Natalia Jakubowska, Trans.iNFO: Prices for electric cars have recently fallen by 30%. Should one consider getting an electric car as soon as possible?
Jan Sieper, Partner Strategy & Transactions at EY Strategy & Transactions GmbH: Indeed, the market is currently quite enticing from a customer’s perspective. On one hand, we witness a growing availability of public charging infrastructure along with an expanding product range across all OEMs. Customers are also realizing that some of the perceived barriers to e-mobility do not materialize in practice, such as concerns about range. Moreover, manufacturers are currently offering very attractive prices.
On the flip side, the discontinuation of subsidies has a varied impact depending on the product and segment, which somewhat dampens the enthusiasm—and also raises questions about the seriousness of politicians regarding the target of 15 million BEVs in Germany by 2030. Residual values and the used market also play a significant role. For many customers, it’s not just about the initial purchase price but also about the stability of the vehicle’s value, as ultimately, the customer has to bear the difference. Regardless of whether it’s leasing, financing, or purchasing, the depreciation of some electric cars exceeds expectations, leading to hesitancy, especially among commercial customers.
You described the market as quite attractive, but would you also describe it as consumer-friendly?
Manufacturers are currently compelled to seek customers in certain segments, leading to typical phenomena observed in a consumer-friendly market.
What is driving the falling prices for electric cars?
They stem from the resolution of delivery bottlenecks experienced in recent years. Particularly in the case of electric vehicles, many manufacturers have geared up for increased quantities and procured volumes, such as batteries, which they now need to utilize. Consequently, manufacturers are keen on bringing these vehicles to the market. Additionally, we observe an increasing number of German brands offering electric vehicles, and the product range from established manufacturers is expanding. Moreover, export options for vehicles produced in Europe are becoming more limited, leading to excess capacity, thus rendering the market more consumer-friendly.
Are Chinese manufacturers becoming increasingly present in Europe?
Indeed, this trend is noticeable. Regarding Chinese manufacturers, a distinction must be made between those owned by Chinese entities and those that are genuinely Chinese brands. If we examine the electric car market and include brands with Chinese owners, we find that by the end of 2023, they will have captured a market share in the high single-digit percentage range in Germany, nearing the 10% mark. Chinese manufacturers are also contemplating not only boosting exports from China but also establishing value creation in Europe through partnerships or other means, as scaling via a pure import model in Europe doesn’t make economic sense in the long term.
Should Chinese manufacturers be denied access to the European market?
One must consider the implications. Looking back over the past few years at the profits German manufacturers have earned in the Chinese market, one wonders what these companies would have done if the Chinese market had been completely closed to foreign OEMs. In my view, isolation isn’t effective.
Instead, efforts should be made to ensure fair competition. From a consumer perspective, having a wide range of products is certainly preferable, and new brands also drive innovation. Of course, industrial policy considerations come into play, given the automotive sector’s significance to the national economy in Germany.
Therefore, there seems to be a growing inclination not to exclude certain manufacturers or brands but to ensure that support, when provided, is tied to value creation in Europe. Initial steps have been taken, such as in France, where funding for vehicles is linked to specific local content requirements.
It’s definitely not conducive to competition to exclude intriguing product concepts that could also spur German and European manufacturers on. Additionally, not all Chinese brands present in the market today will endure in 10 years. Some will fade away, while others are here to stay.
We estimate there are around 100 electric car brands in China. Is there perhaps not enough competition among European manufacturers here in Europe?
I wouldn’t say so. In Europe, we have a stronger emotional connection to automotive brands compared to China. This is due to the industry’s history and the automotive industry’s roots in these countries. This is particularly evident in Germany and France, where local brands command a significant market share.
However, the situation differs in Norway or the Netherlands. Hence, new brands often target these markets first, as consumers there are more receptive. In summary, one could say that the closer a national economy is tied to the automotive industry, the stronger the affinity to local brands. This affinity is often bolstered in these markets by extensive dealer and service networks.
How might Chinese manufacturers falter in Europe?
Some tend to underestimate the diversity of the European market. Europe isn’t a monolithic entity and boasts strong local competitors. This necessitates a strategy tailored to individual markets and the establishment of local organizations. Language barriers also pose a challenge since many operations need to be conducted in multiple languages.
