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EU adopts 2035 ICE sales ban bill; what are the challenges for European car companies?

The European Parliament recently adopted a bill that will effectively ban the sale of small cars with internal combustion engines in 2035. Meanwhile, discussions are expected to continue on a special system to allow the registration of ICE vehicles that use only carbon-neutral fuels such as e-fuels in their operation, but the rules have largely been finalised to strengthen sales of basically zero-emission new vehicles only in 2035. (It remains possible, however, that the rules will be re-validated by 2026 and that future targets, including a 100% ZEV mandate in 2035, will be revised.)

The European automotive industry will accelerate its strategy to become carbon neutral with a focus on BEVs, but the challenge will be how to ensure sufficient revenues from the focus on BEV sales. With raw material costs soaring and facing challenges in battery cell procurement, it is not necessarily optimistic that manufacturers, especially those of mass-market brands, will be able to maintain their revenue security with a focus on BEVs.

The Carbon Neutral Strategy and DX Promotion of German Automotive Manufacturers and Suppliers provides a detailed summary of the German automotive industry’s carbon neutralisation and DX strategic direction and challenges, including VW.

Germany aims to become carbon neutral by 2045 and intends to promote the use of fossil fuel-free, nuclear-free and renewable energies in the long term. The automotive industry is aiming to become carbon neutral throughout the entire automotive value chain, including the supply chain, with a focus on BEVs that use renewable energy for manufacturing and charging. It is adhering to this policy in the face of various challenges, such as energy shortages, over-dependence on China and obstacles to semiconductor procurement.

In response to the EU’s vehicle CO2 regulations, German car companies have a strategy to rapidly increase the proportion of BEVs sold, while green hydrogen and e-fuels, which utilise surplus renewable energy to generate electricity, are also attracting increasing attention. While BEVs are the main focus of the product line-up of car manufacturers, a mechanism is being proposed to allow ICE-equipped vehicles that use E-fuel to be registered as new vehicles exempt from the CO2 regulation. The number of manufacturers wishing to utilise E-fuels as a complementary measure while focusing on BEVs may increase.

The move towards software-defined cars, where in-vehicle functions can be updated and extended by OTAs to add new functions and services, and the move to e-fuelling, which will increase productivity and optimise the use of energy for operations, is also being promoted. Companies are also working on the introduction of manufacturing DX solutions that can optimise and reduce the use of energy for operations in addition to improving productivity. Germany is leading the way in the promotion of manufacturing DX, which is an evolution of Industry 4.0 and can contribute to CO2 neutral production in addition to improving production efficiency and optimising equipment costs. On the other hand, they are trying to develop their own in-vehicle operating systems and deploy digital subscription services.