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