With threat of CO2 fines, EV profitability must improve, Hyundai’s Schmid says

Hyundai Europe COO Thomas Schmid forecasts that the cost of electrification will force automakers to focus on a healthy business by cutting marketing costs and limiting sales incentives. Electrification is still too costly to reach the smaller segments, even in the midterm and even in the form of a mild hybrid, says Schmid, who has been Hyundai Europe’s COO since 2015. Plug-in hybrid vehicles will not be a long-term solution, either, as sales depend too heavily on government incentives, he says. The 60-year-old Austrian national, who will step down from his post at the end of the year, discussed these topics and more with Automotive News Europe Correspondent Andrea Malan.

European automakers are rushing to get ready for the transition to the 2020 European CO2 emissions limits. How will it impact the market?
Every carmaker has the same basic task: Improve profitability due to the tremendous cost of electrification. Therefore, and you already see it in the markets, everyone is trying to reduce incentives. There is maybe one exception: That’s the Volkswagen Group. They need huge volumes to keep a high cash flow because they are currently financing all their investments out of cash flow. Other automakers, such as Fiat Chrysler, reduced their incentive levels, and you see it in the market share now. That is also true for Renault or PSA Group and for Japanese companies such as Toyota and Mazda. Everyone is more focused on a healthy business. To me that’s an indication that this increase in registrations might not happen because they can already now reduce the production of high-CO2 vehicles. That would be a smarter way to tackle the problem.

Looking to 2020, will the market be up or down compared with 2019?
There are two risks. No. 1 is the 95 grams per kilometer CO2 limit with its high penalties [for noncompliance start in 2020]. Manufacturers will try to balance. That means no one will push for high volumes. That’s why the market will suffer a slight decline. You actually see it already, if you compare the data with previous forecasts. The second risk is Brexit.

What would be the impact of Brexit on Hyundai?
The UK is our second-largest EU market after Germany.

Can you put a figure on it?
We risk a 10 percent loss in the UK, which we have to compensate for elsewhere.
Will Hyundai meet its EU CO2 reduction target next year and avoid fines?
Of course. We are preparing to supply electric vehicles in sufficient volume and to deliver them without long delivery times to our customers. However, everyone has to sell many more battery-electric vehicles. That raises some questions: Does the European market have that many customers who want to buy a full-electric car? How long will it take for the national governments to put in place a strategy to roll out a sufficient number of charging stations? When will customer be able to get their electricity with a single card everywhere?

Hyundai will push EVs in 2020-21 to reach your CO2 reduction goals. Does that leave you vulnerable by 2022 and for the rest of the decade?
Yes, that’s a concern. It’s likely that by the mid-2020s we will see competition [for EVs] reach the level we see today for cars with internal combustion engines.

What are the pros and cons of a wider choice of EVs available to buyers?
Well, it would be an opportunity for European customers, and [if there is a strong uptake] it would allow us to slowly lower prices for electric vehicles. But we would still need in Europe 50,000 additional charging stations just to enable long-distance driving. We know 80 to 90 percent of people live in apartments. Do they have parking on the street or in the garage? If not, where are they going to recharge? The infrastructure problem is critical, and it’s unlikely we will have a widely available network in two years. It’s more likely to take 10 years. Given these obstacles, it is not possible that full-electric vehicles will have a 30 to 40 percent market share, contrary to some forecasts. This just won’t work.

Why has Norway achieved this?
The structure of living in Norway is different. They have lots of public charging stations already. People who live in apartments have second houses in the country and recharge during the weekend. And many of them have two cars — one electric and one diesel. In addition, several countries want to ban the sale of combustion vehicles by 2030 or shortly after. In that case, it’s likely that everyone will keep the car longer, maintain it better, so repair shops will see their business grow. We would move into an almost old-timer used-car market.

Plug-in hybrids offer CO2 results of around 30g/km. Are they a solution?
At the moment, plug-in hybrids show very low CO2 values thanks to the testing procedure. But in some countries, like the Netherlands, incentives for plug-in hybrids were canceled when the government realized that people never recharged the battery. They just use the combustion engine, resulting in much higher consumption. With the introduction next year of the real-driving emissions (RDE) test, the data will change for plug-in hybrids because this procedure includes highway driving. When the battery is empty, you face the problem that CO2 values jump dramatically. The idea was that plug-in hybrids would allow you to go into the city in electric mode and use the combustion outside. You already see it in the figures that plug-in hybrid sales are decreasing due to the removal of incentives in some countries. They are down a two-digit percentage every month, while hybrid and full-electric cars are still growing very fast.

Is it too early to commit to plug-in hybrids as a solution because of all this uncertainty?
It’s a solution in the transition period, particularly for the heavier cars. But you still see a dramatic month-by-month decline in plug-in hybrid sales.

What new products can we expect to see from Hyundai in 2020? Is the new Tucson imminent?
Some spy pictures [of the Tucson] have already been published. We are renewing our product range, so we will have a very busy 2020. We revealed at this year’s Frankfurt auto show the new i10, whose deliveries will start in January. Then we will launch a new or updated model every two months. Sorry that I can’t say more than that right now.

