Diesel controversy Temporary shock or paradigm shift in powertrain? Impact of the diesel controversy on OEMs and suppliers Frankfurt, October 2015
Executive summary > European OEMs have utilized the fuel-efficient diesel powertrain as a key lever to reduce corporate fleet CO 2 emissions, especially in the EU due to /21 CO 2 vehicle emission targets. These targets are basically impossible to reach without diesel > We therefore expect diesel to remain a key pillar in OEMs' powertrain strategies, especially in Europe > The current debate about diesel will, however, further drive innovations in combustion 1) and after-treatment of diesel due to increasing regulatory requirements and standards, and will enforce test cycle implementation aiming to reflect Real Driving Emissions (RDE) > In order to fulfill RDE regulations, diesel will become cleaner (with emission levels similar to gasoline engines), but also more expensive > The resulting cost increase will accelerate the substitution process from diesel to smaller gasoline engines, especially in lower vehicle segments. Diesel will still remain dominant in the upper vehicle segments but total diesel share in Europe will decline in the coming years > OEMs therefore have to further accelerate alternative powertrain solutions. Suppliers have the opportunity to implement innovative solutions for the further control of diesel RDE, and should also step up their preparations for alternative powertrains 1) Such as homogeneous combustion and HCCI Source: Roland Berger 2
In the global core passenger car markets, the diesel powertrain is mainly a European phenomenon with more than 50% of new sales New sales of passenger cars, 2014 [m units] 13.8 3% 12.5 18.1 < 1% 47% 53% 97% 99% 2% 4.7 2.6 48% 52% 98% 2.8 100% Diesel Gasoline incl. alternatives Europe = EU-28 Source: IHS; press research; Roland Berger 3
Emission regulations increase pressure on automotive OEMs to improve CO 2 emissions, fuel efficiency and exhaust gas emissions Assessment of CO 2 emissions/fuel consumption and toxic gas emission regulations 1 CO 2 emissions/fuel consumption 2 Toxic exhaust gas emissions (NO x, PM, HC) > Corporate CO 2 emissions target [g/km] 127 2013-25% 95 1) 2021 68-78 2025 > CAFE 2) [g/mi] > Additional ZEV regulation CARB 157 > Fuel efficiency targets [km/l] 105 2025 > Potential 4) corporate CO 2 emissions targets [g/km] > Add. potential fleet xev target share tbd tbd tbd tbd 2013-28% 113 253 g/mi 89 2025 182 g/mi 154 2013-32% 15.1 km/l 20.3km/l 169 2013-31% 117 95 > Inovar Auto energy efficiency increases [MJ/km] 166-13% 145 2025 2013 tbd 2025 1.82 MJ/km 2.07 MJ/km > 2014: Euro 6b emission standard > 2017: Euro 6c with implementation of RDE 5), additionally WLTP > Tier II Standards > Low Emission Vehicle Program (LEV2, LEV3) > 2009: post new long-term standards JC08 mode cycle 1) Average weight-dependent CO 2 emissions target 2) Only for passenger cars 3) End customer pull for low CO 2 emission/low fuel consumption powertrain and/or alternative powertrains 4) No decision made yet 5) Euro 6c test cycle WLTC: to be confirmed Source: Press research; Center for Climate and Energy Solutions; Roland Berger 4
1 CO 2 emissions/fuel consumption Diesel powertrain utilizes its better CO 2 /fuel efficiency compared to gasoline especially in the upper vehicle segments CO 2 emissions by segment/body type in EU-28, 2014 Segment A B C D E Mini cars Small cars Medium cars Large cars Executive cars Avg. CO 2 emissions 1) [g/km] -4% -15% -14% 128 136 111 106 109 118 157-17% 131 226-35% 148 Diesel share of total sales 0.4% 12.2% 24.8% 11.1% 4.3% 53% Gasoline Diesel 1) Based on comparison of performance peer groups Source: EEA; Roland Berger 5
1 CO 2 emissions/fuel consumption Diesel efficiency improvements will be the main lever to reduce fleet emissions for European OEMs to reach 95 g/km target in /2021 EU volume OEM 1) fleet avg. CO 2 emission reduction levers until /2021 [g/km] 132-8 -12-1 -9-2 -1 Efficiency improvements -3 Portfolio changes -2-1 94 > Regarding reduction of fleet average CO 2 emissions, diesel efficiency improvement is a key lever to reach the target from the CO 2 emission regulations in /2021 > A gap of 12 g/km could not be closed with other powertrain technologies if diesel were to be abandoned > Therefore, the improvement of diesel efficiency has to be a key pillar of the OEM's CO 2 reduction strategy 2012 fleet average Gasoline 1) Diesel Transmission Road load Vehicle Altern. fuel Altern. Vehicle propulsion power/fuel Segment shift / 2021 Powertrain efficiency improvement Weight Aero Tires Vehicle FE technol. 1) Exemplary OEM 2) Including CNG/LPG engine technology improvements Changes of vehicle power and propulsion Marketdriven Source: EEA; Roland Berger 6