Moreover, Chinese brands are less familiar with the intricacies of the commercial market, where it’s not just about offering the most attractive product but also about considering the total cost of operations. Additionally, products from China sometimes come loaded with features and gadgets, such as the much-talked-about karaoke system.
For many European consumers, transitioning to an electric vehicle is innovation and change enough. Political currents also play a role. Currently, there isn’t a particularly China-friendly sentiment in Europe. As mentioned earlier, automobiles are highly emotive and politically economic assets.
On the other hand, Chinese manufacturers have intriguing sales concepts. The number of customer visits during the sales process is decreasing. Hence, innovative concepts that require less space and fewer locations are necessary. China boasts numerous compelling approaches bridging digital and physical concepts, which can be seamlessly integrated. It’s certainly advantageous if fresh ideas from other regions find their way to Europe.
So, can a lot be replicated?
That wouldn’t hurt. China has leapfrogged an entire generation of technology, immediately embracing mobile. Hence, Chinese manufacturers are well-versed in mobile-first strategies.
Will the ban on combustion engines seriously impact the electric car market? Do you foresee a change?
We anticipate a nonlinear development occurring in waves until 2035, as there are not only the 2035 targets but also intermediate ones. For instance, there are plans to tighten fleet limits by 2025, motivating OEMs to increase the proportion of electric vehicles in their fleets to meet their target mix.
Therefore, 2024 will likely be a challenging year, especially in Germany, due to the uncertain environment and high interest rates, which will make financing more difficult. However, another question arises: won’t we experience a significant dip before 2035 as manufacturers aim to flood the market with the remaining volumes of combustion engines at extremely favorable conditions, or will customers insist on purchasing the last combustion engines available? Similar trends have been observed with trucks amid changes in emission classes.
The current stance is that vehicles with local emissions will no longer be permitted for sale after 2035. Speculating about revisions to these regulations is akin to peering into a crystal ball. It’s crucial that these targets remain steadfast to prevent a recurrence of the problems we currently face in charging infrastructure.
Thanks to the BMDV funding program, the gap between installed charging stations and charging parks and the vehicle population has widened significantly, resulting in a disproportionately rapid growth in charging capacity compared to the number of vehicles. Consequently, the utilization of charging points is currently relatively modest, and their profitability per charging point could be challenging under certain circumstances. The worst-case scenario would be if these targets were called into question, leading to the dismantling of certain charging points purely for economic reasons.
In the commercial vehicle sector, the goal is for around a third of all transport services to be electrified by 2030. However, if we examine the figures for new registrations of electric trucks or trucks with alternative drives, there is a much larger gap compared to the automotive sector. This is partly due to the cessation of funding. Additionally, price discrepancies remain stark.
Therefore, if we contemplate subsidies or market interventions, we need to consider the entire spectrum. Incentives should not only be confined to purchase bonuses but should encompass the entire chain, particularly in the transport industry.
A freight forwarder will typically only transition to an electric truck if they receive orders exclusively for electric trucks or if they enjoy cheaper TCOs. Conversely, clients are primarily concerned with goods being transported from point A to point B. Simply incentivizing the purchase of electric trucks isn’t sufficient if they can’t be effectively utilized later. Bonus systems, regulations, and funding should therefore focus on enhancing road and rail infrastructure to meaningfully decarbonize certain routes.
However, measures should be abandoned on routes with such demanding topography that it’s questionable whether electric trucks should be permitted to traverse them. The goals are ambitious, which makes it all the more surprising that there’s no clear program to provide short-term measures. Given the industry’s planning horizons, the path to 2030 isn’t particularly long, and many comprehensive approaches will only yield results in several decades.
How will electric car prices evolve? Do you anticipate further declines?
I don’t foresee us descending into a perpetual downward spiral, particularly because the residual value and used market are currently exerting a restraining influence. On the other hand, given the volumes being prepared for export from China and the capacities that may continue to be established in Europe, I don’t expect a complete reversal in the short term.
Moreover, new purely electric brands will continue to aggressively enter the market and may accept lower margins to secure market share. Collectively, these factors suggest that we’ll continue to observe a relatively low price level in the coming months. However, there are also corrective developments that counteract this downward trend. Offering a concrete figure is challenging, as it depends on whether new brands establish themselves in the market or not. Any number I provide now could easily be rendered inaccurate in two weeks’ time.
Photo: Anonymousfox36, CC BY-SA 4.0, via Wikimedia Commons