German carmakers should beef up R&D, not lobbying

The country’s manufacturers are fighting tougher European emission guidelines. The attack may serve short-term profit but is misguided from a broader perspective. Rather than lobbying for the status quo, the industry should invest more in low-emission mobility.

In the European car industry, history does repeat itself. The lesson: ignore industry pleading.

Carmakers don’t like emission limits. In the run up to the first set in 2008, they claimed the proposed standard was all but impossible to meet. Up to 2008, carbon emissions of new cars were falling by just 1 percent per year. Then, wonderful to recount, the rate of progress quadrupled. Today, new cars’ carbon emissions are 20 percent lower than a decade ago and the 2020 targets are looking plausible.

What should future targets look like? The European Parliament wants carmakers to reduce average fuel consumption from the already agreed 3.9 litres per 100 kilometers in 2020 to about 3 litres in 2025. And once again carmakers, especially Germany’s premium manufacturers, are bristling. They have asked the German government to shoot down the parliamentary initiative.

As in 2007, the resistance is misguided. Sure, fuel efficiency is expensive and, yes, German luxury car makers have a problem because bigger and faster cars use more fuel. They have to work harder, but they are especially well positioned to cope with this shift.

BMW, Audi and Daimler are significantly more profitable than pure volume manufacturers. They also boast a long track record of successful innovation. Along with financial clout and engineering expertise, they have strong brands and up-market customers who are more willing to pay up. An extra few thousand euros on the sticker price will not destroy the luxury carmakers’ business models.

Progress on fuel efficiency after 2020 probably requires a bigger market share of electric cars, a technology that is still in its infancy. However, this argues in favour of setting ambitious targets right away, not against doing so. Tougher guidelines encourage more research and development and create planning certainty. Long product cycles of six to eight years make early guidelines especially helpful.

The only real argument against tighter emission targets is that they lower profit in the short term. Delay slows investment and lengthens the life expectancy of existing, already paid-for technologies. Myopic shareholders love such a strategy. Policymakers should not.

This article was initially  published as a Reuters Breakingviews comment on 27 May 2013.


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One Response to German carmakers should beef up R&D, not lobbying

  1. Joe

    Cars have an income elasticity of demand close to 3:

    This means they are luxury or even superior goods. Luxury goods also have high price elasticity.
    The demand for such goods rises with income increases, so at higher incomes going greener while keeping prices will easily continue to attract buyers. Apple is good example of that business model.
    But even charging a premium will attract even more buyers. This is because much of what the German’s sell are not luxury goods, but in fact Veblen goods for conspicuous consumption:

    A green hybrid Mercedes AMG with electrified acceleration would have increasing demand at higher prices, not least because richer people that buy these cars already carry the “richness”stigma of potential social immorality, they don’t want to add environmental immorality to that.

    Indeed, German carmakers’ luxury-oriented business model might thus even profit from greener cars. Never thought of that as a pricing model, Benz? Further, introducing expensive specs at the high end cheapens production through economies of scale (and potentially even scope). Seems like the Germans need some economic sense installed in their corporate engines rather than lobbying.

    Maybe it’s just the angst again…