Diesel decline accelerates as incentives push electrified models

Diesel's share of the European vehicle market has plummeted faster than predicted with the powertrain accounting for 27.8 percent in the first six months of the year, down from 31.4 percent during the same period in 2019, according to data from industry association ACEA.

The rate of decline has been so rapid that just three segments had a diesel share of more than half during the period, down from five segments during H1 2019, figures from market researcher JATO Dynamics show (see table, below).

At the start of 2020 and well before the COVID-19 outbreak became a global pandemic, analysts from IHS Markit and LMC Automotive predicted that Europe's diesel market would stabilize at about 30 percent after dropping from 52 percent in 2008.

The market watchers believed that buyers of larger cars and SUVs would remain faithful to diesels because they continue to offer a competitive balance of affordability, power and good fuel economy.

However, the share has continued to drop as drivers have shifted to alternatives powertrains such as electrified models, which have qualified for generous government-supported subsidies as part of post-lockdown stimulus packages in key markets such as Germany, France and Spain.

“I'm not entirely sure why diesel has done so badly so far this year,” Al Bedwell, director of global powertrain at LMC said. “Electrified cars have been selling well, and they are usually gasoline so that hasn't helped diesel much. Gasoline plug-in hybrids have stolen diesel share for sure.”

Diesels began to thrive in the early 2000s as new turbocharged and direct-injection technology smoothed out their previous roughness.

That allowed automakers to combine refinement and fuel savings even in large premium cars. As a result, by 2012, 90 percent of Volvo's sales, 81 percent of BMW's volume and 70 percent of the vehicles Mercedes-Benz sold were diesels in Europe.

However, the cost of cleaning up diesel pollutants enough to meet increasingly tougher clean air standards has climbed in recent years. Another setback came in 2015 when Volkswagen Group admitted that it cheated emissions tests to make its diesels appear cleaner than they were.

The scandal, which has cost the automaker 30 billion euros in fines, settlements, recalls and legal costs, coincided with campaigns to ban diesels from cities across Europe.

Although diesels continue to be a key powertrain for premium automakers seeking to lower their CO2 averages, many automakers are slimming down their diesel offerings.

For example, Volvo is phasing out sales of diesels and shifting to mild hybrids, plug-in hybrids and full-electric models. Volvo's pivot to hybrids caused its diesel share in Europe fall to 45 percent in the first half of the year. Gasoline-based plug-in hybrids now account for 24 percent of its European sales.

BMW has said it will stop production of its entry 1.5-liter three-cylinder diesel, citing the high cost to upgrade the engine to meet emissions rules.

Of the premium brands, Audi is least dependent on diesel with a 38 percent share in Europe in 2019, according to data from international environmental organization, ICCT.

BMW stood at 52 percent, Mercedes at 55 percent and Alfa Romeo at 66 percent, the 2019 data showed. Jaguar Land Rover wasn't included in the ICCT's figures, but in 2018 81 percent of the automaker's sales in Europe were diesel.

Big premium sedans and wagons such as the BMW 5 Series and Mercedes E-Class remain the category leaders with the largest diesel share at 58 percent for the first half of the year, according to JATO, but that is down from 71 percent during the same period last year.

Large SUVs had a 57 percent diesel share in the first half, down from 68 percent in H1 2019, and midsize SUVs posted the third highest share at 52 percent, down from 57 percent.

The larger cars might have the highest diesel mix but the volume is still in the hands of the more mainstream categories. Compact SUVs dipped to a 33 percent diesel share in the first half from 39 percent during the same period last year, but the segment still had the highest number of diesel sales overall at 272,444, led by the Volkswagen Tiguan.

Europe's No. 1 diesel model in the first half was the Skoda Octavia with a volume of 37,591 units, meaning that the powertrain accounted for 51 percent of the compact car line's overall sales (see table, below).

Germany was the biggest diesel market by sales with a volume of 410,988 in the first half, driven by its size and its high percentage of premium sales. Ireland, however, remained the country with the biggest diesel penetration at 40 percent (see table, below).

Of the top five European countries by sales, Italy continues to have the highest diesel share at 36 percent, down from 40 percent in 2019.

The biggest rejection of diesel meanwhile has come from the UK, which posted a diesel share of less than 20 percent in July, down from 26 percent in the same month last year, according to data from the country's SMMT industry association.

A strong growth in electrified sales, particularly for hybrid electric vehicles, driven partly by generous company car tax breaks, helped vehicles with alternative powertrain take a 16 percent share of the UK market, up from 7.4 percent in July 2019.

The country has taken one of the toughest stances in Europe against diesel and gasoline engines, with the government considering a ban on the sale of cars with internal combustion engines by 2035.

Despite that threat, LMC believes that the UK's diesel share won't tumble much further in the next five years, remaining at around about one-fifth of all sales.

Across Western Europe, however, LMC expects diesels sales to continue to slide. It predicts that the first-half tumble will stabilize to finish the year at a 29 percent share, representing roughly 3.1 million units, before gradually declining to 22 percent by 2025.

Germany's July diesel share of 29 percent -- its lowest since 2009 when scrappage schemes boosted the sales of small gasoline cars -- signals the start of a decline that LMC expects will dip to 22 percent by 2025. Italy's 40 percent share for the year will collapse to 26 percent by 2025, LMC believes.

The gradual shift toward gasoline-powered electrified models in the larger classes will leave passenger versions of vans as the one diesel stronghold, JATO global analyst Felipe Munoz said.

“It is my belief that they will continue running with the diesel technology that the rest of passenger car segments can't use,” Munoz said.

Vans have their own emissions targets that will force automakers to increase their electrified mix, but given they are less stringent than they are for cars, that could make passenger vans the last option for diesel-loving drivers in Europe.