Americans buy big but relatively unsophisticated cars, while Europe's consumers prefer sophisticated small cars. That truism is about to be rewritten in Europe as vehicle manufacturers start to question their small- car strategy in response to costly new legislation covering safety and tailpipe emissions, in particular carbon dioxide output.
The regulations are about to wreak havoc among automakers with a stake in Europe, forecasters believe. Many say the age-old tradition of the European market — the dominance of the small car — is now in question.
Opel will drop its Karl and Adam minicars, while fellow PSA Group brands Peugeot and Citroen said their 108 and C1 minicars are unlikely to survive.
A source at Ford confirmed it will stop exporting the Indian-built Ka+ small car to Europe. Volkswagen executives have said privately that the automaker is preparing to drop combustion-engine versions of the Up minicar, which would almost certainly mean the gasoline-powered Seat Mii and Skoda Citigo also will disappear.
Daimler, meanwhile, has begun shifting production and development of its Smart brand to China, where the small cars will be built exclusively starting in 2022 as part of a joint venture with Zhejiang Geely Holding Group. That decision also puts a question mark over Renault's Twingo minicar, which was developed alongside the current Smart model range.
The fundamental problem? The technology required to meet the new regulations will price small cars out of the market.
"New CO2 rules will require automakers to fit thousands of euros of tech to each car," Max Warburton, an analyst at research and brokerage firm Sanford C. Bernstein wrote in a report this spring. "Big cars have the price points and margins to cover these costs. Small cars simply do not. These segments may soon be abandoned by many manufacturers."
It won't be only Eurocentric minicars that are affected, Warburton wrote. He predicted the VW Group could be forced to ax the Polo small car as well as the related Audi A1, Skoda Fabia and Seat Ibiza. "This is a very big volume platform, but it will face an increasingly tough economic challenge," he wrote.
Warburton also highlighted BMW's challenge with Mini. "BMW will need to rethink or reduce the size of the Mini business," he wrote. "We are not convinced it's ever made proper money."
As the European Union rules start to take effect next year, the industry must reduce its fleet average CO2 levels to 95 grams per kilometer, down from 120.5 g/km last year, according to JATO Dynamics. Most current minicars cannot get to below the 95 g/km average without including some form of electrification.
The EU is finalizing plans that, once formalized this year, would cut automaker CO2 targets by 15% from 2021 averages by 2025 and by 37.5% by 2030, meaning average CO2 emissions of less than 60 g/km. Automakers would need popular EVs in cheaper, more accessible categories to be able to continue selling conventional SUVs, or they could face fines.
That means an automaker's smallest, lightest car — the car that traditionally helped lower the company's average CO2 — would no longer offset the higher emissions of bigger cars. The small car will exist purely as a business case in its own right — and the business case for minicars is poor.
"Ironically, the smaller vehicles are toughest to reduce CO2 in," Ford of Europe Chairman Steve Armstrong told Automotive News Europe at the April unveiling of the Kuga crossover. "The smaller the vehicle, the tighter the margin, the harder it is to meet emissions targets."
PSA's head of Europe, Maxime Picat, agreed.
"The ability of any carmaker to make a profit is under pressure because of all of the technology we have to add in our vehicles for safety and for emissions," Picat said.
Another reason small cars are going to get more expensive to produce — even if they keep their combustion engines — is the tougher standards for oxides of nitrogen that take effect in September 2020. Armstrong estimated that bringing tailpipe emissions to the new standard will cost about $2,400 per vehicle, whether the car has a diesel or gasoline engine. Also affecting all cars, small to large, are EU requirements to add a raft of mainly camera-based safety equipment starting in 2021.
One option is cutting CO2 emissions by means of partial electrification, such as adding mild-hybrid, full-hybrid or plug-in hybrid technology. But that solution won't be economically viable for many brands. A 48-volt mild-hybrid option adds as much as $1,100 to the cost of a vehicle, according to the Bernstein analysis. A full hybrid adds twice that much, while a plug-in hybrid option raises the cost by about $5,600.
‘Not ready to pay'
It's clear that minicars and small cars are not capable of absorbing such extra cost.
"The smaller the car, the harder it is to justify this price increase. The tech costs more or less the same for a small car as a big car," said Alain Favey, head of global sales and marketing for Skoda. "People are not ready to pay it."
