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Auto industry grapples with plug-in hybrid 'sincerity' problem


IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform

Auto industry grapples with plug-in hybrid 'sincerity' problem

Plug-in hybrid cars with electric and gasoline motors under one hood are an important part of the evolution toward fully electric cars as batteries steadily improve, but their green credentials are running up against an unforeseen problem — a lack of "sincerity."

Subsidies and tax breaks for cars that offer unlimited range plus zero-emissions capability in urban environments have attracted droves of fleet buyers, but research by U.K.-based fleet fuel management company TMC in November 2018 discovered that users often neglect to charge the battery and instead burn extra gasoline by carrying the dead weight of the battery. TMC tracked 1,500 plug-in hybrids and found they averaged 39.3 miles per gallon, less than a third of the average level advertised by manufacturers of 129.7 miles per gallon.

That has turned plug-in hybrids, or PHEVs, designed to be green, into overweight gas guzzlers that consume more energy and pollute more than the combustion-only variants of the same model, the researchers found, reporting cases of discovering charging cables still unwrapped in the luggage compartment.

"If you want to have [PHEV] mobility that gives you range on weekends and zero-emissions capability on weekdays, then you need to demonstrate your sincerity," Peugeot SA CEO Carlos Tavares told reporters at the Geneva Motor Show on March 5.

Tavares insisted — against colleagues' wishes — that Peugeot PHEVs feature a tell-tale blue light visible from outside signaling that the car is in zero-emissions mode, a feature he hopes will prompt drivers to charge up and run on batteries more often, especially in built-up areas.

"They didn't like the idea so I had to force them to do it," Tavares said.

As PHEVs are designed to be charged at home, in some cases the problem could be one of laziness. But it may just as often be down to the difficulty of accessing sockets or the lack of alternative charging points.

Although early skepticism of battery-electric cars has subsided as renewables gradually decarbonize the power grid, plug-in hybrid technology is dividing opinion, in no small part due to its reliance on good faith.

Mitsubishi Motors Corp. has had major sales success with its plug-in hybrid Outlander SUV, which achieves unprecedented fuel economy for a car of its size. However, Toyota Motor Corp., which in 1997 brought the world the first commercially available hybrid car, the Prius, has since expanded the gasoline-electric powertrain to almost all of its range but has restricted a plug-in option to the Prius only. Recent marketing has focused on the self-charging variant without the plug.

It is "arguably the best of both worlds but also arguably the worst of both worlds," said Al Bedwell, a global powertrain analyst at U.K.-based consultancy LMC Automotive, in an interview.

That is truer than ever in the U.K. market since rule changes in October 2018 stipulating that plug-in hybrid cars must be capable of at least 70 miles of zero-emissions driving to qualify for a £3,500 grant toward the cost of the car.

Only vehicles with larger, heavier batteries that are capable of this range now qualify. These cars should help cut air pollution with diminished needs for engine power but could potentially worsen it if driven with flat batteries.

"You get these distortions of the market by policies which weren't very well thought through. Often, the people setting these tax breaks don't necessarily understand or haven't thought that deeply about the implications," Bedwell said.

"We are not saying that the PHEV sector with the big battery and the big range is going to die overnight, but we don't see it as a long-term winner. It's not going to give the benefit unless you actually plug it in, which you don't have to do. You'd be surprised how many people don't," Bedwell said.

Peugeot's Tavares described plug-in hybrids as "expensive" because of their dual powertrains, but as major European cities clamp down on emissions, in places banning diesel cars sometimes less than five years old, he said there is no equivalent for drivers who cover long distances but also need to navigate the urban jungle unhindered by tightening regulations.

Bayerische Motoren Werke AG CEO Harald Krüger went further. He said plug-in hybrid cars are here to stay since it may never prove feasible to provide sufficient charging points to turn battery-electric cars into a universal solution. That is particularly true in some developing countries where both road and electricity grid infrastructure are poorly developed.

"It's not a transitional technology. It will be a full end technology because the infrastructure will not be everywhere so that you can charge cars everywhere in every location," Krüger told S&P Global Market Intelligence at the Geneva Motor Show.

But where power is plentiful, Krüger said evidence has shown average drivers of longer-range PHEVs may rarely need the combustion engine at all.

"We have research that says if you cover a [daily] distance of about 60 to 70 kilometers, you are driving as much on electric as you typically drive in a pure electric car."

Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
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