The Automotive Sector: Electrification Goes Into Reverse

Nein!

Last month, the EU’s ambitious climate agenda began to unravel, as a last-minute decision by Germany to block a ban on new internal-combustion engines by 2035 was supported by Italy, Portugal and the Czech Republic. These countries want to shield their important automotive industries from the potentially over-rapid transition to electrification. Further, EU member states now want to weaken limits on pollution from heavy trucks and large-scale farms.

In Europe, the battle lines are now drawn on the green transition. Most politicians from across Europe admit that climate change is a real and present danger that needs to be tackled; but many question how quickly that transition should be pursued, given rampant inflation and soaring energy costs which – as in the UK – are eroding disposable incomes. Currently, the European Commission is still committed to cutting greenhouse-gas emissions in the bloc by 55 percent by 2030 and to reaching net-zero carbon by 2050. Though – as I have repeatedly written here before – how this is assessed is extremely vague.

Some greens and net-zero diehards described the German move as “unacceptable.” But the German car giants responded by unveiling an alternative route: that cars powered by so-calledplant-based e-fuels should be permitted beyond 2035. Berlin insists that Brussels should permit this alternative technology which, while still based on the internal-combustion engine, is supposedly carbon neutral. Meanwhile, there are some states in eastern Europe that never signed up to Europe’s net-zero programme in the first place. Right now, the future status of the internal-combustion engine in Europe looks highly uncertain.

BMW Ponders Hydrogen

Last month, German automotive giant BMW announced that electric cars were just not viable in large parts of the world. I assume they were thinking of much of the developing world where there is little or no EV charge-point infrastructure in place as yet. Instead, the iconic German brand said it was pushing ahead with hydrogen-powered vehicles. BMW wrote in its annual report:

“The world is full of diversity and individuality – why should mobility be any different? …We firmly believe that the mobility of the future needs one more leg to stand on, in addition to battery-electric drivetrains. We see hydrogen-electric vehicles as a meaningful complement to e-mobility.”

And yet BMW expects that 15 percent of all its cars this year will be EVs – and 20 percent next year. BMW’s UK-based subsidiaries, Mini and Rolls-Royce, will all be electric in less than a decade.

BMW is not alone. Toyota and Renault have also announced that they are developing hydrogen-powered vehicles. Renault unveiled a new hydrogen-fuelled sports utility vehicle (SUV) model last year. It aspires to gain 30 percent of the hydrogen-powered vehicle market in Europe by 2030. Toyota launched its hydrogen-powered Mirai in the UK in 2014. It retails for around £54,000 – though it is still very much the choice of a narrow band of specialists and first adopters. Sales of the Mirai outside Japan have been disappointing.

These car manufacturers’ interest in hydrogen partly reflects hardening doubts within the industry about the ultimate viability of battery-powered vehicular transport; and partly a strategic decision to diversify away from one single emerging technology. They are right. It is increasingly doubtful that there are sufficient deposits of nickel, cobalt, lithium and other rare-earth metals to create sufficient batteries to power all the vehicles on the planet. And hydrogen power is prospectively even more efficient for large, heavy vehicles such as trucks and trains.

Downward Pressure On Petrol And Diesel Car Prices

Tesla began 2023 by cutting prices on its leading models across the globe. In the UK the price of a Tesla Model 3 was cut by £8,000. This was to stimulate demand – though many Tesla fans who had bought at the old prices were unhappy. It worked: Tesla sold a record number of cars in the first three months of this year – 422,875 to be precise – and its share price has responded accordingly.

There is now the prospect that the sale price of conventional petrol and diesel-powered cars may also be about to fall. The supply bottlenecks which occurred as a result of the various lockdowns imposed during the pandemic – particularly in terms of the supply of microprocessors – have now largely been resolved. That means that car production is up at a moment when people across Europe are tightening their belts in response to cost-of-living crunch, with inflation outpacing wages, and while global economic growth is slowing. Analysts at UBS therefore think that increased supply combined with falling demand will inevitably result in price cuts for new cars.

Price cuts on new petrol and diesel-powered cars would be good news for motorists who want to buy a new car. But this would be a setback for the programme of electrification of vehicular transport. In the UK, family cars account for about 12 percent of all greenhouse-gas emissions. That is why the government still intends to ban the sale of new internal-combustion-powered cars in 2030.

