Politikbrief 02/2013

News service for decision makers in politics and the economy

The European CO2 regulation for cars – what next? 2 Loud protests from certain NGOs and a knee-jerk reaction from some areas of the media might give the impression that …

Conflict minerals from the Democratic Republic of Congo: 3 Why transparency alone will not bring change The European Commission is currently planning to regulate the trade in raw materials with the Democratic Republic of Congo …

simTD lets cars speak to one another safely 4 Talking cars and, indeed, listening cars are no longer a thing of the future. A large-scale field test in the Rhine-Main region of Germany …

Success continues for German suppliers to the automotive 5 industry, but the conditions must be right Supplier organizations play a crucial role in the globally successful German automotive industry. They are highly innovative …

Transport reduces resource use – a response 6 to the popular “yoghurt cup” example One of the main challenges that we all face is saving resources. Politicians and businesses are rightly making every effort …

Automotive finance companies: The domino effect of banking regulation? 7 In order to restore confidence in economic and financial systems following the disruption caused by the economic crisis, measures are being taken …

Imprint 8

Contents

Politikbrief 02/2013

N e w s s e r v i c e f o r d ec i s i o N m a k e r s i N p o l i t i c s a N d t h e ec o N o m y

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Loud protests from certain NGOs and a knee-jerk reaction from some areas of the media might give the impression that the ambitious efforts by the automotive industry to reduce its impact on climate change were not making good progress. However, the facts tell a different story. Europe has set itself the toughest CO2 reduction target of any region in the world. The USA‘s limit for 2020 is 121 grams of CO2 per kilometer, while in China the figure is 117 grams and in Japan 105 grams. In the EU, newly registered cars must have an average CO2 emission of 95 grams per kilo-meter by 2020, which corresponds to fuel consumption of 3.6 liters of diesel and 4.1 liters of gasoline per 100 kilometers.

The existing CO2 regulation requires a limit of 130 grams for new cars in Europe by 2015. The new target therefore represents a reduction of a further 35 grams in only five years (from 2015 to 2020). This amounts to an average saving of seven grams per year. The target can only be achieved if manufacturers make huge investments in new technologies and sell large volumes of models with alternative drive systems, because further impro-vements to traditional combustion engines will only bring an annual reduction of around two to three percent.

The large German car manufacturers have reduced CO2 emissions by 22 percent since 2006

Significant progress in reducing fuel consumption has been made over the last few years. If we look only at newly regis-tered vehicles in Germany, the large German manufacturers have reduced CO2 emissions by 22 percent since 2006. Over the same period, the CO2 emissions of imported cars fell by a slightly smaller amount.

However, these improvements cannot continue in a linear fashion, because the potential for introducing cost-effective measures is gradually being exhausted. Each additional gram of CO2 reduction will require increased use of technology, which in turn will lead to higher costs. Furthermore, companies are being forced to make investments of this kind at a time when the Western European car market is going through one of the most difficult periods in its history. With predicted sales of 11.3 million units this year, it is around 2.5 million new cars below its 2009 level. The market still needs a long time to recover.

In overall terms, the regulation represents a significant chal-lenge for the automotive industry and especially for premium car manufacturers. The European requirements challenge them particularly, because while the regulation allows larger cars to consume more fuel, it at the same time requires increased reductions in emissions. In Germany alone, more than half the jobs in car plants are dependent on the premium sector. While the production of smaller cars in Germany is subject to particu-larly tough conditions, the manufacture of premium vehicles is bucking the trend of outsourcing production to other countries.

The European CO2 regulation for cars – what next?

Source: Cologne Institute for Economic Research, VDA

The European CO2 target is the toughest legislation internationallyThe USA is aiming for 28 percent higher CO2 emissions per vehicle

