Global Research
5 December 2016
Q-Series
Equities
Is the diesel era in passenger cars about to end? Diesel is likely to face the 'perfect storm' over the next 5-10 years The popularity of diesel in passenger cars is shrinking, in particular in Europe. We expect the diesel to almost disappear in the passenger car powertrain mix by 2025, replaced by a combination of (mild-) hybrid gasoline and battery-electric vehicles (BEVs). We forecast the global diesel share to decline from 13.5% today to 4% in 2025. The trend is likely exacerbated by punitive regulation (higher taxes, city entry restrictions) that will eliminate the cost-of-ownership advantage and put residual values of diesel cars at risk. Our 10,000 participant-strong UBS Evidence Lab survey (July 2016) found that the share of consumers likely to buy a diesel is well below the current diesel share in new car sales in the largest diesel markets, e.g. 32% versus 46% in Germany. Earnings impact on OEMs likely lower than feared, mixed picture for suppliers We demonstrate that CO2 targets can be met with a mix of (mild-) hybrid gasoline cars and BEVs, at limited incremental costs for OEMs. However, OEMs could face 'stranded' investments in new diesel engine generations and plants, and the potential drop in residual values poses a significant risk to OEM lease books, which BMW would have the highest exposure to. Our interactive model also provides the exposure of global auto suppliers in our coverage to the shift in the powertrain mix. On aggregate, supplier content in combustion engines continues to go up whereas the shift to BEVs poses downside risk. The interactive model enables clients to flex powertrain mix assumptions and derive the expected impact on growth and EPS for our global supplier coverage. Oil sector: A challenge for European refiners but not the main driver European oil refiners are negatively affected by our diesel decline scenario but the impact would be a small c0.75% hit to global oil demand by 2025. Other changes, such as the dynamics in marine fuels, are likely to be more significant, adding up to 2Mb/d of gasoil demand in 2020 vs 450kb/d of lost diesel demand by 2025. We selected key stocks impacted by the theme Our base penetration forecasts (versus 'no change') would translate into 0-2% negative EPS impact for European OEMs, except for PSA, which faces 9% EPS risk. Valeo, Hella, Conti, Delphi and Denso have the strongest growth profile, while Faurecia appears most challenged from the likely drop in diesel share. Schaeffler's exposure is mixed.
Figure 1: UBS global powertrain mix forecast – diesel to become marginalised 110 100 90 80 70 60 50 40 30 20 10 0 2012
Global Automobiles Patrick Hummel, CFA Analyst
[email protected] +41-44-239 79 23
David Lesne Analyst
[email protected] +44-20-7567 5815
Julian Radlinger Analyst
[email protected] +41-44-239 13 41
Chervine Golbaz Analyst
[email protected] +44-20-7568 1171
Colin Langan, CFA Analyst
[email protected] +1-212-713 9949
Kohei Takahashi Analyst
[email protected] +81-3-5208 6172
Young Chang Analyst
[email protected] +82-2-3702 8803
Sonal Gupta Analyst
[email protected] +91-22-6155 6063
Yankun Hou Analyst
[email protected] +852-3712 4451
Jon Rigby, CFA Analyst
[email protected] +44-20-7568 4168
Henri Patricot, CFA Analyst
[email protected] +44-20-7568 6485
Eddie Hsieh Associate Analyst
[email protected] +1-212-713 3263 2014 Gasoline
2016E
2018E
48V/mild hybrid (gas)
2020E Diesel
Source: IHS, ACEA, CAAM, Fourin, EV-Sales, UBS estimates
HEV
2022E PHEV
2024E BEV
FCV
Note: Annual passenger car sales (million units).
www.ubs.com/investmentresearch
This report has been prepared by UBS Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 39. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Contents Executive summary .......................................................................... 3 Why has diesel become so popular, and why do we expect it to change? ............................................................................................. 7 Introduction ................................................................................................. 7 The beginning of the end of the Diesel era in cars ....................................... 7 The consumer point of view......................................................................... 8 Our UBS Evidence Lab survey has confirmed our hypothesis ...................... 10 48V/mild-hybrid gasoline with similar fuel efficiency as diesel, but with lower CO2 than diesel .......................................................................................... 11
Patrick Hummel, CFA Analyst
[email protected] +41-44-239 79 23
David Lesne Analyst
[email protected] +44-20-7567 5815
Julian Radlinger Analyst
[email protected] +41-44-239 13 41
Chervine Golbaz Analyst
[email protected] +44-20-7568 1171
Colin Langan, CFA
Full electrification finally eliminates the business case of diesels ................. 13
Analyst
[email protected] +1-212-713 9949
Global diesel share to shrink from 13.5% to 4% ....................................... 13
Kohei Takahashi
Putting the puzzle together: UBS global powertrain mix forecasts.............. 15
Impact on OEMs ............................................................................. 17 OEM content costs and CO2 impact ........................................................... 17 Impact on OEM earnings ........................................................................... 20
Impact on auto suppliers ............................................................... 26 Winners and losers from powertrain mix shift ............................................ 26 Detailed implications, company by company .............................................. 31
Appendix ........................................................................................ 34
Analyst
[email protected] +81-3-5208 6172
Young Chang Analyst
[email protected] +82-2-3702 8803
Sonal Gupta Analyst
[email protected] +91-22-6155 6063
Yankun Hou Analyst
[email protected] +852-3712 4451
Jon Rigby, CFA Analyst
[email protected] +44-20-7568 4168
Henri Patricot, CFA Analyst
[email protected] +44-20-7568 6485
Eddie Hsieh Associate Analyst
[email protected] +1-212-713 3263
Q-Series 5 December 2016
2
Executive summary Perfect storm for diesel in passenger cars ahead, in particular in Europe Diesel cars have been a long-time favourite of OEMs and consumers alike, due to lower CO2 emissions and fuel costs than for gasoline cars. However, we expect diesel to become marginalised over time in Europe – today the most important diesel market globally. Key drivers are: (1) rising content requirements; (2) shrinking cost of (mild-) hybridisation of gasoline engines/full electrification; (3) potential punitive measures for diesel cars (higher taxes, driving restrictions); and (4) rising consumer concerns about residual values. Shrinking consumer confidence in diesel could lead to a 'vicious circle' accelerating the shift. Figure 2: Axes of uncertainty – the trend is not the diesel's friend
Source: UBS
Running costs will no longer be in favour of diesel: Near term, (mild-) hybrid gasoline will be better value for consumers and, on a post-2020 view, BEVs are likely to become the lowest cost of ownership alternative in Europe. Globally, we expect the diesel share in passenger cars to shrink from 13.5% to 4.3% in 2025. Figure 3: Cost of ownership of diesel cars likely to turn into a disadvantage (annual costs in €) 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 Diesel
Gasoline 2016
BEV
2021E
Source: UBS estimates, based on VW Golf (gas and diesel) and Chevrolet Bolt
Q-Series 5 December 2016
Figure 4: Diesel to become marginalised in passenger cars, mainly due to the drop in Europe 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2012
2014
2016E
Europe
2018E India
2020E
2022E
Korea
2024E Global
Source: IHS, UBS estimates
3
In the passenger car market, we see a longer-term future for diesel only in niches, such as large SUVs and heavy-duty pick-up trucks. The dominating role of diesel in the global trucks market is highly unlikely to be challenged in the foreseeable future, neither from a cost of ownership nor a regulatory perspective. All-electric trucks are only an option in an urban delivery environment, but not in long-haul because of the substantial reduction in payload due to heavy batteries.
OEMs can largely offset CO2 issue with hybrids and electrification Our interactive model shows an incremental negative 0-2% EPS impact for European OEMs from the anticipated declining diesel share. Only PSA stands out with 9% negative incremental EPS impact, due to the high European exposure. While slightly more expensive than diesel content (which is set to rise, too), 48V/mild-hybrid gasoline has lower CO2 emissions than diesel, and therefore represents an attractive cost per gram of CO2 ratio (€20-50/g). After 2020, we see the shift towards full electrification as a key contributor towards more ambitious CO2 targets. Premium OEMs have the highest diesel share today, but are also likely to enjoy the most rapid increase in mild-hybrid gasoline and BEV sales. We see two other areas of concern: (1) OEMs could face 'stranded' investments in new diesel engine generations and engine plants; and (2) residual values of diesel cars on the OEM lease books could drop faster than expected, causing write-downs. On the latter, we believe BMW is most exposed.
Suppliers: Large variation in earnings impact from powertrain mix shift On the supplier level, the picture is very diverse. Diesel-related revenues will likely shrink over time, even though selective catalytic reduction systems (SCRs) will provide a boost to emission control revenues of some suppliers, including Faurecia and Tenneco. We believe that (48V/mild) hybrid and BEV content providers will be the biggest beneficiaries in the longer term. In our global coverage, we see Valeo, Hella, Conti, Delphi and Denso as the biggest winners, and Faurecia most at risk. Schaeffler appears caught in the middle as a 48V/mild-hybrid beneficiary but at risk from BEVs. Overall, the supplier subsector should benefit from rising content in combustion engines whereas the long-term shift to fully electric cars poses risks. Our interactive model provides a detailed breakdown of content by powertrain technology for every supplier. Based on the assumed mix shift, market shares and margins (we assume lower margins for EV-related content due to likely intense competition), we model the earnings impact for our supplier coverage. Clients can flex the powertrain mix assumptions and will derive the expected earnings impact for every company at a glance. Figure 5: Incremental emission-related costs by OEM, as % of 2017E EPS Daimler
Renault
FCA
BMW
VW
PSA
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% Base scenario
Disruption scenario
Source: UBS estimates. Note: Compared to stable diesel share in powertrain mix.
Q-Series 5 December 2016
Figure 6: Valeo, Conti, Hella, Delphi and Denso as biggest winners from mix shift (EBIT CAGR 2016-25E) Valeo Conti (Auto) Hella Delphi Denso BWA Hyundai Mobis Aisin Seiki Tenneco Autoliv Schaeffler (Auto) Faurecia -1% 0% 1% 2% 3% Diesel (engine + specific exhaust parts) 48V Exhaust systems Non-powertrain
4% 5% 6% 7% 8% 9% 10% Gasoline EV Transmission systems
Source: UBS estimates
4
Impact on oil sector: Small on total demand, not main driver for diesel The impact of lower diesel car sales on overall oil demand is limited. We estimate that, under the scenario of a global market share loss for diesel to 4% by 2025, oil demand from passenger cars would decline by 2.5% versus 2015, compared with a base case assuming stable market shares for each type of car at 2015 levels. This is equivalent to 0.7% of total global oil demand. This decline is more attributable to the rise of electric cars, which will start eroding the market share of traditional gasoline cars, too, from 2017, rather than the decline in diesel itself, as diesel cars are more efficient than gasoline cars. The shift in the car fleet mix has more serious implications for refiners as they can shift their product yields only by 2-3% between middle distillates and light distillates without investments. We expect changes in other segments, such as the marine fuel market to have more material consequences than lower diesel car sales, at least over the next 10 years. More specifically, the International Maritime Organisation in October approved the implementation of lower sulphur limits in marine fuels from 2020. The IEA estimates that the new rule could lead to a 2Mb/d switch from fuel oil to marine gasoil in 2020. This is c20x higher than the negative impact from lower diesel car sales in 2020, which we estimate at c100kb/d by then. Even by 2025, the 450kb/d negative impact from lower diesel car sales is likely to be smaller than the impact from the change in marine fuels. Figure 7: Impact on oil demand from passenger cars versus stable diesel market share scenario
Figure 8: Diesel car hit versus marine market boost
5% 0% kb/d
-5% -10% -15% -20% -25% 2015 Diesel
2017
2019
Gasoline
2021
2023
2025
Overall passenger cars' fuel demand
Source: UBS
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Lost diesel demand from cars
Additional marine gasoil demand
Source: UBS, IEA Note that IEA forecasts for additional marine gasoil demand end in 2021; we have assumed a flat development beyond that date.
