Announcements

    Drinks

      European auto industry: fast-tracked EV transition raises challenges and uncertainties
      WEDNESDAY, 14/12/2022 - Scope Ratings GmbH
      Download PDF

      European auto industry: fast-tracked EV transition raises challenges and uncertainties

      The regulation-driven transformation confronting the European auto industry is putting the sector’s ability to preserve cashflows to the test as manufacturers prepare for the de facto ban on new internal-combustion vehicles from 2035.

      By Georges Dieng, Director, Corporate Ratings

      The EU’s recent decision to effectively ban the sale of new internal combustion engines (ICE) cars and vans from 2035 will accelerate the shift to full-electric vehicles.

      The change will prove most financially challenging for original equipment manufacturers (OEMs) exposed to the mass market such as Volkswagen AG, Stellantis NV and Renault SA. Premium manufacturers – Audi AG, BMW AG, Mercedes-Benz Group, Volvo Cars AB – are better positioned to convert their ICE portfolio to higher-priced EVs as their customer base is less price sensitive.

      During this 12-year transition, the European auto industry faces a unique challenge: maximise cash flows from its existing ICE portfolio, which is headed for a structural decline, to finance a massive decade-long but shorter-than expected investment phase in EVs for which there is not yet a guaranteed market.

      OEMs need to speed up their EV-related investments in cheaper, efficient batteries, repurposed production lines and expanded EV line-ups based on new platforms.  Aiming for a high share (~70-80%) of the EV value chain, prioritising investments will be critical to avoid skyrocketing capital expenditure and R&D spending.

      OEMs forced to take drastic investment decisions on existing models

      OEMs are already making tough investment decisions, visible in drastic streamlining of their ICE line-ups. Volkswagen will reduce its ICE range by 60% by 2030; Mercedes-Benz will cut its ICE-related investments by 80% by 2026 from 2019. Most carmakers will stop developing new ICE powertrains and architectures as soon as feasible and might phase out smaller vehicles due to the prohibitive cost of adding emissions-reduction technology at an extra EUR 1,000-3,000 per car to meet Euro 7 standards due in 2025/2026.

      The European Commission’s 2035 deadline gives the industry 12 years to further adapt to an all-electric mobility. While this is less time than the industry had lobbied for, preferring a 2040 deadline, carmakers are already investing in electrifying their fleets. Scope expects investment ratios to exceed pre-pandemic levels by 2024, mainly driven by R&D spending as the pure capex ratio declines (Figure 1), though visibility beyond that date is poor.

      Figure 1: European carmakers' R&D ratio edges up; capex ratio on decline


      Note: Data for BMW, Mercedes-Benz, Stellantis, Renault, Volkswagen combined – excludes Chinese JVs at equity Source: Scope Ratings

      Some OEMs are committed to reaching carbon neutrality before the EU’s overarching 2050 deadline: Stellantis (2038), Mercedes-Benz (2039), Volvo Cars (2040).  While most automakers have pledged to go full electric by 2030, not all intend to phase out ICE vehicles, given the uncertainties around the pace of EV adoption in other regions where regulation allows, and demand is strong, for ICE cars.

      The European industry has a long way to go before it can boast of all-electric new vehicle sales, as the table below shows. BMW’s premium Mini brand had the highest proportion of sales of battery-electric vehicles (BEVs) in the nine months to end-September 2022 at nearly 14%. Only 6% of Volkswagen Group and Mercedes-Benz Group sales were BEVs.

      Figure 2: European OEMs: challenging electrification road ahead (%, unit sales)

      Sources: companies, Scope       PC: passenger cars; LDT: light duty trucks; BEV: battery-electric; PHEV: plug-in hybrid; LEV: low emission

      EU’s tough intermediate, final requirements contrast with low-level consumer interest

      The EU’s requirement for a 100% reduction in CO2 emissions for cars and vans from 2035 comes with an intermediate target of a 55% reduction for cars (vs 37.5% currently) and a 50% reduction for vans (vs 31%) by 2030 compared with 2021.

      Yet there is no proven mass market for the new vehicles, despite rapid growth in EV sales in Europe (12.1% penetration for Jan-Sept 2022) from a low base in the past few years (1.3% in 2018).

      Poor affordability, range anxiety and limited charging infrastructure remain obstacles for greater uptake of EVs. Widespread EV adoption will require more government support and favourable market conditions.

      EVs will continue to attract buyers, but the competition for incumbent OEMS will intensify as regulation encourage new entrants such as Chinese OEMs, without a “Buy European Act” or protective measures like the US Inflation Reduction Act.

      The tail risk is that battery-based technology is overtaken by a more efficient, less costly alternative by 2035, stranding investment the industry has made in EVs.

      These risks cloud the outlook for OEMs’ medium- to long-term cashflow just as inflation and slowing economic growth cast doubt over near-term demand. Registrations of new passenger cars in the EU fell 7.8% in the 10 months to end-October compared with the same period last year.

      Industry emerges from pandemic in robust condition

      At least, the industry is in a healthy position today. Pent-up post-pandemic demand and long waiting times for new vehicles, due to supply-chain bottlenecks, have allowed OEMs to improve net pricing and favour production of higher-margin vehicles, boosting profitability and cashflow.

      The OEMS will try to share the capex burden ahead through new joint ventures and partnerships while seeking more cost cutting, notably by relying more on direct sales than dealerships and developing new sources of service-related revenues, such as subscription-based software upgrades.

      Such initiatives will mitigate downward pressure on the sector’s operating profitability and cashflow, but the all-EV era promises huge uncertainty in the short to medium term.

      Related news

      Show all
      Scope publishes final rating methodology for European Real Estate Rating Methodology

      28/3/2024 Research

      Scope publishes final rating methodology for European Real ...

      Scope affirms BB/Stable issuer rating on Hörmann Industries GmbH

      28/3/2024 Rating announcement

      Scope affirms BB/Stable issuer rating on Hörmann Industries GmbH

      Scope downgrades Nitrogenmuvek to B from BB-, places it under review for possible downgrade

      27/3/2024 Rating announcement

      Scope downgrades Nitrogenmuvek to B from BB-, places it under ...

      Webinar: Commercial real estate – how concerned should debt investors be?

      26/3/2024 Research

      Webinar: Commercial real estate – how concerned should debt ...

      Scope affirms BB-/Stable issuer rating of Infogroup Holding Kft.

      25/3/2024 Rating announcement

      Scope affirms BB-/Stable issuer rating of Infogroup Holding Kft.

      Scope affirms Opus Tigáz’s BBB- issuer rating and revises the Outlook to Positive from Stable

      25/3/2024 Rating announcement

      Scope affirms Opus Tigáz’s BBB- issuer rating and revises the ...