in g/km

0

60

120

EuropeJapanChinaUSA

5.2 l 5.0 l 4.5 l 3.8 l

121 117105

95

Effective limits should challenge manufacturers, but not ask too much of them. The purpose of the regulation is surely not to require the production of standardized European cars. People in Europe and elsewhere have differing transport requirements and want to be able to choose from a variety of models. The flexibility in the 2020 target that is currently under discussion will probably only amount to the option of making more flexible use of the planned incentives for particularly low-emission cars, which are poor when compared with the incentives on offer in other areas of the world, and granting car manufacturers a minimal relaxation of the regulations relating only to 2020. This very moderate concession is significant in industrial policy terms but is trivial with regard to its effect on climate change, because the European CO2 regulation would still remain by far the most stringent legislation relating to vehicle emissions anywhere in the world. A planned economy based on climate policy is not to be trusted New limits for the period after 2020 are already under discus-sion. This type of planned economy based on climate policy cannot be relied on. This is because it remains entirely unclear what types of technological quantum leaps will be made in the meantime, how quickly this will happen and how the market for alternative drive systems and the related costs will change. From today‘s perspective, it is not even possible to tell whether the current system of limits will still be useful.

We have not yet identified the ideal approach to regulation after 2020. However, it is clear that before we push ahead using old systems and setting new emission limits, their technical feasibility must be evaluated and impact assessments must be carried out.

Politikbrief 02/2013

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The European Commission is currently planning to regulate the trade in raw materials with the Democratic Republic of Congo (DRC). New requirements for transparency concerning the origin of raw materials are aimed at preventing the proceeds from the sale of these materials from being used to finance the conflict in the country. It is not the case that all the revenues from raw materials in the DRC are funding the fighting, but only those from the mines held by the rebels. The idea behind the new legislation is that European companies will only use conflict-free minerals in the future, with the result that the money from the sale of minerals will not reach the militant rebel groups. The intention is that the lack of funding will force the militias to reconsider their position and to stop illegal mining and the ruth-less exploitation of the miners. Essentially, it is all about drying up the supply of minerals from the mines in rebel hands.

Armed conflict has been a feature of life in the DRC since the 1990s. A variety of rebel groups, particularly in the east of the country, has been fighting one another, financed in part by the trade in raw materials in the region.

Against this background, US president Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (referred to in brief as the Dodd-Frank Act) in July 2010. Section 1052 of the Act requires companies listed on the US stock exchange to disclose whether they use tantalum, tungsten, tin or gold from rebel mines in the DRC in their products. The European Commission‘s current plans for regulations are based on this legislation. The situation of the people in the DRC must be improved German industry fully supports the goal of improving the situation of the people who live in the DRC. The Federation of German Industry (Bundesverband der Deutschen Industrie, BDI), in cooperation with many of its member associations, commis-sioned the Oeko-Institut (the Institute for Applied Ecology) to carry out a scientific study of the effects of the Dodd-Frank Act. The results of the study are clear. The multi-stage industrial value chain (see the figure) makes it impossible to prove the precise origin of individual raw materials. This is all the more true when it is a question of distinguishing between different mines in the DRC on the declaration of origin.

The probable solution to this problem for many companies will be to obtain their materials outside the DRC. In this case, conflict-free would mean DRC-free. However, this does not help the population of the country, because the people in the eastern areas in particular are heavily dependent on small-scale mining. If the customers from industrialized countries stay away for fear of reputational damage, the workers will

Conflict minerals from the Democratic Republic of Congo: Why transparency alone will not bring change

ultimately lose their livelihoods. As a result, we will not only be failing to improve the situation in the DRC, but actually doing the exact opposite. Even the experts in the DRC itself agree that the Dodd-Frank Act will have a negative impact.

We in Europe need to learn from these experiences. However desirable a rapid solution may be, a European copy of the Dodd-Frank Act will not improve the complex situation in the DRC. For this reason, the BDI and BusinessEurope are supporting more targeted voluntary measures.

The political decision-makers, the industrial players and civil society must work together to develop ideas as part of a Congo Stewardship Initiative. What is needed is a coherent mix of measures. Most importantly, a stable system of mining rights and concessions must be established and put into practice on a reliable basis. At the same time, targeted measures can be taken to provide support for responsibly managed mining projects. It is clear that the eastern regions of the DRC cannot be stabilized without a decisive joint political initiative. The automotive industry will fully support such an initiative, because companies in the industry want to contribute to finding an effective solution.

The conflict potential occurs during small-scale mining (stage 1). However, the automotive manufacturer (stage 9) is responsible for ensuring that the material is conflict-free. Providing precise proof of origin would involve overcoming major bureaucratic obstacles and is simply not possible.

