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Cablegate: Audi On Eu Co2 Rules, the Future of the Automobile, and The

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DE RUEHMZ #0175/01 1350530
ZNR UUUUU ZZH
P 140530Z MAY 08
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4373
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 03 MUNICH 000175

SENSITIVE
SIPDIS

DEPARTMENT PASS TO ENVIRONMENTAL PROTECTION AGENCY

E.O. 12958: N/A
TAGS: ECON ETRD PGOV EINV PREL FR GM
SUBJECT: AUDI ON EU CO2 RULES, THE FUTURE OF THE AUTOMOBILE, AND THE
U.S. MARKET

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.

REF: (A) MUNICH 100; (B) BERLIN 560

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SUMMARY
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1. (SBU) Senior Audi officials told ConGen Munich they share BMW's
view that proposed EU CO2 rules represent nothing less than French
industrial policy. Going a step further, they made the questionable
argument that the EU rules would effectively "kill" the European
auto industry while achieving little benefit to the environment.
The Audi officials added that the European subsidiaries of U.S.
firms Ford and GM were, in Audi's view, part of the problem, as they
appeared to have sided with the French and Italian manufacturers of
smaller cars, rather than with the German premium manufacturers.
Unlike BMW, Audi stopped-short of praising the Merkel government's
efforts on behalf of the German auto industry. Like BMW, Audi has
an aggressive research program to build cleaner cars for the future,
although leaving more advanced technologies, such as hydrogen, off
the table for now. Despite the impact of the weak dollar, Audi
appeared largely unenthusiastic about possibly opening a U.S.
production facility. End Summary.

--------------------------------------------- -----
AUDI: EU RULES WOULD "KILL" EUROPE'S AUTO INDUSTRY
--------------------------------------------- -----

2. (SBU) In a follow-on to an earlier meeting with BMW on EU CO2
regulations (Ref A), ConGen Munich met with Audi officials at the
firm's Ingolstadt headquarters, including Senior V.P. for the
American Region Matthias Braun, Head of Government Relations
Brigitte Manitz, Product Manager for American Region Peter Kremer,
and Volkswagen Group's Manager for Research and
Development/Authorities and Regulations Dr. Klaus-Peter-Schindler.
Like their BMW counterparts, the Audi officials were skeptical of
proposed EU CO2 rules limiting auto producers' CO2 emissions to
120g/km based on a fleet-wide average by 2012. The Audi officials
not only shared BMW's view that the EU rules represented French
industrial policy, but going a step further, argued that the
proposal would effectively "kill" not only the German automotive
industry, but the European auto industry as a whole, while achieving
relatively little in the way of cleaner air.

3. (U) When asked about the dire prediction of the demise of the
European auto industry, Manitz explained that it would be nearly
impossible for the German premium segment to survive under the EU
rules. According to Manitz, without the premium segment the German
auto industry would find it difficult to compete only in the low-end
market, given the significant cost advantages enjoyed by Asian and
Eastern European manufacturers of small cars. Additionally,
Germany's smaller, less expensive cars benefit from the
technological developments that "trickle-down" after being initially
engineered into its expensive premium models. Manitz argued that
the extensive R&D that goes into expensive models can't be justified
for cheaper cars -- a loss which will not only affect the German
industry, but other European manufacturers that benefit from
technology licensed from German firms, putting all European
manufacturers at risk.

--------------------------------------------- ---
GOING AFTER LOW-VOLUME PRODUCERS ACHIEVES LITTLE
--------------------------------------------- ---

4. (U) Like BMW, our Audi interlocutors made it clear they were not
opposed to environmental regulation, but wanted rules that
safeguarded a level playing field among all car manufacturers.
Manitz argued that the EU rules focus too much on the relatively
small number of heavy premium cars sold in Europe, while effectively
ignoring the much larger market share of smaller, lighter cars. To
illustrate their case, the Audi officials explained that if the 50
car models with the highest CO2 emissions reduced CO2 emissions by
20 percent, the overall CO2 emissions from automobiles would drop by
just 0.5 percent. However, a 20 percent CO2 reduction for the 50
highest-selling cars in Europe (mostly smaller, lighter cars) would
reduce overall automotive CO2 emission by 14 percent. In other
words, the current proposal would devastate Germany's relatively
low-volume premium sector, but achieve little overall environmental
impact. Manitz said Audi would also like the EU to take into
account other factors in formulating CO2 rules, including efficiency
of automotive systems such as air conditioning, and a phase-in
period for the rules which takes the product development cycle into

MUNICH 00000175 002 OF 003


account.

