The expected decline of the popularity of diesel-fuelled vehicles in the European car market has been significantly accelerated in the light of the Volkswagen diesel emission fixing scandal according to research carried out by analysts at just-auto's QUBE research unit.

The analysts say that a number of factors were already expected to gradually reduce the significance of diesel light vehicles in Europe over time. These factors include: the increasing cost of aftertreatment to reduce NOx emissions under Euro VI and future regimens; more efficient direct-injection turbocharged downsized petrol engines; a mounting backlash against diesel emissions from cities such as Paris and London, and the increasing electrification of powertrains.

The VW imbroglio, in which US government regulators found software in vehicles that produced false emissions data, should see that anticipated future decline accelerate.

QUBE's team see West European diesel penetration declining from 49% in 2016, as in the last forecast to just 44% in its October 2015 release. Mid-term diesel penetration in light vehicles will fall to 38-39% in 2020 from 44% previously. By 2025, QUBE analysts expect diesel penetration in West Europe to fall to 33.7%.

This decline in the European diesel forecast could cause problems for automotive manufacturers (OEMs). Calum MacRae, QUBE's head of development, warned that the industry has been geared to diesel vehicles helping vehicle makers meet tougher CO2 targets ahead. “Many OEMs will have been banking on Europe having a much higher diesel market share to ensure their fleets comply with 2021's 95g CO2 fleet target,” he said. “Those calculations will now have to be revisited, which should have implications for powertrain planning mixes and potentially total market volume.”

One beneficiary of a worsening outlook for diesel engined vehicles in Europe will likely be hybrid vehicles, MacRae believes. And he also draws attention to financial implications associated with failure to hit future CO2 average targets. “Failure of any OEM to meet individual targets under the 95g legislation will result in an EUR95 fine for every gram exceeded over the OEM's limit value curve target multiplied by the number of vehicles registered by the OEM in the EU.”

In Europe, the bastion of the diesel market since the 1980s, the picture is very complex. Due to the extra cost of diesel powertrains, penetration in Europe is concentrated around certain segments. For example, penetration among high-mileage D-segment drivers is highest, while smaller vehicles – with their lower sticker price – have low diesel penetration due to the relative cost of diesel engines compared to petrol and the likely typical annual mileage of smaller cars.

Additionally, many markets in Europe are led by the fleet sector – in the UK for example fleets typically account for 50% of the new car market – and it could be that many large companies will reconsider having diesel and/or VW group products on their lists.

Furthermore, throughout the 2000s many European governments have been promoting the use of diesel as a means to meet European CO2 targets, which has led to increasing take-up of diesels.

QUBE's analysts do not believe the revision is all downside for the European OEMs though. The furore could see prices for Euro 6 diesels and future compliant diesels increase so consumers pay market prices for DeNOx technology. In Europe's deflationary pricing environment for cars, it's hitherto been very difficult for OEMs to pass on emission compliance costs to the market.

"Now automakers might be in a position to say to consumers 'if you want low-NOx and low-CO2 diesels you'll have to pay for the technology," adds MacRae.

However, the potential for higher diesel transaction prices and a more expensive and electrified powertrain mix, in order to meet CO2 targets, could result in a lower total industry volume depending on demand elasticity. Similarly, QUBE's analysts have announced that the expected penetration of diesel in the light vehicle market in the US has also been significantly downgraded.

Background

The European Union (EU) has adopted strict new standards on pollutant emissions from diesel and gasoline light vehicles, limiting in particular nitrogen oxides (NOx) and particulate matter (PM) which pose the most serious health and environmental problems. Fuel exhausts have an impact on air quality and human health, especially in urban areas where traffic is dense. To reduce this impact, the EU has adopted legislation to impose stricter emission limits on both diesel and gasoline vehicles. Successive Euro emission standards for passenger cars and light vehicles were initiated in the EU as of 1993. They have already helped achieve a reduction in air pollution from cars, for example by forcing vehicle makers to fit catalytic converters to exhaust pipes. Heavy-duty trucks and buses, off-road diesel vehicles and motorcycles are subject to separate emission regulations.

Japan and the US have adopted similar legislation to the Euro emissions standards. Emerging countries in Asia, Africa and South America are also gradually adopting legislation on emissions standards and fuel requirements.

The quantity and composition of emissions vary depending on a number of factors, including the quality of diesel fuel used, the type of engine and the engine tuning, and the workload demand on the engine. The tightening of vehicle standards is closely linked to fuel quality improvements. In some cases, fuel modifications are necessary to allow the introduction of new technologies that are needed in order to meet the tighter emission standards. For example, the adoption of Euro I standards for gasoline vehicles required the development of unleaded gasoline.

Aftertreatment opportunity

Future diesel aftertreatment provides new opportunities for manufacturers. Manufacturers predict the content per vehicle for diesel exhausts will increase significantly due to the ever-tightening emission regulations. Successive Euro emission standards for passenger cars and light vehicles were introduced in the European Union in 1993.

Manufacturers estimate that the average price (cost to the carmaker) of a complete exhaust system for a diesel light vehicle complying with Euro 1 is about EUR250. To comply with Euro 5 standards, that same exhaust would also feature a diesel particulate filter, fabricated insulated manifold and thermal management system and cost the carmaker about EUR600.

Heavy-duty trucks and buses, off-road diesel vehicles and motorcycles are subject to separate emission regulations. Forthcoming stricter emissions regulations throughout the world will, therefore, significantly increase demand for automotive catalysts and many diesel-powered vehicles will need to be equipped with diesel particulate filter systems at the factory. Diesel particulate filters, selective catalytic reduction and de-NOx systems will be required in greater quantities in the years to come and consequently the demand for precious metals and ceramics will also increase. Some of these systems will also be used on gasoline-fuelled vehicles. The cost of ceramic and catalytic materials is high and emissions treatment systems are expensive.

In commenting on the price pressures that Bosal has faced in its OE business, Karel Bos, CEO of Bosal, told just-auto: "Volume-wise it is doing okay overall, but in the United States it’s depressed – from both a sales and profitability perspective. And steel price compensation is an issue. When you have a raw material component in your sales price that accounts for 70-80%, you can’t just absorb a 15% rise in base metal price from the steel industry – there is just not enough margin for that. Even if it is split 50/50 that’s 8% and if you have 20% added value and profitability then taking 8% out is just way too much. It’s still too much if it’s 4%."

Diesel share of the European car market by country, 2000-2014