The motor industry drives into difficulties

This week, German car giant BMW reported a 79% decline in pre-tax profits in the third quarter on the back of a 13% slide in car sales. Toyota reported a decline of 10% in interim vehicle sales and a 22% decline in pre-tax profits.

Ther are several reasons for this slump. There are reports of slow sales to China, an important market for exporters. Both manufacturers are encountering difficulties in selling enough battery vehicles against stretching targets in various countries to get raise the proportion of electric cars on the road. Both businesses will be hit by US tariffs if President Trump presses ahead with his universal tariff plans against European and Japanese producers.

The slowdown in sales is also related to slowdown in the German and Japanese economies and to the general background worldwide for credit and confidence. The attempt to change people’s preferences over type of car is not helpful, as many are adopting a wait-and-see strategy.

They will keep their existing petrol or diesel vehicle for longer, to see how others get on with the new battery vehicles. They are also waiting to see if the shortage of chargers is resolved, if there can be more certainty about electricity pricing and taxation, if there will be improvements in battery range, resilience and fast charging, and if electric car prices will fall.

In the nine months to September, VW reported a fall in its operating margins to just 5.4% and a decline in vehicle sales from 6.8 million to 6.5 million. They reported “the urgent need for significant cost reductions and efficiency gains”. They commented on their 4.7% decline in all electric car sales in the nine months, pointing to “industry wide buyer reluctance”.

How many battery cars are there?

Battery cars do strange things to people. President Biden discovered an inner Trump when he decided to slap a 100% tariff on imported Chinese electric vehicles (EVs). He thought the US car industry needed protecting from cheap, presentable Chinese electric vehicles which the US could not match for numbers or cost. Many Western consumers, faced with governments telling them to buy electric and often giving them financial incentives to do so, are currently unpersuaded.

Motor manufacturers under pressure to sell more EVs are cutting their prices and discouraging customers from buying more petrol and diesel cars that they prefer. The European Union (EU) too has agonised over the dilemma of whether to allow further cheaper Chinese battery cars to be sold to help hit targets, or whether to try to protect its domestic industry. It settled for quite high and variable tariffs by company.

It is true that Norway has had much more success with EVs, putting considerable effort into generating more renewable power and in rolling out recharging points. Subsidies also helped drive more sales. China has become the dominant producer and now sells an EV to a significant proportion of new domestic car buyers. Europe and the UK have got purchases of battery cars above 10%, with the EU on 14% of all sales last year, with 8% of sakes being plug-in hybrids. Worldwide, 12% of new car sales were battery operated, whilst in the US it was just 8%. This leaves the world very short of electric cars

China took electric cars more seriously

The Chinese saw the growing pressures by world governments to decarbonise and set about creating a major industry to meet expected demand for battery cars, wind farms and solar panels.

They acquired reserves of the major materials like lithium that is needed to fabricate the batteries. They worked on better and cheaper designs for the vehicles and panels. They persuaded their domestic car market through subsidies and public education to buy more of these vehicles. They acquired brands abroad such as MG that would help them sell EVs outside of China. As a result, the country has become the major producer of EVs and has a range of models at much more affordable prices.

Western manufacturers worried that their customers were not ready for the switch. They saw the problems from a slow rollout of recharging points, difficulties over the pricing and taxing of electricity and issues over the range of the vehicles. They took their time and developed intermediate technology around hybrids. Governments then decided hybrids were not the answer and pressed for faster progress on all-electric vehicles.

The most successful Western electric car maker was a new company, Tesla. It did well with strong sales growth, but its product was pitched at the upper end of the market for people able to afford expensive cars. Its customers may own second vehicles powered by petrol with longer range or other travel options.

Why is there the continuing reluctance to buy battery cars in many countries?

People still worry about range, even though this has typically been much improved on the latest models. There are concerns in many countries that there are still not enough charging points. Charging away from home can be difficult and a lot more expensive than relying on a home supply.

Cheaper energy should be a good selling point for battery cars, as they are spared the high motor fuel duties that are popular in many places with governments. However, some recharging places put a substantial premium on normal power prices for providing the charger. There are concerns that, as the number of battery cars increases, so countries relying on fuel duties for tax revenue will have to consider some tax or user charge system to recoup revenue from electric car users.

In Western markets electric cars still tend to be dearer. The imposition of tariffs on Chinese imports in the US and in the European Union (EU) has placed protection of domestic industry above wanting to increase the stock of battery cars more quickly.

The main problem is the cars do not seem to offer an improvement on the diesel and petrol cars many people are used to. We have seen people adopt new technology for phones and home computers because they have offered new services and features that people want. The battery car only does what a petrol car can already do, with the added complications of recharging.

It is true some manufacturers are introducing more automated computer technology into electric cars, which appeals to some drivers. These systems may offer greater safety, better speed control and help with navigation, but they are also available for petrol cars.

VW at the heart of the storm

The recent news that VW is going to close plants in Germany and make workers redundant shocked the industry and the German nation. VW has long prided itself on keeping employment for its staff and seeing them through lean times for demand. This latest downturn is seen to be bigger and longer lasting, as it is partly structural.

It was always going to be very expensive for a major manufacturer of petrol cars to switch over to a full model range of EVs. For the transitional period they sell fewer of each model and must have different production lines, supplies and techniques for making the very different battery and internal combustion vehicles. They lose economies of scale and impose on themselves a substantial extra cost of new lines and manufacturing equipment. Normally new model launches would be slower and would come in immediately replacing the old model.

The Western industry has also watched as China has developed its dominant position in raw materials, battery manufacture, other components, assembly and new electric car design. The economies of scale from such a vast home market allied to considerable state support for developing the new models has given China an important head start.

VW itself has gone to China to make more cars there to sell to the local market. It has seen its German plants become less and less competitive. VW has added to its difficulties by accumulating a wide range of brands including Bentley, Audi, Lamborghini, and Porsche at the top end of the market. These products require more labour-intensive, small-scale manufacture. It also has the Skoda and Seat brands in the mass market alongside the VW brand.

Worsening outlook for European and UK carmakers

Governments have gone further and faster than customers in their aspirations for sales of battery cars. Now they are turning exhortation into firm targets backed up by penalties and levies on manufacturers failing to meet the requirements, the industry must reconsider where to invest and where to sell products.

Tariff walls and subsidies to buyers of the “right” types of car are offered to manufacturers to help them, but the targets and the taxes make it difficult to turn a good profit. This will be compounded if the Chinese market remains weak for Western exporters, and if the US triggers a new round of tariffs.

The resolution of the problem lies in one of two ways. It is possible the governments will back off a bit and allow a longer transition to EVs without extra taxes and penalties. The Trump tariffs may be moderated by the responses of America’s trading partners.

It is possible that government and industry will co-operate to install many more chargers, set cheaper prices for electric recharging, and develop new models that are affordable and desirable to many more people. By now, to hit net-zero targets, battery cars should be the dominant purchase of car buyers, not under a quarter of new cars. Given the low level of battery vehicles in the stock of existing vehicles it will take many years to replace them all with electric. To achieve that needs many more sales from now on.