crisis finally gave an impulse for car manufacturers to change their ways of thinking about car engines, although state regulations were a major factor for this. (autobild.de, 2008; manager-magazin.de, 2008; autobild.de, 2008; washingtonpost.com, 2008)

As in the previous crisis many car-makers responded by layoffs. Peugeot for example announced in 2008 that it would cut 11.000 jobs worldwide. The reason was that it’s profit fell in 2008 by 78%. In Europe its sales fell by 4% and world wide by 7%. However also in this crisis the premium cars were most hardly hit. Car manufacturers as Mercedes, BMW and Audi faced a strong slump in sales. It were again the producers of small economical cars which were less hardly hit by the crisis. Especially the Japanese cars, at least the fuel efficient ones, were in demand again. Also Japanese car manufacturers saw their sales drop, for example Toyota by 33.9% and Honda by 31.6%. Finally the Big Three of the US car manufacturers faced similar losses, for example General Motors lost $30,9 billion in 2008. In the wake of the crisis, General Motor and Chrysler even went bankrupt in 2009. (manager-magazin.de, 2008; autobild.de, 2008) (news.bbc.co.uk, 2009; news.bbc.co.uk, 2009; Fackler, 2008; nytimes.com, 2009)

Finally the 2008 oil crisis seems to have brought many car producers to a new way of thinking about how to empower their cars. The crisis, for the first time, gave rise to serious efforts to create new types of car engines. The future is expected to show way higher oil prices and therefore demands for fuel efficient cars. As Toyota already showed with it hybrid car Prius, which is successful all over the world, the future seems to belong to electrification. Pretty much every car producer in the world is now making efforts to join the new trend by providing hybrid and developing pure electric cars. However, the governments of the world first had to make it economically reasonable for the car producers to focus on this kind of cars. Countries as France but also the United States provide subsidies for the purchase of electric cars. It seems that there is finally a learning effect from oil shortages and a clear visibility of the dependency of western nations on the oil from the Arab world. (associatedcontent.com, 2009; hybridcar.com, 2007; heatingoil.com, 2010; Huffman, 2009)

The question is if the current boom for electrical cars is really sustainable. One can has up to now hardly seen any affordable and at the same time convenient electrical car by any manufacturer. Due to the high price of lithium ion batteries and the long charging times, it is strongly questionable when electric cars can be produced economically and be used as conveniently as cars which rely on diesel or gasoline. Until this state is reached a lot can happen and also a new oil crisis, with an oil price far over 100$ per barrel in 2011, is easy to imagine. However, the hybrid technology shows a way by which car makers can still avoid the vast effects from a potential new crisis. With a fast industry wide introduction of hybrid engines the average fuel consumption of their cars could be reduced strong enough as one can already see in the case of the Toyota Prius, which only has an average fuel consumption of around 4,3 liters of gasoline. A further combination of diesel engines and hybrid technology would be the next step, which, however, has not been made yet due to high costs. Furthermore, a concentration on new materials as it was observed in Japan during the 1973 crisis can be a lesson learned to be used in the future. Already today there are experiments with parts of carbon instead of steal to be built in cars. The problem however is the price. Therefore, one can conclude that there is a clear way in which car manufacturers can use the learnings from the crisis, which is the need to reduce fuel consumption to avoid strong effects of such an oil crisis: There have to be large scale investments of all car manufacturers especially in carbon material production but also in other of light materials. Furthermore, the electrification by high investments in batteries has to be pushed forward. However, since the development of batteries that enable pure electric cars to have a convenient capacity will take a long time, car manufacturers should concentrate on diesel hybrid technology. Diesel has two big advantages: It can be viewed as a renewable energy source and has a higher energy level than gasoline. Therefore with less diesel in a tank, and due to that also less weight, a hybrid car can drive way further than a gasoline hybrid car. However, again high scale of production is needed to solve the cost problem of batteries, diesel engines and bio diesel. Either government regulations or an alliance between several or possibly all car manufacturers could lead to the needed developments. It seems clear that without regulations the manufacturers would not strive for long term improvement of fuel economies of their cars, as long as there is no long term price development of oil that continuously lowers their profits. This has been seen after the 1973 oil crisis after which hardly any car manufacturers except for the Japanese learned anything. However, even in Japan, the boom of hybrid cars was originally caused by strict state regulations for emissions. (fueleconomy.gov, 2011; dieselnet.com; hybridcar.com, 2007)

Summarizing, one can say that the automotive industry has no way of avoiding oil crisis especially those caused politically. However the industry can be prepared by new technologies since it is always about the same problem: fuel consumption. The best way to reach an automotive industry that is not strongly affected by such crisis is by regulating it so that it is induced to produce fuel efficient cars. In the end it is therefore not only the car-makers’ task to improve the industry but also the governments’ responsibility.

4 Euro Norms

4.1 History and Contents

The EURO Norms for the emissions of passenger cars are a set of regulations decided by and put on paper by the Council of the European Commission. Their aim is to regulate and limit the emissions of various gases and fumes which are harmful to the environment.

4.1.1 Origins

Probably the first origins of any type of regulations considering the emissions of cars were in California in the early 60s. The geographical situation and climate conditions of this state at the pacific were responsible for its susceptibility for smog. This caused local governments to create laws to limit emissions by local traffic in order to protect environment and also the health of the inhabitants.

