Europe’s legacy automakers currently have little choice but to keep investing in electric vehicles, while the majority of consumers remain hesitant and market positions face growing pressure from Chinese entrants.
Key takeaways
- If current trends continue, a crash in Europe looks inevitable.
- Consumers still worry about things like pricing, driving range, and charging infrastructure.
- This story has already played out in the US where car makers have taken big write-downs.
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I think the wider investor community underestimates the extraordinary electric vehicle bubble in Europe that just keeps expanding. We’ve already seen the significant costs of backtracking away from electric vehicles (EVs) in the US, affecting giants like Ford and General Motors, and I'm confident it will happen in Europe too, but at a massively higher cost.
My view is not consensus. Many of my colleagues even within Fidelity will disagree with me but I don’t see how a crash doesn’t eventually happen if current trends continue.
The problem stems from the fact that Europe keeps investing heavily in EVs, largely as a result of European Union directives on emission standards, to a degree that far exceeds the demand pickup as originally envisaged. Battery electric vehicle registrations should sit at around 25 per cent within the overall mix by now, yet they remain stuck between 15 and 20 per cent.
Consumers are sceptical for the same reasons as ever, over issues like EV prices, range anxiety, charging infrastructure, and so on.
While the EU has recently eased the 2035 targets for tailpipe CO2 emissions target, lowering the new 90 per cent target, down from 100 per cent, will do little to ease the burden on producers. More could have been done, such as encouraging alternative drivetrain technologies (like running on synthetic fuels) or taking steps to fend off increasing competition from Chinese entrants.
Why am I particularly worried about the current direction of travel? The US offers some clues. Many large US manufacturers took multi-billion-dollar write-downs and one-off cash cancellation costs on their investments after the reversal of emission regulations by the Trump administration. Bear in mind that EV roll-out in the US had been proportionately lower than in Europe, meaning those companies had a lower height from which to fall. For European automakers, the potential costs of even a partial backtrack gets more severe every year they’re forced to expand their EV offerings.
At the same time, I still think it would be in the industry’s best interest to correct course and face reality now, while legacy makers remain financially healthy and hold relatively strong market positions. There would be some immediate and scary headlines, but it would allow those companies room to optimise their model line-up and improve profitability. EVs would not disappear of course, but the balance would be more representative of actual demand.
One alternative scenario is sustained change in consumer preferences, driven by the introduction of more affordable EV models, or further technological and infrastructure improvements. My hesitancy is that rival Chinese EV manufacturers have a much better chance of succeeding and gaining market share given their lower cost base helped by their vertical integration and manufacturing expertise.
Still, other views are available. I’m just yet to be convinced.
