Automakers fight to rescue small cars from extinction as EU rules bite

The U.S. buys big but relatively unsophisticated cars, while Europe prefers sophisticated small cars. That truism is about to be rewritten in Europe, however, as automakers start to question their small-car strategy in response to costly new European Union legislation covering safety and tailpipe emissions, in particular the output of CO2.

"New CO2 rules will require automakers to fit thousands of euros of tech to each car," Max Warburton, an analyst at research and brokerage firm Sanford C. Bernstein wrote in an April report. "Big cars have the price points and margins to cover these costs. Small cars simply do not. These segments may soon be abandoned by many manufacturers."

Automakers across Europe are axing their smallest cars or preparing to do so.

• Opel will drop its Karl and Adam minicars, while fellow PSA Group brands Peugeot and Citroen said their 108 and C1 minicars are unlikely to survive. A source at Ford confirmed that it will stop exporting the Indian-built Ka+ small car to Europe.
• Volkswagen executives have said privately that the automaker is preparing to drop combustion-engine versions of the Up minicar, which would almost certainly mean the fuel-powered Seat Mii and Skoda Citigo would also disappear.
• Daimler, meanwhile, has begun the process of shifting production and development of its Smart brand to China, where the small cars will be built exclusively starting in 2022 as part of a joint venture with Zhejiang Geely Holding. That decision raises a question mark over Renault's Twingo minicar, which was developed alongside the current Smart model range.

It won't just be minicars affected, Warburton said. VW Group could be forced to axe the Polo small car as well as the related Audi A1, Skoda Fabia and Seat Ibiza, he said. "

This is a very big volume platform, but it will face an increasingly tough economic challenge," Warburton said. He also flagged up the size of BMW's task with Mini. "BMW will need to rethink or reduce the size of the Mini business. We are not convinced it's ever made proper money," he said.

These cars are at risk because tougher EU rules for CO2 start to take effect next year. The industry has to reduce its fleet average to 95 grams per kilometer, down from an average of 120.5g/km last year, according to JATO Dynamics. The problem is that most current minicars cannot get to below the 95g/km average without including some form of electrification (for example, the Citroen C1 achieves 95g/km).

Beyond 2021, the EU is finalizing plans that, once agreed later this year, would cut automaker CO2 targets by 15 percent from the 2021 averages by 2025 onwards and to 37.5 percent after 2030, meaning average CO2 emissions of less than 60g/km on an NEDC basis (almost 110 miles per gallon), or 66g/km under WLTP. Automakers would need popular EVs in cheaper, more accessible categories to be able to carry on selling conventional SUVs or face fines.

That means an automaker's smallest, lightest car -- the car that traditionally helped lower the company's average CO2 -- no longer offsets the higher emissions of bigger cars. This car exists purely as a business case in its own right, and the business case for minicars is poor.

'Under pressure'

"Ironically the smaller vehicles are toughest to reduce CO2 in," Ford of Europe Chairman Steve Armstrong told Automotive News Europe at the recent unveiling of the Kuga SUV. "The smaller the vehicle, the tighter the margin, the harder it is to meet emissions targets."PSA's head of Europe, Maxime Picat, agreed. "The ability of any carmaker to make a profit [from minicars] is under pressure because of all of the technology we have to add in our vehicles for safety and for emissions."

Another reason why small cars are going to get more expensive to produce -- even if they keep their combustion engines -- is because of tougher standards for oxides of nitrogen (NOx) that take effect in September 2020. Ford's Armstrong estimated that bringing tailpipe emissions to the Euro6d Temp standard will cost about 2,000 euros whether the car has a diesel or gasoline engine. Also affecting all cars, small to large, are EU requirements to add a raft of mainly camera-based safety equipment starting in 2021.

Cutting CO2 emissions by means of partial electrification such as adding mild-hybrid, full-hybrid or plug-in hybrid technology is one option, but this solution won't be economically viable for many brands. A 48-volt mild-hybrid option adds 600 euros to 1,000 euros per car, according to Bernstein analysis, a full hybrid costs almost 2,000 euros while a plug-in hybrid adds up to 5,000 euros.

Looking at the average cost of minicars and small cars, it's clear they are not well placed to absorb the extra cost. Statistics from JATO show that the average retail price of cars registered in Germany, Spain, France and Italy in the first quarter of 2018 was 14,152 euros for minicars and 17,459 euros for small cars. Bernstein estimates that automakers make "only a few hundred euros" gross profit per car on small cars.

'Not ready to pay'

Any cost increase, however, will not be tolerated by the customer. "The smaller the car the harder it is to justify this price increase because the tech costs more or less the same for a small car as a big car," Alain Favey, head of global sales and marketing for Skoda, told ANE. "People are not ready to pay it."

Automakers will only be able to pass on 25 percent of the total cost of CO2 compliance technology, leaving automakers to shoulder the remaining 75 percent, according to a recent report by UBS that examined the earnings impact.

Right now electrification in small cars and minicars accounts for a tiny portion of the market. Toyota alone has shown that car companies can make a full-hybrid system work in a small car with the successful Yaris hybrid, which emits 84g/km of CO2.

