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Statutory Vehicle Inspection: Chain reaction

January 13, 2020

Apart from the fireworks, the Champagne and the unavoidable Instagram selfies with “2020” balloons, the turn of the decade seemed to be a relatively unspectacular event. For the European Automotive industry though, Dec 31st 2019 marked the end of an era of glove-on treatment.

From 2020 onwards, the long-looming drastic tightening of the EU’s “fleet CO2 emission targets” became a reality. For those unfamiliar with the topic: In order to fight global warming by reducing CO2 emissions, the EU already in 1995 defined that the average CO2 emissions per kilometer for each car sold must not exceed a certain, gradually decreasing (i.e. more ambitious) target. Both general and company-specific goals were set – the latter to account for the fact that it is much easier for an OEM such as Fiat, who predominantly sells small fuel-efficient cars, to reduce emissions per vehicle than for Mercedes-Benz.

The formula is simple: For each OEM, sum up the generic CO2 emissions per km for each car sold in the EU (as per homologation) in one year and divide by the number of cars sold by this particular OEM, giving an average annual CO2 emission per km per car – the OEM-specific “fleet CO2 emission value”.

For each gram of CO2 above the target, a penalty has to be paid – for each car sold. This penalty increases over the years and is set at EUR 95 per gram excess emissions for 2020. Example: 1 million cars sold in 2020, 1 gram of CO2 emissions on average above the target – EUR 95 million penalty for the respective OEM.

The clear goal is to incentivize OEMs to work towards improving fuel efficiency, propagating electric vehicles and in general selling smaller cars. A cleverly designed policy.

So far, so good – but where is the problem? Well, until Dec 31st 2019 23:59, the EU CO2 fleet target was set at a rather comfortable 130 grams of CO2 emissions per km per car. From Jan 1st 2020 00:00 onwards, the target is 95 grams. A quite significant, and sudden, cut by more than 25%.

It would be wrong to say the industry wasn’t able to prepare, as this was decided and set into motion more than 10 years ago. But still, it didn’t manage – maybe because selling vast numbers of these gasoline-powered SUVs was too much of a temptingly lucrative business, and because car buyers simply love their “Chelsea tractors”.

Now, the Automotive industry is in trouble and faces potentially huge penalties, depending on the 2020 sales mix. A simulation performed by the reputable CAR-Center Automotive Research at the University Duisburg-Essen in 2018, confirmed to be still realistic, concluded that, based on the expected sales mix without a considerable number of battery-electric vehicles and hybrids,

  • The BMW Group could face a penalty of EUR 1bn
  • Daimler of EUR 1.25bn
  • The Volkswagen Group of EUR 4bn and
  • even Fiat and PSA of EUR 600-700m.

A painful extra-burden to carry in times of massive required investment into e-mobility.

Interestingly, Automotive OEMs seem to have found a solution, or rather scapegoat, for the problem. According to a recent narrative, it is not their fault to offer the wrong models – it is the fault of car dealers to sell the wrong cars, leading to an unfortunate sales mix. Consequently, dealerships would have to carry (most) of the penalties.

That would bring most car dealers to brink of bankruptcy, and most probably push them over the edge – if they do not come up with other sources of revenue for paying the bill. And this is where the TIC industry comes into play.

The 2010s have seen at least one legislative initiative in the EU parliament towards the so-called “Meister-HU” / “Repairshop Vehicle Inspection”, i.e. further liberalization of Statutory Vehicle Inpection. There are pro’s for and con’s against that, which have been debated at length. In any case, until now, the TIC industry was able to defend 3rd party Statutory Vehicle Inspection, one of its most profitable segments.

But this time, it could be different, due to the potential sheer economic horror in the Automotive industry. To get a feeling for the numbers: The estimated 40,000 Western European car dealerships employ 600,000+ people. Let a third of these go out of business, and 200,000 jobs are lost, too.

We calculate that the five TIC players with the heaviest Automotive SVI exposure (Applus+, DEKRA and the TÜVs) achieve revenues of more than EUR 2bn in the field, extracting profits between EUR 400 and 500m. Factoring in other providers’ revenues and profit, the Western European SVI profit pool is probably worth EUR 500-700m.

Tapping this honeypot would not solve, but alleviate the problem and help transforming an uncontrolled car dealership bloodbath into a more-or-less controlled scale-down. Therefore, with mounting economic pressure, we expect the next push towards SVI liberalization very soon – probably in the 2nd half of 2020, and with much higher chances of success.

