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Fit for 55: Where are the French and German Car Industries Heading?

Analyses - 1 September 2021

Cars are the primary mode of transport for Europeans. They currently account for about 15% of CO2 emissions and are one of the primary causes of global warming. On July 14, 2021, the European Commission published the ‘Fit for 55’ climate package, which contains important guidelines for the future of the automobile industry: from 2035 onwards, only new, 100% electric or hydrogen-powered vehicles that generate no emissions while driving will be allowed for sale on the European market. This transition will be easier for German than for French manufacturers, as Germany’s car industry is already well established outside Europe and is likely to fund the transition by continuing to sell combustion vehicles. Yet both countries will need to make significant efforts to convert their share of pure electric cars in the energy mix from 8.2% (2021) to 55% of sales (2030). Anuchika Stanislaus, International Affairs Officer in the Germany and Tech programs, reviews the European Commission’s newly announced plan. 

To fulfill the commitments of the Paris Climate agreement and reach the EU’s climate neutrality target by 2050, electric vehicles (EV), which do not emit CO2, appear as one of the most effective ways to fight air pollution and global warming. For a few months now, the European debate around climate policies has been putting pressure on car manufacturers to move towards low-carbon vehicles, in particular since the January 2020 Regulation (EU) 2019/631 requires new cars to comply with an average CO2 emission limit of 95 grams per kilometre. Failure to comply with these limits could result in penalties amounting to hundreds of millions of euros. This is why we may see major auto groups hastily accelerating their EV production. In France, electric car registrations have been taking off since 2019, especially since the government unveiled an €8 billion plan to save the country’s car industry from the huge losses incurred because of lockdowns. This plan includes a big boost for electric vehicles. Meanwhile, Germany is the major European supplier of EVs: 21% of all EVs registered in February 2021 were registered in Germany, and 1/5th in China. On July 14, 2021, the European Commission released its ‘Fit for 55’ EU climate package for the auto sector with a proposal to reduce car emissions by 55% before 2030, compared to 1990 levels. In other words, the Commission’s ambition is to have only zero-emission vehicles on the road by 2035. For at least a year, the Fit for 55 package will undergo amendments and debate. As it is, what are the driving forces behind this shift and the consequences of this development for all stakeholders? 

What Fit for 55 does and does not do for the automotive industry

The Fit for 55 package contains proposals that pertain to a large range of policy areas and economic sectors: industry, transport, buildings, and energy. These reflect the European ambition to achieve the 2030 target of a fair, competitive, and green transition. The package includes four proposals promoting cleaner vehicles and fuels in a technologically-neutral way: energy taxation, investment in charging and refuelling infrastructure, new carbon pricing, and updated CO2 standards.

In order to meet its ambitious target, one of the key responses put forth by the Fit for 55 is the acceleration of charging infrastructure deployment. Through the Fit for 55 plan, the Commission proposes to bring the network of public charging points to 1 million in 2025 and around 3.5 million in 2030, as opposed to 225,000 in late 2020,to have at least two fast public charging stations (including at least one with a capacity of 150 kW) every 60 kilometres starting in 2025, and twice as many in 2030. While such networks are currently under development in Germany, the Netherlands, France, and Denmark, such is not the case in Spain, Italy, Portugal, Greece, and Central and Eastern Europe, where economic development (notably in Hungary, the Czech Republic, and Slovakia) is crucially dependent upon the German automotive industry. 

One of the key responses put forth by the Fit for 55 is the acceleration of charging infrastructure.

Directive 2014/94/EU on the deployment of alternative fuels infrastructure sets out a framework of common measures for the deployment of such infrastructure in the EU. However, ever since its implementation, a lack of ambition, consistency, and coherence among member states has been seen, leading to insufficient and unevenly distributed infrastructure.

The Directive requires member states to set up national policy frameworks to ensure that an appropriate number of publicly accessible recharging and refuelling points is put in place, particularly to allow for the free, cross-border circulation of such vehicles on the TEN-T network.

Beyond this ambitious target, the EU must build charging infrastructure in all of Europe through binding legislation between member states or put into place incentives for regions in difficult situations. For example, one of the tasks of the 2019 European Green Deal was to support regions in phasing out coal. Two thirds of the world's largest coal deposits are located in Saxony and Brandenburg (Germany). The Green Deal allowed five eastern Länder to offer significant subsidies to attract electric car producers to the region, in order to mitigate the economic impact of shutting down operation of these facilities. Such initiatives are welcome in order not to leave any region behind. 

Ensuring joint movements within the entire supply chain 

The automotive sector is one of the most complex supply chains in the world. The EU’s new proposed target is likely to significantly speed up the structural transformation of the automotive value chain. Disruptive trends that lead to new consumer demands, changes in manufacturing processes, and legislative landscapes, will all have an impact on the entire automotive supply chain (suppliers, OEMs, distributors, and customers). Across all sectors, supply chain actors have two objectives: to lower costs and accelerate their production cycle. 

To be effective and accessible, the industry’s green transition must follow the same goals along the entire supply chain. "Price is key when it comes to generating a significant positive impact on global warming and embracing the full society's potential customer base of EV vehicles", said Carlos Tavares, CEO of Stellantis, during a conference organized by Institut Montaigne and the Grüner Wirtschaft Dialog in April 2021, which brought together political representatives, unionists, OEMs, manufacturers, suppliers, and automotive companies to discuss the future of the European car industry. 

The EU’s new proposed target is likely to significantly speed up the structural transformation of the automotive value chain. 