--------------------------------------------- -------
U.S. MANUFACTURERS NOT HELPFUL; BERLIN COULD DO MORE
--------------------------------------------- -------

5. (SBU) Our interlocutors observed that the European subsidiaries
of U.S. manufacturers Ford and General Motors appeared to be
lining-up with French and Italian manufacturers of small cars like
PSA (France) and Fiat (Italy). They referred to a case in which
Ford and GM had intervened with the Belgian car manufacturer's
association, preventing it from taking a position on CO2 emissions
that would have been favorable to manufacturers of heavier cars.
The Audi officials said this lack of unanimity among German car
manufacturers on CO2 rules made lobbying more difficult [Note:
Separate Mission Germany discussions with Ford and GM suggest
whatever daylight exists between German manufacturers is minor, and
that both U.S. manufacturers are firmly against the EU proposal.
End Note]. Manitz added, however, that ultimately Audi was in a
better position than BMW or Mercedes given that it was part of the
Volkswagen Group, which offered a broader range of cars than its
competitors, helping it to mitigate the impact of any new rules on
the company. When asked if Audi believed the Merkel government in
Berlin was doing enough to defend the interests of the German auto
industry, Manitz obliquely answered by saying the French government
does a very effective job of looking-out for French economic
interests when formulating environmental and other policies.

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AUDI FUTURE-TECH
----------------

6. (U) Asked how Audi viewed the future of the automobile given the
increasing demand for clean technology, Schindler told us he
expected gasoline would remain the predominant fuel until the middle
of this century. He noted that Audi, like BMW, was committed to
diesel technology, and was currently working on improving a "clean"
diesel engine design originally developed by Mercedes. While
diesels accounted for nearly half of sales in Germany, Audi was
cautious about the prospects for diesel sales in the U.S. given the
lingering negative image from earlier generations of diesels. As
with BMW, Audi anticipates a menu of technologies will be used to
address the demand for less polluting transportation, rather than a
single dominant propulsion source.

7. (U) Audi is particularly focused on developing better battery
technology, given its application to both hybrid and fully electric
vehicles. Schindler said Audi was not as bullish on hybrid
technology as other manufactures such as Toyota, arguing hybrids
only make sense in relatively heavy stop-and-go traffic conditions
where their efficiency comes into play. Breaking with its BMW
brethren, Audi is notably unbullish on hydrogen fuel cell
technology, arguing that, in addition to the cost of producing
hydrogen fuel, fuel cells take up too much valuable space within the
car. Furthermore, hydrogen fuel cells would be produced with
expensive precious metals which manufacturers would have to import
from sources such as Russia. Schindler also saw little promise in
biofuels, particularly given the dramatic increases in food prices
recently. Additionally, the energy required to produce and
transport biofuels (ethanol can't be shipped via pipeline like
gasoline, for example) gave them little or no CO2 advantage over
traditional fossil fuels.

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WILL AUDI JOIN BMW AND MERCEDES IN THE U.S?
-------------------------------------------

8. (SBU) Although Audi has a goal of roughly doubling its sales in
the U.S. to 200,000 units per year by 2015, Audi officials appeared
unenthusiastic about setting-up production in the U.S, as BMW and
Mercedes have done. While the current weak dollar might argue for a
U.S. plant, Braun noted future exchange rates may be very different,
perhaps making this strategy less attractive. Braun said U.S.
production would make sense if Audi could sustain sales above
150,000 units per year. However, Audi would also want to have at
least 80 percent local content allowing it to minimize the cost of
shipping components across the Atlantic. Braun said one possibility
for U.S. production would be if Audi parent Volkswagen were to set
up a U.S. plant again, as it did in Pennsylvania from 1978 to 1988.
Manitz said that another complicating factor was that BMW and
Mercedes had experienced difficulties building a skilled labor force
in their U.S. plants, given the lack of an apprenticeship system as
Germany has. Braun explained that while the U.S. remains a very

MUNICH 00000175 003 OF 003


important market for Audi, other markets, notably China, offered
greater opportunities for Audi's attention at the moment.

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COMMENT
-------

9. (SBU) Audi's views of the EU's proposed carbon-reduction rules
closely mirror those of BMW, including plainly calling the rules
French "industrial policy." Audi's views diverged from BMW's,
however, in some notable areas. While BMW was relatively quick to
express satisfaction with Berlin's efforts on behalf of the German
auto industry, Audi was reluctant to do so. We also had not
anticipated Audi's criticism of Ford and GM -- something we had not
heard from BMW. Audi's argument that the European auto industry
would be fatally strangled by the EU rules strikes us as simply
overstated, and clearly intended to elicit opposition to Brussels'
plan.

10. (U) This report has been coordinated with Embassy Berlin and
Consulate General Duesseldorf.

11. (U) Previous reporting from Munich is available on our SIPRNET
website at www.state.sgov.gov/p/eur/munich/ .

NELSON

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