Stocks impacted by the theme
OEMs face a moderate negative impact. If we plug in our diesel forecasts, PSA would face the biggest incremental CO2 compliance costs. However, this result is to be balanced since, assuming no change in the penetration of the various powertrains from today, PSA would be the only car maker not to require producing EVs to meet the regulation standards. BMW has the largest diesel lease book as a percentage of its market cap.
Suppliers show a diverse picture. Valeo, Hella, Conti, Delphi and Denso appear to be biggest potential winners while Faurecia looks most at risk. The picture for Schaeffler is mixed.
Only a small negative for oil refiners. European refiners are the most exposed to middle distillates globally. The product mix of independent European refiners is fairly similar. Saras and Tüpras have a slightly higher exposure to middle distillates than average.
Q-Series 5 December 2016
5
Figure 9: Stock exposure to diesel theme (based on UBS-defined success criteria) Positively impacted by the theme UBS rating
P/E (2017E)
Price (lc)
Ford
Buy
6.9x
12
GM
Buy
5.4x
35
Tesla
Sell
-120.6x
181
Nissan
Neutral
8.2x
1,074
Honda
Sell
12.2x
Toyota
Sell
12.4x
Hyundai
Buy
Kia
Stocks
Price target Upside/ (lc) downside
Comment
OEMs 14
14%
Diesel sales of minor relevance in global sales mix
38
7%
Diesel sales of minor relevance in global sales mix
160
-12%
BEV only
1,000
-7%
Diesel sales of minor relevance in global sales mix
3,367
2,600
-23%
Diesel sales of minor relevance in global sales mix
6,686
4,900
-27%
Diesel sales of minor relevance, focus on hybrids
4.8x
133,500
165,000
24%
Diesel sales of minor relevance in global sales mix
Buy
5.1x
37,200
50,000
34%
Diesel sales of minor relevance in global sales mix
Continental
Buy
9.6x
166
245
48%
Only 3% of sales exposure to diesel; beneficiary of hybrids/EVs
GKN
Buy
9.0x
303
355
17%
No diesel-specific powertrain content; opportunity in EVs
Hella
Buy
9.1x
32
43
33%
Limited exposure to combustion engines, beneficiary of hybrids/EVs
Suppliers
Schaeffler
Neutral
7.1x
12
14
16%
Beneficiary from hybridisation, no diesel-specific content
Valeo
Buy
12.5x
52
62
19%
Beneficiary from hybridisation and EVs, no diesel-specific content
BorgWarner
Buy
9.8x
36
44
22%
Rising emissions control content, but potential risks in EV world
Delphi
Buy
9.8x
64
83
30%
Beneficiary from hybridisation and EVs, no diesel-specific content
Hyundai Mobis
Buy
7.0x
251,000
360,000
43%
Beneficiary from hybridisation and EVs, no diesel-specific content
Aisin Seiki
Buy
14.4x
4,875
5,100
5%
Beneficiary from hybridisation due to high Toyota exposure
Neutral
19.7x
4,913
4,000
-19%
Denso
Beneficiary from hybridisation and EVs, no diesel-specific content
Negatively impacted by the theme UBS rating
P/E (2017E)
Price (lc)
Neutral
8.2x
80
79
-1%
Highest diesel share in Europe, largest diesel lease book
Buy
6.7x
62
90
44%
High diesel share in Europe, but mild-hybrids to be launched 2017
FCA
Neutral
4.3x
7
7
-3%
Significant gap to CO2 targets, but diesels are under-represented
PSA
Neutral
7.8x
14
14
0%
High exposure to Europe – largest potential negative impact
Renault
Buy
5.0x
74
110
48%
High diesel share in Europe; first mass maker to produce EV
VW
Buy
4.6x
119
180
52%
High diesel share in Europe; strong push for electrification
Faurecia
Sell
11.4x
33
31
-7%
Long-term risks related to high diesel-specific emission content
Tenneco
Buy
8.3x
59
66
12%
Long-term risks related to high diesel-specific emission content
Stocks
Price target Upside/ (lc) downside
Comment
OEMs BMW Daimler
Suppliers
Source: UBS estimates
Note: Based on prices as at 5 December 2016.
Links to recent powertrain-related UBS Research Global Autos – UBS Evidence Lab: What consumers think about electric cars, and what it means for auto profits – September 2016 Global Autos Q-Series – What is the powertrain of the future? – March 2016 Global Auto Suppliers – Raising forecasts for mild-hybrid 48V – August 2016 Global Auto Suppliers – Mild-hybrid 48V: Who are the winners? – February 2016
Q-Series 5 December 2016
6
Why has diesel become so popular, and why do we expect it to change? Introduction Diesel has been a long-time favourite of European OEMs and consumers alike. OEMs have pushed the diesel due to its lower CO2 emissions, and consumers like it because of its fuel efficiency and long rang with a single tank. The combination of these and tax/regulatory incentives drove the market share of diesel passenger cars to 46% in Germany, 48% in the UK and 40% in Korea by 2016. The focus of this report, will be on passenger cars only: We do not expect the trends described below to disrupt other segments in a significant way in the short term, such as the global trucks market.
The beginning of the end of the diesel era in cars The fundamentals that supported the rise of the diesel engine for passenger cars are about to change radically. We believe the key catalysts to be:
(1)
Rising content requirements;
(2)
Shrinking cost of (mild-) hybridization of gasoline engines / full electrification;
(3)
Increasing punitive measures for diesel cars (higher taxes, driving restrictions);
(4)
Rising consumer concerns about residual values
The combination of these will make diesel become marginalized over time in Europe, today the most important diesel market globally. We think shrinking consumer confidence in diesel will be the ultimate feedback loop which will generate a "vicious circle" away from the technology. In a global context, we expect the diesel share in passenger cars to shrink from 13.5% today to 4.3% in 2025.
Figure 10: Long-term diesel trend in Europe in passenger cars (share in total European car sales)
Figure 11: Axes of uncertainty – heading towards the 'game-over' scenario?
60% 50% 40% 30% 20% 10% 0% 1990
1995
2000
2005
Source: IHS, UBS estimates
Q-Series 5 December 2016
2010
2015
2020E 2025E Source: UBS
7
The consumer point of view From a consumer perspective, some critical purchase decision factors will shift into reverse:
Cost of ownership advantage: Lower fuel consumption than for gasoline cars has outweighed the purchase price premium of diesel cars, in particular for consumers with a high annual mileage. However, the gap in the purchase price is likely to widen on additional content requirements. EURO 6c, which sets tougher NOx limits for diesels under real driving emissions (RDE) testing, will likely require an SCR. Consumption of urea adds to costs. All new diesel vehicles will be tested for NOx under RDE from Q4 17 (the maximum NOx emission is 168µg/km), and the regime is going to tighten again in 2021 when the cap drops to 120µg/km. Gasoline cars will likely 'only' require a particulate filter, which can be integrated as an additional layer in the main catalyst.
Figure 12: Cost of ownership comparison 2016 versus 2021E (€/year)
Figure 13: Real driving emissions today versus NOx limit – meeting targets seems challenging without SCR (g/km)
7,500
0.40
7,000
0.35
6,500
0.30 0.25
6,000
0.20
5,500
0.15
5,000
0.10
4,500
0.05
4,000 Diesel
Gasoline 2016
BEV
2021E
Source: Company data, auto motor und sport, Auto Bild, UBS Note: Based on VW Golf 1.4 TSI (gasoline), 2.0 TDI (diesel) and Opel Ampera E (BEV); includes German circulation tax and urea refill cost; excludes maintenance costs; see appendix for underlying assumptions.
Diesel purchase price to rise more than gasoline, reducing cost of ownership advantage
0.00 Euro-6 limit
Source: auto motor und sport, Emissions Analytics, UBS Note: Study based on 2015 and 2016 model year cars only; sample size 48 cars.
Regulatory/tax discrimination in favour of diesel: Diesel cars receive preferential tax treatment in Europe, both on the fuel level and, to a certain extent, also in terms of ownership/circulation taxes. On average, diesel is taxed €¢15 less per litre than gasoline in the largest European markets, which fully explains the retail price difference between the two fuel types. However, some governments have started to re-think this policy. For example, France has decided to raise the tax for diesel by €¢3.6/litre (20% of the gap to gasoline); Belgium will close its €¢17.2 gap entirely by 2018. The ownership/circulation tax tends to be CO2-related, which means that the diesel will lose its advantage compared with 48V/mild-hybrid gasoline and BEVs.
Q-Series 5 December 2016
Diesel cars with SCR Diesel cars without SCR
Preferential tax treatment of diesel fuel to decline
8
Figure 14: Fuel price difference between diesel and gasoline only driven by tax discrimination in favour of diesel (retail prices) Serbia Belarus Hungary Switzerland UK Sweden Cyprus Estonia Albania Romania Bosnia & Herz. Poland Czech Rep. Bulgaria Iceland Austria Belgium Russia Croatia Slovenia Ireland Latvia Lithuania Spain Finland Italy Malta San Marino Slovakia France Turkey Norway Ukraine Denmark Moldova Luxembourg Germany Andorra Portugal Netherlands Macedonia Greece
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Source: GlobalPetrolPrices.com as of mid-November 2016
Torque/fun to drive: This argument has already been de-emphasised by the arrival of turbocharged gasoline cars, and the boost function of 48V/mildhybrid models will largely eliminate the advantage of diesels and in contrast to simple turbocharging, deliver instant torque. More so, BEVs will provide instant full torque at all revs, beating the performance of diesels.
48V/mild-hybrids and BEVs both beat the diesel's performance
Long range with one tank refill: Thanks to lower fuel consumption, diesel cars go up to 1,000km on a single refill. However, 48V/mild-hybrid gasoline cars can reach a similar range due to their improved fuel efficiency.
48V/mild-hybrid to achieve similar fuel consumption as diesel
On top of the above, consumers face uncertainties that will likely affect their purchasing decision and could eventually lead to a self-fulfilling prophecy about the death of the diesel:
Use restrictions: In the aftermath of the Volkswagen diesel issue, politicians and regulators have become highly sensitive (and increasingly populist about diesel emissions. National governments and large cities have brought up the idea of restricting the use of diesel cars. For instance, Germany is currently discussing the so-called 'blue plaque' (blaue Plakette), which would potentially ban non-Euro 6 diesels from entering large cities. In Paris, the mayor intends to ban all diesel cars from 2020. Even if some plans appear overly ambitious, the direction of travel is obvious and likely irreversible.
Regulation is increasingly harsh on diesel
Residual values: All of the above is likely to lead to an accelerated depreciation of diesel cars, which would likely exacerbate the shift of consumer preferences away from diesel. A negative relative impact is already visible in Germany. Over the past 12 months, residual values of gasoline cars have gone up c5% year on year, while diesel values have remained largely stable year on year (this trend is not due to an underperformance of VW diesels), according to Schwacke data.