Automakers will be able to pass on only a quarter of the total cost of CO2 compliance technology, according to a report by UBS that examined the earnings impact.
Right now, electrification in small cars and minicars accounts for a tiny portion of the market. Toyota has shown that car companies can make a full-hybrid system work in a small car, with the successful Yaris Hybrid. But Toyota has achieved economies of scale for its hybrid powertrain partly because of strong demand for the system in Japan. That popularity should also help Honda when it adds a hybrid version of its new Jazz small car next year, while Nissan has said it will add its e-Power system, currently only offered in Asia, in Europe.
The two brands most reliant on small platforms in Europe are Fiat and Renault, with each brand counting on the models for more than 60% of their total 2018 European sales. Nearly all of Fiat's share was in minicars, due to the popularity of the 500 and Panda, the two best-selling cars in the segment.
That reality could leave parent company Fiat Chrysler Automobiles particularly vulnerable to compliance shortfalls when the new emissions regulations begin.
FCA plans to spend €1.8 bn ($2 bn) in the next three years to buy regulatory credits to minimize the number of emissions-related fines it will pay in Europe and the U.S. This includes payments to Tesla to offset FCA's high emissions in Europe. FCA will also benefit from "supercredits" that ultra-low emissions vehicles bring until 2022. Fiat has already killed the two-cylinder engine that performed poorly in its Panda and 500 in real-world CO2 tests, but the automaker said it remained committed to the sector.
"FCA is constantly working on making cars less polluting and safer, but that does not mean having to renounce market segments that, by their nature, meet specific customer needs," a spokesman told Automotive News Europe.
Next year, Fiat will launch a full-electric version of the 500 on a new platform to prepare for what some automakers believe is the only viable propulsion for smaller cars. Citroen brand CEO Linda Jackson told Automotive News Europethat the Citroen C1's future was likely to be electric. Meanwhile, Skoda has unveiled an electric version of its Citigo, which will be sold under the brand's new e-mobility subbrand, iV.
Full-electric variants look to be the best option for the entry segment when VW Group replaces its current minicars, Skoda's Favey said: "Everything else will be tricky to justify."
The continued popularity of the Renault Zoe, which last year was Europe's No. 2 selling full-electric car after the Nissan Leaf, gives manufacturers hope that an electric future is viable for small cars.
At the Geneva auto show, Peugeot unveiled a rival to the Zoe in the form of the e208. Opel and Citroen are also gearing up to launch related full-electric small cars. PSA's electrification strategy is to restrict full-electric to smaller cars, where range is less important, and add plug-in hybrid technology to larger cars that traditionally cover more ground.
Honda will launch a small electric car, the Honda E, next year following an introduction at the Frankfurt auto show in September. Meanwhile, Dacia, Nissan and Mazda are also expected to debut small EVs in the midterm.
The VW Group so far is concentrating on compact cars for its first large-scale push into EVs via its MEB platform. But more recently, the manufacturer announced the development of a family of smaller, urban-focused EVs starting at less than $22,500. These cars are due around 2023 and will be led by its Seat brand in Spain.
The problem is still one of cost.
"The €10,000 ($11,200) car is going to be very difficult," Ford of Europe sales boss Roelant de Waard said.
Thomas Ulbrich, VW brand's board member for e-mobility, said, "Minicar customers are paying 12,000 to 14,000 euros — but in the future, when they are electrified, it will be 18,000 to 20,000 euros. This will be a problem."
He added that VW and the German government are discussing how to provide extra subsidies to this sector. Those customers "have the right" to have access to electrified models, he said.
Analysts at ING bank predict that price parity between conventional and electric drivetrains won't arrive until 2025.
Fiat's proposal for keeping the cost of small electric cars down was unveiled in Geneva in the form of the Centoventi concept, a look at what might replace Fiat's aging Panda. The price would be kept low on the base car by offering a small battery with about a 62-mile range , but that battery would be expandable to more than 300 miles after purchase via upgrades.
Automakers have only themselves to blame for the high cost of electric cars, chides the European environment group Transport & Environment.
Battery-electric vehicles "are still more expensive than small gasoline cars due to lack of early investment in supply chains and betting on diesel instead," said Julia Poliscanova, Transport & Environment's manager for clean vehicles and e-mobility. But she added a note of optimism, observing that the natural order of new technologies is to fall in price as they gain acceptance.
"Their price will drop fast," she said.