2 Toxic exhaust gas emissions As of today, the road transport sector is the largest source of NO x emissions in Europe Diesel is a major contributor NO x emissions by sector in EU-28, 2013 [%] 39.4% 8.2 m tons 21,0% 15,1% 12,2% Approx. 10% diesel passenger car contribution 1) 6,8% 2,8% 2,6% 0,1% Road transport Energy production & distribution Commercial, institutional & households Energy use in industry Non-road transport Agriculture Industrial processes & product use Waste 1) In Germany, as of 2012 Source: EEA; Bosch; Roland Berger 7
2 Toxic exhaust gas emissions The diesel's NO x and PM limits have approached the level of gasoline but also lead to increases in emission control costs Toxic emission limits 1) of diesel vs. gasoline passenger cars NEDC [g/km] NO x limits PM limits Euro 3 Euro 4 Euro 5 Euro 6 0.500 0.250 0.180 0.080 0.150 0.080 0.060 0.060 0.050 2) 0.0250 2) Same PM limits for gasoline and diesel 0.005 0.0045 Emission control techn. costs 3) [USD/vehicle] ~520 ~675 ~1,082 ~1,630 Gasoline Diesel 1) All emission limits as tested in New European Drive Cycle (NEDC) 2) Only for diesel 3) For a 2.0 liter diesel engine in 2010 Source: ICCT; Roland Berger 8
2 Toxic exhaust gas emissions Nevertheless, the discrepancy between real emissions and EU limits for diesel cars has substantially increased since 2000 NO x emissions: Diesel passenger cars NEDC [g/km] Euro 3 (2000) Euro 4 (2005) 1.0 x 2 0.5 0.25 Euro 5 (2009) Euro 6 (2014) 0.8 x 4 0.18 0.08 x 3 x 8 0.8 0.6 Euro 6c (2017) > Implementation of new Real Driving Emission tests (RDE) is expected > Reducing the RDE of the diesel powertrain becomes a challenge for OEMs and suppliers > Manufacturers will need to find solutions for good CO 2 efficiency, low real NO x emissions and good driving experience Measured on road Cycle limit Source: ICCT; Delphi; Roland Berger 9
The 2025 outlook for diesel Decrease of diesel share in nearly all major automotive markets is expected 2025 worldwide outlook and drivers for the use of diesel in passenger cars > Customer interest in diesel in the US market will decline due to the recent controversy; diesel fuel price remains higher than gasoline > Main local car makers will focus on efficient gasoline engines and electrification > Diesel will only be offered in some niche market segments > European OEMs will still focus on diesel technology due to existing investments and CO 2 emission targets > Diesel powertrain is getting more expensive, partly due to implementation of RDE cycles with Euro 6c > Diesel will lose market share (esp. in smaller vehicle segments) > Chinese government is heavily promoting the development of battery electric vehicles (BEV) > Diesel engines will not play any role in China for passenger cars > Diesel engines are only relevant for trucks > Ban of diesel engine passenger cars in place > Fierce competition with ethanol/flex fuel (local production) > No uptake of diesel engines in passenger cars expected > Diesel fuel has a price advantage even without subsidies > Sales of diesel-fuelled cars expected to keep on rising > Strong focus of Japanese OEMs in alternative powertrain technologies (i.e. hybrid and electric vehicles) > Government subsidies for alternative powertrains > No major share of diesel engines in passenger cars expected Source: Diesel Technology Forum; press research; Roland Berger 10