Value depreciation of diesel cars to accelerate
Q-Series 5 December 2016
9
Figure 15: Overview of diesel-related policy and company headlines in Europe/US Policy/plans
Country / City
Year
Status
Comment
Scrapping incentive for diesel cars
France
2015
Enacted
€10,000 government incentive to exchange diesel car for EV
Elimination of retail diesel tax advantages
France, Belgium
2015 -18
Ongoing
Reduction (France) or elimination (Belgium) of fuel tax gap between gasoline and diesel fuel
Blue plaque for diesel cars
Germany
2016
Proposed
Only diesel cars meeting Euro 6 emissions standards would be allowed in certain urban zones
Elimination of diesel tax advantages
Germany
2016
Rejected
Push by five German states to end tax breaks for diesel cars vs gasoline cars
VW: Cessation of diesel sales
US
2016
Announced
Decision made to (most likely) end all diesel engine sales in US, due to emissions compliance cost
Mercedes: Cessation of diesel sales
US
2016
Suggested
Option being evaluated whether to end all diesel engine sales in US, due to waning consumer demand
Elimination of corp. diesel tax advantages
France
2016 -18
Announced
French companies to receive same tax credit for gasoline as diesel fleet cars going forward
Diesel car ban in city limits
Düsseldorf, Germany
2017
Ongoing
Regional court ordered city administrators to devise plan to lower diesel emissions in city, including possible diesel car ban. Proposal deadline Oct '17
Scrappage scheme for diesel cars
UK
2017
Proposed
Direct incentive to scrap old diesel cars proposed
Diesel car ban in city limits
London, UK
2019
Proposed
London Ultra-Low Emission Zone (ULEZ) to be enacted in city centre in 2019 and expanded in 2020
Gradual phase-out of diesel
France
-
Announced
Prime Minister Manuel Valls announced intention to gradually eliminate diesel car sales in France
Diesel car ban in city limits
Paris, France
By 2020
Announced
Plan by Paris mayor to restrict diesel cars from Paris city limits through various measures by 2020
Full diesel car ban within city
Madrid, Paris, Athens, Mexico City
By 2025
Announced
Plan to fully ban diesel cars in respective cities, through EV subsidies and outright restrictions
Source: AutoNews, The Guardian, Auto Zeitung, T&E, European Commission, London government, BBC
Our UBS Evidence Lab survey has confirmed our hypothesis In July 2016, UBS Evidence Lab surveyed over 1,500 participants in each of the large diesel markets Germany, UK and Korea. The survey strongly supports our view of a shrinking diesel share in the future.
More consumers likely to purchase diesel than gasoline
When asked 'How likely is the nex t v ehicle y ou purchase going to be a diesel/ gasoline/ all-electric, etc, car?', a diesel car is likely considered only by 32% in Germany and 40% in the UK, well below the 70%/66% that will likely consider a gasoline vehicle – and well below the current diesel share in these markets. Only in Korea does diesel receive a purchase likelihood that is broadly in line with its share today (43%). Nonetheless, gasoline also scores better in Korea (58%). On top of that, we believe that not all consumers are well informed about the potential regulatory changes discussed above, which, otherwise, could have made the result of the survey even more dramatic. One might argue that the explanation for the large difference between "purchase intention responses" and "current market share" could be that diesel is still more popular for large fleet buyers than it is for retail consumers (which we have surveyed). However, even if that happens to be the case, fleet buyers are mostly focused on cost of ownership, which is why we also expect the preferences of fleet buyers to shift.
Q-Series 5 December 2016
10
Figure 16: Percentage of respondents likely to purchase diesel or gasoline vehicle 80%
Figure 17: Likelihood of purchasing a diesel vehicle versus current share of diesel in new car sales 60%
70%
50%
60% 40%
50% 40% 30% 20% 10%
30%
70%
66%
58% 40%
32%
43%
20%
48%
46% 32%
49% 40%
43%
10%
0%
0% Germany
UK Gasoline Diesel
Source: UBS Evidence Lab Note: Multiple choices possible.
Korea
Germany UK Market share (ytd 2016)
Korea 'Likely to purchase'
Source: UBS Evidence Lab Note: Multiple choices possible.
48V/mild-hybrid gasoline with similar fuel efficiency as diesel, but with lower CO2 than diesel A key reason for our bearish stance on diesel is the 48V/mild-hybrid technology. We argue that the net cost of content for a mild-hybrid gasoline car will be lower than for the diesel when including CO2 benefits.
Our bearish stance on diesel is fuelled by our bullish view on 48V/mild-hybrid
First, we take a look at cost of ownership. The step to mild-hybrid will improve fuel efficiency by c15% (compared with a conventional gasoline engine), which puts it almost on par with equivalent diesel vehicles today. We assume that the consumer would have to bear a certain portion of the mild-hybrid content costs because the technology is also torque/acceleration-enhancing and could therefore be monetised by OEMs. In the example below, we assume that €250/car (about 25% of the system cost) can be added to the sticker price. For the diesel cars, the incremental cost of SCR (which we believe is a must for most diesel vehicles in an RDE testing world, unless the compression is reduced, resulting in worse torque/acceleration) would not affect the costs to the consumer, as we expect the OEM to take the full P&L hit. In the table below, we compare the cost of ownership between the gasoline and diesel version of three ICE (internal combustion engine) car models. At 15,000km mileage, the cost of ownership advantage can go either way, though diesel always wins on fuel costs.
Q-Series 5 December 2016
11
Figure 18: Cost of ownership comparison gasoline versus diesel (€) – at today's prices Model
Opel Astra
Fuel type
Opel Astra
BMW 3Series
BMW 3Series
VW Golf
VW Golf
Gasoline
Diesel
Gasoline
Diesel
Gasoline
Diesel
1.4DI Turbo
1.6CDTI
330i
330d
1.4TSI
2.0TDI
Engine power
125 HP
110 HP
252 HP
258 HP
150 HP
150 HP
Purchase price
20,990
21,590
45,100
47,750
27,775
30,400
Residual value
50%
50%
50%
50%
50%
50%
Variant
Time of ownership
3
3
3
3
3
3
Depreciation p.a.
3,498
3,598
7,517
7,958
4,629
5,067
Driving distance p.a.
15,000
Comment
MSRP (incl VAT) in Germany
Diesel always higher
15,000
15,000
15,000
15,000
15,000
Fuel consumption (l/100km)
6.1
4.8
9.2
7.3
6.9
5.5
Real tested (not NEDC*)
Fuel cost per litre
1.20
1.10
1.20
1.10
1.20
1.10
Current European average
Total fuel cost p.a.
1,098
792
1,656
1,205
1,242
908
Diesel always lower
Urea refill cost
0
0
0
0
0
0
Circulation tax
86
110
132
355
70
234
Total other cost p.a.
86
110
132
355
70
234
4,682
4,500
9,305
9,518
5,941
6,208
Total costs p.a.
Source: Company data, auto motor und sport, Auto Bild, GlobalPetrolPrices.com, UBS
German circulation tax 'Winner' unclear * New European Driving Cycle.
If we add the 48V/mild-hybrid system to the gasoline engine (of which €250 passed on to consumers) as well as €75 per year of urea refill costs for an SCR system to the diesel cars, the cost of ownership is lower for the gasoline than for the diesel version for every model. This is even though we left the sticker price of the SCR-equipped diesel unchanged. The swing factor is nothing other than the 15% fuel efficiency improvement induced by the 48V/mild-hybrid system, which lowers the annual fuel costs for the gasoline cars by about €200.
The 48V/mild-hybrid's higher fuel efficiency more than offsets its price to the consumer
Figure 19: Cost of ownership comparison gasoline versus diesel (€) – gasoline now including 48V/mild-hybrid system Model
Opel Astra
Fuel type
Opel Astra
BMW 3Series
BMW 3Series
VW Golf
VW Golf
Gasoline
Diesel
Gasoline
Diesel
Gasoline
Diesel
1.4DI Turbo
1.6CDTI
330i
330d
1.4TSI
2.0TDI
Engine power
125 HP
110 HP
252 HP
258 HP
150 HP
150 HP
Purchase price
21,240
21,590
45,350
47,750
28,025
30,400
Residual value
50%
Variant
50%
50%
50%
50%
50%
Time of ownership
3
3
3
3
3
3
Depreciation p.a.
3,540
3,598
7,558
7,958
4,671
5,067
Driving distance p.a.
15,000
Comment
Gasoline price €250 higher (48V)
Price gap now slightly smaller
15,000
15,000
15,000
15,000
15,000
Fuel consumption (l/100km)
5.2
4.8
7.8
7.3
5.9
5.5
Fuel cost per litre
1.20
1.10
1.20
1.10
1.20
1.10
Total fuel cost p.a.
933
792
1,408
1,205
1,056
908
Diesel advantage now lower Urea refills necessary with SCR
Urea refill cost
0
75
0
75
0
75
Circulation tax
86
110
132
146
70
234
Total other cost p.a.
86
185
132
355
70
309
4,559
4,575
9,098
9,593
5,797
6,283
Total costs p.a.
15% lower for gas than before
Gasoline 'wins' in each case
Source: Company data, auto motor und sport, Auto Bild, GlobalPetrolPrices.com, UBS
On top of that, we expect the discrimination in taxation between gasoline and diesel to shrink or even disappear over time, which is not included in the above calculation. The charts below also show the result if there were no discrimination
Q-Series 5 December 2016
12
on fuel and ownership taxes. On this basis, the mild-hybrid gasoline version is even more advantageous. Figure 20: Opel Astra cost of ownership
Figure 21: BMW 3-Series cost of ownership
4,800
Figure 22: VW Golf cost of ownership
10,000
6,500
9,500
6,000
4,600
9,000
4,400
5,500
8,500
5,000
8,000
4,200
4,500
7,500
4,000
4,000
7,000 Astra today
Astra 2021 Gas
Diesel
Astra 2021 (no discrimination)
Source: UBS estimates
Golf today
3-Series today 3-Series 2021 3-Series 2021 (no Gas Diesel discrimination)
Source: UBS estimates
Golf 2021 Gas
Diesel
Golf 2021 (no discrimination)
Source: UBS estimates
Full electrification finally eliminates the business case of diesels As the sticker price premium of battery electric vehicles (BEVs) is set to shrink dramatically on the back of lower battery costs (see our global auto reports QSeries: What is the powertrain of the future? and UBS Evidence Lab: What consumers think about electric cars, and what it means for auto profits for an indepth analysis), the substantially lower running costs of the BEV (the electricity bill is c25% lower than the diesel bill on the same mileage) looks set to finally eliminate the advantage that has been a key selling argument for diesels. Figure 23: Sticker price…
Figure 24: …and cost of ownership – gas versus diesel versus BEV (€ per year)
38,000
7,000
36,000
6,500
34,000
6,000 5,500
32,000
5,000
30,000
4,500
28,000
4,000
26,000
3,500
24,000
3,000
22,000
2,500 2,000
20,000 2016 Gasoline
2021E Diesel
2016
2025E BEV
Source: UBS estimates (based on VW Golf 1.4 TSI and 2.0 TDI and generic massmarket BEV priced slightly above Chevrolet Bolt; 3-year ownership; current avg. EU fuel costs; includes German circulation tax but excludes maintenance costs)
2021E Gasoline
Diesel
2025E BEV
Source: UBS estimates (based on VW Golf 1.4 TSI and 2.0 TDI and generic massmarket BEV priced slightly above Chevrolet Bolt; 3-year ownership; current avg. EU fuel costs; includes German circulation tax but excludes maintenance costs)
Global diesel share to shrink from 13.5% to 4% We expect diesel penetration in the European passenger car market, the world's largest diesel market, to drop sharply from 51.6% in 2015 to 10% in 2025. There is already an initial negative trend, which started in 2012 and seems to have been fuelled further by the Volkswagen issue lately. The required step-up in content to meet new RDE-tested NOx emissions from 2018 will likely lead to the elimination of diesel versions of newly launched compact cars, for which the incremental content costs would be prohibitively high as a percentage of the total value of the
Q-Series 5 December 2016
We expect the diesel share in Europe to fall to 10% in 2025 from >50% today
13
car. The current diesel share in the compact (A and B) segment, which represents c20% of the total European market, is 20%, down from 30% 10 years ago. We expect the diesel to disappear in this segment over one product life cycle (seven years). Simultaneously, 48V/mild-hybrid cars will become cheaper than diesel for OEMs from a CO2 avoidance cost perspective while offering similar or lower cost of ownership. We expect the diesel decline trend to accelerate after 2020, when BEVs will reach the cost of ownership break-even with ICE cars, as shown in our previous research. In a global context, we expect the diesel share to shrink from 13.5% in 2015 to 4.3% in 2025. Korea and India are the other two main diesel markets. In Korea, we expect a steady decline from a record share in 2015, induced in part by the Volkswagen diesel issue, which has dented the diesel's public image – as much as 70% of Korea's diesel sales are from European OEMs. In India, we forecast a flattish diesel share for the years up until 2020, but expect a declining share thereafter due to rising content requirements (India will skip directly from Euro-4 to Euro-6 in mid-2020). In North America, we believe the Volkswagen case has done major damage to the image of the diesel, which is why we expect it to remain in a niche. Only in large SUVs and heavy-duty pick-ups do we expect a rising diesel share.