The mineral tantalum in the automotive value chain

Conflictpotential

Stage 6Industrial

manufacturer

Stage 7Electronics

manufacturer

Stage 8Supplier

Stage 9OEM

Stage 5Dealer

Stage 1Small-scale

mining

Stage 3Local

exporter

Stage 4Smelter

Stage 2ProcessorOre Powder

VehicleVehicle SheetsWires

CapacitorControl

unit

Politikbrief 02/2013

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simTD lets cars speak to one another safely

Talking cars and, indeed, listening cars are no longer a thing of the future. A large-scale field test in the Rhine-Main region of Germany has shown that cars can communicate with one another, with radio stations and with traffic management centers. As a result, the traffic flows more efficiently, smoothly and safely. The “Safe and Intelligent Mobility Test Field Germany” or simTD has been a success and has demonstrated that car-to-x technology functions in practice.

This will allow useful new functions to be provided in the cars of the future. These include giving accurate warnings of hazards in situations like the one described here. The sensors of a car being driven around a tight bend identify another car that has broken down on the road ahead. This information is passed on to other vehicles. In the cars following the first vehicle, a warning appears on the display: “Warning: A car has broken down 500 meters ahead. Slow down!” The simTD project has shown that these warnings work by causing drivers to pass hazards at lower speeds. In the future, traffic lights will also have the ability to communicate. They can inform approaching vehicles about the phase of traffic lights. This allows the optimum speed to be calculated and the following message to be displayed to the driver: “If you continue driving at 40 km/h, you will catch a green wave.” Even more can be done in areas where traffic jams are a frequent problem. The traffic lights will not only provide cars with information. They can also react to the traffic situation, because the cars have informed them about their speed and their route. This enables the system to recognize that a particularly large number of cars is traveling in a north-south direction and to

lengthen the green phase of the lights in this direction. The result is traffic which flows more freely and a reduction in fuel consumption.

After several years of preparation, 120 cars supplied by all the major German manufacturers and fitted with car-to-x technology spent the six-month-long field test phase traveling the roads in the greater Frankfurt area under real-life conditions. More than 100 WLAN radio stations were set up by the sides of the roads. The result of this research, development and testing program is a joint, non-proprietary standard which allows all cars to communicate with one another.

The new technology is on its way and will be introduced in future generations of vehicles. German manufacturers have said that they will gradually be equipping their new cars with the necessary technology from 2015 onwards. Some functions will be available before that. The first project involves fitting all the trailers used to display signs warning of road work between Amsterdam and Vienna with transmitters. These will inform cars about mobile road work. Drivers will see a warning which reads: “In 500 meters there is temporary road work. Drive carefully and watch out for the construction workers!” The new technology also offers important opportunities for the public sector. In areas where traffic jams are worsening, bottlenecks need to be widened. However, intelligent methods of preventing jams will also play a major role. In order to allow car-to-x technology to have its full effect, public sector organizations must begin putting in place the necessary infrastructure and transmitter stations as soon as possible. This will enable Germany to play a pioneering role in car-to-x technology.

Example of results from simTD: The improved safety impact of the Electronic Brake Light was demonstrated in the practical test

Sensors in each vehicle record its immediate surroundings. However, conventional sensors cannot fully identify potential hazards in many situations because of physical obstacles. For example, when a car 100 meters away has to brake hard, other vehicles or objects may conceal this fact from the drivers in the following cars. This is where the Electronic Brake Light comes in. A car transmits the information that it is braking (hard) via the car-to-car communication system to the vehicles behind it. This direct message gives all the other drivers more time to react and allows them to slow down earlier.

Source: simTD final report

The largest field test of car-to-x technology produces successful results

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Success continues for German suppliers to the automotive industry, but the conditions must be right

Politikbrief 02/2013

Supplier organizations play a crucial role in the globally success-ful German automotive industry. They are highly innovative, provide 75 percent of the added value and in the next few years will be consolidating their position further on both a national and international level. In 2012, a record year, German automo-tive suppliers generated over 68.4 billion euros in sales, a third of which came from sales outside Germany. In 2013, turnover is expected at least to reach the level of the previous year. The number of employees in this sector (293,000 in September) is also likely to remain unchanged during this year.

