POLITICO — 2024-07-20
News from Brussels
In the past week, the world’s biggest automotive companies have undergone their quarterly check up with investors. The results aren’t good: In fact, the financial statements show them bleeding out.
The source of their pain? Electric vehicles, or EVs.
Sales of all-electric models have uniformly declined across the West, including at General Motors, Renault and EV giant Tesla. But, far from a death rattle, the sales slump is more a brief stop of the heart before the paddles bring the EV shift back to life.
Or, in the case of Europe, before new emission standards come into effect next year.
As part of the Green Deal, the EU passed a law banning the new sale of internal combustion engine (ICE) cars from 2035. While that law is now under attack from right-wing lawmakers who want to see it repealed, it does contain milestones along the way to bring carmakers along. And the next one comes up in 2025, when automakers must reduce their emissions by 15% compared to a baseline established in 2021.
If they fail to meet that benchmark by the end of the year, carmakers will be fined €95 per gram of CO2/km above the target for each non-compliant vehicle sold in the bloc.
Several carmakers plan on introducing new models to coincide with the stricter emissions target, said Pedro Pacheco, vice president of automotive research at Gartner, a consulting firm. For example, BMW is set to launch its Neue Klasse all-electric SUV — an electrified X3 — sometime next year and has built a new factory in Hungary to manufacture the model.
“This will lead to a reversal of fortunes,” Pacheco said.
Or at least a reversal for the European brands that take the opportunity to reset their all-electric strategies.
The EV sales that have carried the sector so far are primarily from early adopters, like the Tesla fanboys.
The market was also buoyed by the pandemic when lockdown orders stifled consumers’ ability to spend on travel, said Arun Kumar, automotive global lead at consulting firm AlixPartners. In lieu of trips, some went all in on electric cars.
To maintain that sales volume, car brands need to convince the average consumer to buy an electric vehicle, but the sector has yet to hit the tipping point in the West where the electric model reaches price parity with its ICE counterpart.
“In order for electromobility to become widespread, attractive vehicles are needed, especially in the entry-level segment,” Volkswagen CEO Thomas Schäfer said in May, announcing the German brand’s electric strategy.
The car market is not immune to broader economic issues such as inflation and slow GDP growth which affect customer behaviour.
“There is a negative sentiment and that is filtering into EVs,” said Kumar.
Sector-specific issues such as range anxiety and a lack of charging infrastructure also plague consumers, who cited those as their top concerns about switching to electric vehicles in a global survey by AlixPartners.
The share of European consumers in the survey who said they plan for their next vehicle to be all-electric has stayed unchanged over the the past three years at 43%. The proportion of Chinese consumers answering the same question positively, meanwhile, rose to 97% from 85% over the same period thanks to the country’s robust charging network.
But even if the infrastructure dots align, electric cars across all markets are likely to show the same cyclical pattern as other auto sales, said Kumar.
“The notion that we were going to have a linear path to some end state for EVs — that’s just not going to be the case,” he said. “There will be pull markets for several years, you go to a peak and then you end up in a trough.”
In other words, it was always going to be this way.
Next years’ emissions targets may help breathe new life into Europe’s electric vehicle market, but the shape of the recovery is likely to be determined by China.
European brands currently struggle to compete because they don’t yet have more affordable models or ones that check the boxes of superior technology and a great software experience — two realms in which the Chinese brands excel.
“If you’re very good on price but you forget about the rest, you’re not going to sell,” Pacheco said.
Consumers have plenty of all-electric options in the luxury car segment, such as the BMW 7 Series or the Tesla Model S, where electric vehicle penetration rates are close to 45%, according to Pacheco.
But all-electric models with high-tech offerings are missing in the mid-size market where prices are closer to €25,000 or €30,000 for an ICE. And that is exactly what the Chinese have to offer.
Concerned about the threat posed by cheaper, tech-glitzed Chinese models, regulators in the US and Europe have erected new trade barriers to temporarily halt their expansion into Western markets.
In June, the European Commission announced the results of its anti-subsidy investigation into made-in-China electric vehicles, slapping higher-than-expected duties of up to 37.6% on the brands, meaning some now facing total tariffs of almost 50%.
But intense competition and a weak domestic economy mean Chinese auto manufacturers aren’t pausing their expansion, instead turning their efforts to their own backyard. If they create enough of a foothold in markets like southeast Asia, India and Australia, they wouldn’t need to enter the European or US markets to considerably undercut Western automakers’ sales.
It also means that Chinese brands are setting the new standards for what consumers expect and want in their vehicles.
“The fact that they’re innovating much faster and the market is growing faster gives them the license to put new things in play,” said Kumar at AlixPartners. “So they’re kind of defining what a future consumer in China and the future US or European consumer will be.”
Next year’s new emission standards mark a fork in the road for European automotive companies: Do they go all in on EVs or continue to hedge their bets?
Some — like Renault CEO Luca de Meo — say the future is electric but companies need more time to adjust. Others are clinging to the middle road, splitting resources between their traditional models, hybrid vehicles and electric cars.
“Our customers will continue to be able to choose from a wide range of powerful and efficient combustion and hybrid models as well as electric models in the future,” Porsche finance chief Lutz Meschke told the company’s latest earnings briefing.
At stake is the ultimate survival of the business — a fact recently acknowledged by Stellantis CEO Carlos Tavares.
“We are going to be challenged, and I would say brutally challenged by the Chinese offensive on the European market,” Tavares said at a presentation of its factory line in Serbia. “We are ready for the fight.”