Paradigm shifts are starting to take place at exponential speed. After 20 years of reckless central bank stimulus, consumers and markets are suddenly having to adapt to the New Normal. The European auto industry highlights the pace of change, as the chart shows:
- In 2019, just 4 years ago, gasoline/diesel cars were 89% of sales but last year, their share had collapsed to just 49%
- Battery/Plug-in electric vehicles (EVs) and hybrid demand are both now ~25% of sales; they were each around 5% of sales in 2019
And, of course, their sales are set to continue increasing at exponential pace. Governments have already banned the sales of Internal Combustion Engine cars from 2030/35 so buyers are not going to waste money buying one as this deadline approaches.
- Resale value is very important when buying a car, and it is likely to be relatively low
- Who will want to buy a used ICE when the whole model range has been phased out?
The rest of the world is seeing the same trends develop as the Bloomberg chart above confirms:
- Bloomberg expects global EV sales — battery-electrics and plug-in hybrids — to increase 21% in 2024, to 16.7m
- 10m EVs will be sold in China as the government continues to build out the industry
- European growth may slow as recession bites, but 2025 will see a new surge as CO2 limits tighten
- US growth depends on charger capacity, which is accelerating under the Inflation Reduction Act
EV SALES WILL CREATE WINNERS AND LOSERS
Automotives is the world’s largest manufacturing industry, and its growth highlights the move into Winners & Losers discussed last week.
As the Bloomberg chart shows, employment in the European auto industry supports 5%-10% of jobs in countries such as Germany and Hungary. Many of these jobs will start to disappear. EVs are much simpler to build, with <20 moving parts versus >2000 in ICEs. They are also simpler to maintain and will likely last longer.
This will reduce after-sales income for suppliers, garages and others in the value chain. Financial services will also be impacted. Today’s business models for risk, lending and insurance will need to be reinvented.
Similarly oil demand is already reducing.
Some suggest that additional chemicals sales will cover the loss. But in reality, the chemicals market is very small by comparison. so refineries will need to shut.
Former Saudi Oil Minister Sheikh Yamani’s warning in 2000 is now looking very prophetic:
“30 years from now, there will be a huge amount of oil – and no buyers. 30 years from now, there is no problem with oil. The Stone Age did not end because the world ran out of stones, and the Oil Age will not end because we run out of oil. I am a Saudi and I know we will have serious economic difficulties ahead of us.”
EUROPEAN AUTOMAKERS NEED TO ACCELERATE THEIR MOVE INTO EVs
Worryingly, there are growing doubts over whether European auto manufacturers can make the transition:
- ICE’s are a technology-based business based on complex engineering
- But EVs are essentially software-based, with price an increasingly important factor for buyers
It is therefore likely that European automakers will also divide into Winners & Losers. VW, Europe’s largest manufacturer is clearly at risk, as new CEO, Thomas Schäfer, warned in July:
“The future of the VW brand is at stake – the roof is on fire”.
And the list of problems that he cited clearly justified his warning – EV sales were 30%-70% below budget, the software issues at the Cariad digital unit were still unsolved and VW’s share in the key China EV market was just 3%.
As The Economist commented, “disaster is no longer inconceivable.” The issue is that these paradigm shifts are coming at the same time as the loss of the peace and demographic dividends.
As discussed last week, they are taking our world in a new direction. The likely Winners will be those companies and investors who focus on becoming demand-led.