Impact of environmental regulations on the future roadmap of the automotive industry: a global perspective

Abstract

The automotive industry all over the world is in the midst of major changes dictated by the increasing environment awareness of customers. Across the world, governments are taking cognizance of these market forces as well of the geo-political issues related to the environment and are formulating stricter environmental regulations on the equipment manufacturers (OEMs) for emissions control and fuel economy with respect to technical performance parameters like emission standards and fuel efficiency. To add to the complexity, these regulations vary from region to region and in some regions country to country, thus implying that vehicles offered by OEMs will have multiple variants in various regions and countries. And as the regulations keep getting more stringent in keeping with the prevailing environmental pacts, OEMs have to keep renewing their product portfolios which only adds to their manufacturing costs. At a global level, surface transport (specifically road transport comprising of passenger vehicles and commercial vehicles) have been found to contribute approximately 14% of the carbon dioxide (or CO2) emitted due to human activities. And despite the fact that newer vehicles emit significantly lesser carbon dioxide (as compared to older vehicles),yet their increasing number with growing prosperity levels has meant that the carbon dioxide emitted by vehicles at an aggregated level is only increasing. There are other factors at play as well like growth in the number of vehicles in freight transport and increased fuel efficiency leading to increased mileage and usage. In the European Union, it was found that the annual mileage of motorists increased by 16.4% in the years from1995 to 2003. Another perspective on the energy consumption of conventional motor vehicles is that approximately only 15% of the fuel s energy is employed in moving the vehicle while the rest is consumed towards overcoming friction implying that there is great scope for further improving fuel efficiency. As of the present, all OEMs have made reducing the emission levels of carbon dioxide their top priority. OEMs are deploying cost-effective technologies that can be incorporated in the mass-produced vehicles to decrease the carbon-footprint of their vehicles so that their offering is an environmental friendly vehicle . To achieve this purpose, the strategies of the OEMs focus on the following:- Reducing carbon dioxide and other pollutants and improving the fuel efficiency. Development of Internal combustion engine (ICE) technology vehicles that can run on alternate fuels, be it other non-renewable fossil fuels like natural gas or renewable fossil fuels like bio-fuels. Employing electric technology and developing cost-effective hybrid variants or purely electric vehicles. Since these technology shifts have a huge financial implication, it is expected that governments will play a facilitating role to increase the adoption of these new technologies, but so far expectedly government responses have varied across the world. For example, the US government has taken a more involved approach by funding new initiatives in the areas of automotive batteries and electric vehicles. The Japanese government has adopted a relatively indirect approach by sanctioning subsidies for vehicles that are fuel efficient. On the other hand, the Chinese government is strongly supporting the efforts of the Chinese OEMs in developing New or Alternate Energy Vehicles and in developing battery technologies possibly because of the fact that it is impossible for the Chinese to match up or overtake US and European manufacturers in the conventional ICE technology space. In view of the huge variance in the regulatory mechanism/frameworks across the globe, and absence of resolve and determination to synchronize various country/region standards into a common world-wide standard, companies are being forced to employ multiple strategies to optimize the trade-offs between risks and returns. And though all the OEMs are looking at multiple green-technology options, it is the country/region specific regulations that have decided the offerings/solutions for each market. For example, Japan and Europe are expected to witness extensive adoption of the start-stop technology while it is expected to pick up in North America in a limited way. On the other hand, the OEMs in China are focused more towards the development of small-car technologies, which can possibly make them the largest manufacturers of New or Alternate Energy Vehicles in the coming years. The extent to which consumers, governments and auto companies can change or redefine the structure of the industry also varies from region to region. In recent years, factors like global recession and resultant excess capacity combined with stringent environmental norms has resulted in an extensive consolidation in the automotive sector which is expected to continue in the coming years. As per a report of the KPMGLLP, which is part of the KPMG International Co-operative, the most attractive Mergers and Acquisitions are likely to place between firms in Asia and North America followed by Asia and Europe, and lastly Europe and North America. These prospective trends have been echoed in the latest mergers/deals between Samsung and Bosch, Mitsubishi and Peugeot Citroen, Suzuki and Volkswagen and many more. Such trends are likely to gain momentum as companies look at prospects of integrating horizontally and vertically. In times to come, the suppliers who would be most severely affected would be those whose products are not differentiated enough to meet the increasing expectations in the area of fuel-efficiency and emission-control. While those that adapt to the evolving scenario by revamping their offerings will stand to gain from the regulations which are only expected to become more stringent in the coming years. The future is likely to see the auto industry innovating in the direction of new technologies with alternate powertrains leading to a new technological paradigm.