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Slimming the motor industry

The push by governments for green vehicles is not match by consumer enthusiasm, but changes in the auto industry are significant and revolutionary.

The push by governments for green vehicles is not match by consumer enthusiasm, but changes in the auto industry are significant and revolutionary.

by
Charles Stanley

in Features

26.06.2020

Joe Biden, the Democrat candidate for President, says he wants the US to go over to all-electric vehicles. The EU is building the whole policy of the new Commission around a Green Deal, with similar ambitions to drive diesel and petrol vehicles off the road. China too speaks enthusiastically about the need to expand electric cars and vans. In a world market of around 100 million new vehicles a year before the Covid-19 crisis struck, China accounted for almost 30%, Europe just under a quarter and North America 18%. These big three dominated with 71% of the total.

Despite the subsidies and exhortations to people to buy more all-electric vehicles, the world only bought 2 million of them in 2019. Despite the growing heavier taxes on buying and running a diesel or petrol car, the world's customers still wished to stay with tried and tested technology.

When asked about electric cars many people expressed general support for the idea, that fell short of wanting to go out and buy one for themselves anytime soon. Some point out that the range of many of the models is well below the range you achieve on a full tank of petrol or diesel. Some worry about the absence of charging points, making it difficult to plan journeys that require charging to get there or to get back. Some worry about the length of time it takes to recharge the vehicle, limiting it for those who want to use a van or a business car or taxi intensively. Some just find the electric cars too expensive, with many of them built by high-end car producers anyway. The recently introduced Tesla 3 Series which was rumoured to be coming to us for around £35,000, still a high figure, turns out to cost considerably more in most of the variants and specifications people want to buy.

Solving problems

The electric car industry is developing apace and claims it will soon have the answers to these criticisms. Fast charging is cutting the times it takes to recharge. Governments are actively supporting more charging points to reassure people they will get home again, and manufacturers are trying to cut the costs of batteries and see their way to the economies of scale kicking in. Some see electric vehicles accounting for maybe a quarter or more of all sales by 2030.

Few think we will be achieving near 100% of the new fleet on the timescale Mr Biden and the EU would like to see. There are good prospects for rapid growth in sales and turnover for a company like Tesla which has popular electric products. Time will tell how much of this can be profitable and which main competitors emerge to make progress more difficult. So far Tesla has been the stock market motor industry darling of the fans of green growth.

The Covid-19 closures did grave damage to the motor industry in the short term. European car factories were typically shut down for 6-7 weeks, only to be followed by re-opening under social distancing conditions which limit output. In early April European production was down 95%, and in the UK, April saw the worst ever month with output down 99.7%. US car output nosedived from 1.7 million cars in March to just 103,000 in April. Forecasts suggest the year as a whole may see a fall of between a fifth and quarter in world output, implying some price weakness. It also makes more plant closures and workforce reductions more likely.

Shrinkage likely

A footloose industry which famously has stretched its supply lines right around the world will push governments to find the best deals for the places where it wishes to remain. There is a new regionalism or nationalism emerging in location decisions, with companies wishing to concentrate more of their production at home or close to the customers where it is strong in the world market.

It is difficult to judge whether some of the established brands, good at producing petrol and diesel vehicles, will emerge as leading brands for the new electric fleets, or whether challengers like Tesla will be the new leaders. What is clear is the established companies have plenty of legacy problems to resolve, however good they become at designing and promoting the new products governments insist on.

Companies including VW are still battling over claims concerning their emissions reporting. Many companies have to face up to excess capacity, made worse by the virus in the short term and by the coming of the electric vehicle in the long term. All that investment in clean diesel technology, in engine production plants and related drivetrains will need slimming and eventually writing off, whilst the companies pour much more money into electric development, which will not be rewarding unless and until they get to large volumes based on the new designs.

The share prices of many traditional car producers have suffered badly in the crisis. There are good reasons. The shares are only cheap in the case of a traditional company that can continue to generate good cash from traditional products whilst it builds up a profitable capability around good designs for electric vehicles. This is a massive top down revolution, which will produce more losers than winners in the industry that has to lead it. A lot of expensive restructuring lies ahead.

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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