MHA | Cold feet on Electric Vehicles?

Cold feet on Electric Vehicles?

Alastair Cassels · April 18th 2023 · read

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As Car Retailers and manufacturers get to grips with the ZEV Mandate it seems that our colleagues and counterparts in Europe may be getting cold feet on the transition to Zero Emission Vehicles.

Germany, backed by Italy, Poland and Bulgaria have successfully lobbied the European Commission to put forward an option allowing cars to use synthetic fuels (e-fuels). The legislation for the 2035 ban in ICE vehicles was due to be ratified but the last-minute e-fuel concession will allow combustion engine technology to persist beyond that point if the fuel can be derived in a carbon neutral process.

This news will be of particular interest to invested parties in the UK as part of the “Brexit dividend” was that the UK would lead the way in phasing out ICE vehicles with a more aggressive timeline of 2030. Most industry experts considered this incredibly ambitious but, we’ve gone with it as it was a key part of our decarbonisation strategy

What is motivating this last-minute change of heart?

The automotive sector is of vital importance to the German economy and whilst it has often been the pinnacle of engineering it also suffers from inefficiencies that may be proving to place them at a competitive disadvantage for the first time in several generations. Having worked for several OEMs I know how difficult it is to “pivot” these businesses in response to competitive pressure.

Agile is not how you would describe these industrial behemoths and I suspect that within the boardrooms of Wolfsburg, Munich and Stuttgart they are concerned expressions. 

Most car makers rely on volume to drive cost out of the product. Volume drives better purchasing, lower assembly costs and allows for more extensive distribution and marketing spend. However, scaling EVs to the volumes of ICE cars looks problematic until the battery cost can be significantly lowered and as most OEMs aren’t yet making their own batteries at scale then they have a big challenge. Established OEM profitability is therefore under an existential threat not only from Tesla but from a raft of new car manufacturers who don’t have legacy ICE businesses to run out and aren’t restricted by Germany’s inflexible labour laws.

I suspect that this is at the heart of the sudden reticence to embrace a 2035 deadline. When you also consider the threat from Tesla, BYD, Great Wall, Chery and SAIC (MG) to name a few, then you can understand why the incumbents may wish to extend the transition period.

The fact is that EVs are too expensive for most people at this time and until the cost and convenience of ownership achieves parity with equivalent ICE models there will a problem in generating sufficient demand to comply with the 2030 deadline.

What can be done to avoid changing the target?

Aggressive targets can stimulate innovation, but the recent history of our sector also illustrates that they can encourage undesirable behaviours. As a sector we must avoid any temptation to revert to either cheating the consumer or the environment. Instead, we need to focus on creative solutions that allow sustainability for all.

Charging infrastructure - Governments have a bigger role to play here. You can’t make aggressive targets without aggressive support to deliver the infrastructure that makes living with an EV as convenient as an ICE vehicle. We need VAT parity at 5% for public and domestic charging and investment support to expand charger availability in line with sales growth.

Residual Values - OEMs need to think more carefully about how they maintain RVs. Tesla’s mishandling of remarketing has created a problem at the worst time, and we need to avoid further self-inflicted pain with far more controlled and considered remarketing strategies. When VW launched the Id.3 the plan was to only lease and buy back the cars for remarketing. The strategy lasted weeks before the pressure for numbers grew and overcame the long-term view.

Affordability. Intrinsically linked to 2) but perhaps we need to think about longer change cycles, refurbishment, software updates and extended warranties. Longer terms might reduce some volume, but it softens the monthly payment/subscription. If RVs are managed well, then flipping drivers prior to the end of the lease/contract might become a reality again.

Battery Reliability - Unfortunately, consumers draw parallels between mobile phones and cars and there is nervousness about the longevity of the battery performance. OEMs have to assuage these concerns either through comprehensive warranty or with tech like NIO is employing in its Battery Swap Stations. Batteries are set to become commodities in the drive to net zero therefore they can be recycled for multiple uses once their performance is no longer optimal for a car. This means that OEMs can afford to have stronger warranty provision.

Education - There is a lot of information and misinformation out there regarding EVs, hydrogen, e-fuels. It’s hard to know what to believe and must be confusing for consumers. A concerted effort by OEMs and their distributors is required to reassure customers that this technology is right for the future and is the safe choice for most drivers.

This transition was always going to be the biggest challenge the industry has faced and now is not the time to lose your nerve. Doing so not only risks further damage to the environment but a loss of credibility in the eyes of the younger generation that will face greater consequence of our inaction or delay. The future of zero emission passenger car transport is electric and the sooner that is accepted the more confidence customers will derive from their decision to drive an EV.

Get in touch

Please contact us for an informal discussion and see how we are able to support you and your business.

Alastair Cassels
E: [email protected]

Steve Freeman
Partner – Automotive & Mobility Sector Head
E: [email protected]

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