Our economies are in the process of transitioning to a low-carbon or at least significantly reduced emissions model. This movement has been underway long enough for investors, politicians and citizens to make demands on the various players, first and foremost the large listed companies.
The progress of certain sectors is being scrutinized with particular attention, such as transport, because its transformation is both a considerable climate issue and a revolution that is about to have a visible impact on our daily lives.
In the Clean Energy sector, the theme of decarbonisation of the transport sector has been a major focus of investment for years. These investments are mainly directed towards companies that are pure plays, particularly in the field of automotive electrification. In this context, we are observing the evolution of the competitive landscape and remain unenthusiastic about the strategic plans of the “historic” Western car manufacturers.
These players are not yet up to the challenge of the transition, which poses a considerable risk to their future and contributes to the emergence of new competitors who are more agile and more in tune with the evolution of the market.
The traditional automotive sector, through conservatism or blindness, runs the risk of becoming a textbook case of failed transition. In the hope that other key sectors for decarbonization will prove to be more successful, we detail below 6 mistakes that should not be repeated.
1. Underestimating the trend
At the end of April, Renault CEO Luca de Meo mentioned the potential spin-off of its electric division, which would become independent of the traditional vehicle division. This project, aimed at taking advantage of the higher valuation of pure electric players on the markets, would allow the extraction of value that has been unfairly ignored by investors.
This announcement is symptomatic of a form of denial regarding the developments underway in the industry. The mere fact of imagining the listing of an OEM (Original Equipment Manufacturer) that would only manufacture vehicles with petrol engines no longer makes any sense.
Over the period 2017-2021, sales of ICEs (Internal Combustion Engines) have declined four years in a row. At the same time, BEV (Battery Electric Vehicle) sales have increased fivefold, with their market share of total sales rising from 1.4% in 2017 to 8.6% in 2021. The increase in electric vehicle sales is accelerating in most markets and analysts are now forecasting a 20% to 50% share of electric vehicle sales in 2030.
What would be the point of becoming a shareholder in a company whose market volume will fall by almost a third over the current decade and whose business model is characterized by a very heavy industrial tool and high fixed costs?
To think that a quoted ‘non-EV-Renault’ could make sense[1] is to underestimate the power of the transition underway and its inevitable arrival point: the total cessation of the sale of combustion engine vehicles. It is surprising that the incumbent manufacturers are not building their entire strategy around this conclusion, which is all the more obvious as all countries are announcing one after the other the date on which sales of combustion engine vehicles will be banned outright[2].
In defence of the automotive sector, the precedents of the oil, gas and utilities sectors show that it is very difficult for an industry to conceive of the decline or loss of value of some of its assets. It is likely that incumbent car manufacturers will soon be faced with the problem of stranded assets in the combustion engine part of their business.
2. Ignoring / misunderstanding customer expectations
Traditional car manufacturers have largely underestimated consumer demand for electric vehicles, thus offering unhoped-for market share gains to new entrants (Tesla continues to sell more electric vehicles in the US than all other manufacturers combined!) Even today, ranges are insufficiently electrified and delivery times continue to stretch (admittedly partly due to external factors that are difficult to control), generating frustration among consumers.
In addition, traditional OEMs still seem to have a poor grasp of the new expectations arising from the ongoing paradigm shift.
The customer experience of the electric vehicle owner is very different. Studies show that the level of satisfaction is very closely linked to flexibility and efficiency when it comes to recharging the battery. It is no coincidence that Tesla owes a significant part of its reputation to its network of proprietary superchargers and that some Chinese players such as NIO are investing in a network of minute battery replacements. Removing range anxiety from the electric vehicle is a priority in this new market.
Because it was an unnecessary consideration in the internal combustion engine vehicle market, manufacturers are now lagging behind in their rollout of dedicated charging infrastructure, an area where the gap with first movers may prove difficult to close.
3. Thinking there is time
Over the past eighteen months, the ‘historic’ car manufacturers have announced the timetable for the planned end of their sales of combustion engine vehicles. Among the most aggressive, companies such as Volvo and Stellantis[3] are aiming for 2030 to complete their switch to all-electric. More cautious manufacturers such as GM, Mercedes and Audi are talking about 2035.
These targets may seem ambitious, but are they really? And how should they be measured?
On 4 April, without any fanfare, via a simple press release, the Chinese car manufacturer BYD announced that it had definitively stopped producing thermal vehicles in March, thus becoming the first manufacturer in the world to complete this change.
