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Insight: Is the diesel decline terminal?
Neil King
At Autovista Group, we – the international editors - discuss the ongoing issue of diesel and its apparent demise on a regular basis. Legislative changes and the level of public discussion vary per market, but it is certainly impacting both new and used diesel demand and, in turn, residual values. Nevertheless, even if driving bans are introduced, they will not affect drivers outside of major cities and diesel is more fuel-efficient and therefore still offers fleets the most cost-effective solution. Given this, is the decline in diesel terminal?
The diesel share of the new car market is falling quickest in the markets where legislation has been introduced and is accompanied by negative media coverage. Italy was bucking this trend and even showed a slight increase in the first two months of 2018 compared to 2017. Following recent news that Rome is considering a diesel ban and a widening public discussion on the subject though, the diesel share of Italy's new car market fell to 54.3% in March, down one percentage point compared to the share attained in the first two months of the year. At 55.1%, the diesel share in Q1 was lower than in Q1 2017 - despite the growth in the first two months.
Although diesel residual values (RV) as a percentage of list price have not really fallen, they have certainly been underperforming the development of petrol RVs with the value retention gap narrowing. This gap has been least noticeable in Spain as diesel RVs have more closely tracked the development of their petrol counterparts. But there are increasingly clear signs of a convergence of diesel and petrol RVs in Spain too now, and diesel values are being adjusted accordingly every month.
The broad consensus view of Autovista Group is that the diesel share of the new car market will continue to fall in the short term. Our latest residual value outlook also forecasts that EU5 diesel values will underperform petrol RVs in 2018 and 2019. In this context, it is not entirely surprising that ALD Automotive is increasingly pushing leasing of petrol and hybrid cars. LeasePlan has even gone one stage further and 'has committed to achieving net zero emissions from its total fleet by 2030.' In an initiative called GreenPlan, the company will only finance petrol, hybrid and electric cars from 2025 onwards and will no longer offer finance on new diesel cars from 2020.
We envisage a 'stabilising effect' in the medium term, i.e. 2020-25. The volume of fleet diesels that will enter the used car market as three-year-old vehicles from 2020 onwards is lower than in recent years; diesel fleet sales grew by 9% and 10% respectively in Germany in 2014 and 2015 for example.
This high volume supply of young used diesel cars has coincided with the 'disrupted demand', and this has naturally compounded the pressure on diesel residual values. Although diesel values will underperform petrol in the EU5 to 2020, the lower prices go, the more attractive diesels arguably become again.
Diesel still accounts for 60% of fleet sales in Germany for example, down from 74% in 2015. Among private new car buyers, the share has fallen more dramatically from 33% in 2015 to just 18% in the first two months of 2018. Private consumers may increasingly reject diesel in Germany and across Europe, but the fuel type will remain the most financially viable option for medium and large fleets and will therefore still play a major role in the European new car market for years to come.
There is still a lot of uncertainty in the longer term, however. We are already seeing higher emissions figures reported under the new WLTP testing procedure and the increasing share of petrol cars is contributing to rising CO2 emissions in Europe. Carmakers have already been outspoken about the challenge of meeting the new 2021 EU CO2 targets and this is exacerbating the issue. Given this and the limited, albeit rapidly growing, uptake of hybrid and electric cars, new cleaner diesels look set to remain part of the solution for years to come. On that note, the German motoring organisation ADAC has tested three new diesel models which conform to the Euro6d-TEMP standard and found that they performed well in both test conditions and on the road. And the German environmental group DUH, which has been highly critical of diesel, is also campaigning against direct injection petrol engines without particulate filters. The political debate may yet even switch back to focus on the CO2 emissions of petrol cars and turn the tide of criticism of diesels in the process.
The exact pace and extent of the decline in demand and values of diesel cars does, of course, largely depend on legislation, which is of course notoriously difficult to predict. For example, if diesel driving bans are introduced in Germany (which is more likely following a recent court ruling) and beyond and taxes on diesel fuel are increased so that it is no longer cheaper than petrol (as already proposed in France and Germany for example) then this would accelerate the downward trend in the market share and residual values of diesels. Conversely, if legislation does swing back in favour of new cleaner diesels, the decline in diesel could quickly be arrested and even result in a recovery of both the diesel share and values.
In the longer term, bans on the sale of cars with internal combustion engines (ICE) are proposed from 2030 in Austria and the Netherlands and 2040 in the UK and France for example. It remains to be seen whether these bans will become a reality and be in effect beyond cities, but even if not, the discussions alone should certainly bolster demand for hybrid and electric vehicles. Considering the challenges of electric vehicles gaining significant market share though, continuous improvement and refinement of petrol and diesel engines as well as growing penetration of hybrids is to be assumed. In an Autovista Group survey, more than 50% of respondents expressed the view that hybrids would become the dominant fuel type over the next decade. Diesel will inevitably continue to play a role in the longer term too although it may be in the form of hybrids such as the new plug-in diesel hybrid models announced by Mercedes.
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