We expect the global diesel share to drop from 13.5% to c4% in 2025
Figure 25: UBS global diesel share forecast – Europe key driver of decline 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2012
2014
2016E Europe
2018E
2020E
India
Korea
2022E
2024E
Global
Source: National car associations, UBS estimates Note: UBS estimates exclude LCVs.
We display the underlying data below. Figure 26: UBS global diesel share forecast Region
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
Europe
55%
53%
53%
52%
50%
48%
45%
41%
36%
31%
26%
21%
16%
10%
India
58%
53%
48%
44%
43%
42%
41%
40%
30%
28%
26%
24%
22%
20%
Korea
30%
36%
41%
46%
45%
44%
43%
42%
41%
40%
39%
38%
37%
36%
US
0.9%
0.9%
1.0%
1.0%
0.7%
0.6%
0.5%
0.4%
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
China
0.4%
0.4%
0.3%
0.5%
0.2%
0.2%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Japan
1.3%
1.4%
1.5%
1.5%
1.4%
1.3%
1.2%
1.1%
1.0%
0.9%
0.8%
0.7%
0.6%
0.5%
15.9%
14.4%
14.0%
13.8%
13.5%
13.2%
12.4%
11.5%
9.8%
8.7%
7.6%
6.6%
5.5%
4.3%
Global
Source: National car associations, UBS estimates Note: UBS estimates exclude LCVs.
Diesels in western Europe have been on a moderate decline path over the past five years, in particular in markets with the highest diesel share (France, Spain, Belgium). In 2016 to date, the diesel share in these countries is already 1-5 percentage points lower than last year (3% on average).
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14
Figure 27: Diesel share in western Europe by segment 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 H1 16 A+B C D E+F MPV SUV Source: LMC Automotive
Figure 28: Global historical diesel share trend 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Western Europe US Global
India China
Korea Japan
Source: National car associations, ACEA, EPA, Wards, Fourin
Putting the puzzle together: UBS global powertrain mix forecasts Our newly established forecast specifically for diesel has been the final 'missing piece' in the puzzle of our powertrain mix model. Since we have already extensively analysed the potential of BEVs and 48V/mild-hybrid (which we expect to be used mostly in combination with gasoline cars), we now have the framework in place to forecast the global powertrain mix for the next 10 years. How do we deviate from consensus?
Diesel: Our view about declining diesel sales is substantially more aggressive than consensus expectations.
BEV: We are broadly in line with consensus on a 2020 view, but as we expect BEV sales penetration to enter the steep part of the S-curve after 2020, our 2025 BEV sales forecast is substantially above consensus.
48V/mild-hybrid: Our recently raised penetration forecasts are well above consensus.
HEV/PHEV: We expect a significant increase in HEV penetration in particular in Asia and the US (broadly in line with consensus), but forecast long-range PHEV to remain in a niche (too high costs for OEMs, unattractive for consumers) versus fully electric cars (BEVs).
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15
Figure 29: UBS global powertrain mix forecast (total annual passenger car sales, million units) 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 2012
2013
2014
2015
Gasoline
2016E
2017E
2018E
48V/mild hybrid (gas)
2019E
2020E
Diesel
2021E
HEV
2022E
PHEV
2023E
2024E
BEV
2025E
FCV
Source: IHS, ACEA, CAAM, Fourin, InsideEVs, UBS estimates
Based on the above analysis, we forecast the following growth/decline rates for each powertrain technology. Figure 30: Units sold trend by powertrain technology Annual growth (%)
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
6%
4%
2%
2%
1%
1%
0%
-1%
-3%
-3%
-4%
-6%
-8%
Gasoline Diesel
-5%
1%
0%
-1%
0%
-2%
-4%
-12%
-10%
-11%
-13%
-15%
-22%
48V/mild-hybrid (gas)
0%
0%
0%
0%
0%
247%
87%
67%
30%
24%
17%
20%
19%
HEV
4%
22%
-24%
24%
25%
26%
26%
25%
20%
16%
13%
12%
11%
PHEV
66%
50%
68%
55%
25%
26%
25%
24%
24%
24%
23%
22%
19%
BEV
66%
44%
54%
49%
20%
21%
25%
26%
34%
44%
47%
50%
51%
FCV
0%
0%
0%
60%
94%
73%
52%
83%
87%
84%
58%
50%
45%
Total
5%
4%
2%
2%
2%
4%
3%
3%
1%
1%
1%
1%
1%
2022E 2023E 2024E
2025E
Source: UBS estimates
Below, we display the underlying data. Figure 31: UBS global powertrain mix forecast (total annual passenger car sales) Total units (m)
2012
2013
2014
2015
Gasoline
65.5
69.7
72.2
73.9
2016E 2017E 75.2
75.9
2018E 2019E 76.6
76.7
2020E 2021E 76.2
74.0
71.4
68.9
64.6
59.2
Diesel 48V/mild-hybrid (gasoline) HEV
12.6
12.0
12.1
12.1
12.1
12.1
11.8
11.3
9.9
8.9
7.9
6.8
5.8
4.5
0.0
0.0
0.0
0.0
0.0
0.9
3.0
5.7
9.5
12.3
15.3
17.8
21.5
25.6
1.3
1.4
1.7
1.3
1.5
1.9
2.4
3.0
3.8
4.6
5.3
5.9
6.6
7.3
PHEV
0.0
0.1
0.1
0.2
0.3
0.4
0.5
0.6
0.8
1.0
1.2
1.5
1.8
2.2
BEV
0.1
0.2
0.2
0.3
0.5
0.6
0.7
0.9
1.2
1.6
2.2
3.3
5.0
7.5
FCV
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.1
0.2
79.6
83.3
86.3
87.8
89.7
91.8
95.1
98.3
101.3
102.3
103.3
104.4
105.4
106.5
Total
Source: IHS, ACEA, CAAM, Fourin, EV-Sales, UBS estimates
Q-Series 5 December 2016
16
Impact on OEMs Our interactive model shows an incremental negative 0-2% EPS impact for European OEMs on our base-case scenario (the margins on diesel would have shrunk anyway on content requirements). Only Peugeot stands out with a 9% negative incremental EPS impact, due to its high European exposure and skew to compact cars. While slightly more expensive than diesel content, 48V/mild-hybrid gasoline has lower CO2 emissions than diesel, and, therefore, represents an attractive cost per gram ratio. After 2020, we see the shift towards full electrification as the key contributor against more ambitious CO2 targets. Premium OEMs have the highest diesel share today, but are also likely to enjoy the most rapid increase in mild-hybrid gasoline and BEV sales. Two other areas of concern: (1) OEMs could face 'stranded' investments in new diesel engine generations and engine plants; and (2) residual values of diesel cars on the OEMs' lease books could drop faster than expected, causing write-downs. On the latter, we believe BMW is most exposed.
OEM content costs and CO2 impact We have built an interactive model that assesses the financial impact from the powertrain mix shift. The following key assumptions have been incorporated:
Diesel: The profitability of diesel drops over time, due to rising content requirements. We model €450 of incremental content per car for the SCR unit, which we expect to be quasi-mandatory after 2018 in a RDE testing world. Today, only c10% of diesels sold in Europe are equipped with SCR. We think this is possibly a conservative scenario, as even a combination of a SCR and NOx trap and/or other measures might be required.
Gasoline: Profitability also decreases on rising content, but, in combination with 48V/mild-hybrid, we believe it will be easier for OEMs to partly monetise the incremental content, due to the enhanced performance of the car. The incremental cost for the system is €1,100 per car (we consider the start-stop system, which is part of the package, to be standard already in gasoline and diesel cars, and, therefore, not part of the incremental costs), out of which we assume €250 will be passed to consumers due to better vehicle performance.
BEVs: Initially, BEVs are a substantial drag to margins, but we expect this to change after 2020 on economies of scale and the declining need to 'subsidise' BEVs once the cost of ownership turns favourable (driven by lower battery costs). We assume that by 2021, 40% of the incremental content cost can be passed to the consumer (versus 10% today).
Q-Series 5 December 2016
17
Figure 32: Costs of emissions reduction content (€ per car)
SCR system
Clean diesel 450
Electrical architecture
Gasoline mild-hybrid
BEV today
BEV 2021
15,000
9,600
Function of battery cost decline
100
300
12V battery today, 48V in 2021
90
Supervisory controls
70
DC/DC converter
140
E-motor controller
70
E-motor
280
48V li-ion battery
280
Other
70
Gasoline particulate filter
100
Li-ion battery 12V/48V battery On-board charger
700
700
Electric motor
1,200
1,000
Electronics & wiring
3,250
2,800
Differential Less redundant ICE powertrain parts
150
150
-6,800
-7,300
Gross costs to OEM Pass-through to consumers
450
1,100 -250
13,600 -1,360
7,250 -2,900
Net costs to OEM
450
850
12,240
4,350
-
15%
100%
100%
Reduction of CO2 emissions (g/km)
Comment
Source: ICCT, EPA, NHTSA, DM3 Consulting, Delphi, UBS estimates
10/40% BEV cost pass-through today/2021
Note: VW Golf 1.4 TSI and 2.0 TDI used for gasoline and diesel cars in the table.
Looking at content costs for the OEMs without taking into account CO2 does not give the full picture. As a matter of fact, the incremental required content in diesel (SCR system at €450 of incremental costs) does not improve CO2, as it affects only NOx emissions – fuel consumption and, therefore, CO2 go marginally up if anything. The mild-hybrid system, on the other hand, brings about 15% CO2 savings on the gasoline car.