Although the Fit for 55 plan recognizes that the cost of vehicles is considered one of the most important barriers to the market uptake of zero and low-emission vehicles, a target for incentives could have been explored. The ability to lower the price of EV vehicles through government incentives and a lower cost of energy in the context of rising oil prices will enable a better trade-off between EVs and combustion engines. But we cannot rely solely on these two factors to lower EV prices; we also need to create competitive sourcing in battery cells at a highly competitive power density to lower their cost. New unified cell battery has to be settled, a cell format adaptable to various chemical mixes and one that is compatible with all major upcoming innovations on both products and the production process. It will allow stakeholders to reduce complexity and costs, and therefore to achieve a sustainable European automotive industry. The German government has played a leading role within the EU, with its "National Industrial Strategy 2030" which provides for, in addition to a commitment to electric cars, battery cell production in Germany and other parts of Europe. 

While France prides itself on having three quarters of its electricity production powered by nuclear, unlike Germany where most is generated by gas, oil and coal, both countries are losing parties during the car manufacturing phase (6.57 tons of CO2 for the electric car, vs. 3.74 tons for a combustion engine car). For electric vehicles, whether in France or in Germany, this figure could be offset through standardized recycling methods for battery metals. The core element of the European industrial strategy should be to use the opportunities for cost reduction offered by other synergies across the value chain. The EU must ensure that environmental issues are embedded along the whole battery value chain and that the environmental relevance of EVs is not questioned in the medium term. 

Safeguarding jobs and investing in people

"The European Green Deal must pave the way for a more sustainable, digital and innovative European mobility landscape! The EU should offer companies and employees clear guidelines for a reliable and socially just transformation," stressed Dr. Franziska Brantner, member of the German Parliament. But all traditional industrial players will be forced to make difficult decisions in the face of significant overstaffing in the field of traditional engines.

The automotive industry is a key sector in Germany, France, Italy, and Spain as in the rest of Europe: 14.6 million people directly or indirectly work in the industry, which represents 6.7% of all EU jobs. The EU knows it and as such must invest in training, as highlighted by the contributors of our series Green Deal Reloaded. In April, the European Commission launched a platform for facilitating training projects dedicated to shortening the skill gap among Europe’s workforce on battery manufacturing across national borders.

To ensure battery independence, 70 industrial projects are being supported by the European Battery Alliance (EBA) - Europe’s multinational drive to support a massive domestic production base and supply chain - which is expected to create as many as 4 million jobs by 2025. The EU added lithium to its list of materials deemed necessary to secure supplies of. These initiatives will allow the EU to close the investment gap with its major Asian competitors, and to move fast towards its open strategic autonomy in this critical sector. 

The automotive industry is a key sector in Germany, France, Italy, and Spain as in the rest of Europe: 14.6 million people directly or indirectly work in the industry, which represents 6.7% of all EU jobs.

Some jobs will transform more than others. The production of battery-powered vehicles is much less labour-intensive than the production lines for internal combustion vehicles. The Ifo Institute of Munich estimates that about half a million jobs in Germany are dependent on combustion engine vehicles. The job losses associated with the transition to electric models will only be partially offset by the retirement of the baby boomers. The German Economic Institute estimates that at least 178,000 jobs could be affected by 2025 in Germany. In order to support equipment manufacturers, a fund of several hundred million euros, called the Best Owner Group, has been launched by IG Metall and several players in the automotive world.

It is financed by private capital and should make it possible to buy out SMEs specializing in parts for petrol or diesel vehicles. The aim is to help SMEs in the sector to cope with this major electric vehicle shift by providing them with capital. 

The EU has to ensure funding for this transformation, preserve the strength of carmaking regions, and implement a cross-sectional approach so that employees can remain in their respective regions. On the one hand, the EU is heavily investing in mobility (through inter alia, the Innovation Fund, the State aid rules for investments, the European Social Fund Plus - ESF+, InvestEU and other EU funding programmes); on the other hand, we don’t have clear rules and perspectives for our investments within the next 10 years. Therefore, an urgent task consists in formulating clear targets on employment and working towards them, lest we end up forcing manufacturers to abruptly switch to EVs, causing dramatic consequences for employment in Europe. 

The future of EVs is data and software 

Within a few years, all cars will run on batteries, data, and software, which will become part of a new ecosystem of intermodal mobility designed to allow what Carlos Tavares dubbed "our freedom of movement." While cars are becoming a platform for apps, data is the new "petrol and diesel" that fuels the machine; thus, Europe needs to set its own standards and safeguard its digital sovereignty. Europe needs new business models that take into account the efficient use of cars and other European values, such as data protection and individual rights. 

The change in the value chain will be tremendous and revenues will shift dramatically, with revenues from internal combustion engines likely to decrease over the next five years. In parallel, the total software revenues will surpass the total electric vehicles revenue. Investments in autonomous technologies, connectivity, and electrification are a challenge for automotive stakeholders.

Europe needs to set its own standards and safeguard its digital sovereignty. 

Given the significant tech players currently on the rise in this field, from EV makers to autonomous vehicle innovators, traditional players in the automotive industry face new competitors such as the Baidu platform, Apple software or Amazon Logistics. Electric vehicles require new skills, particularly in IT, electronics and chemistry, but the conversion of electromechanics to these new jobs will cost around 10,000 euros per employee, according to the Ifo Institute. The investment needs here will again be very high. Our report on the "role for cars in tomorrow’s world" (2017) suggested that the automotive industry, with the support of public authorities, analyze the impact of the car of the future on employment, both quantitatively (number of jobs threatened in each sector of activity) and qualitatively (possible redeployment according to skills). This shared diagnosis would allow for the adoption of a forward-looking profession and skills management strategy and thus avoid the difficulties of sudden restructuring operations in the future.

EU member states and the European Parliament will be debating the Fit for 55 package and a number of changes are expected to be made. The EU would be wise to include more concrete and tangible targets for EV price incentives, competitive sourcing in battery cells, and resale production, as well as for the industry's employment structure. 




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