Automakers pull models, halt output as testing deadline roils European market

A double shot of new emissions tests is shaking up the European auto market this year, disrupting production and sales, and weighing on automakers’ profits.

The two tests are the WLTP, or Worldwide harmonized Light vehicles Test Procedure, and its on-road companion, the RDE, or Real Driving Emissions. They replace the NEDC, or New European Driving Cycle, which has been criticized as understating emissions –- especially of toxic nitrogen oxides -- by not reflecting real-world conditions and offering loopholes for automakers.

EU rules have required new models to undergo the testing starting Sept. 1, 2017, but the real challenge for manufacturers has been to test existing models by Sept. 1 of this year. Many models have required new emissions equipment such as particulate filters -- because the WLTP generally produces higher pollution figures -- and testing stations have been operating nonstop. However, it is not clear whether all models can be certified in time.

“It’s like a multidimensional game of chess,” said Mark Fulthorpe, director of light vehicle production forecasting at IHS Markit. “People have not realized just what it was going to take to achieve this.”

Every variant of a model -- thousands in all -- must undergo testing, because different powertrain and option packages can affect carbon dioxide emissions. The WLTP is longer and more involved while tacking on the RDE adds time and complexity.

Any car not certified by Sept. 1 cannot legally be sold in Europe, although exemptions are available to manufacturers, a process known as derogation. That has meant an inventory balancing act for automakers. They need to quickly sell cars that are neither WLTP-compliant nor derogated, and at the same time do not want to build up unwanted stock of models that have already been certified.

Models pulled, output stalled

The new rules have “left automakers trying to sell their vehicles in Europe with little choice but to pull models from sale or stall production as they grapple through the regulatory minefield,” IHS said in a note in July.

The number of models requiring certification has led to bottlenecks at the agencies that perform emissions tests. TUEV Sud, one of about 20 organizations in Germany that do such tests, is running 24 hours a day, six days a week to accommodate the manufacturers ahead of the deadline, spokesman Vincenzo Luca said.

A complete test cycle for an engine family can take up to two months, Luca said, because the new tests are much more complicated than the NEDC. Traffic jams and other issues can mean that the RDE process must start all over. In addition, older models first certified under NEDC take much longer than ones designed for the WLTP, Luca said.

“It was clear to us and our customers that there would be a lot more testing than under the NEDC,” he said, adding that some manufacturers were very early in booking testing time, while those that came later might face delays. TUEV Sud can perform 12,000 tests annually at three facilities; it is increasing capacity at its Stuttgart facility, but that will not be ready until 2019. “Next year, there will be even more variants” including plug-in hybrids, which take more time to test than internal combustion engines, Luca said.

Automakers say they were not given enough time to prepare. Because the EU’s final WLTP regulation was not published until late July of last year, “it was simply not possible for a manufacturer to start WLTP testing ahead of this time,” a spokeswoman for European automotive industry association ACEA said.

“This is not an insignificant effort, especially considering that it comes at the same time that they have to deal with the new RDE regulation. Consequently, the process of obtaining EU approval has slowed, resulting in planned production being stopped or delayed,” she added.

Missing models

The effects are being felt at car retailers. Many models have been taken off the market until they can be certified, meaning car buyers and dealers cannot order them. “Our users are confused,” said Philipp Sayler von Amende, CEO for the German arm of carwow.com, an online service that connects buyers and dealers. “They can find a car on our platform, but they can’t order it.” Carwow.com’s survey of dealers in Germany and the UK has found that at certain times, entire brands were not able to be ordered.

This year, BMW has taken models including the X1, X2, X5, X6 and 550i out of production at various times. The group was able to certify almost all its models by March, but CO2 results were higher for many variants. “Due to the complexity of the BMW Group portfolio, the process of adjusting our entire vehicle fleet to the new statutory requirements is carried out in a step-by-step manner,” a BMW spokesman said. “This leads to planned offer interruptions for certain models with lower sales volumes.” BMW said all its gasoline and hybrid models have now been fitted with particulate filters, and diesel engines have multi-stage emissions after treatment that includes selective catalytic reduction technology. Despite the challenges, BMW said it still expects to reach its sales targets.

