As global electric vehicle sales growth slows, car makers and regulators are asking an existential question: is the current slowdown a blip?

One scenario sees mass market buyers, who currently balk at higher prices of EVs, eventually come around and flock to the technology. EVs are silent, accelerate like sports cars and can save money in the long run. Once they are cheaper than petrol cars, and there are enough chargers, most consumers will never turn back.

The other scenario is more worrying. If prices do not fall, or legitimate concerns over charging infrastructure are not met, motorists may resist indefinitely.

The implications of the second are potentially concerning. Meeting long-term decarbonisation targets without removing all petrol and diesel cars from the roads is impossible.

But if politicians cannot persuade consumers to buy EVs, will they tear up their net-zero pledges, or turn to other measures to drive EV sales? You cannot, in the words of Ineos boss Jim Ratcliffe, force EVs “down consumers’ throats”.

Norway has become the world’s hotspot for EV adoption by penalising petrol cars through higher taxes. But France’s gilets jaunes protests over higher fuel taxes show this approach will not work everywhere.

The shift to EVs will take time. Prices will fall as new models come on sale, while the job of installing charging stations grinds on. “The next two years are going to be very wobbly,” admits one former EV adviser to the UK government, who predicts demand will not pick up until later in the decade.

Car makers must be prepared for either scenario. Asking senior industry executives the question over the past weeks has elicited almost an even split. “EVs are more expensive and just not as good,” says the head of one carmaker that has nevertheless pledged to phase out engine sales in the coming two decades.

Car makers, like all companies, only have a certain number of chips to place on the board. Deciding where to put the money has direct consequences – a new hatchback means no money for an alternative model, for example.

Eye on hybrids

The rise of the electric era throws this issue into even sharper relief. Volvo Cars last week made its last-ever diesel model, after choosing to invest in battery models instead.

How fast to ramp up EV production is a key – possibly the key – decision being taken in automotive boardrooms currently. From Ford and General Motors all the way up to Bentley, car makers globally have pulled back EV plans to focus on hybrid models, with one eye on milking the cash cow of the internal combustion engine for just a little longer.

But they may not have gone far enough. The global auto industry manufactured 10.5 million electric vehicles last year – and expects to produce 13.5 million this year, according to data pooled from suppliers and forecasters by one auto investor.

In 2025, on current projections, output will rise even further to 18 million – a 70 per cent increase in global EV output in just two years, the forecasts show. Yet sales, the same data set predicts, will lag even further behind. EV interest last year resulted in sales of 9.5 million vehicles, but the figure is only expected to be 9.8 million this year.

Some investors are now privately warning about an “enormous misallocation of capital” across the industry. “It is difficult to see anything that could cause a marked acceleration in demand in 2025,” says one investor who has studied the data.

“Arguably the cars need to be cheaper than their engine equivalents to drive adoption, but with many carmakers already losing billions on EVs, their appetite for further price cuts to promote the switch is going to be very limited.”

Even BYD – the most feared of the new EV players from China – has seen price cuts dent its profitability, while on Tuesday it announced that sales in the first quarter fell 42 per cent.

Even Tesla’s deliveries are now lower than a year ago. If governments slow targets – a possibility that several car makers believe is more likely than not – it helps the industry generate higher profits in the short term, while also giving them more breathing room to compete with the coming wave of Chinese EVs.

But slow too fast, and you lose the competitive edge. US auto manufacturers are privately worried that a second Donald Trump win will lead to a gutting of EV rules. While this helps boost short-term profits, it shields the industry from the necessity of coming up with something to beat China.

As one senior executive at a global auto company told me, if the Chinese sell an EV that is just as good as a Western car, but cheaper, that is one thing. But if they sell a better car that also undercuts the West, it’s impossible to catch up.

Extracted in full from:  https://www.afr.com/companies/manufacturing/the-big-worry-for-carmakers-what-if-the-ev-slowdown-is-not-a-blip-20240403-p5fgxn

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