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The costly transformation of the car industry

Governments want to make rapid progress cutting emissions, which means changing from vehicles that run on petrol and diesel to cars that run on batteries. This will cost the industry dearly.

Governments want to make rapid progress cutting emissions, which means changing from vehicles that run on petrol and diesel to cars that run on batteries. This will cost the industry dearly.

by
John Redwood

in Features

06.02.2020

A few years ago, the large car makers of the world felt assured of their continuing presence as titans of the industrial economy. They had strong customer support. Governments courted their presence as investors and factory owners in their territories. Model changes came slowly. The industry kept its pace of innovation under control, aware of the high demands for reliability and safety and the dangers of changing too much too quickly.

Governments then became concerned about air quality and carbon dioxide emissions. The industry listened and responded by converting much more of its car output to diesel from petrol to increase fuel efficiency. At the same time, it did considerable work to clean up the diesel exhaust, removing particulates. The main German, Japanese and American car makers navigated these changes well and continued to dominate markets outside China.

Governments in driving seat

More recently, the industry has faced a barrage of demands for faster change. First, the industry was told that diesel is not the answer, with many governments wishing to ban diesels after a certain date, and many authorities imposing bans on older diesels entering urban areas already. Demand for diesel cars has plunged, as people fear falling second-hand values, more limitations on diesel use and higher taxes. The large investment of the industry in diesel engines and cars is being eroded by this change of requirement.

Governments want to make rapid progress to net zero carbon dioxide outputs, which means changing from vehicles that run on petrol and diesel to cars that run on batteries. This is a huge change, requiring a revolution in vehicle design and manufacture. The industry thought it had a couple of decades or more to make changes, and thought there would be a decent period to exploit hybrid technology.

The hybrid cars the main manufacturers have been bringing out keep the flexibility and range of a traditional petrol or diesel car, whilst allowing more journeys to be carried out on battery. They improve fuel efficiency considerably. It looked as if this investment would pay off, with car manufacturers expecting many buyers to move from a traditional vehicle to a hybrid this decade. Instead, governments are now questioning the suitability even of hybrids, before much of the investment in new hybrid designs has been completed. More capital is going to be under rewarded or written off.

In the long run-up to COP26, the global environmental conference to be chaired by the UK at the end of this year, countries are looking at ways to speed their individual moves to net zero carbon dioxide. Some are bringing forward the date to get to net zero. Some are setting tough intermediate targets for 2030 or 2035, to show more progress by those dates towards the end of net zero.

In the process, some are redefining the contribution the car industry needs to make. It leaves the conventional industry stranded. It still has a huge sunk investment in ordinary petrol and diesel cars, and is mainly selling such vehicles as the public still likes them. Volumes are now falling as potential customers worry about further changes in taxes and rules. It has a growing investment in hybrids which it thought it would be selling in growing numbers, that now may face more criticism from governments, implying a much shorter period to exploit this investment. It has the need to accelerate its investment in all-electric vehicles but has problems in selling anything like enough of them to justify the huge cost of the transition. In Germany in the third quarter of last year, electric vehicles accounted for just 2.9% of the market.

Old vs new

Equity markets have decided that governments will win and will insist on rapid moves to all-electric vehicles. Tesla is given a huge share price to reflect this viewpoint as the stand-out new designer and producer of all-electric cars. Traditional car manufacturers have much lower share prices and smaller capitalisations, despite making and selling more cars, as markets expect a rapid fall-off in conventional car sales from here. Governments will support their car makers with grants and loans to get them into electric technology, but will not support their current businesses making and selling diesel and petrol cars.

The public looks on, telling politicians climate change is a serious issue, but at the same time, many say they want to stay with cheap holiday flights, their diesel car and their current household heating. The challenge for the car industry is to effect the transition at a pace the public will accept whilst keeping governments happy who wish to go faster.

It seems that the all-electric car needs a bigger range and a lower price before more people will willingly buy one. The uncertainty generated by governments changing their minds about what they want does not help. We still do not know how they will tax all the motorists who do shift to electric power, once they are losing large sums on diesel and petrol tax foregone. They also face the complication that more and more people amongst the urban young see no need to own a car, but want to use hire cars or taxis on demand. If that catches on it means far fewer cars in the car parks. Investors need to proceed with caution. A lot of capital is going to be written off, and a lot of car companies are going to struggle to earn enough revenue.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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