Toyota, however, is unique in achieving economies of scale for its hybrid powertrain partly because of strong demand for the system in Japan. That popularity should also help Honda when it adds a hybrid version of its new Jazz small car next year, while Nissan has said it will add its E-power system, which is currently only offered in Asia, in Europe.

Small-car dependent

The two brands most reliant on small cars in Europe are Fiat and Renault, with each brand counting on the models for more than 60 percent of their total 2018 European sales. Nearly all of Fiat's share was in minicars due to the popularity of the 500 and Panda, which are the two best-selling cars in the segment, leaving parent company Fiat Chrysler Automobiles particularly vulnerable to fines once the new emissions regulations start to take effect next year.

FCA plans to spend 1.8 billion euros in the next three years to buy regulatory credits to minimize the number of emissions-related fines it will pay in Europe and the U.S. This plan includes paying Tesla to join it in a pool to offset FCA's high emissions in Europe and also benefit from the so-called "supercredits" that ultra-low emissions vehicles bring until 2022. Fiat has already killed the two-cylinder engine that performed poorly in its Panda and 500 in real-world CO2 tests, but the automaker said it remained committed to the sector.

"FCA is constantly working on making cars less polluting and safer, but that does not mean having to renounce market segments that, by their nature, meet specific customer needs," a spokesman told ANE.

Electric future?

Fiat next year will launch a full-electric version of the 500, on a new platform, to prepare itself for what some automakers believe is the only viable propulsion for the smaller car sectors. Citroen brand CEO Linda Jackson told ANE that the C1's future was likely to be electric. Meanwhile, Skoda recently unveiled an electric version of the Citigo, which will be sold under the automaker's new e-mobility subbrand called iV. Full-electric variants look to be the best option for the entry segment when the VW Group replaces its current trio of minicars, Skoda's Favey said: "Everything else will be tricky to justify."

The continued popularity of the Renault Zoe, which last year was Europe's No. 2-selling full-electric car after the Nissan Leaf, gives automakers hope that an electric future is viable for small cars. In Geneva, Peugeot unveiled a rival to the Zoe in the form of the e208, while Opel and Citroen are also gearing up to launch related full-electric small cars. PSA's electrification strategy is to restrict full-electric to smaller cars, where range is less important, and add plug-in hybrid technology to larger cars that traditionally cover more ground.

Honda will launch a small electric car, the Honda E, next year following an introduction at the Frankfurt auto show this year. Meanwhile Dacia, Nissan and Mazda are also expected to debut small EVs in the midterm.

The VW Group is so far concentrating on compact cars for its first large-scale push into EVs via its MEB platform, but more recently the automaker announced the development of a family of smaller, urban-focused EVs starting at less than 20,000 euros. These cars are due around 2023 and will be led by its Seat brand in Spain.

Expensive solution

The problem is still one of cost. "The 10,000 euro car is going to be very difficult," Ford of Europe sales boss Roelant de Waard said. "Even if you reach $100 per kilowatt hour you still need 40kWh as a minimum so that's still $4,000," he said.

Said Thomas Ulbrich, VW brand's board member for e-mobility: "Minicar customers are paying 12,000 to 14,000 euros but in the future, when they are electrified, it will be 18,000 to 20,000 euros. This will be a problem." He added that VW and the German government were discussing how to provide extra subsidies to this sector. These customers also "have the right" to have access to electrified models, he said.

Analysts at ING bank predict price parity between conventional and electric drivetrains won't arrive until 2025.

Fiat's proposal for keeping the cost of small electric cars down was unveiled at the Geneva auto show in March in the form of the Centoventi concept, a look at what might replace the aging Panda. The price would be kept low on the base car by offering a small battery with a 100-km (62-mile) range, but that battery would be expandable to 500km after purchase via upgrades.

"It is driven by a desire to capture the essence of one end of the Fiat spectrum, while at the same time -- if we are being honest -- to build our electrified portfolio and avoid any [CO2-compliance] fines," Fiat brand head Olivier Francois told Autocar magazine at Geneva.

Automakers only have themselves to blame for the high cost of electric cars, believes European environment pressure group Transport & Environment.
"BEVs [battery-electric vehicles] are still more expensive than small gasoline cars due to lack of early investment in supply chains and betting on diesel instead. But their price will drop fast," said Julia Poliscanova, T&E's manager for clean vehicles and e-mobility. She pointed out that all technology, batteries included, trickles down from more expensive categories.

Despite the fears, smalls car will remain a staple of European motoring into the midterm, analyst firm LMC Automotive believes. Sales of small cars will sink from 3.16 million last year to less than 3 million next year and 2020, but stabilize at about 3 million until 2023, LMC predicts. Similarly, minicars are forecast to drop from 1.1 million last year to a little less than a million this year and to 900,000 in 2021, before returning to more than 1 million in 2023 (when the new generation Fiat 500 arrives).

"There will always be a demand in the market for a cheap form of mobility," LMC analyst Sammy Chan said.

De Waard at Ford believes small cars will keep their place in Europe. "I think you will still get the same segmentation, but the vehicles will be 1,000, 2,000 or 3,000 euros more expensive."