The €400 excess cost of 48V/mildhybrid over diesel seems worth the CO2 benefit
48V/mild-hybrid gasoline achieves almost the same fuel efficiency as diesel cars without this technology. However, burning one litre of diesel produces 13% more CO2 emissions than one litre of gasoline, due to the higher energy content. In other words, the OEM spends an incremental €400/car to save (in our example) 20g/km of CO2. This results in a very low cost per gram ratio of €20/g. Therefore, the financial burden to the OEM to replace diesel with mild-hybrid gasoline is less negative than the content cost comparison suggests initially. For BEVs, this ratio is not as favourable today, due to the relatively high battery costs, but with a 5-10year view, the picture also looks more favourable for BEVs.
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18
Figure 33: Reducing CO2 emissions by replacing diesels with mild-hybrid gasoline cars – incremental content versus diesel only €20/gram (all numbers € per car, based on the VW Golf example) Clean diesel 450
Gasoline mild-hybrid 850
CO2 emissions per litre fuel (kg)
2.64
Fuel consumption (l/100km) CO2 emissions (g/km)
Net costs to OEM
BEV today
BEV 2021
12,240
5,800
2.33
0
0
4.5
4.3
0
0
119
99
0
0
-
49
105
37
Costs per g of CO2 savings (€) – incremental
Comment
NEDC. Assumed 15% reduction in consumption for mild-hybrid vs gasoline
CO2 efficiency improvement over diesel (g/km)
20
119
119
Difference in net content costs
400
11,790
3,900
Costs per g of CO2 savings (€) versus diesel
20
99
33
Source: UBS estimates Note: Based on Volkswagen Golf 1.4TSI versus 2.0TDI (both models have 150 hp).
Figure 34: Diesel versus gasoline – CO2 emissions and fuel efficiency CO2 per kg fuel Fuel l / 100km 10.0 9.0 ... gasoline emits 8.0 12% less CO2 per 7.0 kg fuel ... 6.0 5.0 4.0 3.0 2.0 2.6 2.3 1.0 0.0 CO2 emissions per litre fuel (kg)
g CO2 / km Compared to diesel ... ... therefore emits 11% more CO2/km
... but is 25% less fuel efficient ...
X
4.3
5.4
=
Fuel consumption (l/100km, NEDC) Diesel
200 180 160 140 120 100 80 60 40 20 0
113
125
CO2 emissions (g/km)
Gasoline
Source: UBS estimates Note: Fuel efficiency based on estimated current European (NEDC) average.
Figure 35: Diesel versus 48V/mild-hybrid gasoline – CO2 emissions and fuel efficiency CO2 per kg fuel Fuel l / 100km 10.0 9.0 8.0 ... 48V/mild-hybrid gasoline emits 12% 7.0 less CO2 per kg fuel 6.0 ... 5.0 4.0 3.0 2.0 2.6 2.3 1.0 0.0 CO2 emissions per litre fuel (kg)
g CO2 / km Compared to diesel ... ... but is only 6% less fuel efficient ...
X
4.3
15% more efficient than gasoline
4.5
Fuel consumption (l/100km, NEDC) Diesel
=
... therefore emits 6% less CO2/km
113
106
200 180 160 140 120 100 80 60 40 20 0
CO2 emissions (g/km)
48V/mild hybrid
Source: UBS estimates Note: Fuel efficiency based on estimated current European (NEDC) average; 48V/mild-hybrid fuel efficiency based on 15% improvement over gasoline (avg. estimate).
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19
Figure 36: Global regulatory NEDC-based gCO2/km emissions targets
Global targets (g/km):
220 200
2020:
180
Japan: 122 China: 117 Korea: 97
160
2020/21 targets
140
2021:
120
US: 119 India: 113 Europe: 95
100 80 US
Europe
China
Japan
Korea
India
Source: ICCT
Impact on OEM earnings Net costs of emissions compliance – scenario analysis Our analysis focuses on the European OEMs, because: (1) in Europe, OEMs largely depend on the high diesel share to meet the 2020/21 CO2 target of 95g/km; and (2) the mix shift away from diesel is likely most pronounced in the European market. OEMs can meet the EU 2020/21 targets with our forecast 32% European share of mild-hybrids. We think it is substantially cheaper for OEMs to sell more 48V/mild-hybrids (net system cost ~€850 per car, or €50 per gram) than paying the €95 per gram penalty for overshooting the 2020/21 cap. Figure 37: Net costs of CO2 reducing technologies – road to 2021 EU target (gram CO2/km) 130
2.1% improvement per year €35 per gCO2 = €530 per car (fleet avg.)
125
€55 per gCO2 = €195 per car (fleet avg.)
120
€50 per gCO2 = €350 per car (fleet avg.)
115 110
15
105
3
4
100 95
7 118
90
From ~50% to ~30% share
102
85
95
80 75 70 European fleet emissions 2015
ICE improvements
Diesel decline
EV mix
Fleet emissions ex 48V
Mild hybrid gasoline
Regulatory target 2021
Source: UBS estimates
Q-Series 5 December 2016
20
The following overview shows the current CO2 emissions of the European fleet by OEM (2015) and where they need to get to by 2021, as well as their current global diesel/gasoline sales mix. Figure 38: Gasoline versus diesel sales split – global 100% 80%
140
12%
90% 38%
29%
Figure 39: CO2 European fleet emissions 2015 versus 2021 target by OEM (g/km)
40%
36%
24%
120 100
70% 60%
80
50%
60
40% 30%
127
123 102
122 101
40
20%
90
104
91
111
120 91
96
20
10% 0% BMW
Daimler
FCA
Gasoline
PSA
Renault
VW
0 BMW
Diesel
Source: Company data, UBS
Daimler
FCA
2015 CO2 fleet emissions
PSA
Renault
VW
2021 target
Source: Company data, ICCT, UBS estimates
In the following, we calculate the incremental emissions compliance costs for all European OEMs (CO2 and NOx) for three different scenarios:
Base scenario: The European diesel share shrinks to 31% in 2021, from 52% in 2015, as outlined before.
No-change scenario: The diesel share remains stable at current levels.
Disruption scenario: Diesel sales drop to zero.
For all three scenarios, we have calculated the financial impact by OEM under the assumption that the EU 2021 CO2 target is always met. We plug in our assumptions for the expected diesel and EV shares, and the residual is the share of 48V/mild-hybrid that is needed for gasoline cars to reach the 2021 target. OEMs will prefer to meet 2020/21 via additional content (ICE improvements, 48V, EVs), for which we assume average costs of €50/gram, as opposed to paying the €95/gram fine. We assume that under a stable diesel share scenario, all the costs and investments to meet the 2020/21 targets are already baked in company guidance and consensus expectations. Our analysis focuses on the additional costs that occur due to the powertrain mix shift. Multiplying the cost per car with the number of units sold in Europe gives the overall earnings risk for the OEMs.
Our proprietary model estimates the financial impact of each scenario
The table below displays our base scenario. Please refer to the appendix for the nochange and disruption scenarios.
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21
Figure 40: Our proprietary model estimates the incremental emissions compliance costs for each OEM OEM
BMW Daimler
FCA
PSA Renault
VW
Comment
Core data and assumptions 2,244
2,000
4,610
2,973
2,799
10,010
Company data
Europe share of group unit sales
47%
39%
20%
60%
55%
45%
Company data
ICE efficiency improvement p.a. through 2021
2.1%
2.1%
2.1%
2.1%
2.1%
2.1%
UBSe; below 10y avg. (2.5%)
Diesel share of European sales today
81%
71%
33%
63%
57%
60%
Company data, Statista, ICCT
Diesel share of European sales in 2021E
51%
41%
18%
39%
33%
36%
UBSe
5%
5%
0%
2%
5%
3%
UBSe
Average cost per g CO2/km reduction (€) ICE improvements
35
35
35
35
35
35
Average of industry estimates
EV
54
54
54
54
54
54
From figure 33
48V/mild/hybrid
49
49
49
49
49
49
From figure 33
Current gasoline emissions
140
133
126
111
119
128
UBSe, derived from fleet mix
Current diesel emissions
126
120
113
100
107
115
10% lower than gasoline
2015 avg. CO2 fleet emissions (g/km)
127
123
122
104
111
120
Company data
-17
-16
-15
-13
-14
-15
UBSe: 2.1% improvement p.a.
4
4
2
3
4
4
Based on UBS diesel forecast
-6
-6
0
-2
-5
-3
Based on UBS EV forecast
102
101
90
91
91
96
Official data (ICCT)
7
5
19
1
5
9
22
21
21
18
19
21
31%
21%
88%
5%
24%
44%
Incremental average cost per car (€) …from ICE improvements
586
557
527
465
498
536
Based on data above
…from EVs
309
300
0
101
272
176
Based on data above
…from 48V
328
220
916
45
191
415
Based on data above
Total (pre-diesel compliance cost)
1,223
1,077
1,443
610
959
1,125
…from rising diesel compliance cost
180
144
54
0
108
108
Total (post-diesel compliance cost)
1,403
1,221
1,497
610
1,067
1,233
Total cost to OEM (€m)…
Group unit sales (m, 2015)
EV share of European sales in 2021E
2015-21 fleet emission pathway (g CO2/km)
Impact from… …ICE improvements …diesel decline …from EVs CO2 target 2021 Shortfall to target CO2 savings per 48V car 48V/mild-hybrid mix required to close shortfall
Based on OEM-specific fleet emissions
Cost calculation
1,479
953
1,380
1,089
1,643
5,556
…per share (€) 2017E EPS
1.58 9.67
0.62 9.07
0.78 1.68
0.84 2.17
4.23 14.93
7.84 24.64
Total cost in % of EPS
16%
7%
47%
39%
28%
32%
Cost per share in no-change scenario
15%
6%
45%
30%
28%
31%
Incremental EPS impact from powertrain mix shift
1.1%
0.5%
1.2%
8.8%
0.8%
1.1%
UBSe: €450 SCR cost per diesel car; 20% already equipped
Cost per car x European sales
Already included in OEM medium-term financial targets
Source: Company data and UBS estimates
Note: 2021 diesel share estimates based on an assumed diesel decline for each OEM that is directly proportional to our European diesel market share forecast.
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The following chart compares the expected net content costs (after tax), as a percentage of 2017E EPS. Daimler is facing the lowest financial burden, followed by BMW. FCA and PSA are at the other end of the spectrum. The numbers shown in the chart below reflect the fact that PSA already has SCR units in all its diesels, i.e. there are no incremental costs for PSA's diesel cars in the future. It is also worth highlighting that in our no-change scenario, PSA screens better since it does not require the production of any EVs to satisfy regulatory requirements.
Daimler and BMW face the lowest financial burden; FCA and PSA the highest
Figure 41: 2021 EU emissions content costs (% of 2017E EPS) Daimler
BMW
Renault
VW
PSA
FCA
0% 10% 20% 30% 40% 50% 60% 'No change' scenario
Base scenario
Disruption scenario
Source: UBS estimates
We assume that in the scenario of a constant diesel share, OEMs already have efficiency measures in place to hold their margins roughly stable over the next five years, in spite of increasing content. Therefore, we believe the OEM earnings risk is limited to the incremental content spending in the event of a declining diesel share. The chart below provides the EPS risk relative to the business-as-usual scenario. For all OEMs but PSA, the projected negative EPS impact remains less than 5%, on our estimates. PSA has a c9% EPS risk in our base-case decline scenario, because it has the highest diesel share of all the European OEMs, given its regional skew to Europe. While the company is better on track to meet the 2021 targets than any of its peers in a stable diesel scenario (the gap between actual emissions and the 2021 target is the smallest measured in grams), its EPS would be affected most negatively from a declining diesel share (60% of units sold in Europe).
