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Driving change in the car market

Shifting from diesel to electric is a major change and consumers are confused. As a result, vehicle sales are falling.

by
John Redwood

in Features

11.07.2019

The manufacturing slowdown which has hit world markets over the last year has been particularly intense in the motor industry. In China, car sales fell by 13% in the first five months of 2019, continuing a fall which started in the summer of 2018. In June 2019, US car sales were 9.5% down on the same month last year. In the UK, car sales this year to date are down by a further 3.4% after falls last year. In the EU as a whole the first five months of 2019 brought another decline of 2.1% after a weaker year in 2018.

Credit an issue

Some of this is the result of tighter money policies leading to restrictions on car loans or dearer leasing packages. As the Fed brings interest rates down and as the European and Chinese authorities relax money a bit more, this should help stimulate more car buying. There is, however, a much bigger reason why car sales have been so poor in many markets. That is the worries over car exhausts and the massive drive to get people to buy electric cars.

In 2017 in the EU, 45% of new cars sold were diesel. In Portugal and Ireland, more than 60% of all cars sold were diesel, with more than half in Italy. The EU had encouraged cleaner diesel technology, and had been in favour of diesels for their better fuel consumption and lower carbon dioxide output than petrol vehicles. There is a now a rush to cut down the number of diesel cars sold, and to move to a world where there will be no diesel cars at all. In the EU, diesel car sales fell 12% in the year to May. In June in the UK, diesel car sales were 20% below a year earlier. In China car sales managed to increase in June because dealers were clearing stocks of older models at heavily discounted prices as new emissions regulations come in.

Governments driving

In China and the EU, government wants many more people to buy electric vehicles. China has been more successful where people are more inclined to do as the government requires. In the EU, battery electric vehicles accounted for just 2.1% of new registrations so far this year, and in the UK for just 0.9%. Consumers are reluctant for a variety of reasons. Many are unhappy with the mileage range of electric vehicles, which in most cases is much shorter than that of a petrol or diesel car. They are concerned about how long it takes to charge a battery, and how few fast charging points that are available. They consider many of the vehicles to be expensive, and worry about how long a battery will last and how much it costs to replace.

The car industry is keen to travel in the direction governments want, but it causes massive change and large costs. Shifting from diesel to electric is a major change. It requires complete redesign of the vehicle. It means new factories and new tooling, with the need to acquire new expertise. The battery technology needs developing and improving. Meanwhile, if the customers are reluctant to buy the products available, it reduces sales and cashflow and creates a new tension with the users. The immediate issue is how will the capital investment in electric cars be remunerated if sales do not leap ahead soon?

The EU is wrestling with issues like the lack of noise from an electric car which can lead to more accidents, and the need for a new network of charging points so people can travel decent distances without needing to return to home base to recharge. More customers buy hybrids to take advantage of tax breaks and encouragements, but then use the hybrid mainly as a conventional vehicle. The electric travel range of the hybrid is often disappointing, and the car has extra weight and complexity to operate the two systems.

Costs up, sales down

There is no short-term fix to these problems. A sceptical car-buying public expects more restrictions and penalties on using diesel and petrol cars, but also expects new taxes and controls on electric vehicles once there are more of them about. As a result, buyers are cautious and fewer in number, increasing the problems for motor industry investors. The car companies need to spend a lot more on new electric models before they are guaranteed mass buying of these products.

Meanwhile, the Fed is steering markets to a US rate cut, which equity markets like. In the US, general consumer activity remains strong. SUV and truck sales in the US are better than cars, and US buyers have less worry than Europeans and Chinese about the fossil fuel issues. It appears we have avoided the worse slowdown markets feared late last year, with authorities shifting to a more accommodating stance.

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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