Demand for electric cars jumped at the beginning of 2022 after Russia invaded Ukraine and when petrol and diesel prices rocketed. Yet demand waned in the fourth quarter as petrol prices eased and, correspondingly, electricity prices soared. Electric cars are already significantly more expensive to buy than their petrol and diesel-powered analogues. For example, a new Vauxhall Corsa-e currently retails at £29,190 according to AutoTrader. The petrol version of the same car sells for £17,570.

AutoTrader points out that motorists can expect to make up much of the price differential over time in reduced running costs. It estimates that while a petrol or diesel car costs about seven-eight pence per mile to run, an electric car costs around three-four pence per mile. Charging at home with a reduced electric-car tariff from a leading energy provider might bring running costs down even lower. Moreover, service charges are lower because there are fewer parts to malfunction, and there is zero road tax on electric cars. (But for how much longer? Governments will surely start to tax EVs when they become predominant). Another benefit is that EV drivers do not have to pay to drive in London’s congestion charge zone, the cost of which can be considerable for regular commuters.

That said, many prospective buyers will focus on the upfront price, especially if the price differential widens even further. Unlike in many European countries such as France, the UK government no longer offers a subsidy on the purchase of new EVs. Further, for people who are unable to charge their cars at home, the differential in running costs between petrol-powered cars and EVs is less favourable.

The big car manufacturers have learnt lessons from the pandemic bottlenecks and have managed to sustain their margins. Volkswagen, Mercedes and Stellantis (which ultimately owns the Vauxhall brand in the UK) all reported record profits in 2021. BMW reported sales of €142.6bn and profit before tax of €23bn for 2022 – up by 46 percent on 2021.

In a bid to cut costs, several major players such as Ford and Mercedes are going to move to the so-called “agency model” to sell their cars. Rather than selling only to dealers, they will try to sell directly to the final customers. Tesla has already taken this route. The problem is that the manufacturers will have to balance supply with demand more precisely.

Under UK government legislation coming into force in January next year – the so-called “zero-emissions vehicle mandate” – 22 percent of new cars and 10 percent of vans manufactured in the UK must be electric, otherwise British manufacturers will be subject to penalties. That proportion will rise to 52 and 46 percent respectively by 2028 and 100 percent in 2035. Any car maker which misses the target will be fined £15,000 per non-electric car and £18,000 per non-electric van produced – that’s about half the sale price of an average new vehicle.

But car makers will be permitted to defer a proportion of their annual target for several years and will be able to trade their shortfall one amongst another. This concession, announced last month, follows pressure from the industry, given that some UK-based manufacturers such as Jaguar Land Rover (owned by Tata Motors) and Toyota are not due to offer a full range of EVs until the end of the decade.

Car makers will be allowed to register under the zero-emissions vehicle mandate either individually or as a group. For example, Volkswagen, Audi, Porsche, Bentley and Škoda could all be registered and measured as the Volkswagen Group.

The zero-emissions vehicle mandate has left the UK car industry in a state of uncertainty. Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT), said it would “make product planning near impossible.” The good news for car makers is that new car registrations in the UK were up almost a fifth last month as compared with March last year – but only around 15 percent of those were EVs.

Car Parks In Peril

I mistook something in the Sunday Telegraph last weekend for an April Fool – although it wasn’t April Fool’s Day.

This was a report by “car-parking experts and engineers” (I believe such people do exist) suggesting that if all parked cars were EVs, which are much heavier than internal-combustion engine cars on account of their massive batteries, then the UK’s unloved multistorey car parks might collapse under their weight. Some, myself included, might think that is something devoutly to be wished – given that these hideous structures disfigure the skyline of otherwise pleasant heritage towns and cities like Gravesend, Peterborough and Norwich. But obviously this possibility entails the risk of horrendous loss of life, so we should clearly pay attention.

EV batteries, depending on the model, weigh in at around 500 kilograms. Many of our multistorey car parks were designed and built in the 1970s, out of reinforced concrete, when 500 kilos was the weight of an entire Austin Countryman. By contrast, the Tesla Model 3 weighs 1,672 kilos. An Audi E-tron weighs 2,351 kilos. Even the humble Nissan Leaf weighs 1,580 kilos.

According to the Telegraph, a senior technical manager at the building-materials firm Sika UK, said that many multilevel car parks have “structural issues”, exacerbated by years of poor maintenance by councils. The British Parking Association is due to publish a new guidance document on load-bearing weights for new multistorey car parks imminently. I’m sure my readers can’t wait to learn its findings.