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EPS impact limited to less than 5% for all OEMs except PSA, which is skewed most to Europe
23
Figure 42: 2021 incremental EPS risk due to lower diesel share (of 2017E EPS) Daimler
Renault
FCA
BMW
VW
PSA
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% Base scenario
Disruption scenario
Source: UBS estimates Note: Above analysis focuses on additional costs, assuming zero earnings impact from emissions content in a stable diesel share scenario.
Elevated risk of write-downs on stranded diesel investments Another question is whether the assumed mix shift gives OEMs sufficient time to recover their recent diesel investments and wind down/adjust existing production capacity accordingly. As the following overview shows, several European OEMs have invested heavily in next-generation diesel engines to meet the tougher Euro 6c norm. While it is near to impossible to quantify the potential write-downs by each OEM (the information about diesel-related book values of PP&E and capitalised R&D is not disclosed separately), we believe our base-case scenario implies elevated risks of write-downs and restructuring.
Several European OEMs have invested heavily in nextgeneration diesel engines to meet the tougher Euro 6c norm
Figure 43: Most recent diesel-related investments by OEMs (selection) OEM
Investment
Amount (€m)
Year
Ford
Diesel engine plant expansion
150
2014
GM (Opel)
Diesel engine plant expansion
130
2014
FCA
Diesel engine plant expansion
88
2014/15
PSA
SCR technology
Several 00s
2013-16
FCA
Euro 6 upgrade
-
2016
BMW
Diesel engine plant expansion
90
2016
Daimler
Engine plant
500
2016
Daimler
Diesel engine generation
3,000
2013-16
Volkswagen
SCR technology
-
2016-17
FCA
SCR technology
Several 00s
2015-17
Comment Engine plant in Dagenham, UK, expanded to produce range of new 2.0l diesel engines Engine plant in Kaiserslautern, Germany, expanded to produce new Euro 6 compliant diesel engines Diesel engine plant in Puglia, Italy, expanded annual capacity from 250k to 320k units Latest SCR technology gradually fitted in all models; system meets RDE requirements Owners of older Euro 6 diesel cars to receive free upgrade to reduce emissions figures Diesel engine plant in Steyr, Austria, to receive €90m expansion New plant to produce four-cylinder gasoline and diesel engines New diesel engine generation first fitted in new E-Class; to be rolled out across model portfolio; meets RDE requirements All new diesel cars to be fitted with SCR systems from 2016 Latest SCR technology to be fitted in all models; system meets RDE requirements
Source: Company data, media reports
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Residual value risk on lease books – BMW most exposed On top of the impact on earnings from new car sales, the topic of residual values is highly relevant for the Fincos. An accelerated depreciation would represent meaningful write-down risk, particularly for the European OEMs. The following charts provide the EPS risk in the case of a 10% write-down of diesel lease assets, and the size of the estimated diesel lease book as a proportion of the OEM's market cap. Possibly, less new diesel car sales could help to stabilise used diesel prices (less supply), but this will largely depend on how quick consumer preferences shift away from diesel. Figure 44: Diesel lease assets in €bn and as a % of market cap by OEM 30,000 25,000
BMW, Volkswagen and Daimler most at risk of diesel lease asset write-downs
Figure 45: (2016E) Earnings impact of a 10% write-down of diesel lease assets 35%
43% of market cap
30% 25%
20,000
25%
15,000
20% 18%
15%
10,000
10%
5,000
15%
0 BMW Source: UBS estimates
Volkswagen
Daimler
Renault
Note: Market cap data from 25 November 2016.
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5% 0% BMW
Volkswagen
Daimler
Renault
Source: UBS estimates
25
Impact on auto suppliers For auto suppliers, the picture is very mixed. Diesel-related revenues will likely shrink over time, even though the SCR-equipped share of diesel increases – providing a boost to the emissions-control revenues of some suppliers, including Faurecia and BorgWarner. 48V/mild-hybrid and BEV content providers will be the biggest beneficiaries. In our global coverage universe, we see Valeo, Hella, Conti, Delphi and Denso as the biggest winners, and Faurecia as most at risk. Schaeffler looks set to benefit from a higher 48V/mild-hybrid mix, but is at risk from pure electrification. We forecast a substantial negative earnings impact in powertrain for both companies on a 2025 view. Overall, the suppliers sub-sector should benefit from rising content in combustion engines, whereas the long-term shift to fully electric cars poses risks. Our interactive model has a detailed breakdown of content by powertrain technology for every supplier down to the component level.
Winners and losers from powertrain mix shift There are two groups of suppliers exposed to diesel: powertrain and emissions. Powertrain suppliers include BorgWarner, Delphi, Conti, Valeo and Schaeffler. Emissions suppliers include Tenneco and Faurecia. Figure 46 shows the relative content for diesel and gas for relevant parts (engine, emissions treatment and stop/start system; we exclude transmission parts here). •
For powertrain suppliers, the content is ~50% higher for diesel than for gas.
•
For emissions suppliers, potential content is about twice as high for diesel than for gas, given the need for more complex systems like diesel oxidation catalysts (DOCs), diesel particulate filters (DPFs), lean NOx traps (LNTs), and/or selective catalytic reduction systems (SCRs).
•
48V/mild-hybrid systems, typically supplied by powertrain suppliers, represent a ~100% opportunity on top of 'conventional' gasoline powertrain and emissions systems.
Figure 46: Range of emissions and powertrain content (€) – ex transmission 1,100 1,000 900 800 700 600 500 400 300 200 100 0 Emissions Diesel
Turbo Gas 48V/mild hybrid
Direct injection Gas turbo
Start / stop system Gas
Source: UBS estimates
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When it comes to BEVs, the incremental supplier content opportunity adds up to €6,900/car (excluding the li-ion battery cell), at the expense of losing €3,200/car on the ICE and emissions control content, as well as €1,000/car for the gearbox. Figure 47: Total supplier content by powertrain (€/car – at current prices) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Gasoline Engine / E-motor
Diesel
48V gasoline
Emissions system
Start/stop
BEV
Transmission
Other
Source: UBS estimates
Our modelling approach is as follows: (1) We estimate the content per vehicle for each powertrain technology on a company-by-company basis; (2) Based on the projected powertrain mix and market shares, we model the expected revenues and earnings on both a 2020 and 2025 view; (3) We compare the result with today's revenues and earnings contribution from the powertrain divisions. Figure 48: Content by powertrain for UBS supplier coverage (€ and US$/car) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Autoliv
Conti (Auto)
Faurecia
Hella Diesel
Schaeffler (Auto) Gasoline
Valeo
Aisin Seiki Gasoline turbo
Denso 48V
Hyundai Mobis
BWA
Delphi
Tenneco
EV
Source: Company data, UBS estimates. Note: US suppliers in US$, European and other suppliers in €.
Even though the potential supplier content in a BEV is high for some companies, there is a trend towards offering modular solutions with high content from subsuppliers. Therefore, the margin achievable on BEV-related products is likely below ICE products. Furthermore, BEV content is likely to be a very competitive market in which many suppliers want to secure their share, which will add to the margin pressure. Finally, high R&D on BEV content will also initially weigh on returns.
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We assume lower margins on BEV-related content in our model
27
Figure 49: Earnings impact by company from our forecast powertrain mix shift Autoliv
Conti (Auto)
Faurecia
Content per car (€/US$ for US suppliers) – 2016E 48V 0 1,000 0 EV 50 3,000 0 Diesel – engine parts 0 500 0 Diesel – after-treatment 0 0 920 Gas turbo 0 300 345 Gasoline 0 150 345 Transmission systems 0 100 0 Sales – 2016E Powertrain Diesel (engine + exhaust) Gasoline 48V EV Exhaust systems Transmission systems Non-powertrain
€m 0 0 0 0 0 0 10,302
Hella
SHA (Auto)
Valeo
Aisin Seiki
Denso
Hyundai Mobis
BWA
Delphi
Tenneco
200 600 0 0 0 0 0
500 1,000 250 0 250 250 250
1,000 3,000 0 0 300 150 150
0 500 0 0 0 0 1,300
1,000 3,000 1,000 0 500 500 100
0 2,500 0 0 0 0 0
300 1,000 500 0 350 0 250
700 4,500 750 0 600 500 0
0 0 0 920 345 345 0
€m 5,757 1,208 2,404 375 0 1,769 18,741
€m 8,899 778 1,317 0 6,804 0 10,055
€m 0 0 0 0 0 0 6,692
€m 7,045 332 2,291 0 0 4,422 3,239
€m 4,856 495 801 375 0 3,184 11,651
¥bn 2,170 0 0 54 0 2,115 1,252
¥bn 1,320 63 353 496 409 0 2,819
€m 266 0 0 266 0 0 29,815
US$m 8,581 951 4,086 9 0 3,535 560
US$m 3,787 1,034 2,333 420 0 0 12,734
US$m 5,241 663 4,578 0 0 0 3,302
8.6% 7.4%
2.2% -1.2%
19.5%
5.2% 0.9%
9.5% 8.4%
4.1% 0.0%
6.1% 6.5%
28.9% 28.8%
6.5% 5.5%
10.9% 13.0%
7.1% 2.1%
7.0% 6.2%
1.9% 3.7%
5.7% 5.3%
5.0% 3.0%
7.2% 6.6%
3.8% 7.5%
3.0% 2.0%
5.7% 5.3%
4.0% 4.0%
5.0% 4.8%
4.0% 4.0%
8% -0.6% 2.2% 4.0% 1.4%
2% -0.3%
6%
12% -0.5% 4.8% 1.5% 0.5%
13% -0.5% 1.4% 7.5% 2.2%
18%
1%
1.0%
27% -1.4% 18.8% 2.7% 1.6%
11% -1.1% 6.1% 3.5% 2.0%
21% -1.3% 22.0%
1.8%
18% -0.5% 2.0% 0.3% 14.7% 0.9%
6.1% 6%
2.3% 23%
16.4% 11%
24%
23%
4.9% 1%
15%
7%
1% -0.8% 0.3% 1.8% 1.0%
18% -0.9% 0.8% 8.8% 9.5%
-1%
4%
4.4%
32% -4.0% 23.1% 3.7% 8.1%
25% -2.2% 4.8% 4.7% 17.2%
8% -2.9% 11.3%
2.2%
13% -0.8% 0.2% 0.3% 13.6% -0.3%
-1.1% 3%
-0.5% 31%
-2.9% 27%
16%
29%
0.8% 1%
20%
9%
Contribution to group EBIT growth from powertrain content 8% 2% 6% 2016-20E 10% -2% 8% 2020-25E
12% 1%
13% 18%
18% 0%
18% 13%
1% 4%
27% 32%
11% 25%
21% 8%
Total group EBIT growth 14% 2016-20E 18% 2020-25E
18% 4%
36% 48%
29% 26%
41% 29%
24% 34%
28% 33%
25% 45%
28% 18%
Organic growth CAGR (implied) Powertrain 2016-2020E 2020-2025E Non-powertrain 2016-2020E 3.5% 2020-2025E 3.7% Contribution to EBIT growth (%) 2016-20E Powertrain Diesel (passenger cars) Gasoline 48V EV Exhaust systems Transmission systems Non-powertrain 14% 2020-25E Powertrain Diesel (passenger cars) Gasoline 48V EV Exhaust systems Transmission systems Non-powertrain
6.4% 2.3%
0.7% 28%
10% -1.9% 1.5% 4.9% 6.1%
2%
27%
-2% -1.1%
8%
7.6% -0.9%
18%
-0.2% 32%
33% 42%
6%
4% 4%
33%
34% 40%
Source: UBS estimates Note: For Denso and US suppliers, diesel sales to commercial customers included in 'Non-powertrain' sales ('Powertrain' includes only passenger car sales).
