By Dan Neil
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 23, 2017).
Two weeks ago (Sept. 11), the night before the IAA Frankfurt
International Motor Show opened to the press, I strolled through
the doors of Daimler Mercedes-Benz' vast, lighter-than-air pavilion
thinking I knew the story. I even had a headline: Daimler AG's
Stuck Throttle.
The oldest of the German automaking giants, Daimler's recent
financials have rocked. Group revenue was up 3% (153.3 billion
euro) in 2016, with record profits (8.8 billion). Mercedes-Benz
Cars in particular has come roaring back to retake the title of
world's number-one premium luxury brand. Sales were up 9% in Q2
2017 alone. Product design is killing it.
Even the Formula One team is winning. Lounging on stage, an
Amazonian creature in a windswept carbon-fiber negligee: the
Mercedes-AMG Project ONE, a street-legal hypercar built around the
+1,000-hp hybrid powertrain of a Formula One car. Each of 275
copies costs $2.7 million euros. The engine revs to over 11 grand.
That should be lively.
But Daimler's solemn commitment to eternally high returns, what
it calls a "sustainable" 10% net profit to shareholders, means it
can't let off the throttle, ever. And it's heading for a wall. A
Great Wall. In China.
See? I even had catchy phrases at the ready.
Two days before Daimler's pep rally, on Sept. 9, industry
ministers in China confirmed that, like France, the U.K., Norway
and the Netherlands, the world's largest vehicle market (24.4
million in 2016) would phase out fossil-fuel vehicle sales in favor
of widespread, state-sponsored vehicle electrification.
Because of climate change? Sort of, sure. But with its cities
shrouded with deadly tailpipe smog, China's air-quality concerns
are more regional than global. The nation of 1.37 billion souls is
also trying to kick the imported-oil habit. China has already
outlined tough electrification mandates for automakers, with costly
penalties behind them, that have left the German automakers crying
for mercy. With German Chancellor Angela Merkel's help, they got
the start date pushed back to 2019.
Though not unexpected, China's announcement brings two things to
the EV battery industry it sorely needs: certainty of demand
(albeit compulsory) and scale. Global battery production is
expected to double in the next five years. As down-payment on its
plan to lead the world in energy storage devices, China will add
120 gigawatt-hours of annual battery production capacity by 2021.
That's three times the output of Tesla's Gigafactory. VW Group
board member for research and development Ulrich Eichhorn told
Automotive News the company will need more than 200 gigawatt-hours
worth of batteries by 2025 to meet its goals.
Now sooner than later, China's mandates will push the market
price of batteries below the $100/kWh threshold at which --
thereabouts, all things equal -- an EV design attains cost-parity
with an internal-combustion vehicle. After that, Katy bar the
door.
The other skunk at Daimler's picnic was Dieselgate. Two years
after clean-air investigators discovered emissions-cheating
software in VW Group products, affecting 11 million vehicles
world-wide, the scandal and public ire has become general. In
remarks from the stage, Daimler AG chairman Dr. Dieter Zetsche
pushed back on growing sentiment in Europe to restrict diesel
vehicles if not ban them altogether. "It's a fact that it's
worthwhile to improve modern diesel engines rather than to ban
them," Mr. Zetsche said. "That is why Daimler has invested 3
billion euros in the further development of our diesel
engines."
With respect, that is a bit post-hoc: It's the 3 billion euros
already spent that makes it worthwhile, not the other way around.
Even the Project ONE raised an eyebrow.
In any event, Mr. Zetsche will have to take it up with the
people and parliaments of Europe. In two years, diesel's market
share has fallen by 8%. In the home court of Germany, sales fell
14% in August from 2016. Madrid, Paris, and Athens have announced
diesel bans to combat urban concentrations of NOx and particulates,
coming fully into force by 2025. Even Daimler's hometown of
Stuttgart wants to brush the city's famous soot from its
shoulders.
It's worse that it looks. In Western Europe the carmakers depend
on the profits from large luxury vehicles, many with diesel
engines, which produce less carbon per kilometer than gasoline
equivalents. Without diesel's carbon offset, automakers have no
hope of meeting the European Union's fleet-average standards (95
grams per kilometer by 2021) or avoiding hefty pollution fines,
Brussels' bill for noncompliance.
The theme of Mercedes-Benz' media gala was #settingthemood; but
everywhere I looked I saw #sunkcostfallacy, the human tendency to
double-down on bad bets, for fear of losing what economists call
sunk costs. But sunk costs are not recoverable in any case, thus
the fallacy.
It's hard knowing when to walk away. But walk away. Diesel is
politically doomed in Europe. China's electrification mandates
represent a whole new industrial super-gravity. Given these events,
and rising public sanction, Mr. Zetsche, how long can the German
car industry afford to hang on to diesel? Long enough to recover
sunk costs? Oh dear.
Anyway, even that wasn't the big story, the real story. Did you
see those heels F1 driver Lewis Hamilton was wearing? G'wan,
mate.
Corrections & Amplifications An incorrect version of this
piece was initially published online. Madrid, Paris, and Athens
have announced diesel bans to combat urban concentrations of NOx
and particulates coming fully into force by 2025. An earlier
version stated the year was 2015. Daim is the oldest of the German
automaking giants; an earlier version said it was the oldest and
biggest. Ulrich Eichhorn told Automotive News VW Group will need
more than 200 gigawatt-hours worth of batteries by 2025 to meet its
goals; an earlier version said it will need 200 gigawatt-hours.
Clean-air investigators discovered emissions-cheating software in
VW Group products, affecting 11 million vehicles world-wide; an
earlier version said "more than" 11 million. Also, the Audi Aicon
concept lacks a steering wheel, foot pedals or other basic cabin
landmarks. A previous version of the slideshow included an image of
the Audi Elaine concept, misidentified as the Audi Aicon. The image
has been removed. (September 22).
(END) Dow Jones Newswires
September 23, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.