The Price Of Interventionism

In a more rational world – or, perhaps, a world with more farsighted politicians − the transition from fossil-fuel-powered transport to electric-powered would be facilitated over time by the market. But by accelerating that transition by decree, governments in both the UK and the EU are creating market distortions which may have unforeseen consequences.

The UK government is to ban the sale of all new petrol and diesel-powered cars in 2030, although some hybrid vehicles will be permitted until 2035. There is much uncertainty about which types of hybrids will be permitted, thus further discouraging any investment in new product or capacity. People will still want to buy new petrol cars after 2030 – but ‘Nanny’ says no!

This means that an entire technology – that of the internal-combustion engine – which has been developed over 150 years, is to be junked and replaced by a technology which is still relatively untested. We still don’t know how long EV batteries should last and how best to recycle them when they can no longer be charged. Internal-combustion engines – and, for that matter, gas boilers – have been getting more and more efficient in recent years, given improvements in design and materials science. Yet they are still to get the chop.

Clearly, internal-combustion-engine-powered vehicles will continue to be sold in developing countries long after 2030 – but none will be manufactured in the UK. For that reason alone, the multinational automotive players are extremely unlikely to build any new plants in this country.

Ford has already signalled its intention to cut 1,300 jobs in the UK over the next three years. But then it is also cutting 2,300 jobs in Germany. It says that the greater simplicity of electric cars means that it does not need as many engineers in its product-development teams. Most of the UK job cuts will be at Ford’s research centre at Dunton, Essex, where the company designs new vans.

But then again, Ford has not built cars in the UK since the last Ford Fiesta rolled off the line at its Dagenham plant in 2001, after 71 years of car production there. And in 2020, it closed its engine plant at Bridgend, Wales, after 40 years. The US giant still manufactures diesel engines at Dagenham – but obviously not for much longer. At least Ford’s Halewood factory on Merseyside seems safe for now as it is switching from making gearboxes to making EV drivetrains. The conversion of the factory was assisted with £30m of government funding.

The risk is that the UK government, in its quest for the chimera of net zero − which Theresa May made legally binding even if it is unattainable − may preside over the decline and possibly total collapse of an entire industry which still accounts for over 800,000 British jobs.

It is widely thought that there can be no sustainable UK electric-car industry without a sufficient number of domestic battery manufacturers. Batteries, as already noted, are heavy and therefore expensive to transport – nor do we mine or process any of the critical inputs required in battery manufacture. So far, such battery factories remain elusive. The proposed Britishvolt gigafactory at Blyth, Northumberland, has disappeared in the mist.

And there are still an inadequate number of EV charge points – although Transport Secretary Mark Harper announced at the end of last month that the government was setting aside £381m for new charge-point infrastructure.

Moreover, data from Imperial College London out last month showed that replacing all hydrocarbon-derived sources of energy from the economy by 2050 would require a fourfold increase in peak electricity demand in the UK. Electricity consumption would surge from 12.8 kilowatt hours per household per day on average now to 126 kilowatt hours per day. Hence the National Grid has stated that over the next seven years it will have to install new transmission infrastructure equivalent to five times the existing capacity.

Even assuming that everyone has an electric car, and everyone has unimpeded access to a charge point, if electricity production is unequal to demand, those electric cars will not get very far.

Afterword

I hope that many of you will join me at the Design Centre, Islington this Saturday (15 April) − either in person or digitally − for the Master Investor Show, 2023. The line-up will be formidable. Not least, I’ll be in dialogue with our Chairman, Jim Mellon, who is always insightful, and who might help you to calibrate your portfolio differently.

What we do here is to analyse, inform and explain the intricate complexities of the modern investment landscape, which inevitably involves an admixture of opinion and foresight. And, unlike the “impartial” BBC, our service is entirely free of charge to our users.

What’s not to like?

Listed companies cited in this article which merit analysis:

• Tesla (NASDAQ:TSLA)
• BMW (ETR:BMW)
• Toyota (LON:TYT)
• Renault (EPA:RNO)
• Mercedes Benz Group AG (ETR:MBG)
• Stellantis (NYSE:STLA)
• Volkswagen (ETR:VOW3)
• Tata Motors (NSE:TATAMOTORS)
• Ford (NYSE:F)