EU’s ‘Fit for 55’ energy and climate legislation package is scheduled to be released on 14 July, and potentially involves a material change in vehicle emission target for 2030. While we estimate that the current 2030 CO2 target requires 45-50% of EV/PHEV mix, a potentially extreme case of next week’s announcement may call for ~70% EV/PHEV penetration. While we plan to follow up after the EU announcement, this report summarizes the background of the event and implications for Autos and Batteries under our coverage.

 EU to announce ‘Fit for 55’ next week, potentially involving tougher vehicle emission targets. In December 2019, the European Commission (EC) launched the European Green Deal as the EU’s new growth strategy.

In addition to investment plans complementing Green Deal initiatives, the commission also hinted at potential revision of the current vehicle emission regulation. The commission’s amendment is expected to be disclosed on 14 July along with proposals for the revision of other key climate legislations – the so-called ‘Fit for 55’ package. Among the proposals reportedly under discussion is a 60% vehicle emission cut by 2030 and 100% by 2035.

 2030 target emission could be drastically lowered, calling for much higher EV/PHEV penetration. Current regulation aims for 78g/km vehicle emission by 2025 (15% cut vs. 2021) and 59g/km by 2030 (37% cut). The potential 60% cut implies a tougher emission target of 38g/km in 2030, which we believe calls for a combined EV/PHEV penetration of 65-70% for the industry to comply – a drastic increase compared to 45-50% penetration required to meet the current 2030 target, and a dramatic shift in powertrain mix that renders ICE vehicles a potential niche in a matter of a decade.

 Batteries would be the winners, select parts makers would also benefit.

Based on technology leadership, the Korean battery value chain (LGC, SSDI, SKInno, and material suppliers SKIET, SKC, and EBM) have built a strong foundation for long-term growth in the EU EV/PHEV market. We expect this leadership to continue with aggressive localization strategy in the medium term. We also believe that select parts makers with strong presence across EV OEM customers – Hanon Systems and Mando – would benefit against the potential acceleration of powertrain shift.

 Tougher regulation is a headwind for OEMs, but HMC/Kia looks competitive to survive. Tougher regulation is a headwind to sector profit, likely driving a consolidation of capacities. At this stage, we see little risk of HMC/Kia becoming a victim of industry consolidation, given their solid execution in emission compliance so far. We also note the above calculation does not take FCEVs into account – the EU targets 5% mix by 2030. HMC is a global leader in FCEVs and has already made solid business progress in Europe. We also highlight HMC/Kia’s diverse regional exposure, which provides more leeway in balancing profit and emission compliance.