UK electric car revolution – where next?

Have the UK government managed to ‘stall’ the electro mobility revolution that it had decided would be the flagship of its environmental and technological strategy?

After the recent Fiscal Statement by the UK government, I was reminded of that innocent question and its allegory to the current state of the vehicle market. Had the UK government managed to “stall” the electro mobility revolution that it has decided would be the flagship of its environmental and technological strategy. The 2030 ZEV target for passenger cars was always ambitious. More so than other developed nations but it would be churlish to criticise it as an ambition given that the prize is linked intrinsically to cutting emissions and saving the planet. However, sometimes ambition has to be pragmatised.

To the layperson, it all seems to be going well. Sales of AFVs and in particular BEVs have been growing rapidly. The OEMs are launching more models by the week and the market seems to be on track with a linear progression toward the 2030 target.

As of November 22, BEV sales are up 38%, Petrol down 11% and Diesel down a staggering 40%. Tesla has a model in the top 10.

However, what we can’t deduce from this table is how much of the top ten are ZEV. Qashqai, Puma, Sportage, Tucson, Kuga don’t currently come in BEV format.

Back in 2018 the top 10 looked like this

Some similarities but notably no Ford Fiesta in 2022, largely because it was a low profit model for Ford and supply prioritisation in the pandemic and post pandemic period would have placed components in Puma’s and Kuga’s to boost profitability in segments where demand was still strong.

The interesting point to be made here is one around affordability. If you took the list price of the middle trim line model of the 2018 cohort, assumed a generous 50% RV and that the depreciation on the car was funded at 0% over 36 months you would arrive at an average monthly payment of £269/month (inc VAT).

The EV or Hybrid version of the 2022 Top Ten cohort will demand an average monthly payment of £475/month (inc VAT). That’s an increase of 76% and ignores the recent interest rate movements which have pushed most consumer finance offers into the 8% APR territory.

Add in the cost-of living squeeze which will cost most mortgage holding house owners c£500/month more in 2023 than for most of the last decade and you can appreciate that maintaining momentum of the EV revolution looks more challenging than it did even a year ago. We’ve seen from the proliferation of industrial action being threatened or taken by employees in several sectors that pay and conditions are deteriorating and it doesn’t feel good. This is not the time to ask more people to pay more for their motoring.

(Average UK wage has increased by 11% in the last 4 years –currently £33,000)

So, amidst this bleak assessment what can be done

1. We have new cars less often than before. Ownership cycles were already creeping towards 48 months and perhaps they have to go further. 5 years 0% was always a good hook but it locked customers into products longer than vehicle suppliers required and therefore PCP became ubiquitous in driving change cycles closer to 24 months. Average finance terms in the US have been tending towards 70 months and beyond for some time. Partly because they tend to favour HP over PCP. Maybe the tactics that drove the market to 2.5m units are no longer required and selling less units is here to stay which means longer ownership terms are acceptable.
2. The price of EVs and PHEVs has to come down. This is stating the bleeding obvious of course and there is evidence that we will see some better affordability from the likes of MG and some other Chinese brands. You can have a basic MG4 for £352/month (inc deposit £4k). However, it’s a 49-month term with a balloon payment of 56% of the list price. That’s confidence in your product or a gamble on EV residual values.
3. We find a new way of funding electric vehicles. With the battery largely responsible for the delta between ICE and EV products maybe it’s time to think differently about this component. If OEMs took permanent ownership of the battery it could be amortised separately from the rest of the vehicle. Batteries potentially have a 2nd life as part of any new circular economy. This would mean that any user of the car would continually pay a rental = depreciation cost directly to the OEM. A payment that would bridge the new cost with the resale into a usage where efficiency and capacity retention were less of an issue –eg domestic or commercial energy storage. It fits with the agency model as OEMs will contract directly and could be expanded to the aftermarket. The battery costs would then not require full recovery from the first owner which would potentially lower the monthly payment.

This concept is where NIO’s engineering could have a real advantage. A replaceable battery is a big re-assurance for a phone owner breathing life into a £400 asset, imagine the value there is a for a car driver who is concerned about battery degradation and the RV of the car.

This industry invented PCP decades ago when Ford and Vauxhall launched the product we take for granted today. It made new car ownership something that the average earner could contemplate as the monthly payments were compelling and the risk was low. Aside from a small wobble in the 2000’s the product has driven the market to record levels and kept reliable motoring affordable. We need the next innovation to help support greater EV adoption.

The UK government, by its actions clearly thinks the job is done in term creating demand for EVs. Perception is still vital in this developing market and the recent inclusion of EVs in the VED Tax regime is unhelpful and doesn’t raise much revenue. At the risk becoming overtly political we are also faced with the prospect of more Brexit collateral damage to EV affordability as the current rules of origin tariff exemption on EVs is in danger of expiry in 2024. OEMs estimate that this would add 10% to the price of an EV.

Instead, government has decided to throw its focus behind improving the charging infrastructure. Arguably it’s too little too late as unfortunately EV owners experience is mixed if they go beyond range or can’t charge at home. There unfortunately is some evidence that well intentioned customers find the ownership experience too challenging, and a percentage revert to ICE mobility after an initial foray. Infrastructure development is improving but not at the rate required to support the best EV ownership experience.

As we await the output from the recent “Technical consultation on zero emission vehicle mandate policy design” the prospect of government deploying punitive sanction on OEMs not up to speed with their ZEV product sales looms like a black cloud over this finely balanced, one in a lifetime technology pivot. It’s mooted that OEMs ZEV sales rates <22% by 2024 could receive encouragement to catch up but the irony is that we risk stalling the EV revolution over a lack of investment in charging and short-sighted government strategy that places completely underestimates the size of the challenge involved in achieving mass adoption of EVs.

Let’s hope the sector and government can work together to solve this problem. The prize is the most worthwhile thing anyone involved could ever achieve.

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Alastair Cassels
Partner – Automotive Advisory Head
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