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November 20, 2003
Carmakers and Carbon Constraints: Who Will Capitalize and Who Will Cave?
    by William Baue

A new report assesses ten auto companies’ relative readiness for reduced carbon emissions and increased fuel efficiency regulations in Japan, the EU, and the US.

The rising popularity of gas-guzzling sports utility vehicles (SUVs) this past decade makes one wonder whether drivers, and the automobile manufacturers that outfit them, recognize the risks of climate change and the likelihood of a carbon-constrained future. The European Union (EU), Japan, and, to a lesser degree, the United States, are setting regulations and guidelines for decreasing carbon dioxide (CO2) emissions and increasing fuel efficiency of automobiles. The degree to which companies (and their shareowners) feel the squeeze on revenues and returns varies greatly depending on the companies’ current carbon profiles, as well as their technological and management abilities to reign in carbon emissions.

So says a report released late last month by the World Resources Institute (WRI), a Washington, DC-based environmental research and policy organization, and Sustainable Asset Management (SAM), a Zurich-based sustainable investment firm. The report, entitled Changing Drivers: The Impact of Climate Change on Competitiveness and Value Creation in the Automotive Industry, assesses ten carmakers’ readiness to capitalize on (or suffer from) carbon constraints.

“Carbon constraints could significantly affect earnings and competitiveness in the global auto industry,” said Alois Flatz, head of SAM research.

Carmakers studied include BMW (ticker: BMW), DaimlerChrysler (DCX), Ford (F), General Motors (GM), Honda (HMC), Nissan (NSANY), PSA Peugeot Citroen, Renault (RNO), Toyota (TM), and Volkswagen (VOW). The report studies markets in Japan, the EU, and the US, which account for almost 70 percent of current car sales globally, and considers the time period between now and 2015.

The report first assesses the current carbon-intensity of companies’ vehicle lines, and finds that PSA and Renault derive profits from the least carbon-intensive vehicles, while Ford and GM derive more than 70 percent of profits from high carbon-emitting vehicles.

Looking forward, the report measures companies’ “value exposure,” or the costs of achieving higher fuel economy standards by 2015, and estimates that the costs per vehicle differ by a factor of 25, from $650 for BMW to less than $25 for Honda. However, BMW’s seemingly excessive exposure to this risk may be deceptive, the report points out.

“Clearly, among those companies that face high downside risks, BMW is best placed to mitigate the risks for two reasons,” said Niki Rosinski, SAM’s sustainability analyst. He co-authored the report with Colin Le Duc, SAM’s head of research operations, and Duncan Austin and Amanda Sauer in WRI’s Sustainable Enterprises Program. “Firstly, BMW commands higher pricing power than its peers thanks to the focus on premium segments, which puts BMW in a stronger position to pass additional costs over to its customers, and higher margins make BMW less vulnerable to additional costs.”

“Secondly, BMW is set to introduce a new series of small cars (1-series), which comes in addition to the MINI and is expected to help BMW to reduce its carbon profile in future,” Mr. Rosinski told

Next, the study assesses management quality in terms of capitalizing on lower-carbon technologies. Toyota stands out from the crowd by excelling in all three potential carbon-reduction technologies--diesel, hybrid, and fuel cells.

“A good example is the recent tie-up between Toyota and Nissan around hybrid electric vehicles (HEVs), which aims to put both companies in a strong position to be able to recover development costs and bring down production costs through economies of scale earlier than competitors,” said Mr. Rosinski. “The Nissan tie-up is expected to contribute to Toyota’s global sales objective of 300,000 HEVs annually through its dealerships by 2007.”

Finally, the report translates the value exposure and management quality into changes in forecasted “earnings before interest and taxes” (EBIT) for the period of 2003 through 2015, a statistic that can aid investors and analysts project effects on shareowner value. Toyota appears to be best positioned, with a projected EBIT eight percent higher than an EBIT forecast that does not take carbon constraints into account, while Ford’s carbon-constrained EBIT projection is ten percent lower than its business-as-usual EBIT.

“It is critical that portfolio managers understand the implications of carbon constraints and begin to differentiate carmakers on the grounds of their relative carbon positioning,” concluded Mr. Flatz of SAM.


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