Alongside the success of these companies in Germany, which includes an increase of more than 50 percent in their turnover since the start of the new millennium, comes an increasing involvement in other countries. German automotive suppliers already have more than 1600 sites in 65 countries. In recent years, China has become the most popular investment location and medium-sized companies are rapidly catching up with the larger organizations.

In overall terms, the balance of the market has shifted in favor of the BRICS countries and currently also the USA. Where the vehicle manufacturers are investing, the suppliers are following suit in order to meet their customers‘ requirements and to do business on these markets themselves. In the new locations, there are also opportunities to sell to new customers. Experts are predicting that suppliers‘ added value will continue to increase worldwide in the next few years. Oliver Wyman has predicted growth of 50 percent to around 1.25 trillion euros

by 2025. It therefore makes sense that the current preferred areas of investment are in the potential growth markets. A survey carried out by the German Association of the Automo-tive Industry (VDA) in the spring of 2013 among its member companies in the supplier industry showed that this is the case. The results also indicate that locations in Germany will benefit from these investments. German automotive sites will benefit from investments in growth markets

In order to maintain their competitiveness, suppliers to the automotive industry have made huge efforts, even during the European financial crisis, to guarantee growth, innovation, modernization and cost reductions. This is partly because they were and still are under significant pressure from their custo-mers. The industry must make greater attempts to sustain the successful model of partnership and cooperation.

Both manufacturers and suppliers want to continue their success story, but they rely on conditions remaining consistent. They must not put their competitiveness at risk. These conditions include in particular the flexibility of the labor markets, changes in salary costs, the level and stability of taxation and limits on energy costs. The last item is an increasing burden for many companies. We must not find ourselves in the situation where our companies can only be successful on international markets. It is one of the main tasks of the new federal government to ensure the long-term viability of production sites in Germany.

German suppliers: The main areas of investment over the next five years(Ranked by the total of high and medium priority areas)

China

100

90

80

70

60

50

40

30

20

10

0

in %NAFTA Eastern Europe India Brazil Germany Asia:

Other marketsRussia

Source: Polk, VDA

99.6 99.2

84.0

73.970.8

66.7 65.058.3

Politikbrief 02/2013

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One of the main challenges that we all face is saving resources. Politicians and businesses are rightly making every effort in this area, as are individual citizens in their own homes. However, good intentions do not always produce good results, for example if you buy locally produced goods with the aim of reducing the amount of transport used. At first glance it seems that less trans-port means reduced resource use. But is that really the case?

In the early 1990s, the Wuppertal Institute for Climate, Envi-ronment and Energy carried out a study into the amounts of resources consumed by transport, which looked at the amount of transport needed to produce a 150-gram cup of strawberry yoghurt. It emerged that during the entire production process (including manufacturing the packaging and taking into account all the suppliers), a total of 29 journeys was needed across Germany, some of them involving imports from neighboring countries. Since then this study has often been quoted in discus-sions on the subject as the perfect example of the resources consumed by transport.

The simplistic logic involved here brings a smile to many econo-mists‘ faces, because transport is in fact one of the most impor-tant means of reducing resource use. Resources are a means of production and include the working hours needed to produce goods or services and importantly also services such as refores-tation, wildlife conservation and land restoration.

The following example demonstrates that transport saves resour-ces. The yoghurt study carried out by the institute in Wuppertal states that in the case in question the yoghurt cup was filled up in a dairy in Stuttgart. However, the cup was manufactured in the Bavarian town of Neuburg and transported the 260 kilometers to Stuttgart. Is that necessarily a waste of resources? No, because the production and transport process could use more resources even if the cup was manufactured in a factory close to the dairy in Stuttgart. For example, it could be the case that a manufacturing plant nearer to Stuttgart can only produce a cup of the same quality using a larger amount of resources, e.g. because of older machi-nery or less trained employees or, vice versa, because the cup manufacturer in Neuburg has developed an especially efficient production process which is patented. The yoghurt producer in Stuttgart will only use a cup manufacturer further away, if the

Transport reduces resource use – a response to the popular “yoghurt cup” example

resulting transport cost was more than compensated for by the other resource savings. The producer “buys” a (higher) saving in resources in the production process by means of a (lower) increase in resources used in the transport process.

All transport of goods always results in a saving of econo-mic resources. In our example above, one unit of resources is saved because of the transport of the yoghurt. This could be, for example, a specific number of working hours which could instead be used to produce schoolbooks, provide social services or carry out conservation measures.