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Model results in detail Figure 50: Sales mix by technology (2016E) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Autoliv
Conti Faurecia Hella Schaeffler Valeo (Auto) (Auto) Diesel (engine + specific exhaust parts) Gasoline 48V EV
Aisin Seiki
Denso
Exhaust systems
Hyundai BWA Mobis Transmission systems
Delphi
Hyundai Mobis
Delphi
Tenneco
Non-powertrain
Source: UBS estimates
Figure 51: Sales mix by technology (2025E) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Autoliv
Conti (Auto)
Faurecia
Diesel (engine + specific exhaust parts)
Hella
Schaeffler (Auto)
Gasoline
48V
Valeo EV
Aisin Seiki
Denso
Exhaust systems
BWA
Transmission systems
Tenneco
Non-powertrain
Source: UBS estimates
Figure 52: Contribution to revenue CAGR 2016-20E 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Autoliv
Conti Faurecia Hella Schaeffler Valeo Aisin Seiki Denso (Auto) (Auto) Diesel (engine + specific exhaust parts) Gasoline 48V EV Exhaust systems
Hyundai BWA Delphi Tenneco Mobis Transmission systems Non-powertrain
Source: UBS estimates
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29
Figure 53: Contribution to revenue CAGR 2020-25E 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% Autoliv
Conti Faurecia Hella Schaeffler Valeo Aisin Seiki Denso (Auto) (Auto) Diesel (engine + specific exhaust parts) Gasoline 48V EV Exhaust systems
Hyundai BWA Delphi Tenneco Mobis Transmission systems Non-powertrain
Source: UBS estimates
Figure 54: Contribution to EBIT CAGR 2016-20E 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Autoliv
Conti Faurecia Hella Schaeffler Valeo (Auto) (Auto) Diesel (engine + specific exhaust parts) Gasoline 48V EV
Aisin Seiki
Denso
Exhaust systems
Hyundai BWA Mobis Transmission systems
Delphi
Hyundai Mobis
Delphi
Tenneco
Non-powertrain
Source: UBS estimates
Figure 55: Contribution to EBIT CAGR 2020-25E 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Autoliv
Conti (Auto)
Faurecia
Diesel (engine + specific exhaust parts)
Hella
Schaeffler (Auto)
Gasoline
48V
Valeo EV
Aisin Seiki
Denso
Exhaust systems
BWA
Transmission systems
Tenneco
Non-powertrain
Source: UBS estimates
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30
Detailed implications, company by company BorgWarner is the most exposed US supplier. Light vehicle diesel is 15-20% of BWA sales, and it has another ~10% diesel exposure through commercial vehicle sales. While BWA's diesel mix is the highest among US suppliers, the ratio of BWA content on diesel vehicles versus gas turbocharged vehicles is only US$1:US$0.75, diminishing the impact of a shift from diesel. Moreover, we expect stricter emissions standards to push greater usage of turbos and other cost-effective fuelsaving technologies.
BorgWarner
Continental could more than offset lost diesel sales. Lower diesel penetration should translate into a negative impact on Conti's annual EBIT growth of c30bp (2016E-25E), but this should be more than offset by the mild-hybrid 48V opportunity (+130bp). Conti's total powertrain exposure stands at about 19% of group revenues. However, only 3% of its group sales (c€1.2bn) relate to diesel. Diesel-specific content includes diesel injectors, high-pressure pumps and enginecontrol units (ECUs). Conti is also a player in SCR, supplying urea tanks and NOx sensors to carmakers. We think Conti would be able to more than offset the revenues lost from a shift away from diesel, with higher take rates for 48V (we estimate ~2x the average diesel content), gasoline turbo chargers, gasoline injection systems (GDI) and heated catalytic converters. We would thus regard a faster-than-expected shift towards downsized gasoline engines and mildhybridisation as a net positive for organic growth.
Continental
We see several near-term catalysts: (1) FY 16 pre-release and initial guidance for FY 17 (9 January 2017) and the powertrain strategy update (March/April 2017). The latter should provide clarity on (1) the plan to manage the transition/legacy costs; and (2) the level of investments required – we already expect the R&D/sales ratio to increase by 100bp to 10%-plus. Delphi's overall diesel exposure is low. The ratio of Delphi content on diesel vehicles (diesel direct injection) versus gas turbocharged vehicles (gas direct injection, cam phasers, and sensors) is about US$1:US$0.75. At its 2016 investor day, Delphi disclosed that its powertrain gas/diesel mix is about 53%/47%. Within gas powertrain, Delphi is relatively new to the gas direct injection market, so we believe its gas powertrain business is more skewed to traditional gas than gas direct injection. Nevertheless, a loss in diesel mix would imply an increase in hybrid/EV content. We see additional help to Delphi in this case, as mild-hybrid 48V is more than 2x the content of gas content and EVs can have 7-8x equivalent gas engine content.
Delphi
Denso's diesel exposure is mainly in commercial vehicles. Denso's diesel exposure is around 7% of total sales, and it has around 15-20% diesel market share globally. It has leading technology for common rail systems, which achieves one of the highest injection pressures in the world. Denso is also known for i-ART, which allows continuous optimization of fuel injection and makes it possible for diesel engines to be powered by other fuel sources like biofuel.
Denso
Denso's primary business is in Asia, where it supplies trucks, pick-up trucks, large SUVs, and agriculture/construction machinery. Exposure to diesel passenger cars is low. The need for commercial vehicles in Asia (emerging countries) is expected to grow with increased investment in infrastructure and logistics. We therefore expect Denso's diesel business to continue growing even in an environment where the number of diesel passenger cars decreases.
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While relatively protected from a decline in diesel passenger cars, Denso is also well positioned to benefit from a shift from light vehicle diesel to hybrids and electric vehicle technology, supplying a wide range of hybrid-/EV-related products, including power control units, systems main relay, and battery monitoring units. Faurecia is among those most at risk from electrification. Faurecia has only limited diesel exposure at about 3% of group sales (~€700m). However, about 40% of Faurecia's group sales and 40-45% of EBIT relate to the Emissions Control Technologies (ECT) division. Faurecia’s diesel portfolio includes after-treatment solutions, particulate filters, catalysts and selective catalytic reduction systems (SCR). We expect a sharp reduction in diesel penetration from 13% today to 4% in 2025. This would limit Faurecia's ability to benefit from 'clean diesels' for passenger cars, though Faurecia should continue to benefit from its exposure to commercial vehicles. In addition, given its strong exposure to emissions controls, Faurecia is among the suppliers most at risk from a 100% 'EV-world'. We estimate that diesel and exhaust could impair the organic growth of Faurecia by more than 100bp from 2020E.
Faurecia
Hella has no meaningful direct exposure to diesel, as most of its revenues relate to lighting (44% of group sales) and electronics products (~33%). Less than 2% of group sales are exposed to the pure internal combustion engine (ICE) business, so Hella should be among the suppliers under our coverage least affected from a faster shift in the powertrain mix, in particular to BEVs. The main products affected by a '100% EV world' for Hella would be components for downsized internal combustion engines, including 12V DC/DC converters for start-stop systems, actuators for gasoline turbo-chargers and cooling valves circuits. We estimate a slight positive net benefit to growth from a 100% EV penetration scenario for Hella, mainly driven by the higher content per car in EVs for products such as (1) electric vacuum pumps; (2) intelligent battery sensors; and (3) the increasing importance of lighting products as a source of differentiation. In the aftermarket division (19% of group sales), we assume a similar revenue mix as in the Automotive division, and therefore see limited risk to demand for spare parts from EVs.
Hella
Hyundai Mobis has no diesel exposure: We estimate Mobis' revenue from green cars (and ADAS) should grow to cWon3.1trn by 2020 (or 8% of 2016E revenue). Green cars: Hyundai Motor Group has a fairly aggressive green car strategy and plans to increase green car line-ups from seven models in 2015 to 28 by 2020. The group aims to be a global #2 by volume in green cars by 2020. Kia’s Niro hybrid is selling well, helping the group’s green car sales YTD to have grown 45% YoY to 82.5k units. Mobis is a sole supplier of key components like battery management systems, motors, inverters and converters for cWon3m (or U$2,700) per unit of a green car. Separately, battery packs are supplied by a 51/49 JV between Mobis and LG Chem. We estimate Mobis should derive cWon1.5trn of revenue from green cars in 2020 (versus only Won0.2-0.3trn in 2015) – here we assume a 10% share of the global green car market in 2020E (or 0.7m units) and Won2.1m per unit (30% lower than the current Won3m).
Hyundai Mobis
Schaeffler would benefit from less diesel and more 48V: We estimate Schaeffler's diesel exposure to be only 2-3% of sales, and believe a declining diesel share coupled with a growing gasoline and gas mild-hybrid share would be a slight net benefit. Its diesel content is limited to engine parts (as opposed to emissions treatment content), and is marginally lower than its content in gasoline engines, according to management. Further, we estimate Schaeffler's content in 48V mild-
Schaeffler
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hybrid vehicles to be around 5x higher than in ICE cars, so rising 48V penetration should also support sales. However, Schaeffler's content in battery electric cars (BEVs) could fall to zero and, since we believe the BEV will be the powertrain 'endgame', we maintain a cautious stance on the company's shares. Tenneco exposed to diesel decline, but has higher market share in gasoline. About 11% of Tenneco's passenger vehicle division sales are diesel. Assuming the majority of its commercial vehicle/off-highway exposure (13% of sales) is diesel, we estimate less than a quarter of Tenneco's Clean Air sales come from diesel. We also think Tenneco is set to gain sales from any loss in diesel mix. The higher dollar content of emissions systems in diesel vehicles (diesel oxidation catalyst, diesel particulate filter, and selective catalytic reduction) versus gas vehicles (three-way catalyst, manifold, and muffler) is more than offset by Tenneco's overexposure to the gas market (we estimate Tenneco holds 24% of the gas market versus 8% of the diesel market). Moreover, tightening emissions standards would force gas vehicles to add more emissions content.
Tenneco
Valeo would benefit from less diesel: While we estimate that about 25% of Valeo's group sales are related to powertrain components, its pure diesel exposure is limited (only c3% of group sales). The majority of Valeo's powertrain portfolio would experience stronger growth from a faster shift away from diesel towards downsized gasoline-powered cars (start-stop) and mild-hybridisation (48V). Further, over the near term, transmission systems (20% of Valeo's sales) should play an important role in achieving further CO2 savings. Valeo expects the market for actuators/dampers in automatic transmissions to grow at 30-50% over the next 10 years. Valeo has already won more than 25 contracts for its mild-hybrid 48V products, making it the market leader. Valeo estimates that its system is already cheaper than diesel for carmakers.