As the number of cars all over the world grew, smog and pollution became an increasingly important problem also in other parts of the world were climate was not as unfavorable. This caused the first restrictions of this type to come into effect in 1970, first limiting only carbon monoxide and carbon hydrides. Later on in the late seventies, nitrogen oxides were also added to the catalogue of limited emissions. Since then, the regulations and norms have been changed frequently due to technical advance and increased feasibility of the ideal emission goals connected to this.

4.1.2 Different Norms

These changes have been manifested by establishing new regulations and giving them consecutive numbers. This started with Euro 1 in 1991, followed by Euro 2 in 1994, Euro 3 and Euro 4 in 1998, and Euro 5 and onwards in 2007. The above mentioned years state the year of approval. Each of the norms went into effect about one or two years later, except for Euro 4, which was effective starting 2005.

We are currently at Euro 5, which is effective for the inspections made by the German technical supervision society (TÜV) every two years, and has to be met by newly produced cars since beginning of 2011. The next step, which car makers are already preparing to meet with their newly introduced models and projects still in the pipeline is Euro 6, coming 2014 and 2015 respectively. (Euroäische Union, 2007;Europäische Union, 1999)

The fact that still today, it is not easy for every carmaker to meet these requirements, one can see why the regulations follow a step-by-step procedure. Today, relatively big Sedans like the VW Passat or the 5 series BMW can accomplish consumption figures of around 5 liters per 100 kilometers (VW AG, 2011); (BMW Group, 2011) and correspondingly low emission values. In the early 1990’s at the time of the introduction of Euro 1, this was a figure that a small car like the Golf or the Polo could not nearly match. Around the turn of the century, VW introduced the Lupo 3L, a special edition of the tiny Lupo car, which only needed 3 liters of fuel to drive 100 kilometers. To accomplish this, the car was stripped of anything that was heavy and not desperately required (Healey, 1999). In 2011, the biggest cars of the same manufacturer’s fleet, like the Passat mentioned above, come close to this, back in 2000, sensational figure while still offering a lot of power and a great amount of luxury. Another interesting fact: a Porsche 911 Carrera of the most recent model, if driven somewhat consciously, consumes roughly the same amount of fuel as a Golf did with some load back in 1990. These facts show mainly two things. First of all, as stated above, the reason for the increasing limitations is due to technical progress. Second, it shows that the demand and consciousness for such measures has changed. Euro 6, if established directly in 1990, would have caused immense development costs at one time, which would be passed on to the customer. These customers, facing higher costs due to regulations they do not yet deem necessary, would certainly have been very unhappy with their politicians. (Euroäische Union, 2007;Europäische Union, 1999)

That a norm in effect does not automatically mean that every car is in accordance with it is shown by the German Kraftfahrt-Bundesamt (KBA). According to their statistics, only 45,3% of all cars on the roads in Germany met the requirements for at least Euro 4. Not even half of Germany’s vehicles meet the environmental standards required for new cars. This shows, that the implementation is not easy and a given. On the other hand, the report states, that the average age of a car as of January 1st 2010 amounts to 8.1 years.

Taken this number into account, one cannot deduct, but at least infer that there must also have been cars before, that met already the standards of the next norm to come. Although the challenge is not easy, there are manufacturers that can implement them already ahead of time. (Euroäische Union, 2007; Europäische Union, 1999)

4.1.3 Measures and Regulations

The Euro norms apply to a certain set of emissions and numbers connected to passenger cars. These are split into carbon-monoxides, hydrocarbons, nitrogen oxides, non- methane-hydrocarbons, and for some types of engines also particulate mass, or dust.

Euro 1 only limited emissions of the first three in the list above. While limited in combination before, starting with Euro 3, hydrocarbons and nitrogen oxides had separate allowed top levels instead of a sum of emissions for the two. Starting with the effectiveness of Euro 5, the latter two figures are also limited and have to be measured. (Euroäische Union, 2007; Europäische Union, 1999)

In addition to the increasing number of different emission-contents considered, the permissible amount of each of them also decreased with each further Euro norm. For example, while in 1990, 3.160 milligrams per kilometer where allowed, this number has been reduced to 1000 mg/km with the current Euro 5 norm. The same is also true for other statistics, which have even been reduced by up to 90%. (Euroäische Union, 2007; Europäische Union, 1999)

4.2 Effects on the Development of Automobiles

The increasingly strict regulations in the EU had to be met by manufacturers in order for them to be able to sell their products. This demanded a constant flow of innovations in the areas of drive train and engine efficiency. While these innovations concentrated on small optimizations in single areas in the 1990s, the type and management of innovations changed with the turn of the century. Stricter regulations required more innovations, and the topic was addressed increasingly often in the public. This was caused by ongoing debates about humanity’s influence on the environment and what effect this might have for future generations, but also by increasing costs associated with owning and using an automobile, for example fuel prices. (Repovs, Technological Invention and Innovation Marketing: Case Studies in the Car Industry, 2010)

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Details

Pages
48
Year
2011
ISBN (eBook)
9783656195054
ISBN (Book)
9783656199595
File size
631 KB
Language
English
Catalog Number
v194157
Institution / College
European Business School - International University Schloß Reichartshausen Oestrich-Winkel
Grade
3.0
Tags
regulations automotive industry

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Title: Regulations and their impact on the Automotive Industry