Volkswagen AG has had to certify hundreds of drivetrain and option combinations at its VW, Audi, Skoda, Seat and Porsche brands. As a consequence, VW Group CEO Herbert Diess said in June that production of up to 250,000 cars could be delayed until after the summer holidays to avoid unwanted inventory.

“Within the Volkswagen brand alone, we need to test more than 200 model variants and have them type-approved within a very short space of time,” Diess said in a news release. “We must expect production interruptions in the third quarter.”

Justin Cox, director of global production forecasting at LMC Automotive, said VW and other automakers were adjusting their production schedule around the test deadline. “They don’t want to be building stock they can’t sell -- there’s a massive cost to holding onto inventory,” he said.

Cox added he expected that European production would be about 5 percent higher in the second quarter as non-WLTP certified cars were made to meet the derogation deadline, and also to plug any holes in the lineup for models that were taken out of the range for certification. That could be offset by a decline in the third quarter, while dealers still had “derogated” models available and any non-certified cars are taken off production lines. IHS’ Fulthorpe said he expected to see a similar pattern, but later in the year.

Renault Group CEO Carlos Ghosn warned in February that WLTP certification would have an effect on operations until spring 2019. “We don't know how quickly the type approvals will be given,” he said. “We don't know if customers will be willing to pay the new prices because we need to add technologies."

Carwow.com’s survey of British and German dealers this spring found that many Renault models were not available to order. A spokeswoman for Renault said that delivery time for certain models could be affected, adding that dealers would help customers find “the best solution for them.” As of mid-July, about 75 percent of Renault models had received WLTP certification, she added.

Some automakers, however, said that the new tests were not having a big effect. A Ford of Europe spokesman said that although the “regulatory challenge was significant due to the late development of the requirements,” customers were not affected. According to carwow.com’s dealer survey in Germany and the UK, nearly all Toyota and Volvo models remained open to order, and PSA Group said in July that all its models had undergone WLTP certification.

Mixed news

Sayler von Amende of carwow.com and Stephen Latham, the head of operations at UK dealer association NFDA, said dealers and consumers were struggling to understand the effect of the new tests. “I don't think consumers understand the full ramifications yet,” said Latham, whose group represents 4,000 franchisees in the UK. “Manufacturers haven't been coherent because they're all in a different situation.”

While dealers and car buyers might be inconvenienced now, they could benefit if -- as expected -- automakers offer generous incentives and lease deals to sell noncompliant cars before the Sept. 1 deadline. “There will be both consumer and dealer incentives,” Latham said. “There will have to be to sell all the old vehicles. I can see them being quite attractive products for consumers to buy.”

Carbon-based taxation

Another area of great uncertainty for private and especially fleet buyers is emissions-based taxation. Currently, about 20 EU countries use CO2 levels as a reference, and some cars could be pushed into a higher tax band based on WLTP or NEDC-correlated results. In an example given by VW, emissions for the Up GTI have risen to 126 gram per kilometer under the new test, compared with 110g/km under the NEDC. In France, where a pollution penalty starts at 120g/km, that would mean an additional registration fee of 140 euros.

So far, the UK has said that the correlated NEDC results will be used until 2020, but that raises a question about cars that produce higher adjusted emissions numbers. The rules have not yet been clarified in Germany, France and many other countries. An analysis by JATO Dynamics last year estimated that the higher CO2 figures could mean an additional 600 million euros in fees paid by consumers.

Repairing trust

Analysts said that the upheaval from the WLTP could last until spring 2019 or longer, but that in the long run the new emissions tests would benefit consumers and automakers by easing some of the mistrust following the Volkswagen diesel-cheating scandal.

“There will naturally be a period of months when dealers and buyers are confused especially as they compare different testing results based on two measurement methods,” Sayler von Amende said. “Eventually, it will clear up, as the new test results become standard.”

Fulthorpe said results from the WLTP would help set the baseline for the next decade of emissions testing. “I’m sure the industry wants to get to a point where it has a better relationship with consumers and legislators,” he said. “If the industry can get through these next few emissions cycles, that’s a very good place for everybody.”