Valeo
In a world of 100% EV penetration, we estimate that about 20% of Valeo's group sales would be at risk. There could also be a negative impact on the aftermarket (13% of sales; 25% of EBIT on our estimates), since there are fewer parts in an EV than in an internal combustion engine. This, however, assumes no offsetting effect from new products/innovations, which will expand in an EV world. We would expect some products to benefit, such as electric motors, inverters, converters and battery chargers. Valeo does not intend to make the battery or produce the cells. Valeo recently entered into a JV agreement with Siemens, a leader in electric motors and power electronics, with the goal of developing high-voltage (>60V) components for hybrids, plug-in hybrids and full electric vehicles, such as electric motors, battery chargers, inverters and DC/DC converters. Valeo expects the electric components market to grow at an annual rate of more than 20% over the next four years. The mitigating factors of a faster shift towards EV are that: (1) average content per car will be higher in mild, full and plug-in-hybrids than in ICE cars (between 2x and 9x times higher content); and (2) it is developing and has begun to launch products for BEVs that are priced significantly higher than its other products. However, with limited visibility today and tight competition in the space, we acknowledge the earnings risk inherent in faster-than-expected EV penetration.
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Appendix
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34
Figure 56: Financial impact of powertrain mix change – 'No-change' in diesel share scenario OEM
BMW
Daimler
FCA
PSA Renault
VW
Comment
Core data and assumptions Group unit sales (m, 2015)
2,244
2,000
4,610
2,973
2,799
10,010
Company data
European share of group unit sales
47%
39%
20%
60%
55%
45%
Company data
Annual ICE efficiency improvement
2.1%
2.1%
2.1%
2.1%
2.1%
2.1%
UBSe; below 10-yr avg. (2.5%)
Diesel share of European sales today
81%
71%
33%
63%
57%
60%
Company data, Statista, ICCT
Diesel share of European sales in 2021E
81%
71%
33%
63%
57%
60%
No change assumed
5%
5%
0%
2%
5%
3%
UBSe
Average cost per g CO2/km reduction (€) ICE improvements
35
35
35
35
35
35
EV
54
54
54
54
54
54
Average of industry estimates From Figure 33
48V/mild/hybrid
49
49
49
49
49
49
From Figure 33
Current gasoline emissions
140
133
126
111
119
128
UBSe, derived from fleet mix
Current diesel emissions
126
120
113
100
107
115
10% lower than gasoline
Current average CO2 fleet emissions
127
123
122
104
111
120
Company data
-17
-16
-15
-13
-14
-15
UBSe: 2.1% improvement p.a.
0
0
0
0
0
0
Diesel share unchanged
-6
-6
0
0
-5
-3
Based on UBSe EV forecast
102
101
90
91
91
96
Official data (ICCT)
EV share of European sales in 2021E
2015-21 fleet emission pathway (g CO2/km)
Impact from … … ICE improvement … diesel decline … from EVs CO2 target 2021
3
1
17
0
1
5
Lower shortfall in this scenario than base case
22
21
21
18
19
21
Based on OEM-specific fleet emissions
12%
3%
79%
0%
6%
26%
… from ICE improvements
586
557
527
465
498
536
Based on data above
… from EVs
309
300
0
7
272
176
Based on data above Based on data above
Shortfall to target
CO2 savings per 48V car 48V/mild-hybrid mix required to close shortfall Cost calculation Incremental average cost per car (€)
… from 48V
123
26
824
0
51
265
Total (pre diesel compliance cost)
1,019
883
1,351
471
820
976
… from rising diesel compliance cost
292
256
108
0
216
216
Total (post diesel compliance cost)
1,310
1,139
1,459
471
1,036
1,192
Total cost to OEM (€m)…
1,382
888
1,345
841
1,596
5,370
… per share (€)
1.48
0.58
0.76
0.65
4.11
7.58
2017E EPS
9.67
9.07
1.68
2.17
14.93
24.64
Total cost in % of EPS
15%
6%
45%
30%
28%
31%
UBSe: €450 SCR cost per diesel car; 20% already equipped
Cost per car x European sales
Source: Company data and UBS estimates
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35
Figure 57: Financial impact of powertrain mix change – 'Disruption' scenario (zero diesel share in 2021) OEM
BMW
Daimler
FCA
PSA Renault
VW
Average
Core data and assumptions Group unit sales (m, 2015)
2,244
2,000
4,610
2,973
2,799
10,010
Company data
European share of group unit sales
47%
39%
20%
60%
55%
45%
Company data
Annual ICE efficiency improvement
2.1%
2.1%
2.1%
2.1%
2.1%
2.1%
UBSe; below 10-yr avg. (2.5%)
Diesel share of European sales today
81%
71%
33%
63%
57%
60%
Company data, Statista, ICCT
Diesel share of European sales in 2021E
0%
0%
0%
0%
0%
0%
Zero diesel share assumed
EV share of European sales in 2021E
5%
5%
0%
2%
5%
3%
UBSe
ICE improvements
35
35
35
35
35
35
Average of industry estimates
EV
54
54
54
54
54
54
From Figure 33
48V/mild/hybrid
49
49
49
49
49
49
From Figure 33
Current gasoline emissions
140
133
126
111
119
128
UBSe, derived from fleet mix
Current diesel emissions
126
120
113
100
107
115
10% lower than gasoline
Current average CO2 fleet emissions
127
123
122
104
111
120
Company data
-17
-16
-15
-13
-14
-15
UBSe: 2.1% improvement p.a.
… diesel decline
11
9
4
7
7
8
Higher impact from stronger diesel decline than in base case
… from EVs
-6
-6
0
-2
-5
-3
Based on UBSe EV forecast
102
101
90
91
91
96
Official data (ICCT)
Average cost per g CO2/km reduction (€)
2015-21 fleet emission pathway (g CO2/km)
Impact from … … ICE improvements
CO2 target 2021 Shortfall to target
14
10
21
5
8
13
Higher shortfall in this scenario than base case
CO2 savings per 48V car
22
21
21
18
19
21
Based on OEM-specific fleet emissions
63%
47%
97%
27%
42%
63%
Incremental average cost per car (€) … from ICE improvements
586
557
527
465
498
536
Based on data above
… from EVs
309
300
0
101
270
176
Based on data above
… from 48V
675
486
1,008
239
400
639
Based on data above
Total (pre diesel compliance cost)
1,570
1,342
1,535
805
1,168
1,350
… from rising diesel compliance cost
0
0
0
0
0
0
Total (post diesel compliance cost)
1,570
1,342
1,535
805
1,168
1,350
Total cost to OEM (€m)…
48V/mild-hybrid mix required to close shortfall Cost calculation
UBSe: €450 SCR cost per diesel car; 20% already equipped
1,656
1,047
1,415
1,436
1,798
6,079
… per share (€) 2017E EPS
1.77 9.67
0.69 9.07
0.80 1.68
1.10 217
4.63 14.93
8.58 24.64
Total cost in % of EPS
18%
8%
48%
51%
31%
35%
Cost per share in 'no-change' scenario (i.e. 'baked in')
15%
6%
45%
30%
28%
31%
Already included in OEM medium-term financial targets
3.0%
1.1%
2.4%
21.1%
3.5%
4.1%
Impact vs no-change scenario higher than in base case
Incremental EPS impact from powertrain mix shift Source: Company data and UBS estimates
Q-Series 5 December 2016
Cost per car x European sales
36
Figure 58: EU emissions standards for passenger cars (based on NEDC testing) Grams per kilometre Standard
Date
CO
Euro 1
Jul 1992
2.72
Euro 2
Jul 1996
2.20
Euro 3
Jan 2000
Euro 4
HC
HC+NOx
NOx
PM
PN
-
0.97
-
-
-
-
0.50
-
-
-
2.30
0.2
-
0.15
-
-
Jan 2005
1.00
0.1
-
0.08
-
-
Euro 5
Sep 2009
1.00
0.1
-
0.06
0.005
-
Euro 6
Sep 2014
1.00
0.1
-
0.06
0.005
6x10^11
Euro 1
Jul 1992
2.72
-
0.97
-
0.140
-
Euro 2, IDI
Jan 1996
1.00
-
0.70
-
0.080
-
Euro 2, DI*
Oct 1999
1.00
-
0.90
-
0.100
-
Euro 3
Jan 2000
0.64
-
0.56
0.50
0.050
-
Euro 4
Jan 2005
0.50
-
0.30
0.25
0.025
-
Euro 5 a
Sep 2009
0.50
-
0.23
0.18
0.005
-
Euro 5 b
Sep 2011
0.50
-
0.23
0.18
0.0045
6x10^11
Euro 6
Sep 2014
0.50
-
0.17
0.08
0.0045
6x10^11
Gasoline
Diesel
Source: ICCT *After 30 September 1999, vehicles with DI engines had to meet the IDI limits.
Figure 59: US emissions standards for passenger cars (based on EPA FTP-75 chassis dyno testing) Grams per mile Standard
Date
NOx
NMOG
CO
PM
HCHO
THC
NMHC
Tier 1
1994
0.6
-
4.2
NLEV
1999
0.3
0.09
4.2
-
-
-
0.31
0.08
0.018
-
-
Tier 2
2004+*
0.07
0.09
4.2
0.01
0.018
-
-
Tier 1
1994
1.25
-
4.2
NLEV
1999
0.3
0.09
4.2
0.1
-
-
0.31
0.08
0.018
-
-
Tier 2
2004+*
0.07
0.09
4.2
0.01
0.018
-
-
Gasoline
Diesel
Source: ICCT, EPA *Phase-in 2004-09.
Q-Series 5 December 2016
37
*UBS Ev idence Lab provides our research analysts with rigorous primary research. The team conducts representative surveys of key sector decision-makers, mines the Internet, systematically collects observable data, and pulls information from other innovative sources. They apply a variety of advanced analytic techniques to derive insights from the data collected. This valuable resource supplies UBS analysts with differentiated information to support their forecasts and recommendations—in turn enhancing our ability to serve the needs of our clients. The UBS Evidence Lab electric vehicle survey was run in six countries (Germany, the UK, the US, Korea, China and Japan) in July 2016. A representative sample of consumers was invited to take the survey and, in total, 9,400 qualified. Representation was based on gender, income and regional distribution. Qualification criteria were based on owning a private vehicle and/or intending to purchase a vehicle in the future – in other words, the sample did not include car objectors. Country samples were as follows: Germany (N=1,625), UK (N=1,549), US (N=1,503), Korea (N=1,516), China (N=1,613) and Japan (N=1,594). The survey was sent out via an online methodology. The margin of error for whole sample responses is +/-1.01 at a 90% confidence level.
Valuation Method and Risk Statement The automobile sector has in the past exhibited high levels of volatility in terms of profitability and valuation. Sector earnings and performance are highly sensitive to variations in volume, pricing, raw material costs and currency, all of which have been volatile recently. Interest rates are also a key driver of sector earnings as they affect demand and mix as well as earnings of the OEMs' financial services arms.
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38
Required Disclosures This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 05 December 2016 07:58 PM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating
Definition
Coverage1
IB Services2
Buy
FSR is > 6% above the MRA.
45%
28%
Neutral
FSR is between -6% and 6% of the MRA.
39%
25%
Sell
FSR is > 6% below the MRA.
15%
17%
Short-Term Rating
Definition
Coverage3
IB Services4
Buy
Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.
