Electric Car Sales Bad For Profits, Forecasts Look Unattainable.
“There are way, way too many electric car models and the average volume at 26,000, is much lower than the 180,000 per ICE car”
Electric car sales in Europe are poised to accelerate, not least because Germany, France and probably Britain plan massive subsidies to boost their marketplace appeal, but they are inherently unprofitable so if governments expect this to boost the struggling coronavirus–crippled auto industry’s bottom line, they are barking up the wrong tree.
Stefano Aversa, chairman of consultants Alix Partner’s European operation said most big carmakers, with the exception of Tesla, Nissan and VW, are planning to produce electric cars on a much lower scale than for traditional internal combustion engine (ICE) powered vehicles, so profits are likely to be elusive.
“There are way, way too many electric car models being planned and the average volume per model, at 26,000, is much lower than the 180,000 average volume per ICE car, and that means it will be very hard to make money,” Aversa said in an interview.
“If you take out Tesla, models like the Nissan Leaf and Volkswagen’s ID.3, the rest are way below at perhaps 10,000 per model and some more like 5,000. It’s very hard to make money in electric cars” Aversa said in an interview.
That’s not the view of every industry expert. The accepted opinion is that electric cars would be much cheaper to produce than ICE ones because the power trains use many fewer parts, with the assumption that strong profits would eventually be made as production increased and battery costs came down.
In a report last month investment bank Morgan Stanley said electric vehicles could eventually make money.
“While the 2nd quarter will not be the best quarter to measure true profitability of auto companies, we believe as EV makers expand scale, incorporate cost savings and expand production in more cost effective factories they will show the inherent profitability of the architecture,” Morgan Stanley analyst Adam Jonas said in a report.
“In our view, as EVs continue to prove they benefit from secular top line growth and superior profitability vs. increasingly cumbersome and obsolete ICE tech, more and more auto companies will substantially allocate capital towards capacity growth, new model development and commercialization,” Jonas said.
Alix Partners Aversa and others believe the electric car sales ambitions of the industry are hugely exaggerated.
Volkswagen has said by 2025, at least 25% of its global sales will be battery electric. VW plans to spend $36 billion through 2024 on a family of electric cars right across its mass market brands. Other big German manufacturers like BMW and Mercedes-Benz parent Daimler have only slightly smaller ambitions.
“We expect investments in electric cars will be a very disappointing return on investment. (global sales of) 25% (of the marketplace) is completely unrealistic. We expect by 2025 sales of electric vehicles plus plug in hybrids (PHEVs) to reach 12% of the market, up from a combined about 3% now,” Aversa said.
Morgan Stanley, in a report earlier this year, itself only expects electric car sales to rise from about 2% globally last year to 11% by 2025. IHS Markit predicts a battery electric market share of 14% in Europe for 2025, implying a much lower total for global sales. Investment bank UBS is an outlier at 15.6%.
Bodes ill for electric profitability
If these forecasts are accurate, it bodes ill for the profitability of carmakers.
Meanwhile in the short-term, Germany and France put electric cars at the forefront of their plans to bail-out the auto industry, weakened by the lockdown forced by the coronavirus pandemic.
The supply of new electric cars is limited but more models are either now appearing on the market or are expected soon. The current market leader is the Tesla Model 3, followed by the Nissan Leaf and the Renault Zoe. New models about to appear include the Honda e, Peugeot e208 and electric Mini. In the summer, expect the ID.3, VW’s first vehicle designed from the ground up to be an electric car and which is likely to overtake the Model 3 as the biggest seller.
German’s 130 billion euro ($150 billion) stimulus package included buying incentives for electric cars which were raised to an effective 9,000 euros ($10,000). France introduced an 8 billion euro ($9 billion) plan to boost its auto industry including incentives for electric cars of up to 12,000 euros ($14,000). Britain is expected to follow suit, but so far no details have emerged about the shape and extent of the plan.
These plans, particularly Germany’s, stranded a large number of high-priced, high profit margin gas-guzzlers, which the manufacturers desperately need to sell to help restore profit margins. The boost to electric car sales will be constricted by a lack of available vehicles because most of this year’s sales were probably already sold. The nature of the emerging electric technology means it will be very hard to raise output by a significant amount in the short-term.
Battery supply constraints
Citi Research analyst Angus Tweedie put it this way.
“This is a relatively niche portion of the market so we won’t have broad-based stimulus coming through. There are constraints on battery supply, which means that the absolute volumes that can be driven through this are going to be relatively limited,” Tweedie said.
Germany will have to revisit its plan to concentrate on green vehicles and supply some help to boost expensive ICE-powered vehicles. According to the German Federation for Motor Trades, there are 15 billion euros ($17 billion) worth of ICE cars stranded on dealer lots. The industry needs government help to move these, otherwise there are likely to be big job losses.