In our opinion, yet again, the TIC industry must come to terms with new and deteriorating circumstances: Neither is it immune to unfortunate developments in underlying verticals – nor does its alluring profitability go unnoticed. And potentially, in times of dire straits, its clients may not perceive TIC providers as partners, but their business as prey.

 

https://archiv.wirtschaftsdienst.eu/jahr/2018/2/elektroautos-eu-regulierung-loest-ungewohnten-preismechanismus-aus/

https://www.spiegel.de/auto/aktuell/autojahr-2020-das-schicksalsjahr-fuer-die-auto-industrie-a-1301640.html

Opus buyout offer: Blind side hit

December 10, 2019

Neither are we too familiar with the potential business case nor do we want to speculate about the motives – and it has happened before that a CEO of a listed company, backed by a financing partner, has placed a buyout bid for his employer.

Still, both the timing and the circumstances of the “Ograi” offer for Opus Group AB feel a bit strange – but that’s not our key point.

More interesting are the thoughts and arguments in favor of the deal that Magnus Greko, the influential founder of Opus, shares on the “ograioffer.com”-website:

“(…) Considering the transformation that is taking place in the automotive industry, I clearly see the need for a long-term partner providing the financial resources needed to make the required investments. In particular, the increased penetration of battery electric vehicles, which do not require emissions testing in our core U.S. market and the current U.S. administration’s focus on de-regulation will require Opus to continue to invest in new business areas.”

Or, in other words: Statutory Vehicle Inspection, and in particular emissions testing, are set for decline. We need massive investments into a new business model, and because the next years could be unpleasant from a financial point of view, we’d rather like to take the company private in order to manage the transformation without stock market pressure.

In contrast to that, other TIC players, especially the Germans such as DEKRA or TÜV Rheinland, happily continue investing into the traditional SVI/PTI business model (cp. e.g. TÜV Rheinland’s acquisition of Certio this fall). Maybe time to re-think this strategy, to say the least.

 

Link to “Ograi offer”-website: https://www.ograioffer.com/en

Augmented Reality: Visions of the future

October 28, 2019

Even three years after the hype, Pokémon Go still serves as the best example when having to explain what is meant by “Augmented Reality”. The videogame, built on a clever blending of real-life geocaching and hunting virtual creatures “hidden behind the visible”, was the first AR application with a broader appeal. And, some would say, so far the only one.

Since then, the videogaming hype may have ebbed, but professional use of the technology has gained traction. Several TIC players such as SGS, Bureau Veritas, UL, Lloyd’s Register and ABS have adopted or have started experimenting with AR tools and solutions – most prominently SGS with its “QiiQ” rebranded version of Librestream.  Reason enough for us to head to Munich and visit Augmented World Expo Europe 2019 10 days ago, in order to take a first-hand look at the technology and to assess its viability for TIC.

Our main takeaways:

  • Specialized hands-free glasses and headset can be used for Augmented Reality, but they are no longer necessary. Thanks to the massive boost in computing power of modern smartphones and tablets, AR applications run comfortably and smoothly on these, significantly reducing the hardware cost.
  • Clearly, Augmented Reality is a fascinating technology especially for manufacturing, assembly and maintenance. The possibility to show exactly where cables are to be mounted or where holes have to be drilled, based on precise 3D CAD models, generates a huge opportunity for quality improvement, as e.g. shown by Boeing.
  • For TIC though, due to its variety of settings and its “non-invasive” inspections, this very feature seems to be less relevant or useful.
  • Therefore, current AR software development mismatches the need of the TIC industry – albeit for very good reasons from developers’ point of view.
  • However, almost all AR suites feature some sort of remote collaboration and assistance feature. That is very useful in TIC as well and probably the reason why most TIC AR deployments focus on this function, for the time being.
  • Still, much bigger potential for TIC seems to lie in automation of workflows and of reporting, and in know-how sharing and preservation, considering how dramatically some TIC players’ workforces are ageing.
  • For AR to create further value for TIC, and to generate tangible competitive advantage, considerable additional development efforts and especially intelligent customizing will be needed.
  • Leaving this to AR software providers will hardly work, as they seem to struggle with fully understanding the requirements – not surprising given the idiosyncrasy of TIC.

Customized, in part proprietary AR tools will make the difference in TIC, not deployments of standard software solutions, because the latter are intended for (significantly) different use cases in manufacturing industries.

And: successful adoption of AR for TIC is not going to be a “homerun on autopilot”. Therefore, it is sensible to, at least, start seriously experimenting with the technology now – in order to avoid missing the bus.

 

 

Image copyright: Carsten Röcker