Will the Tucson get a mild-hybrid powertrain like the current one? Will it be more electrified?
Our future vehicles will all be more electrified than what you see with mild hybrids. The exception will be minicars such as the i10. Currently, we don’t see a feasible business case for such vehicles [battery-drive small cars] because the cost of electrification is too high. We see ourselves as providers of mobility for all people. In the near term, there is no chance to have a full-electric vehicle for 10,000 euros ($11,000). Even a hybrid powertrain makes the car 3,000 or 4,000 euros ($3,300 to $4,400) more expensive. Therefore, we are not electrifying small segments.

Not even with a mild hybrid?
Even this kind of technology is too expensive, and for this kind of car, it doesn’t have such a large CO2 effect. So we are optimizing the combustion engines, adding a start/stop mechanism and so on.

Will the minicar segment disappear in the next five to 10 years as the added costs to reduce CO2 from 95g/km to 60g/km CO2 would be too high?
That’s an issue, because in 2030 the average CO2 emissions limit will have to be reduced by 37 percent from the current one – that’s a no-go without electrification. On the other hand, the hype around electrification at the moment is driven by legislation, both at the city and state level. There is a high risk that this [move toward electrification] will never work out because the infrastructure doesn’t exist. That means the entire society has to change its behavior on mobility. Automakers also have a social responsibility. Minicars and small cars are the segments where you have the highest demand in Europe.

What could the governments do to avoid pricing these vehicles out of the market? Relax standards? Give more fiscal incentives?
There is a clear trend to protect our environment. Cars are part of pollution problem, although they pollute less than other sources. But for the politicians, the car is the easiest target. On the other hand, Europe is very strict if you compare it with other parts of the world such as the U.S. Europe is also very fragmented, with nearly 30 members. Everyone has different solutions in mind. This makes it challenging for the industry. Neither politicians nor the industry knows what the perfect solution is. And politicians should be very careful when damning diesel in general because Euro 6d vehicles are compliant [with CO2 rules] and they are much less expensive than battery-electric vehicles.

Is diesel still an option for small cars?
On small cars, it would be possible to use gasoline engines with some technical innovations, but again there we have a cost factor. Governments should think about taxation. If you look across Europe, after the introduction of the WLTP test procedure, only one country, which is France, has decided to keep calculating the tax on NEDC (New European Driving Cycle) data, and that was because of protests. In the rest of Europe, CO2 taxes will increase up to 30 percent [because of the switch to WLTP as the basis for the tax].

Last year Hyundai teased a possible crossover in the minicar segment. What is the latest on that?
We will have a small crossover, but it will not be as originally planned in the minicar segment. We do have such a vehicle in India, but our research shows that it doesn't really make sense in Europe. I know some competitors are doing vehicles like this, especially the premium brands. We, however, decided not to introduce a minicar-sized SUV, but we will have a crossover that is smaller than the Kona.

Could the next-generation i20 be a crossover?
That’s one idea, but it could also be a separate platform.

Why has the ix20 been discontinued?
The main reason was that the small minivan segment is the fastest-declining segment in Europe. Customers for those vehicles are usually wealthy but very old. The market is going toward crossovers and SUVs, therefore, it doesn't make sense to have huge investments when the maximum we sell is 30,000 units.

Was the ix20 a Europe-only product?
Yes. There’s no demand elsewhere. In Asia, let's say from Ukraine up to China, sedans are still strong, and also there is a trend toward SUVs. Minivans are completely fading out of the market, even in India.

When will a model based on the 45 concept arrive?
This model is close to its final design. It’s on a dedicated platform called E-GMP (Electric Global Modular Platform) and will be the basis for future EVs of different dimensions and body styles. It gives an indication about our design language for future EVs, but you have to wait a little bit.

Hyundai said recently it is “actively pursuing collaborations with mobility service providers.” Does that mean that you are looking to provide cars to car-sharing organizations?
We already have collaborations and stakes in big car-sharing companies such as Grab. It’s more in Asia.

Not in Europe?
Do you know a European or American car-sharing company that makes money? There’s no business case at the moment for that kind of service. Grab, where Hyundai has a stake, is active in Indonesia and Malaysia. There you have megacities with a huge demand for mobility. We don’t have megacities of those sizes in Europe. So far, Grab is fast-growing, and they’re earning money. Meanwhile, in Europe we have seen with two premium brands [Daimler and BMW] how challenging it is to make money [from car-sharing] and how hard it is to find any solution to reduce losses. I don’t see a business model that fits European consumers’ behavior. Maybe it will change when city governments start to reduce the spaces or to charge heavily for road space. That would push the cost of ownership up dramatically, and then car-sharing might be combined with public transportation, and then I would say there is a chance to have a business model.

So you’re waiting for that moment?
We are different. We try to be completely open-minded and have a look into all ideas. Hyundai has a company called Cradle, whose main job is to think completely out of the box. For example, can you imagine drone-sharing?

Does Hyundai plan to produce an electric scooter?
Yes. The idea is to offer it as an option on some of our vehicles. It’s coming this year, first to China. It’s really intended as a last-mile vehicle. This kind of vehicles is not improving mobility; it’s just convenience for people who otherwise would walk or use their pedal bikes. I guess some kind of regulation will come. It’s also an environmental problem, as the average life cycle of these products is just three months. In three months, the battery becomes too weak. Our idea at Hyundai is to offer a last-mile option which offers a much higher flexibility than park-and-ride systems in cities.