Three scenarios on future of diesel possible in Europe 2030 "Most likely" is decrease of diesel with shift toward upper car segments Diesel scenarios in Europe/forecast new car diesel shares in EU-28 until 2030 1) "Diesel extinction" "Focused shift" "Diesel constant" Diesel engines to be fully replaced by gasoline and alternative powertrains Diesel engines decreasing, but remain the dominant powertrain in upper vehicle segments No changes regarding diesel as powertrain solution Diesel (incl. MH diesel) 53% 20% 10% 53% 48% 41% 53% 53% 53% 2015 2030 2015 2030 2015 2030 Customers > Do not trust diesel technology as a "clean" solution any more > Still trust diesel technology as "clean" > TCO will be a strong buying criteria > Still trust diesel technology as "clean" > Diesel is "technology of choice" Politicians > Scrap actual tax incentives for diesel fuel > Strong support of alternative powertrains > Change regulations against diesel, e.g. ban it from the roads > Accept importance of diesel technology for CO 2 reduction in general > Increase regulation on Real Driving Emissions > Tax changes in some EU member states > Support the diesel engine without any restrictions Diesel technology > Does not meet new regulation targets > Diesel engine becomes more expensive due to additional after-treatment technologies > No additional technology needed Conclusion 1) In % of new car sales > Diesel will completely lose all importance by 2030 > OEMs have to shift their powertrain strategy to alternative solutions > Diesel engine will lose market share constantly, esp. in lower car segments > Diesel will still play a major role in upper vehicle segments RB most-likely scenario > Diesel will stay at the same level as today in terms of volume > No change in vehicle segments Source: EEA; Roland Berger 11
Diesel powertrain still expected to hold dominant position in upper passenger car segments despite decline in diesel share by 2030 "Focused shift": New car diesel forecast by segment in EU-28 until 2030 1) A Mini cars e.g. Fiat Panda 98% 100% 100% D Large cars e.g. VW Passat 16% 21% 31% 84% 79% 69% 2% B Small cars 64% 67% 74% E Executive cars 12% 20% 30% e.g. Peugeot 208 e.g. MB E-class 88% 80% 70% 36% 33% 26% C Medium cars 36% 40% 45% F Luxury cars 50% 56% 63% e.g. Citroen C4 64% 60% 55% e.g. BMW 7 series 50% 44% 37% 2014 2030 2014 2030 Other powertrains 1) In % of new car sales Diesel (incl. MH diesel) Source: EEA; Roland Berger 12
Diesel essential for CO 2 reduction by OEMs but higher technology demand to meet regulations Potential benefits for supplier industry "Focused shift": OEM and supplier implications OEMs Accept and close the gap between cycle and Real Driving Emissions of diesel engines Develop and implement (after-treatment) solutions in order to reduce RDE Adapt powertrain strategy by shifting the diesel focus from lower to upper car segments Accelerate implementation of alternative powertrain solutions (electrification) to meet CO 2 regulations Successfully convince car buyers and policymakers of "The New Clean Diesel" Innovative solutions for more efficient and clean diesel technologies needed Innovative solutions for more efficient gasoline technologies needed Suppliers Higher demand for alternative powertrain solutions increases demand for cost-intensive BEV/PHEV cars Higher demand for after-treatment solutions for diesel engines to meet RDE regulations Shift from diesel to gasoline engines in car segments changes the technology Long-term volume reduction through increasing demand for BEV cars Powertrain suppliers Exhaust syst. suppliers Source: Roland Berger 13
Roland Berger's Automotive Competence Center The LEADING CONSULTANCY for the AUTOMOTIVE INDUSTRY > We are a global team of 50 Partners/Principals and >300 Consultants fully focused on the automotive industry > Our team covers all regions and countries relevant for the auto industry via local experts > Our client portfolio encompasses all top 10 global OEMs and all top 10 global suppliers, plus a large number of other leading companies in the automotive sector > Players from the entire automotive value chain are served by dedicated specialist teams: raw material and component/systems suppliers, car manufacturers, truck/agricultural and construction equipment manufacturers, dealer groups, as well as all types of aftersales and aftermarket players > Our functional expertise spans all relevant areas: from engineering to purchasing, manufacturing/logistics to sales/marketing and aftersales > Our commitment: We provide you with content and fact-based advice, and ensure successful and sustainable implementation via our experienced teams Source: Roland Berger 14