The objection made by the green lobby at this point is that the manufacturer is only estimating its own transport costs (driver‘s working hours, vehicle wear, damage to the roads, fuel consump-tion etc.) and is not taking into consideration external envi-ronmental costs (pollution, noise and CO2 emissions). In other words, it is claimed that the actual use of resources by society is inadequately represented by the current transport costs.

This objection in itself is inadequate, because in practice manufacturers do not only pay for their drivers‘ working hours, vehicle wear and damage to the roads (truck tolls) and the fuel used. The revenues from road traffic, which include taxes on oil, vehicle taxes and value-added taxes, produce a surplus of around 35 billion euros each year that is not used for road construction and repairs but rather for purposes unrelated to transport. This excess of 35 billion euros is roughly equiva-lent to the environmental costs of road transport, which were estimated by the Cologne Institute for Economic Research in a study in 2009 to be around 38 billion euros. This means that external environmental costs are already included in the manufacturers‘ transport cost calculations. Therefore, the prin-ciple that transport ultimately always leads to resource savings is correct.

The same things applies if we turn away from resource use and look only at the direct environmental effects. For example, a study carried out by the Department of Process Engineering in Food and Servicing Business at the University of Gießen showed that it can be more climate-friendly to buy Argen-tinian rather than local apples. Locally grown fruit bought outside the German apple season is stored for months in huge refrigerated warehouses which consume a large amount of energy. In contrast, apples from Argentina come almost straight from the tree and only have to be cooled during their journey by ship. In this case too we are not doing the climate any favors by purchasing local produce which has not been transported a long distance. As in so many cases, it is worth looking at the facts from a different perspective in order to avoid coming to hasty political conclusions.

RU production

RU transport

RU total

Cup from Neuburg

3 RS

5 RS

8 RS

Cup from a factory in the Stuttgart area

7 RS

2 RS

9 RS

(RU: resource use, RS: resource saving)

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In order to restore confidence in economic and financial systems following the disruption caused by the economic crisis, measures are being taken at an international and a European level to safeguard and stabilize the banking system. These measures are necessary. However, if the regulations are imposed without correctly assessing the situation, the security that is required could turn into exactly the opposite and lead to negative consequences for other areas of the economy. This is currently the case in the automotive industry, where the auto-motive finance companies are affected. The structure and purpose of automotive finance companies differ from those of conventional banks and investment banks, because they have a direct association with a business. Their financial products enable private and commercial customers to buy vehicles within their budgets. The companies also function as the central driving force behind vehicle sales. In addition, they help to refinance future investments by the businesses

Automotive finance companies: The domino effect of banking regulation?

they are associated with by means of their services and earnings. A significant proportion of these investments funds research and development into environmentally friendly and climate-friendly technologies. This tried-and-tested system is now under threat. These changes are being brought about by three new measures at an international and a European level (see the box headed “Details of the three regulatory measu-res”), which are intended to minimize banks‘ and insurance companies‘ investment risks and risks of defaulting and to provide proof of liquidity and capital reserves. The aim is to prevent a repeat of the American subprime crisis.

Essentially, these measures are about reducing the potential for damage caused by asset-backed securities or ABSs (see the box) on the capital market. In order to achieve this, the rules on trading in ABSs will be tightened up across the board. So far, so good. However, the proposed measures will damage the automotive industry, because the automotive finance companies rely on a functioning securities market. Around 75 percent of all new vehicle registrations in Germany are based on leasing and financing models. The manufacturers‘ own finance and leasing companies are responsible for more than two-thirds of those manufacturers‘ total sales. ABSs are of central importance in this respect.

The subprime crisis was triggered by private mortgages which were not adequately secured but were nevertheless securitized by individual US banks. Therefore, it was not the financial instru- ments themselves which led to the crisis, but the inadequate security for the loans. The regulations that are now being proposed do not address the dubious security which is the root of the problem, but instead make a sweeping attack on ABSs.

The automotive finance business is facing major challenges

Details of the three regulatory measures

Revision of the Basel framework for securitiesThe Basel Committee on Banking Supervision is currently planning a dramatic increase in bank capital requirements for securities positions. A threefold to tenfold increase in equity capital is possible where banks have automotive ABSs on their books. This would make the placement of automotive ABSs with banks almost impossible.

