Electric cars and strategic competition; stay selective

The shift to electric vehicles (EVs) was supposed to be swift, but is proving complex. EVs are an element in the climate transition, but the industry also reflects geopolitical rivalries. Economic headwinds, reduced subsidies, affordability concerns and questions about charging networks are all slowing adoption. China has emerged as a leading producer while established carmakers in Europe and North America are struggling to adapt production and face policy confusion.

Widespread EV adoption should play a part in meeting international climate commitments. Personal transport accounts for about 7% of global greenhouse gas emissions, and EVs are as much as three times more efficient than conventional petrol and diesel engines. Tesla Inc.’s innovations, and China’s production ambition mean that EVs now represent almost 12% of new car sales worldwide. Many countries have set a target of half of all car sales by 2030.

EV adoption has nevertheless slowed recently. Some countries have scaled back EV incentives and higher interest rates have translated into higher monthly payments. That has an immediate impact. In the US, 85% of car sales are on credit, compared with 60% of cars elsewhere. Beyond this macro backdrop, potential buyers also have concerns over range and the availability of charging infrastructure. Progress in EV adoption has thus been uneven. China, where 24% of cars are electric, currently accounts for around 60% of EV sales globally. Europe and the US lag with 12% and 7.5% EV penetration rates respectively.

EV adoption nevertheless slowed recently

The industry may have to adapt to new policies and tariffs from the second Trump administration. Tesla chief executive Elon Musk's support for Donald Trump has softened the former president’s comments on EVs. Lower oil prices, which should follow rising US oil production, should not significantly affect the EV industry. However, Mr Trump’s nomination to lead the Environmental Protection Agency suggests that environmental initiatives will be rolled back, threatening carbon emission targets and EV tax credits. If the US scraps its tax incentives, already lacklustre EV adoption in the US could continue to face hurdles. This said, while the Trump administration may decide to prioritise the development of artificial intelligence (AI) and autonomous driving technologies, it is unlikely that the US will want to be left behind in the EV race.

If the US scraps its tax incentives, already lacklustre EV adoption in the US could continue to face hurdles

China’s strategic leadership

After dominating the global car industry for 70 years, Germany has lost its EV leadership to China. China has invested significantly along the EV value chain. The country has focused on mastering EV technologies (including software, where many Western companies have lagged) and expanding manufacturing in an industry where mass production capacity is crucial. China has paid special attention to battery cells, which represent 40% of a car’s raw material costs. They also enjoy a production cost advantage of as much as 30% over most Western brands. The pace of innovation, government subsidies and rapid scaling in EVs has created a proliferation of car firms and capacity. In part, this is because EV production is simpler than fossil fuel engines, reducing barriers to entry. As a result, Chinese firms are manufacturing competitive products and looking for opportunities abroad.

Foreign sales by Chinese EV companies grew 15% in the first ten months of 2024 compared with the same period a year earlier. Leading Chinese manufacturer BYD Co. aims to capture 10% of the European EV market by 2030, and plans to sell half of its output internationally.

These ambitions have triggered trade tensions as legacy Western brands respond. The sector is also of strategic importance to the West. In the European Union, the auto industry represents around 7% of gross domestic product (GDP), 10% of manufacturing jobs, and more than 30% of research and innovation spending. Given this huge role in the EU economy and China’s subsidies to its domestic manufacturers, the bloc has applied import tariffs on Chinese-made cars as high as 35% since 30 October 2024, in addition to an existing 10% duty.

Tariffs have cut Chinese shipments to Europe since a June 2024 peak of 11% of imports

Tariffs have cut Chinese shipments to Europe since a June 2024 peak of 11% of imports to 8.2%, according to Datashare. That may drive Chinese manufacturers to shift production into Europe; ten Chinese plants are already under review for construction in Europe. Meanwhile, Volkswagen Group, Europe’s biggest carmaker by sales, is threatening to shut three plants, the first closures in its 87-year history. Stellantis NV, the world’s fourth largest automaker and home to the Fiat, Chrysler, Peugeot, and Maserati brands, may follow suit. Both Stellantis and Volkswagen have lost European market share since 2019.

Former European Central Bank President Mario Draghi’s recent report on EU competitiveness suggested a possible solution: requiring foreign companies that want to produce in Europe to enter joint ventures with local companies. Historically, this was one of China’s requirements for foreign firms in its market. But this could prove difficult to implement amid a lack of European political leadership.

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Still, we see reasons to be more optimistic about demand for EVs in 2025. Resilient economic growth and falling interest rates should help sales, along with more affordable vehicles, including a broader choice costing around EUR 30,000. The EU is adopting a stricter carbon dioxide emissions policy, which should encourage carmakers to increase their share of EV sales to avoid penalties. While there are calls to delay this policy, estimates point to European EV adoption rates reaching around 20% in the coming years, from 12% currently.

Stay selective

Many legacy automakers will soon launch new, cheaper, more efficient EV models with longer ranges. Mercedes, BMW and Hyundai platforms should all reach the market in 2025, with Stellantis and Toyota following in 2026. This may start to shift the balance of sales between emerging and existing players. We expect EV sales to rise 20% in 2025, from just under 15% this year. The market for non-electric vehicles should be broadly flat next year. An acceleration in charging capacities would be a welcome development that could support more positive momentum in EV sales.

We expect EV sales to rise 20% in 2025, from just under 15% this year

In this uncertain context, European carmakers have underperformed the broader European equity market in 2024, particularly since May, with earnings under pressure and EU-China tensions rising. A series of mid-September profit warnings reinforced these concerns, and valuations have fallen. We keep our cautious view on European mass market carmakers, since we expect competitive pressures to rise. While valuations and dividend yields look attractive, German automakers will reassess production capacity given their dependence on sales in China. Meanwhile, mass-market carmakers will suffer from Tesla’s global ambitions and the arrival of Chinese competitors in Europe. We remain highly selective, favouring a few Asian car manufacturers, and long-established luxury brands that continue to enjoy strong demand and high barriers to entry.