If a Chinese competitor, and not the least important one, has gone all-electric in 2022, what are we to think of European, American or Japanese manufacturers who believe that they still need 5, 10 or sometimes 20 years to achieve this same feat?
This ‘slow start’ of traditional manufacturers would perhaps be less worrying if electrification was not accompanied by two trends:
- The appearance in the competitive landscape of BEVs of an exponential number of new pure-play disruptive players who have been able to raise capital under excellent conditions (until very recently at least), thus having significant financial resources at their disposal.
- A much fiercer battle for access to certain mineral resources (particularly those used in the composition of batteries) which requires securing the supply chain at a very early stage via long-term purchase contracts or innovative partnerships.
The historic manufacturers give the impression of being part of a very long timeframe at a time when the industry is undergoing a transformation which, on the contrary, favours agile and innovative players. It is probably because he came to this conclusion that the CEO of Volkswagen invited Elon Musk to address the 200 top managers of the group at the end of 2021!
4. Relying too much on politics (1/2): believing that the regulator will fix everything
Although the automotive sector has lost some ground in the stock market indexes, there is still one area in which it carries a lot of weight: politics. This can be explained on the one hand by the sector’s high labour intensity (direct employment, including subcontractors, is estimated at 0.5m and 1.0m respectively in France and Germany), but also by more than a century during which the history of the sector has been closely interwoven with the social, trade union and economic history of our countries. This is why, even today, the political importance of the automotive sector is often disproportionate to its economic weight, and public opinion remains very sensitive to crises affecting the sector and to factory closures.
The political weight of the automobile sector (well illustrated by Joe Biden and his ‘I’m a car guy’) is in fact a double-edged sword because it reinforces the industry’s idea that regulation is at its service. This undoubtedly explains a form of chilliness that is now detrimental and a certain unpreparedness for the ‘world after’. After decades of legislators, finance ministers and regulators listening to its grievances, the automotive industry must now adapt to a much more hostile environment.
As evidence of this gradual loss of influence of the historical players, almost all Western countries have announced the date for banning the sale of vehicles with combustion engines. These announcements were made despite the cries of the automobile lobbies.
5. Relying too much on politics (2/2): not being afraid to disappear
Because of this ‘heritage’, in countries such as Germany, the United States, Japan and France, automotive companies are ‘systemic’, as we saw during the 2008 crisis. The states, in a more or less direct way, do not hesitate to come to the aid of the sector when it goes through a crisis. This means that the sector benefits from the famous moral hazard decried by many economists and investors, a situation in which the company’s future does not depend on its strategic choices.
The guaranteed unconditional support of governments may have been a strength in the past, but it also undoubtedly explains the current mistakes. Western car manufacturers are also failing to make the transition because they can afford to.
6. Confusing electrification with energy transition
Whatever the industry, it will always be easier to succeed with your energy transition plan if you understand what it really means. However, looking at the presentations of some of the “historic” car manufacturers, one wonders if some of them are not confusing transition with electrification.
When they detail their strategy for the medium to long term, manufacturers mainly explain how they will, more or less quickly, electrify their range. The thinking seems to stop there.
To take a random example, this means that Audi’s staff, when they think about the decarbonised world of 2050, imagine… the world of today, in which a 2.5 tons combustion engine Audi Q7 will have been replaced by a 2.7 tons electric Audi Q7[4].
However, for transport as for everything else, the energy transition is not simply electrification. A new model for how we travel must now be devised. It will involve the increased use of different modes of transport according to distance and circumstances, combining public transport, smaller individual vehicles, economic models based on shared vehicles, traditional or electric bicycles, etc. It is a “plural”, more virtuous model of travel that must be invented.
The historic car manufacturers must be much more present in this field of reflection and innovation.
[1] Renault is not the only group to have carried out this reflection. Ford’s CEO announced in March that he had given up on the same project and was moving towards an internal separation of the two divisions.
[2] 2025: Norway – 2030: Sweden, Denmark, Netherlands, Ireland, Singapore – 2035: UK, Japan, China…
[3] More specifically, Stellantis aims to end the use of combustion engine models in 2028 for Opel and 2030 for Citroën (in Europe only).
[4] Electric vehicles are still heavier than their petrol equivalents because of the weight of the batteries. This trend should be reversed by the end of the decade with the introduction of the new generation of Solid State batteries.