- China imports remain the dominant challenge for European carmakers
- Companies reiterate 2030 EV targets despite UK delay
Carmakers are in the political crosshairs, with post-Brexit trading frictions threatening production and the UK rowing back on electric vehicle (EV) transition targets at the same time as Europe attempts to fight back against cheap Chinese imports.
The European Automobile Manufacturers’ Association urged the European Commission this week to intervene to prevent a 10 per cent tariff being applied on EV exports from the European Union (EU) to the UK. The body said that EV production on the continent could fall by 480,000 units if the tariff is implemented from January due to post-Brexit ‘rules of origin’ about where batteries are made. The UK is the largest outside market for EU producers.
Renault (FR:RNO) chief executive Luca de Meo said that a failure to act would mean “we will effectively be handing a chunk of the market to global manufacturers”. Existing free trade agreements with Japan and South Korea mean cars made there could be imported tariff-free, and any levies imposed on locally-produced cars would make Chinese imports more competitive.
The tariff plea came shortly after an announcement by Prime Minister Rishi Sunak that a planned UK ban on the purchase of new petrol and diesel vehicles would be pushed back from 2030 to 2035. This is in line with the EU's policy timeline for the same goal (although the bloc has said that certain alternative fuels could be exempt from its combustion engine purchase ban), but the news has been greeted with dismay by the industry. Business has accused the government of introducing significant uncertainty into the investment environment.
Major car companies are still pushing ahead with plans for a rapid pivot to EVs, however. Japanese carmaker Nissan (JP:7201) has reiterated its aim for all new models in Europe to be fully electric by the end of the decade. Stellantis (US:STLA) started production at its EV-only manufacturing plant at Ellesmere Port earlier this month, and Ford (US:F) has also invested heavily in a powertrain factory in Merseyside.
There is support for the sales ban delay from some in the industry; Toyota (JP:7203) said it was a "pragmatic" decision that provided "clarity" for the industry.
Not so slow
While petrol sales will continue for longer, EV sales targets for producers will still be in place from January, even as buyers could be dissuaded from turning to EV models because of the policy shift. Under existing UK plans, zero-emission models at carmakers must make up 22 per cent of total sales in 2024 and this increases to 80 per cent in 2030.
This comes in the context of slowing private buyer demand for battery EV sales in the UK, as high prices and an inadequate charging network put consumers off. According to the Society of Motor Manufacturers and Traders (SMMT), private buyers now make up less than a quarter of the market. However, pure battery EV registrations rose by 72 per cent year on year to 17,243 in August it said. Market share grew by 14.5 per cent to 20.1 per cent over the same period.
The SMMT has called for changes to UK tax policy to boost EV purchases given that the UK is "the only major European market with no consumer EV incentives". The body wants cuts to the VAT rates charged on EV purchases and public charging units, as well as an end to plans to raise vehicle excise on EVs in 2025. It has also called for mandatory targets on rolling out charging points.
The biggest boost this year to the UK EV industry came from Jaguar Land Rover owner Tata Group's confirmation in the summer that it would build a £4bn gigafactory in England, backed up by a significant level of government subsidies.
The EU, meanwhile, has put on a more aggressive face as it tries to compete against China’s EV power. European Commission president Ursula von der Leyen said last month global markets were "now flooded with cheaper Chinese electric cars” because subsidies from Beijing keep vehicle prices down, hitting European manufacturers. The EU has launched an anti-subsidy investigation in response. "We have not forgotten how China's unfair trade practices affected our solar industry," she added.
Currently, the level of imports of Chinese cars into the EU are low. Although China exported 500,000 cars to the EU last year, many of these were Chinese-built Teslas and other models produced for western manufacturers. Chinese brands' combined market share was just 3 per cent, according to Citi analysts.
Yet even if trade barriers are imposed, Chinese-made EVs may still prove to be more competitive than locally-made vehicles. UBS analysts think they could still be around a quarter cheaper, and that Chinese manufacturers' share of the global new car market could climb from around 17 per cent currently to a third by 2030. Research done by UBS shows the interesting variation in thoughts on Chinese models between the UK and Germany. Almost half of UK respondents said they were high-quality, compared with 37 per cent of Germans, although Germans were far more impressed with the looks (37 per cent also citing a reason to buy, compared to 26 per cent of Brits), and the range per charge, at 34 per cent to 26 per cent.
Legacy manufacturers' share will slide to 58 per cent, from around 81 per cent currently, with Europe's carmakers likely to be hardest hit, according to the Swiss bank's forecasts.
Under threat
European carmakers are well aware of the difficulty of competing on cost with the likes of BYD (HK:1211). BMW (DE:BMW) might just have committed £600mn to make all-electric Minis from its Oxford plant, but even its chair, Oliver Zipse, warned that "the base car market segment will either vanish or will not be done by European manufacturers" as China's EV power continues to grow. It's easy to see why. BMW's latest i5 electric model sells for around €70,000 (£61,000), but BYD's Seal, a model recently unveiled specifically to target the European market, is expected to sell for around €45,000-€50,000.
In China, where BYD controls a third of the market, local players dominate in a market where EVs sell for under €30,000 and "European manufacturers are struggling to compete", Citi's analysts argue.
Although they think Europe will be a tougher nut to crack, as "European customers will want a significant discount to switch from their current BMW/Mercedes/Audi loyalties", Chinese carmakers could well be capable of offering them. UBS analysts recently downgraded Volkswagen (DE:VOW) shares to sell, arguing that Europe's biggest carmaker "is likely to be most impacted" by cheaper Chinese imports. It was once the biggest carmaker in China but is now "potentially on a path to marginalisation".
The increased threat means that many of Europe's big carmakers now trade off paltry valuations – Volkswagen's shares are priced at just four times FactSet consensus forecast earnings, while Stellantis shares trade at just over three times. BYD, which is also making moves into the Japanese market, trades significantly higher at 19 times, but still well below EV market leader Tesla (US:TSLA).
Tesla's shares have more than doubled in the year to date and now trade at 57 times earnings as the company has cut prices and focused on volumes. In its second (latest) quarter, revenue was $700mn (£574mn) ahead of the FactSet consensus. Analysts forecast that sales will rise by 23 per cent to over $100bn this year. UBS said that “the long-term bull case increasingly relies on Tesla lowering the cost of hardware to make more money on software”.
For the car dealers, there will be a balance to maintain between securing the opportunity to sell some of the exciting new EV brands and keeping existing relationships sweet. So far, they seem to be managing this. Pendragon (PDG), which is currently the subject of competing bids from US competitors Lithia and Auto Nation, was named as BYD's launch partner earlier this year and is opening eight dealerships for the EV maker, including a flagship on London's Mayfair later this month. BYD has also signed agreements with other UK dealer partners, including fellow takeover target Lookers (LOOK), Arnold Clark and LSH Auto.
The industry is at an inflection point; will the EU imperil the transition to EVs and its own net zero targets by blocking cheap Chinese imports? Given the Green Deal industrial plan from earlier this year specifically raises "unfair subsidies and prolonged market distortion" then Brussels is clearly not worried about cutting off its nose to spite its face.
