The Transformation of the Automotive Industry:The Environmental Regulation Effect 

This KPMG white paper presents an overview of the governmental regulations in North America, Europe, Asia, and Latin America and analyzes the impact of these regulations on the global automotive industry.

 

Executive Summary

The global automotive industry is undergoing a fundamental transformation due to increasing consumer preferences toward vehicles with a lower carbon footprint. Governments throughout the world have responded to these market forces and other geo-political factors by imposing stringent environmental regulations on original equipment manufacturers (OEMs) for emissions control and fuel economy. These regulations vary markedly from one part of the world to the other, adding complexity to the mix of vehicles offered by OEMs worldwide. As a result, global OEMs and suppliers are being challenged to constantly update their product portfolios to meet numerous regional regulatory requirements, which are expected to add significantly to their manufacturing costs.

 

Globally, road transport (passenger cars and commercial vehicles) contributes 14 percent of total man-made carbon dioxide (CO2) emissions.1 Although new cars now emit significantly less CO2, road transportation remains one of the few sectors where emissions keep rising. This is due to the growth of freight transportation, vehicle ownership, and increased mileage. In the European Union (EU), for example, motorists increased their annual mileage by 16.4 percent between 1995 and 2003. For conventional vehicles, only 15 percent of the energy from fuel put in the tank is used to move the vehicle with the rest wasted in friction losses.2 This suggests that tremendous opportunities still exist to
improve fuel economy.

 

OEMs have made reducing the amount of CO2 emissions a priority. To significantly reduce the carbon footprint of their model lines, OEMs are focusing on the most cost-effective technologies capable of being deployed on mass-produced models, in line with their strategy of offering "everyone an environmentally friendly vehicle." To pursue this objective, most OEM strategies are focused on:

 

  • Improving fuel efficiency and reducing carbon and pollutant emissions
  • Developing of alternative fuel vehicles, powered by fossils (natural gas) or renewables (biofuels)
  • Electrification technologies by enhancing the cost-effectiveness of hybrid and electric vehicles

 

Government incentives are expected to play a huge role in accelerating the mass adoption of these technologies, but the government response has been very different across the world. While the United States government has recently been proactive acting as a venture capitalist by funding new ventures in automotive battery and electric vehicles, the Japanese government has only indirectly funded these
ventures by temporarily providing subsidies for fuel-efficient vehicles. The Chinese government has become an ardent supporter of New Energy Vehicles (NEV) and battery development because Chinese OEMs and suppliers understand they cannot catch up to or move ahead of Western manufacturers by developing traditional internal combustion engine (ICE) technologies.

 

Given the variance of regulatory frameworks around the world and the lack of will and direction to harmonize the regional standards into a single global standard, companies may choose to develop multipronged strategies to minimize risks and maximize returns. While all OEMs are exploring a wide variety of green technologies, regional preferences dictate the choice of solution offered in specific markets. For instance, stop-start technology is expected to see widespread adoption in Japan and Europe but limited uptake in North America. Similarly, Chinese OEMs have shifted focus to more
small-car production, which could make them the largest producer of NEVs by 2013.

 

The degree of influence that consumers, government agencies, and automotive companies have in reshaping the structure of the industry varies significantly across the globe. The combination of a global recession, overcapacity, and pressure from stiff environmental regulations has led to widespread sector consolidation that could continue to increase for years to come. As discussed in more detail in section 3, the findings of KPMG LLP (U.S. member firm of KPMG International Cooperative) suggest that the most attractive M&A transactions may be between North America and Asia, followed by Europe and Asia, and North America and Europe. These potential trends are in line with recent cross-border mergers and alliances between Volkswagen and Suzuki, Bosch and Samsung, PSA and Mitsubishi, and many more. These trends are expected to pick up steam as companies seek more opportunities for horizontal and
vertical integration.

 

Regional CO2 Emission Regulations

 

Regional CO2 Emission Regulations

 

Note: EDC – New Europe Drive Cycle

Source: The International Council on Clean Transportation, Passenger Vehicle Greenhouse Gas and Fuel Economy Standards: A Global Update

 

Regional Fuel Economy and GHG Emission Standards

 

Regional Fuel Economy and GHG Emission Standards

 

Source:      The International Council on Clean Transportation, Passenger Vehicle Greenhouse Gas and Fuel Economy Standards: A Global Update

 

In the future, the hardest-hit suppliers may be those with undifferentiated products that do not meet the demand for increased fuel economy or emission control. On the other hand, numerous others that are savvy enough to reposition themselves today could benefit from regulations that threaten to become increasingly stringent in the future. As the industry innovates its way towards a new business model with
alternative powertrains and fuel-efficient technologies, it is clear the map of the industry will look very different from the one today.

 

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The Transformation of the Automotive Industry: The Environmental Regulation Effect (PDF)
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For more information on this white paper please contact: 

 

Ryo Eguchi
Transactions and Restructuring Services, KPMG in the U.S.
reguchi@kpmg.com
+1 212 872 6971

 

Hideharu Kojima
Transactions and Restructuring Services, KPMG in the U.S.
hideharukojima@kpmg.com
+1 212 954 6125

 

1. www.globalwarmingart.com
2. CSM Auto