The liquidity coverage ratio as defined by the EU Capital Requirements Regulation (CRR)The liquidity coverage ratio or LCR is intended to ensure that banks remain liquid in the short term, even in the case of a financial shortfall. The European Banking Authority (EBA) is proposing that ABSs be included only on a restricted basis in the future calculation of the LCR. This measure would lead to the entire securities market being excluded from the LCR calculation. In order to maintain their LCRs, banks would therefore no longer be able to invest in automotive ABSs and would have to withdraw from the securities market.

EU capital requirements for insurance companies under the terms of Solvency IIIn order to regulate insurance companies in their role as investors on capital markets, the European Insurance and Occupational Pensions Authority (EIOPA) has proposed introducing risk factors for different classes of bonds. These must be secured by the insurance companies with differing amounts of equity capital. The proposed criteria for calculating the risk factors will lead to a high level of distortion of the possible investment risk, in particular in the case of automotive ABSs, and will put them at a disadvantage. The result will be a prohibitive capital requirement in the case of investments in automotive ABSs. This, in turn, will lead to insurance companies no longer making this type of investment.

The creditworthiness of bonds: Automotive ABSs

In order to make a loan to a customer, automotive finance companies must have the necessary money directly at their disposal. One means of obtaining this money is through asset-backed securities. The principle is that when a loan is secured, the corresponding claim (for example the leasing contract) is sold by the bank as a marketable security. These bonds are asset-backed securities or ABSs which investors purchase in order to obtain the value of loan payments made by car buyers.

(continued on page 8)

Politikbrief 02/2013

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If these arguments were to be seen as setting a precedent, then the sovereign debt crisis in Greece should logically lead to government bonds in total being called into question as a financial instrument.

German automotive ABSs had default rates of 0.0 percent even during the financial crisis ABSs in the automotive industry are a low-risk instrument. Even during the financial crisis, German automotive ABSs had default rates of 0.0 percent. They have a credit quality or creditworthiness equivalent to that of bonds. In order to maintain these performance levels, banking regulators must treat automotive ABSs differently than other, more risky ABSs, because of their high quality. Otherwise, in the light of the expected slump in the automotive ABS market throughout Europe, the automotive finance companies, followed in a domino effect by the manufacturers, suppliers and consu-mers, the real economy and the end users, will be threatened by an increase in the prices of all the products in this chain, from refinancing through to the cars themselves. The leasing and finance terms for private and commercial customers will become tougher, which will put a greater burden both on

(continued from page 7)

drivers and on small and medium-sized businesses. From the perspective of both banking regulation and the real economy, this move will have the opposite effect to the stabilization which is desired. Differentiation is therefore what is needed:

• ABSsheldbyautomotivefinancecompaniesshouldbe assessed by the political bodies responsible for regulating the banking industry as liquid and secure assets of a bank.

• ThenewBaselframeworkforsecuritiesmustnotrequire an increase in bank equity capital for ABSs held by auto- motive finance companies, because of their low risk.

• Whencalculatingbanks‘liquiditycoverageratioonthe basis of the EU Capital Requirements Regulation, ABSs should be categorized as liquid securities because of their high quality.

• AutomotiveABSsshouldalsoberatedassecurecapital assets when calculating the capital requirements of insurance companies on the basis of the EU Solvency II Directive.

ImprintPublisher German Association of the Automotive Industry VDA (Verband der Automobilindustrie) Behrenstr. 35 D-10117 Berlin Germany www.vda.de

Responsible for contents Dr. kay Lindemann Managing Director Phone + 49 30 897842 - 107 Fax + 49 30 897842 - 603 Email lindemann@vda.de

Editor Sabine Steinhoff Team Communication Phone + 49 30 897842 - 133 Fax + 49 30 897842 - 603 Email steinhoff@vda.de

Contributors to this Political Report Marius Baader, Sandra Courant, Alexander Fritz, Dr. Wiebke Gebhardt, Dr. Martin koers, Dr. Ricarda Leffler, Peter Mair, Christoph Muhle, Dr. Ralf Scheibach, Dr. Volker Schott, Helmut Weirich Status December 2013