European Electric Car Sales Spurting, But Might Sag When Subsidies End, Batteries Lag

Europe’s electric car revolution looks unstoppable and experts are scrambling to raise medium and long-range sales forecasts, but once well-healed first adopters have been satisfied and current massive subsidies are withdrawn, demand might whither away, not least because even the “cheapest” new electric cars are much too expensive for the mass market.

VW’s prediction that 70% of its European own brand sales will be battery-electric by 2030 look dangerously high.

There are worries too that there won’t be enough batteries to propel this massive new fleet of electric cars. And as traditional internal combustion engine (ICE) powered sedans and SUVs are priced out of the market by EU legislation, entry-level electric vehicles are currently unaffordable for average wage earners, although there is plenty of time to fix this gap in the market. If Europeans don’t, there will plenty of Chinese utility electric vehicles priced to go at less than $10,000.   

Last week, the launch of the latest all-electric Audi Q4 e-tron was greeted as an attack on the mass market. The price of this small SUV starts at under $45,000, suggesting that the average price (admittedly after tax) might be at least $10,000 above that. That’s not affordable, in the normal sense of the word. The price of small city cars like the Peugeot 208e and Renault Zoe, are at least twice that of the basic ICE models.

Demand for electric cars in Europe has been very strong over the last year even as ICE car demand was decimated by the coronavirus economic disaster. Electric car sales in Western Europe doubled to 727,927 in 2020, according to Schmidt Automotive (www.schmidtmatthias.de), and will hit 1 million in 2021, 1.18 million in 2022, 1.29 million in 2023 and 1.36 million in 2024. Western Europe includes all the big markets like Germany, France, Britain, Italy and Spain

But electric sales are being fueled by huge subsidies – in Germany this can reach €9,000 ($11,000), in France it’s about half that and Britain about half again   – as manufacturers were forced to bring electric cars to the market because of harsh EU CO2 rules which kicked in last year, will step up again in 2025 and 2030.

The EU insists sedan and SUV makers raise average fuel efficiency by curbing CO2 emissions in terms of grammes per kilometers. In the real, current ICE world, that translates to the equivalent of about 57 miles per U.S. gallon in 2020/2021, up from 41.9 mpg in 2015, tightening again by 15% in 2025, and hitting 92 mpg by 2030. This effectively will make new ICE cars impossibly expensive by 2030, and countries like Britain have decided to ban their sale by 2030. So far Germany, Europe’s largest market, and France haven’t yet brought forward their own bans currently set at 2040.

As this massive increase in electric car sales takes place many questions arise about the availability of many components, with battery worries at the core.

A couple of months ago investment bank Morgan Stanley

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published a report “A Looming Battery Cell Supply Shortage”.

“There are increasing concerns around a potential battery shortage that could change the shape of many of the growth curves in the market on EV adoption in the coming quarters or years. From our perspective, at least, we’d say the chances of there not being a material shortage of battery cell capacity relative to demand is remote,” the report said. 

One Morgan Stanley team forecasts global battery capacity in 2025 at 1.2 TeraWatt Hours (TWh) vs 0.4 TWh today. Another one said EV sales will advance to 12 million in 2025 from just over 2 million today. Global EV sales are growing nearly twice as fast as global battery capacity.

“Does something have to give?” Morgan Stanley asked.

Fitch Ratings analyst Emmanuel Bulle said the market for electric vehicles remains unclear and it is difficult to predict EV penetration in 3, 5, or 10 years.

“The Morgan Stanley report is indeed a very good reminder that a lot is coming into play in the EV equation. We have little data and insufficient insight about cells availability and medium-term production plans from cell-makers, but we believe that a shortage of battery cells is a possibility, or at least that not all manufacturers may receive enough of them if their EV sales plans materialize. Various announcements to develop battery factories in Europe, either from the manufacturers themselves, or through consortium to which (manufacturers) could outsource the production, illustrate carmakers’ concerns that they need to get a better grip on this topic,” Bulle said.

Volkswagen has promised to spend €35 billion ($42 billion) to develop 70 battery-electric powered cars by 2030. The company says electric-only vehicle sales will account for 70% of its own VW brand sales in Europe in 2030.

Forecasters are busily raising their forecasts to take on board the changing and favorable landscape for electric cars, but no estimate comes close to suggesting that VW’s 70% market share has a chance of succeeding. Its previous forecast of 35% looks much more realistic.

Leading data provider IHS Markit

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has raised its battery electric forecast (BEV) forecast for the EU to a market share of 23% for 2025, up from its previous estimate of 19.1%, and to 39.5% from 30% for 2030. LMC Automotive is lower for 2025, at 21%, but is much more optimistic for 2030 forecasting a BEV share of 46.8%.

Schmidt Automotive is lower than both for 2025, estimating only 15% for BEVs, up from its previous forecast of 13%, but is much more bullish for 2030, expecting a whopping 55%, that would total 7.7 million vehicles in a total market of 14 million.

“I have just 15% for 2025 because I reckon PHEVs (plug-in hybrid electric vehicles) are still likely to play a key role in manufacturers’ meeting EO CO2 compliance targets in 2025 which is the main catalyst of the European market and shift to EVs,” Schmidt Automotive’s Matt Schmidt said.

PHEVs are a step up from the traditional hybrid like the Toyota Prius, which uses a battery to enhance the ICE performance, but which had almost no battery-only capability. PHEVs have much bigger batteries which can provide up to 35 miles of battery-only performance. New models promise 50 miles of battery-only, while a Mercedes diesel/plug-in hybrid claims about 75 miles.

Schmidt said that as the EU rules tighten after 2025, PHEVs will be less attractive for manufacturers, while the expected increase in the profitability of BEVs compared with declining ICE profits will make the carmakers happy to switch output to them.

Fitch Ratings Bulle said the probable volatility of the electric car market is making life difficult for big manufacturers like Mercedes, VW, Renault and BMW.

“There is a fine balance to find between being able to produce millions of EVs quickly in case demand accelerates and remaining flexible in case demand does not pick up as planned, without any real certainty about which path will materialize. Daimler (Mercedes) and VW are accelerating their investment into EVs big time but this might prove the wrong strategy if, say, the charging infrastructure remains underdeveloped and this acts as a deterrent to fast EV adoption,” Bulle said.

“Renault and BMW were early movers – maybe too early and they invested a lot of money that has not brought the expected returns. So they have chosen to be more flexible 10-12 years later – but it looks like they are gradually changing tack, again. So I guess there is not one right strategy, although some will benefit more, or earlier, from how EV sales develop in the next 2-3 years,” according to Bulle.

Bernstein Research points out that BEV sales in Europe have been distorted by government and corporate subsidies, and when they are removed the true demand for electric cars will be revealed.

“It’s important to be reminded that many BEVs are either extremely expensive and/or benefit from substantial discounts. At some stage, these discounts will need to be removed which will trigger significant sales volatility and questions about underlying demand. The market also needs to be mindful with respect to EV residual values as leasing should be an attractive sales channel for EVs,” Bernstein Research senior analyst Arndt Ellinghorst said.

Fitch Ratings Bulle said EVs are here to stay, although the level of importance is currently unknown.

“In any case, I believe that EVs will undoubtedly and inevitably be a greater part of the automotive landscape, it is just a matter of time and magnitude. Sales have accelerated but let’s also be cautious about monthly sales figures. EV sales development is a marathon, not a sprint,” Bulle said.